Truist Financial Corp (TFC) 2009 Q2 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the BB&T Corporation second quarter earnings 2009 conference call on Friday, July 17th, 2009.

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

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

As a reminder, today's call 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.

Please go ahead.

Good morning, everyone.

Thank you, Gwen, and thanks to all of our listeners for joining us today.

This call is being broadcast on the internet from our website at BBT.com.

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

We have with us today Kelly King, our President and Chief Executive Officer; and Daryl Bible, our Chief Financial Officer, who will review the financial results for the second quarter of 2009 as well as provide a look ahead.

After Kelly and Daryl have made their comments, we will pause to have Gwen come back on and explain how those who have dialed into the call may participate in the Q&A session.

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

BB&T does not make predictions or forecasts.

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

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

Additional information concerning factors that could cause actual results to be materially different is contained in the company's SEC filings, including but not limited to the company's report on Form 10-K for the year ended December 31st, 2008.

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

And now it is my pleasure to introduce our President and Chief Executive Officer, Kelly King.

Good morning.

Thank you, Tamera, and welcome everybody to our call.

We really appreciate you joining us.

As Tamera said, I am going to try to cover some key metrics around performance for the second quarter and a look at six months, talk about a few unusual items and their impact on results.

I will talk about some of the drivers of performance.

We will talk a little bit about the stress test and the TARP repayment, just to bring everybody up to date on that.

Then we want to talk a little bit about some unique opportunities that we see before us at BB&T as we move through this [correction] process.

Daryl will then pick up and talk about margin, expenses, taxes, and operating leverage, and then we will have some time for questions.

If you look at our numbers this quarter, overall we are very, very pleased, especially in the context of a very challenging credit market.

Revenue growth was strong at 13%.

As you can see from the numbers, we made $200 million before the preferred dividend requirement.

So our net income available to common was $121 million or $0.20 a share.

That was down from $0.48 last quarter.

You recall last quarter we had significant bond gains which we used to move into our loan allowance.

And so this quarter was cleaner in that it did not have that.

I would point out with regard to earnings power, which as you know we feel very important to focus on, was down slightly from first to second in '09, but I would point out positively that it is up meaningfully for year-to-date.

The year-to-date earnings power is $1.743 billion compared to last year's $1.640 billion for a 6.3% increase.

We did have a lot of noise in this quarter.

As you know, we had the $71 million pretax FDIC second quarter special assessment charge, which equates to $0.07 per share.

We also recorded an after tax charge of $47 million on the TARP repayment, which represented $0.08 on a diluted share basis.

And then if you take away from us the gains we had security sales and (inaudible) of $0.06, then you can see that the net unusual items would be positive $0.09.

A fair way to look at our core run rate this quarter is $0.29.

For the six month, we did have $0.67 diluted EPS, which was down from last year.

Let's talk about some of the key drivers.

Obviously the big story is asset quality, as it was last quarter.

You will notice that our nonperformers did increase meaningfully from $2.7 billion to $3.3 billion.

We had indicated that as we moved through the cycle, we would expect to see a meaningful increase in nonperformance, and that is occurring.

The percentage increased from 1.92% to 2.19% for the second quarter.

Our net chargeoffs for the quarter were $451 million, up from $388 million last quarter, and so that brought the percentage to 1.81%, which was a meaningful increase from last quarter.

And I will explain to you a little detail around why that was.

Our provision for the quarter was a very significant $701 million, so you can see that we had a $250 million reserve build over and above chargeoffs, which I will point out is $0.25 a share.

So it is a very meaningful contribution to building our reserve as we continue to go through this cycle.

Our ratio of loans and leases to nonaccrual loans -- we are very glad to say still remained at 1.01.

We are one of the very few companies that still has a ratio to nonaccrual loans at 1 or above.

So we had a meaningful increase in our allowance to loan sale from 1.94% to 2.19%.

We are trying to be frankly very aggressive in terms of staying ahead of the curve, in terms of building our allowance as we continue to move through this correction cycle.

So what we really had was a continuation of what we have seen in credit deterioration -- mostly in housing, in our ADC portfolio, our mortgage portfolio, home equity portfolio, and in consumer real estate.

Still concentrated in Florida, Atlanta, metro DC as we have seen before.

We beginning to see a little deterioration in the coastal Carolinas, and in the mountain areas primarily around resort areas where people had planned to move in from primarily the northeast of the area.

And of course those plans have been put on hold as everybody is having difficulties selling their homes.

I would point out importantly that our past dues continue a very positive trend.

In our 30 to 89 category, our past dues were 1.70%, down from 1.83% in the first and 2.07% in the fourth.

90 day plus was 0.33%, down from 0.38% in the first and 0.44% in the fourth.

So, very significant positive trend there which we take some encouragement from.

Digging a little deeper into some of our portfolios, because I know there's a lot of concern about our real estate exposure.

In the single family residential ADC portfolio, we mentioned last quarter that we had done a deep analysis of that single family ADC portfolio.

We have seen basically it deteriorating consistent with our expectations.

The balances are declining, in fact meaningfully down this quarter from $7.5 billion to $6.9 billion.

And so it is performing about as we thought it would as we continue to see some deterioration as the economy continues to slip and unemployment continues to rise.

We did take a special look this quarter at our lot portfolio.

We did have some meaningful deterioration in that portfolio.

So we are taking a very aggressive approach to it.

We did identify it into schedules for you for complete transparency.

You will see that it is a modest portfolio, about $1.9 billion, less than 2% of loans -- but we are moving aggressively with that portfolio, moving accounts to past dues pretty aggressively -- in many cases moving to nonaccruals, taking losses.

For example, we had $77 million of chargeoffs in that quarter, that portfolio this quarter.

I would point out that this is not an all bad portfolio.

Basically what this is people primarily in the New England area and some up in the Midwest who had long-term plans to move to the Carolinas and further south.

And they have come down here and bought lots typically with a three to five year bullet loan expecting to sell their house, move down here and build a house.

All of that worked well for a long time.

We have been doing this for a long, long time, but obviously now people are handicapped because they can't sell their houses, and the lot values have gone down.

Some people are balking at continuing their payments and we are trying to be conservative in term of dealing with those.

I would point out most of these are good hardworking men end women who plan to retire, probably will still retire here, it is just taking longer than they planned.

This is not lots to developers or any kind of bulk lot programs.

This just people that want to retire down here and ultimately probably will.

In terms of our other CRE, I would point out that we did a targeted review of it this quarter.

Nonaccruals are up from 1.21% to 1.82%.

Chargeoffs are up from 0.32% to 0.47%, which is not to be unexpected in this challenging environment.

I would remind you, however that our CRE portfolio is very different than a lot of the stuff you read about.

It is a very granular portfolio.

Average note size is $539,000.

We for a long, long time had a $25 million project limit which we stick to very carefully.

So we don't have the big office building to big high rise hotels, the big box shopping centers that you see a lot of conversations about in these big CMBS security pools.

We just don't have that kind of portfolio.

Ours is more typically smaller office buildings or small strip shopping center with a major anchor tenant or like a [Belk] or Walgreens with a handful of little local tenants, and they're underwritten to cash flow off of the primary tenants.

We don't do spec deals like that.

We have it preleased.

And so while we will have some challenges in this portfolio, we don't expect it to be some kind of a disaster like some people are talking about in the general CRE portfolio.

And our portfolio is performing well.

Nonperformers are up, but only 1.39%.

Chargeoffs went up a tick from 0.50% to 0.60%.

Demand is slowing somewhat in C&I, and there's a low utilization rate by businesses, but the portfolio is performing well.

There has been a lot of conversation about bank card.

I will point out we have a very modest bank card size portfolio, because we basically only do bank cards for our clients.

We don't do all the national and international mailing.

So ours is about $1.8 billion.

Retail is only $1.2 billion.

Chargeoffs were only up a tick from 6.46% to 6.48% -- substantially lower than 9% or 10% chargeoff rates you hear from the [monolines] on the large institutions.

Past dues are actually down 2.88% versus 3.18%.

So it is performing very well.

Our mortgage business is doing great.

We had another great mortgage quarter, $8.5 billion in originations.

We are at $16 billion year-to-date in originations.

We only did $16 billion all of last year.

So, it is really booming.

Applications, as we move through the second quarter, which of course feeds us into the third, did begin to slow some as rates popped up and then come back some.

That ebbs and flows, but even at a little bit slower level, they're still 90% higher than last year.

We are seeing some increases in nonaccruals and our mortgage portfolio, as unemployment creeps up, and we would expect to see some continuation in that as well.

Our [sales finance] portfolio is doing really well.

Past dues and chargeoffs are better than previous quarters.

So it is actually improving.

Our REO portfolio I will comment on.

It is up meaningfully from the last quarter -- 26% increase to $1.2 billion.

A little detail for you on that.

It is 52% land and lots.

It's 36% one to four residential vertical structures.

I mentioned to you last quarter we set up a special REO group with some of our top real estate lending professionals running that as a separate business.

They're making excellent progress.

We did have $98 million in sales in the second quarter, which was twice what we had in the first quarter, and I am very pleased to say that we already have $73 million in contracts heading into the third quarter, and of course we are just really getting into the quarter.

So we are seeing momentum, we are seeing turnover.

We are attacking it very aggressively.

And so we know that there is concern about it rising in aggregate levels, and what are we going do about it.

But we have a very aggressive remediation program, and I am quite satisfied that it is working quite well.

All of our challenging credit situations are difficult.

We continue to try to work with our clients, and we will continue to do that.

It is really challenging to be honest right now because on the one hand, there are some of our constituencies that want to force us to chargeoff everything as fast as we can and nonaccrue it as fast as we can and kick the clients out.

And on the other hand, some of the constituencies particularly out of Washington want us to work with the clients.

We try as best we can to ignore both of those.

What we try to do is about our mission, which is to help our clients achieve economic success and financial security, and we continue to work with our clients and will continue to work with our clients and do the best we can to help them mitigate their way through this difficult period of time.

In aggregate, we are working hard to stay ahead of the curve with regard to the deterioration we are having, that we expect to continue to have.

That's why you saw us again make a material increase in our allowance of 25 basis points.

We made a material increase in our reserve for our residential ADC portfolio, which is now up to 10.7%.

Again, we exceeded chargeoffs about $250 million, and allowance on our performance is [1.01%] which is a very strong number.

If you look at the consumer portfolio that we have, overall it is a good portfolio.

We are having some challenges as I said in the lot portfolio.

But I will remind you that over the long cycle -- and I have been at this for over 37 years now -- in all of the cycles, while we have challenges like everybody else does in the difficult period, we tend to outperform our peers in the downcycle.

We believe we will do the very same thing in this cycle.

So, our year-to-date chargeoffs are 1.7%.

That is higher than we had expected in the beginning of the year.

There's frankly -- we said then, as I will say now, any projections in terms of chargeoffs and nonperformance is obviously a function of the economy.

And I have not yet seen anyone that has a real clear crystal ball with regard to predicting the future.

There are lots of opinions give about that, but it is really difficult in this kind of uncertain environment to know.

The best you can do is gauge it a day at that time and make the correct evaluation that is required as you go forward.

But given that we are seeing somewhat more challenges in our consumer land portfolio than we had expected, we certainly think at this point that our chargeoffs for the year will be at a higher level than we had previously contemplated.

Again, any numbers we give you are subject to the economy and we certainly could be wrong.

But I will be quite transparent with you -- our actual internal projections show for the year we'll be at about 1.70% for the year.

Because of all of the uncertainty that there is out there, and the difficulty in projecting with clarity, I personally think we should think in terms of a range of about 1.80% to 1.85%.

Now that's up meaningfully from where we started the year at, but I will remind you that the year has gotten a lot worse than than certainly we expected.

And so we are trying to look forward now and be conservative in terms of what we think.

We certainly could beat that or miss it, but that's the best guess I can personally make in terms of what that will look like.

Changing gears, our margin is strong at 3.56%.

Daryl will talk to you about that.

Looking at revenue, we feel good about revenue.

Net interest income, growth is up 8.4%.

Year-to-date, over year-to-date, it is very strong, in this environment.

Noninterest income is strong.

It was actually annualized [first or second] up [46%] which is a very strong number, because we have a strong kickback improvement in insurance as you know.

But year-to-date, over last year-to-date, we are up 16.1%, which is strong.

Net revenue growth is strong year-to-date, over year-to-date, 11.6%.

Our fee income ratio, which is something we stay focused on, is second quarter 44.9, and year-to-date is 43.5, which is up meaningfully over 42.2 for last year-to-date, and is one of the stronger fee income ratios in the business.

So, our noninterest income business is doing well, up 17% over last quarter, last second quarter excluding purchases and gains.

Mortgage is great.

Income at $184 million is up 223%.

Even if you net out the MSR mark, it is still up 156%.

And of course that's driven by the $8.5 billion of originations.

We certainly think that will slow as we head through the third and fourth quarter.

A lot depends on rates.

In the last weeks, rates popped up and we saw [vacation] slow, and then they came back down, and they went back up -- so it is very, very rate sensitive.

But we will end up with a very good second half in mortgage, but it will almost certainly be slower than the first half.

Some other details on [noninterest] income -- our income nondeposit fees and commissions were up [12.8], which is strong.

Service charges were down a little bit because we have slower consumer spinning.

Trust and advisory fees were down a little bit because of market conditions.

Insurance had a great quarter -- of course they come back strong during the second.

Insurance was up 18.6%.

Some of that is acquisition.

But even on a same-store basis, we are up 3.5%, which is clearly moving share because we are still in an insurance premium soft market and most premiums are down 10% plus.

So we are on a same-store basis up 3.5%, which is obviously moving market share.

The good news is we are seeing hardening in the market, especially on the wholesale side of the business.

We expect on [this side] to see some improvement in that.

Investment banking business continues to do well, and it is very steady which I personally really like.

Investment banking income is up 4.5%, primarily driven by [debt sales and trading].

We don't have the whopping kind of gains that some of those guys do.

We are not in that business.

We also didn't have the whopping losses they had, I'll remind you.

But ours is a good steady client oriented investment banking business, and it works out very good.

We did take $19 million security gains in the second, primarily because we wanted to shorten our maturities in anticipation of what we feel certain is going to be rising rates as we head through the latter part of this year and into next year, so we wanted to position our portfolio for that.

If you look at loan growth, I would have to characterize it as saying year-to-date it looks good.

If you look at total loan growth year-to-date, it's 5.6%, which in a recession is pretty good.

Year-to-date commercial loan growth is 10%.

Revolving credit is 10.5%.

Specialized lending is 7.5%.

So those numbers look pretty good.

But I will say to you that annualized first and second is just as flat as a pancake.

So we have clearly seen a slowing in the last 60 days, especially in the commercial area.

Frankly, I don't have a really good handle on that.

I think what it is is people are really nervous, and when I travel around and talk to people, they are concerned about the policies and initiatives that are coming out of Washington which are simply completely unaffordable, and astute business people are very concerned about that.

And I think it's given them some pause in terms of being willing to step it up and buy equipment and make planned expansions, et cetera.

We will have to keep a good eye on that.

I feel fairly confident we are moving market share.

We continue to see a flight to quality to BB&T because of our strong capital ratios.

We are one of the safest banks in the world.

We are one of the best rated banks in the country.

So we feel good about our productivity relative to the marketplace, but I'm a little concerned about where the marketplace is going to be the next six months or so.

So, our retail portfolio continues to run off.

Some consumers are just not spending -- they are saving.

Our sales finance portfolio is doing well relative to the market, but there's not a lot of cars being sold.

We are able to buy some auto portfolios at very attractive yields, because some companies are needing to unload the portfolios to preserve capital.

So that's an opportunity for us.

Likewise, in our specialized lending businesses, we were able to make some nice acquisitions.

So our specialized lending this quarter was up 29.6%.

Good organic growth, but also we had a really nice acquisition in our AFCO and CAFO insurance premium finance business which was very, very pleasing.

In the deposit area, it is just basically all really good news.

Virtually all of our categories are growing really strong, with the exception of CDs, where it is flattish, and that is because we are consciously managing our price to protect our margin.

We know that most of those CDs are very interest rate sensitive and frankly we simply have better sources of funding.

To that point, our annualized link growth in non interest bearing deposits or DDA was up 46%, which is just a whopping number.

Even year-to-date, over last year-to-date, it is up 13.7%.

Client deposits were up 10.5%.

Core deposits are up 12.6% and total deposits are up 8.7%.

So what's happening is we are clearly experiencing a very strong flight to quality as huge disarray in the marketplace, and so we are seeing just a phenomenal increase in our non interest bearing deposits.

Candidly, we are seeing -- recently someone showed me a report on some states and municipalities way out of our marketplace are moving significant dollars over to our bank because we are considered to be a safe haven, and that's certainly very pleasing.

We don't count on that as core deposits, but it is very inexpensive -- obviously it's going into DDA at no interest and something that helps us in the short run.

So we opened 19,700 net new transaction accounts for the quarter which was very, very good.

So our balance sheet is a mixed message on the loan side.

It has been strong first quarter, slowing in the second.

We will to see.

The liability side has been strong throughout.

We continue to improve our mix, and improve our margin relative to the cost of some of the pricier types of deposits and grow net transaction accounts, which is ultimately real, really important.

Now I'll make just a couple of comments about the whole issue of TARP and stress tests and equity just to bring everybody up to date.

We were very pleased as the stress test rolled out that we were one of only two traditional commercial banks to quote unquote pass the stress test, meaning we did not require any capital.

We have had a number of questions from analysts about did -- in order to accomplish that, did we do a lot of pushback, a lot of negotiating, because apparently based on what we have been told a lot of institutions did a lot of negotiating and the regulators apparently made changes and reduced the amount of capital they had to have.

We did not push back at all.

We did not negotiate at all.

We passed on the first results, and frankly we did not think it was worth our time candidly to go spend a lot of time fighting the government over whether or not we could have more capital when we already had more than sufficient.

Ours was a very pure pass, which we feel very good about it.

Following that, as you know, we raised $1.7 billion in the market.

I think it was very reasonably priced.

It was very well accepted.

It has been traded very well since then.

We feel good about that.

Part of that was to cut our dividend from $0.47 to $0.15.

We obviously struggled over that for a long, long time.

It was an extraordinarily difficult decision but it was the right decision.

I will point out that at $0.15, while way down from our previous percentage, it is still one of the best dividend ratios out there in the business today.

So, after our capital raise, we paid off TARP, which was a glorious day, and after about three or four days we came down off the ceiling and got back to running the bank.

It was seriously a very good feeling to have that done.

We are announcing today that we have agreed on retiring the warrants that the government received as a part of the preferred stock investment.

We have negotiated to retire them for $67 million, which is not cheap, but it is not high.

It is a reasonable number we think, and we think it is very, very important to complete the transition of completely exiting the government from our business and this absolutely does that.

Of course what it does for us is removes the uncertainty in our business, which was our primary concern about TARP.

There was certainly a lot of specific things that were done around meetings and all kinds of things you could and couldn't do, and created a lot of uncertainty for your higher paid people -- not your executives but mostly your producers.

And so this eliminates all of those clouds.

But frankly, the main advantage to me is that it eliminates the possibility of the government politcizing lending in our institution, and it still disturbs me that other institutions still have it.

And I am pulling for them to get out as soon as they can, because we do not need to politicize the lending process in this country, which would be horrible for our total economy.

So this removes our uncertainty and positions us to take advantage of future opportunities.

We are one of the best capitalized companies in the country.

We are one of the few best rated banks in the country.

We are seeing lots of flight in quality because of that.

So the future looks really, really bright for us beyond this correction.

We are not naive.

We are not through this.

The economy is still deteriorating.

We think it will still deteriorate for some period of time.

We agree with the Blue Chip economic forecast that we will probably see a bottom of this and some improvement by the fourth quarter.

So we are anticipating slowness and some deterioration through the end of this period, probably finding a bottom around the fourth and then a slow recovery over the next two or three years.

Frankly I think that can be a very good environment for commercial banks and certainly one like us because we don't need an immediate robust return to the 1990s, it wouldn't be sustainable.

So in wrapping up, let me just mention to you that in addition to spending a lot of time on credit, that's the number one thing we have to do.

But it is very important in this kind of environment to not forget running the business for the future.

That's all about focusing on quality service to our clients.

We continue to do that.

Our recent numbers show we have the best service quality we have ever had, best in the market.

We continue to focus on revenue generation with our clients and with prospects.

We are growing revenue 13%, which is very good.

We continue to focus on cost control to allow us to invest in quality and revenue.

And if you ex out all of the unusual items in this year-to-date period, our expenses are basically flat, which means we are controlling all of the things we can control.

So I would just leave you with several reasons that I think continuing invest in BB&T is a good thing and certainly one that we think makes it reason to feel very positive about the future for BB&T.

First, we have the best culture and values system we believe in the business.

We've had it for a long time.

We preach it.

We live it every day.

It is extraordinarily important in leading our company.

We have a really great experienced and talented management team.

They have been with BB&T a range of from 20 to 37 years with an average of 28 years, and yet they're young.

Ages run from 41 to 60 with an average of 50 years old, so we've got a 50-year-old average with 28 years of experience, which is best of all worlds.

This group has been through the battles together.

We've seen multiple cycles.

Most of everything we have in this world -- everything we own is tied up in BB&T one way or the other.

It is our life.

We're just a bunch of achievers.

We're driven to achieve and focus on shareholder value, so we think that's good for shareholders.

We are fortunate we operate in the best markets in this country, probably the best markets in the world.

And we have a tremendous opportunity right now, a huge disruption in the marketplace.

Virtually every one of our major competitors have big time issues in terms of huge mergers they're trying to assimilate and/or internal organic challenge issues, and virtually all of the small banks that have been nuisances for us in the past are struggling, and so there's really not much able competition out in the marketplace today.

So we feel very blessed about that.

And generally, we and all the remaining commercial banks to survive are going to face a very positive 20 years of reintermediation as we move from 35 years of disintermediation of commercial banking balance sheet out into these capital markets.

We are getting ready to go through 15 years of reintermediation, which is going to be a phenomenal opportunity.

It'll be particularly good for us because we have the best model in the market in terms of providing value.

Our community banking model is a 20 year experienced model that works in good and bad times.

If you think about it, we are one of the few banks in the country that has had a set of proven strategies that have worked in good and bad times, and proven leadership that has been tested over the long term and is eager to create shareholder value.

To support that, I will point out that for 15 years we've had a 22.4% compound growth rate in our earnings power, which is pretax preprovision which is very strong.

That portends good cash flow generation in the future, which will be very good for our shareholders, and in the past our shareholders have done well.

Certainly the last several years no one has done well.

But I would point out to you over a 20 year period we've had an 11.2% compound total return to our shareholders versus 8.4% for S&P and 8.7% for peers.

If you compound that difference over a 20 year period of time, that is a huge creation of wealth which is very good for our shareholders.

Let me pause now and turn it to Daryl to give you more color on the several important items and then we will have time for questions.

Daryl.

Thank you, Kelly.

Good morning, everyone.

Thank you for joining us.

Today I will be discussing the following topics -- balance sheet management, net interest income, margin, expenses, efficiency, operating leverage, capital, and taxes.

Let me first discuss balance sheet management and the margin.

As Kelly discussed earlier the call, as expected, linked quarter margin was down 1 basis point.

The linked quarter margin decrease is attributable to lower yields on the investment portfolio, partially offset by wider credit spreads on loans and wider funding spreads on deposits.

Business loan credit spread widened by 10 basis points, and mortgage loan credit spreads widened 9 basis points, offset by a retail loan spread narrowing 6 basis points.

On the other side is of the balance sheet, funding spreads on [many]trade deposits widened while CD spreads narrowed a bit.

While we are pleased with our net interest margin results, if you adjust for the deteriorating asset quality compared to last quarter, net interest margin would have been 3 basis points better, and on a common quarter basis, it would have been 6 basis points higher.

Last quarter, we stated that the primary drivers for net interest margin would be loan growth, prepayment on mortgages, and deposit costs.

While the loan growth factor was negative, the other two drivers were positive, especially the ability to lower our core deposit rates in the face of more rational competition.

We continue to believe the margin for remainer of 2009 will be in the [3.60] area, up modestly in the third quarter, and continued improvement in the fourth quarter.

The primary drivers for margin for the next few quarters will be rates paid on deposit, maintaining wider credit spreads on loans, the amount of carrying associated with nonperforming assets, and changes in the shape of the yield curve.

Overall, we are pleased with our margin results.

Net interest income on a taxable equivalent basis totaled $1.2 billion for the second quarter, an increase of 7.1% compared to the same quarter in 2008.

The growth in earning assets, both loans and securities, and the intense focus on liability cost grow the majority of the increase in net interest income.

On a linked quarter basis, net interest margin was slightly down, driven by a flat margin and a decrease in earning asset.

Client deposits more than funded loan growth on both an average and point to point basis.

As a result, we continue to decrease the amount of national market funding and replace it with client funds.

We also sold $1.6 billion in 30 year mortgage backed securities in the quarter, and [net] $19 million in security gains, continuing to sell our longer [date of] securities, reducing both convexity and the duration of our portfolio.

Now let's look at non interest expenses.

Looking on a common quarter basis, noninterest expense increased 23.1%.

Excluding $46 million in expenses from purchase acquisition and the $71 million special FDIC adjustment, noninterest expense increased 10.4%.

The remaining increase was driven by the higher FDIC expense.

Recall that BB&T's FDIC insurance credits expired last year, so that our FDIC expenses of 32 million excluding the special investment.

In addition, we had $43 million increase due to foreclosed property expense, $13 million operational chargeoffs and legal settlements, and $16 million in pension plan expense.

We told you at the beginning of the year that FDIC, pension, and credit related costs would be headwinds for us in the noninterest expense this year.

That has really turned out to be true.

Excluding these items, noninterest expense was essentially flat.

Looking on a linked quarter basis, noninterest expense increased 42% annualized.

Excluding purchase acquisitions and a $71 million FDIC assessment, noninterest expense increased 30.9% annualized.

The increase was driven primarily by $27 million due to changes in the market value of our [rabbi] trust, which does not affect the bottom line; $9 million for VEVA expenses; $4 million for loan and lease expense; $21 million in foreclosed property expense; and $13 million in credit related legal settlement.

Offsetting the increase in noninterest expense was $11 million for restructuring charges; $6 million for social security and unemployment taxes, as employees began to reach their [withholding] limit; $4 million in salaries due to decrease in FTEs; and $31 million in gains on early extinguishment of debt.

Looking at our full-time equivalent employees, positions decreased by 733 in the second quarter, through the combination of attrition, job elimination in connection with strategy changes, and cost control efforts.

Overall, we are aggressively managing our controllable noninterest expenses and we continue to pursue opportunities for expense management.

Turning to efficiency, we saw some deterioration related to both one-time expenses and costs associated with the current credit environment.

The [GAAP] efficiency worsened to 53% for the second quarter compared to 50.9% in the first quarter, primarily due to seasonality and the FDIC special assessment.

Excluding special items, efficiency was 51.4%.

We remain focused on containing controllable expenses even in the face of costs associated with our [problem] loans.

Operating leverage for the second quarter was negative primarily due to the FDIC special assessment and expenses related to the current credit environment.

However, we are pleased to have positive operating leverage on a year-to-date basis, excluding special items.

Given the effect that the economy continues to deteriorate, we expect our expenses related to asset quality issues to continue to climb.

While we remain focused on achieving positive operating leverage through 2009, the goal is more challenging given the non interest expense headwinds which is consistent.

With respect to taxes, our effective tax rate for the second quarter was 16.5%, which is consistent with lower pre-tax earnings.

For the remainder of 2009, we expect the effective tax rate to be in the 23% range.

Finally, looking at the capital, despite the economic challenges, our regulatory capital ratios remain very strong.

The leverage capital ratio is 8.5%.

Tier 1 capital was 10.6%, and total capital was 15.2%.

Our Tier 1 common to risk weighted asset ratio was 8.4%.

Additionally, we saw improvement in tangible common equity, which came in at 6.5% compared to 5.6% at the end of the first quarter due to the equity issuance that Kelly discussed.

Even though we repaid the TARP investment in the second quarter, our capital ratios continue to place us the top tier of other large financial institutions and we remain one of the strongest capitalized financial institutions in the industry.

In summary, let me say even though we continue to face credit related challenges and heightened cost, our underlying performance remains relatively strong.

The margin remains stable.

Liquidity and capital remain very strong.

Deposit growth and nets are very positive and we continue to be intensely focused on expense control and getting back to generating positive operating leverage.

With that, let me turn it over to Tamera to explain the Q&A process.

Thank you, Daryl.

Before we move to the Q&A segment of this conference call, I will ask we use the same process as we have in the past to give fair access to all participating.

Our conference call provider has been instructed to limit your questions to one primary inquiry and one follow up.

Therefore, if you have further questions, please reenter the queue so that others may have the opportunity to join the call.

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

Thank you.

(Operator Instructions).

We will pause just a moment to assemble our queue.

We will take our first question from Craig Siegenthaler with Credit Suisse.

Thanks and good morning.

Good morning.

My first question is on the other real estate owned portfolio.

I was just looking at the sequential increase in size relative to your loans and capital, which you mention.

I am wondering -- are there any constraints out there with regulators to provide pushback and say let's look to bring this up or down a little bit maybe through bulk sales or auction?

I am just wondering in terms of the growth of the portfolio going forward?

No, not specifically on ORE, but they do have some guidance that they will give around aggregate nonperforming assets, and classified assets.

And so it is not like an absolute definitive ratio or percentage.

But they look at, they don't look at it as a singular category.

They look at the aggregates.

Got it.

So it is within the context of nonperforming assets, not on a standalone basis?

That's right.

I'm wondering -- did you see the home price data this morning?

We've got new housing starts picking up again, beating the economic consensus estimate.

I am wondering if BB&T views that a negative or positive.

It is positive for the economy, but it also adds new supply out there.

I didn't see it specifically.

I have been in meetings, but I'm not too surprised about that -- because what is happening is -- I suspect they probably talked about the new housing starts being in the low price end.

What's happening is the market has really started improving in terms of inventory turnover in the low end, let's call that below $300,000.

And I have heard some feedback that some builders have started saying they don't have any inventory now, because remember for about two years they haven't been building anything.

And so I am not terribly surprised if you see some beginning new starts in the low end.

Our biggest challenge, we being the aggregate economy in the housing sector today, is in condos and higher priced homes, which are not moving.

Part of that is because -- the low end homes are moving because of a lot of it is because of the $8,000 tax stimulus, which is ironic because you may remember we argued as hard as we could argue that if they had put a larger tax credit based on percentage value of the house, they can help move the whole portfolio.

It is really working on the low end, and I suspect that's what is driving the new starts.

We will go next to Chris Mutascio with Stifel Nicolaus.

Good morning, all.

Thanks for taking my call.

A quick question, Kelly -- I think you mentioned if I heard you right that there were about $98 million in REO sales this quarter?

That's right.

So if I just, was the gross inflow of REO in roughly about $340 million, if I take?

That would be right.

Okay.

Can you tell me -- maybe this is more for Daryl.

What writedowns did you take on that $340 million in the quarter and what line item on page 14 -- do the writedowns go through commercial loans or through mortgage loans on page 14 for gross chargeoffs?

You want to answer it?

The average writeoff, when the assets leave REO and we sell is another 16% writedown.

And that goes through the foreclosure expense, noninterest expense line items, not through chargeoff.

You don't take the first hit through the chargeoff?

The hit through charge offs is when the value goes into REO.

So when we, when the asset goes on nonperforming and then goes into REO, we take certain writedowns and impairments, and when it leaves REO and goes off balance sheet and it is sold, then it goes through noninterest expense line item.

Right.

So the gross inflow of REO in first quarter, where would the writedown of that $340 million, what line item on page 14?

That would be embedded in your chargeoffs.

That's correct.

Right.

But which -- is it the mortgage loan chargeoff, is it commercial and loan lease chargeoff?

It would depend on which type of property it is.

Okay.

I'm sorry.

You can't just write that out.

Right.

The 16% -- I'm sorry, is that the average for the quarter or average all year writedown to REO?

That is 16% has been the most recent average for the quarter in the aggregate of product coming out of REO.

We will go next to Nancy Bush with NAB Research.

Good morning.

Hi Nancy, how are you?

Good, Kelly.

Thank you.

Could you just talk about -- the dividend is very important to your shareholder base and it was a wrenching experience for you guys to cut it.

Did you think about or talk about plans for regrowth of the dividend?

Yes.

You know I said, Nancy, when we cut it is the worst day in my 37 years and it truly was.

So immediately upon that I charted two top personal priorities.

The first was to get the government out of our hair.

Thank God we have done that.

The second was to restore our dividend as fast as possible.

That's my personal agenda.

Now that having been said, as you well know, we have to be careful about how quickly we try to do that.

So as we look forward, we will have a strong penchant to restore our dividend to its nature of being a relatively aggressive dividend, because of the retail shareholders.

Now when and how much we do that will simply be a function of our visibility of the economy going forward, our earnings momentum, and overall capital positioning.

So, what we will be doing is as we get stability in earnings look forward, we will be methodically moving it up and probably returning to our traditional -- we have always had a range of 40% to 60% of earnings being returned to shareholders in dividends.

That's a good healthy percentage for our shareholders.

We will be moving back to that.

Do you think you will have to sort of see the end of the recession before you can start to build it or does it just have to sort of be the light at the end of the tunnel?

I think, no, I don't think you have to see everything completely over -- because as you know, the way this thing, well, we don't all know.

But the way I think this thing will evolve is we are going to begin to see some clear light at the end of the tunnel, and actually see the technical recession over, and some indicators like unemployment may be still be hanging up there.

So I don't think it has to be everything is back to normal.

What really we have to see frankly is a change in cash flows.

So, as you know right now our underlying -- our cash flow generation is huge.

But when you take the chargeoff, the costs associated with dealing with [REO] and the reserve build, we are throwing a lot of money in there.

As the portfolio indicators allow us to stop the build, got to be the first step, and then as chargeoffs come down, we will start generating a lot more earnings.

And about the time that that happens will be about the time we will be able to consider a dividend increase.

I don't want to do it too early, Nancy, because frankly, I have been through this nightmare once.

I don't want to go through it again.

We will go next to Brian Foran with Goldman Sachs.

Good morning, guys.

Morning.

I guess the most common concern I hear from investors on BB&T is the fear that you're more exposed to residential construction than appreciated and also that there are more write downs to come on some of the nonperformers.

And I think the stock today reflect that with the lot loan disclosure as well as the growth in REO.

So can you -- it was helpful to hear the writedowns on the $100 million of NPA sales or REO sales you have this quarter.

Any other metrics to help give people comfort that there are no more loans secured by land that might be another bucket or that the REO is marked correctly.

Any metrics you can give?

I think that's the main concern.

I appreciate that and it is a concern and a fair concern.

First of all, the, I don't want to, I hope we won't blow the lot portfolio out of proportion.

We wanted to fully disclose it for full transparency.

Again, it is a $1.9 billion portfolio, and it's well contained, and we have taken an aggressive posture in terms of dealing with it.

We are actually the process of a very aggressive renewal program with those portfolio loans and the vast majority of those clients are simply reviewing the loans with a longer term amortization schedule because they still plan to come here and [hire].

So, I don't think one should look at that as just a total disaster.

It is just one that had some -- it had some tank to it and we wanted to be really aggressive in terms of dealing with it.

Actually, if you look at the rest of the portfolio, remember what I said, in term of our aggregate past dues coming down for the last two quarters, if you look at the 16% discount we are taking on REO disposition, that's not a dramatic number -- and that has been relatively stable for us, I would add.

And so the -- in terms of the existing portfolio, other than this little spike in the lot portfolio, if you go through and really dig through the metrics, look at the capacity used, look at the growth levels, what you will see is it has been performing pretty much what we expected.

Yes, there is an increase in nonperformers.

But we have said all along that with our type of portfolio, of course if you got builder owned loans and so forth, in this kind of economy you will have a run up in nonperformers.

But the real key is in the ultimate loss, and we still believe our ultimate losses will be superior to the industry because of the way we select clients and structure the deals across [counters] we have, the additional collateral, the fact that we don't do speculative lending on and on and on.

We feel confident that it will continue in a methodical type of change relative to the environment, and we are not worried about some massive big surprise in our real estate portfolio.

Rather it will be a portfolio that will perform as you would expect it to perform relative to unemployment and housing prices and housing inventory.

So I don't want to over, I don't want to make it too positive or negative.

What I'm saying is we expect it to continue to deteriorate at a methodical pace for the next two or three quarters, but we think it will be very manageable.

If I can follow up, it seems like market share opportunities or market share is the big opportunity given the Wachovia integration, given the Georgia bank failures, given what's going on with CIT what that could mean for your factoring business.

There's a lot of very specific things that should benefit you.

Are there some metrics that you can give us to update us on the progress so far in any of those businesses or just tangible metrics to help size the total opportunity and progress to date?

We have tried to track some of the numbers in terms of specifically for example how much money have we attracted from Wachovia and that kind of thing.

To be honest, it is difficult because so much business moves in and across our vast system that you just really can't identify.

We tried to track some anecdotals, and we know we're attracted several billion dollars of business over the last 18 months from Wachovia.

So, you're right that the opportunity out there is just unbridled and it is all the ones you said -- it's extraordinary.

So what we are trying to be is really sure that we focus on right now is where we have a strong hand held on the asset quality.

We don't want to miss this phenomenal opportunity, because as I tell my associates, you are never going to see a time in the rest of your career, I don't care how young or old you are, where you're going to see a more opportunistic time because virtually all our competitors are extraordinarily weakened and we will take advantage of that opportunity.

We will go next to Greg Ketron with Citigroup.

Good morning.

Thanks for taking my question.

I had one on the other commercial real estate loan portfolio.

And looking at the dynamics compared to last quarter, if you look at commercial construction, it dropped from about $2.9 billion down to $1.3 billion.

And if you go over to the permanent income producing properties, it had a similar increase.

And first question would be, are those properties that are coming to completion in commercial construction that are being taken over to the permanent financing bucket?

And if so, when you look at the underwriting characteristics of the permanent financing, how does that compare when maybe you originated the construction line?

Okay.

So your assumption is right.

That is the trend for the construction [department], and the way we do it is we underwrite it for its permanent characteristics before we allow them to put the shovel in the ground.

So, we -- whether they plan to sell it or not, frankly in some cases they may have an outside takeout.

But whether they do or not, we underwrite it to a permanent amortization schedule that we are prepared to hold it.

So for one, that we have planned to hold, or one that for some reason if their permanent takeout goes away, it rolls into a permanent amortization schedule that is already predetermined based on prelease cash flow requirements.

Okay.

Kelly, on that, are you seeing the cap rates hold in pretty well compared to when you originally underwrote it or what the original expectations?

Or even if you are seeing some deterioration, is it still holding in to an acceptable level?

They're holding at the same level.

You know what happens with cap rates -- they move up and down depending on what happens in the marketplace.

They will get scared, and then they'll pop up, and they'll get hungry for loans and investments to come down.

But I would say over a period of time, there has not been a material change in cap rates that has caused any inability to move out into a permanent market.

It's rather based on the quality of the product.

We will go next to Paul Miller with FBR Capital Markets.

A follow up from Brian's discussion of the CRE.

He brought up a good point about your construction exposure and why some people feel your losses will be higher coming out of the circle than going into the cycle.

That's what worries some people about your stock.

On the CRE side, which is more of a late cycle losses relative to recessions, do you see that maybe that -- what would your argument be against that your CRE won't peak later on down the road and that you have done, that stuff that you have done is like not the big stuff, smaller stuff and you have a handle on the outlook for those losses will be?

Well, I base that on two things.

One is I know what we have done.

I know what our policies are and what our products are and the nature of what we've booked is.

And I also look at how it is performing.

When you see the metrics, there's some deterioration, but it is dramatically better than all of this trash you hear about in the marketplace.

And so again remember what this is in our portfolio is not the big -- you saw the article in the Wall Street Journal about the [four] high-rise office buildings with no tenants.

We don't do that kind of thing.

We have strip shopping centers, Walgreens stores, and CVS.

We do a lot of that kind of stuff, that number one is completely cash flow underwritten to a very strong anchor tenant.

Number two we typically also have a strong equity in the deal to start with.

Thirdly we typically have it guaranteed by the owner.

First of all, I don't think those projects are going to be the kind of ones that you are going to read and hear about that are going to explode as this -- this trade in [all sorts of] CMBS is expiring next year, and that's all of the big stuff that was packaged up, should have never been packaged up and it is coming due and it is dirty.

We have never participated in that margin.

I don't expect our portfolio to perform even remotely like that.

It's just a difficult [problem].

The other issue is when do you think this [stuff all peaks]?

We are still seeing deterioration in the job market.

Hopefully that starts to really write itself But if the unemployment or the job losses peak in the third or fourth quarter, do you think that's when the chargeoffs will peak, or will the chargeoffs peak a couple of quarters after that?

I think it'll peak a couple of quarters after that.

I think you will get a little lag after that, because some people hang on to the last minute.

And then they lose their job, and then it goes through the process of becoming nonperforming chargeoffs and that kind of thing, and remember in some of these cases the process, because of state limitation [are long] between when you first start difficult and when you ultimately grab the property and charge it off.

So, I think it will be a little bit of a lag effect, but it won't be like two years down the road.

By mid next year or thereabouts we are going to begin to see I think nonperformers and chargeoffs begin to peak.

We will go next to Christopher Marinac with FIG Partners.

Thanks.

Good morning.

Morning.

Kelly, you had made a statement back in the analyst day in February regarding doing transactions with the FDIC and other related acquisitions that -- something along the lines of you want to be paid in advance for those and buy things at discount.

Is that still your opinion today and has anything evolved as we have seen change in the last four or five months?

That's still absolutely my view, and candidly, we have been trying to be helpful to the FDIC in terms of helping them understand how they need to package or structure an assistance deal so that an institution like us would be willing to do the deal.

And what we explained to them as I mentioned at the conferences -- we are not going to go in there and take the deal with a bunch of dirty assets, period.

And then, if you say okay, let FDIC take the assets, that's still problematic because if we just get all the deposits for [no running] assets, that's problematic.

So we are working with them, and I have some optimism that they are reasonably soon going to come out with a structure that is going to be a fairly -- a fair structure.

Not that the bank -- not that you'll be able to make a fortune on it, but that you would be able to take over these institutions if they're strategically important to you and it wouldn't be dilutive.

So is the current loss share arrangements not -- you see certain changes to what's being done right now?

The loss share arrangement is okay, but here is the problem.

If you do the loss share arrangement, you have to take the dirty assets, and you still have huge capital implications.

And I personally don't like to load up a bunch of dirty assets on our balance sheet and [hold] more capital, even if there's an ultimate loss share arrangement with the FDIC.

That's not to say we wouldn't consider doing one, but I would be real careful about the nature of the loss share arrangement and try to look for some some consideration in terms of the capital allocation based on that asset being covered by a loss share with the FDIC.

And if you can get that type of consideration regarding capital allocation, then it would be a reasonable approach.

We'll go next to Jordan Hymowitz with Philadelphia Financial.

Hello?

Your line is open.

Please go ahead.

We will move on to Gary Tenner with Soleil Securities.

Morning guys.

My question is -- all my questions have been answered, but one quick question for you, Daryl.

On the linked quarter increase in [personnel] expenses, was there a particular driver behind that and how should we look at that going forward?

The biggest driver was our VEVA expenses, were up quarter-over-quarter, just higher health care costs.

Okay.

Great.

Thank you.

We will go next to Todd Hagerman with Collins Stewart.

Good morning, everybody.

Kelly, I just wanted to circle back to your prepared remarks on the chargeoff expectations.

You mentioned a couple of times that chargeoffs at this stage of the year were much worse than what you had budgeted or prepared for internally.

If I think about the granularity of the portfolio, and the fact you guys did two targeted reviews this quarter in some of the more troubled piece of the portfolio, what is it specifically that is surprising you guys in terms of the chargeoff rates, implying that the second half of the year is going to be respectively worse than what we saw in the first half in terms of chargeoffs?

Well, the frankly, Todd, the -- from the first of the year until now, there's only two things that have changed.

One is that we did see more deterioration in the one particular lot portfolio than we anticipated at the beginning of the year.

And so as we did a deep dive into that, we had frankly chosen to be pretty aggressive in terms of shoring it up from a nonperforming and a chargeoff and allowance point of view.

And then the other thing frankly is just me trying to be more conservative in terms of giving you some guidance in terms of the future.

I am doing that frankly out of just caution, because we are just in a really, really difficult environment to forecast how things are going to go.

I mean frankly, I do not have great visibility in terms of when this market is going to turn.

I do have a lot of confidence in the fact we are nearing the bottom, and that as we head into 2010, we will begin a flow recovery.

So, just out of an abundance of caution, I am trying to be a bit more cautious in terms of what we put out there in terms of guidance or expectation with regard to what our chargeoffs may be.

It's not that there's been a dramatic change in terms of the rest of our portfolio, because frankly there has not been.

Okay.

I guess what I am looking for is again, given the fact you did this targeted review, is if there was something new or incremental you were necessarily expecting in the second half of the year post this review, outside of just the weakening economy?

Well, I think two things, one is -- you should expect that as the economy continues to linger in recession, more real estate clients will have challenges.

We said all along when you are dealing with real estate clients, whether builders or developers, the longer the recession lasts, the more likely they will run out of cash, and they will become a quote unquote problem.

It does not necessarily say you will lose money -- it just says they're out of cash and we have to be more active and work on the project with them.

The one factor is just the longer it goes on, the more of those you would expect to become classified assets and/or nonperforming assets.

So as you move through the cycle, in terms of allowance for example, the allowance is materially driven by the level of classified assets.

And so you end up having to build your allowance based on the classify, even if you don't lose any money on it.

And then in terms of your chargeoff expectations, part of that is us being somewhat more aggressive with regard to taking stronger upfront hits in terms of chargeoffs as these clients move into the classified status.

We will go next to Jefferson Harralson with KBW.

Thanks.

A question on again the mark of the NPAs and such.

What do you think the average mark on a relatively new NPA, the first time you mark an NPA, let's call it a commercial real estate, okay -- what do you think the average first mark is on a new problem loan?

So the first mark being when it moves out of our performing asset category, into REO.

Yes.

We get a range there of like 15% to 30% I think we said, Daryl, it tends to average somewhere around 20%.

I think it is a little higher, 27%.

27%.

Okay.

And you think that the 16% I guess average mark on REO to sale is a good number to think about going forward or should we see that decline or get better as time passes?

I think most likely it is a reasonable to think about that as kind of a normalized rate going forward.

There will be two things that will work against it.

One good, one bad.

What will work for it will be as we begin to see some increased appetite for these properties -- and that is happening by the way by the day.

There's lots of money on the sidelines that wants to buy these properties.

As you have more demand for the properties, that will tend to put more open price pressure, which will put more downward pressure on the exit costs.

And then on the other hand, on some of the properties you hold a longer time, if there's not an increase in demand that would argue those might take a deeper discount.

So you put all of those together intuitively, and I feel like something in the 16% range would be a reasonable number to look forward.

All right.

And then lastly on balance sheet growth, do you expect -- you guys would have the opportunity to take away a lot of market share if you wanted to and you have done a lot of it in the past, a few quarters.

But is loan demand just not there to grow the balance sheet?

Or are you being cautious?

And what do you expect this balance sheet -- where do you expect this balance sheet to be a year or two from now?

Do you think it should be smaller because of the environment and the economy, or larger because of the great market share takeaway opportunities that you have?

I think it will definitely be larger because of the takeaway market opportunities.

Now, what the market itself does is harder to judge, because right now, I would say the second quarter, I think we and probably everybody else you talk to is probably going to have experienced some real softness in their commercial book in the second quarter.

Their retail book has probably like ours been soft for some period of time.

But these things are very psychologically driven.

If the market begins to sense that we are going to recover from this this economy at the end of this year into next year as they begin to get some sense that Obama and company are going to be more reasonable in terms of some of the fiscal policies they put into effect, all of those things would restore confidence and you would see people buying computers and building plants again.

So I think it is hard to judge what the market itself is going to do.

I personally think it might be sluggish for the next couple of quarters and then you'll probably see some decent growth in the market itself because at some point you have to replace trucks and buy computers.

In terms of our opportunity, independent of the market, there's a wonderful opportunity to first move market share, and our expectation is to grow independent of the market as we do that.

We will go next to Jamie Peters with Morning Star Incorporated.

Hi.

I was just curious -- now that you are out of the TARP funds and we talked about the dividend earlier, would you consider issuing a share buyback repurchase program before raising the dividend?

I think, Jamie, that will depend on the economics at the time.

As you know, it would depend on our stock price relative to our dividend, and we what we'd have to raise the dividend.

It would depend on your capital ratios and/or future opportunity that might require capital.

You really can't forecast that, but we will have a bias towards everything else being reasonably equal.

We will have a bias towards raising the dividend before we reduce TARP buybacks.

Okay.

If you think about your REO as an investment portfolio, how much of that $1.2 billion seems to be something you would be willing to hold on to hoping maybe prices would bounce back, and how much is just garbage you are ready to get rid of at any price?

I don't consider any of it to be garbage, but certainly there -- there's gradation in terms of the whole $1.2 billion portfolio.

Certainly some of it is of a nature that we would not expect it to respond in price with a direct correlation to improvement in market conditions.

That portion we will be moving to move it on out just as quickly as possible at whatever price it takes.

On the other hand, most of it is price sensitive to market conditions, and we do not feel today that it is smart to go out and deep discount that portfolio and flow it out on the street, because it is not shareholder friendly.

It is a business.

We have got it set aside with high powered people running it, and you can run that kind of portfolio over a couple of years if you have the capital, which we do, and it becomes a very shareholder accretive business to hold as long as you don't panic.

And we are not going to panic.

We will go next to Nancy Bush with NAB Research.

Kelly, just one follow up, and this is certainly a question I think you have probably thought about.

I mean I come from Atlanta, and I know that Atlanta has been in a nonstop growth mode for most of my life.

And much of that growth has been generated by residential real estate.

And this is true of the Southeast generally.

It is true of Georgia, it's true of the Carolinas, it's certainly true of Florida, et cetera.

I mean what do you see for residential real estate in the Southeast going forward in terms of growth, and if indeed it's not going to be what it has been in the past, which I don't think it is going to be, what do you see filling in the holes in the economy?

That's a really good tough question, Nancy.

I will tell you what I think.

I think we are going to see a relative downsizing of house sizes.

I think over the last 25 to 35 years, the whole economy moved into houses that were too large, not necessarily, not as large necessarily, too expensive -- and I think a macro trend will be to smaller houses, more efficient practical multifamily.

That will reduce the aggregate costs relative to people's income streams, which will allow them to save more, and I think that's the long term cyclical trend we are going to see.

As that occurs in the short run, I suspect what you are going to see is a number of existing housing inventory that is of the higher end price is going to end up being discounted and bought by investors and turned into rental property for the very same reason.

What will take its place -- I may be a contrarian on this, Nancy, but I don't see -- and I don't think it should be something to take its place in the context of let's -- what would it take to reconstitute the booming economy of the 90s.

I don't think that was sustainable long-term economic engine, and I don't think we ought to try to go back to that.

If we go back to where we were in the 70s, when I first started, if we look forward and want to talk about normalized being 5% to 6% to 7% growth rates, then I think you can return to that and absorb some of these structural changes like houses and even companies having less leveraged balance sheets, and not really have to find something to replace it.

Does that make sense?

I think so.

But if residential real estate is not the growth engine of the Southeast, then are you going to be able to add manufacturing capacity there or is there something to replace it?

Well, again I don't think it is going to have to replace it total, but I understand your point.

What I think is that we are going to see a resurface of manufacturing in the Southeast.

We are already seeing in a number of areas industries finding out they can compete globally as they really do embrace more automation.

So you will see more manufacturing, because I believe one of the broader macro trends you will see over the next maybe long term is there's going to be less willingness to go and do a lot of international outsourcing, primarily because of the geopolitical risk.

I will tell you from my point of view, I am much less likely to look toward international outsourcing than I was ten years ago.

The geopolitical hot risk places around this globe are enormous.

I personally think unfortunately for our kids and our grandkids, it is going to be that way for the rest of our lives and maybe longer.

So, I think you see all of the investments being changed by virtue of that global kind of systemic change.

So, manufacturing is one.

I think you clearly see a continuation of growth in biotech, and for example, in Triad where I'm sitting, as you know this area has been heavily dependent on textiles, furniture, agriculture.

There's a huge surge of investment in biotechnology in this area, lots of new jobs being created, and not just biotechnology, other forms of technology -- Dell Computer, Apple Computer.

So I think the Southeast switches from being slow driven from residential housing into a more balanced drive coming out of pure business investments.

We will go next to Al Savastano from Fox Pitt Kelton.

Good afternoon.

How are you?

Hey, again.

Two questions here for you, first quickly -- was there any bulk sales of NPAs or NPLs this quarter?

And then second you kind of mentioned the three REO buckets -- can you quantify or give us a little idea of what's in each?

Thanks.

Sorry, the question, the first part of the question, did the REO have hotels in it?

Did you do any bulk sales?

Okay.

I'm sorry.

Not really.

We did a little small bulk sale at the end of the first or second quarter.

I can't remember if it was the end of the first quarter or the first and second, but it was very small -- $15 million or something.

We wanted to just dabble and see what the discounts would be, and we didn't like what we saw.

So, we are really not interested in bulk sales.

The fact is the people who are going to buy bulk sales are private equity venture capitalists, and they are going to expect a 25% plus compound return.

And my sense is if it is a reasonable property, which most of ours are, if that kind of return is out there -- which implicitly it is for our shareholder if it is for somebody else -- I would rather give that return to our shareholders.

Then the competition of the REO in the three buckets?

So, it was 52% I think, land, lots, those kind of properties, and then it was 30% something --

It was 35% one to four family, and the remaining feasibility is very marginal between commercial and multifamily.

I'm sorry.

I asked the question wrong.

In terms of the three buckets, what do you think has no value, what you think you can hold onto in the short term, and what you think you can hold on for a couple of years?

We haven't delineated that in terms of a report.

But I would tell you intuitively I think in terms of the trash bucket, if you will, there could be as much as 15% to 20% of our portfolio that we've put into that category, and then really the rest of it, we wouldn't have three buckets.

There rest of the buckets would be the properties that we would consider holding onto and moving out, and we think that moving out be will be 12 to as much as 36 months period of time.

We will go next to David West with Davenport and Company.

Good afternoon.

Hey, David.

Wonder if you can give us a quick update on exposure to auto dealers and your floor plan lending?

I asked the same question a couple of days ago, David.

I don't have exact numbers, but I can tell you what P.

Davenport said.

We don't really have any material issues in terms of our relationships with our auto dealers.

First of all, we don't do that much wholesale, and when we do, it's very conservatively underwritten and monitored.

When we have any other credits to [tune] down, it would be like credit on the building that would be very conservatively underwritten, and with -- on a guaranty.

And so what is really happening is if our portfolio, any of the ones we have that are not being renewed, if you will, we see they're typically being bought up by other lasting dealers, and so our people don't have any material concern about any real deterioration in that portfolio.

And then an unrelated follow up -- could you comment on your expectations in the mortgage area and first half, you have obviously done well, refinancing so forth.

Are you seeing carrythrough to those trends in the third quarter?

No, it is slowing.

We saw applications slow in the second, which will carry over to the third, and it literally changes week by week depending on what happens to the 10 year mortgage rates.

We don't think we will be at the $8 billion level in the third and fourth.

I suspect it will be in the 50% to 60% range of that kind of number per quarter.

That could change.

If rates drop, we can get another huge refinancing.

We could have another $8 billion quarter, but I don't think that's likely.

I think you may see $5 billion to $6 billion quarters versus $8 billion quarters.

There are no further questions at this time.

I would like to turn the conference back to our speakers for additional or closing remarks.

Thank you for all of your questions.

We certainly appreciate your time and participation in this morning's conference call.

If you need any further clarification, please don't hesitate to call the BB&T Investor Relations department.

Have a great day.

Thank you.

Everyone.

That does conclude today's conference.

We thank you for your participation.