Truist Financial Corp (TFC) 2009 Q3 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the BB&T Corporation third quarter earnings 2009 conference call on Monday October 19, 2009.

(Operator Instructions) A brief question-and-answer session will follow the formal presentation.

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.

You may begin.

Good morning, everyone.

Thank you, Brandy.

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/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 Kelly King, our President and Chief Executive Officer; and Daryl Bible, our Chief Financial Officer, who will review the financial results for the third quarter of 2009, as well as provide a look ahead.

As we have in the past, we will have a question-and-answer session after Kelly and Daryl have made their remarks.

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 31, 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.

Thank you, Tamera.

Good morning, everybody.

I appreciate your joining our call.

We're going to cover a number of items today.

I'll start with a focus on the performance for the third quarter and the first nine months.

Then, we'll talk about some unusual items, some drivers of our performance.

I'm going to spend a few minutes on the Colonial integration and the strategic importance of that acquisition.

Then, Daryl is going to give you some more color on the margin and balance sheet composition, including the Colonial impact, expenses and efficiency, taxes and capital.

And then, we'll have plenty of time for questions.

So overall, we feel pretty good about the quarter, given the environment that we're in.

Our net income available to common shareholders was $152 million.

Our diluted EPS in the third quarter was $0.23, which was $0.01 ahead of the $0.22 consensus.

I would point out that it is $0.03 ahead of the second quarter.

So, some nice progress there.

We'll give you more color in terms of the drag on earnings for this quarter as we get through the discussion.

I did want to point out that our earnings power remains very strong.

Earnings power is defined as pretax preprovision.

And if you look at the third quarter, it was $881 million, compared to $916 million in the second.

But remember, we have some seasonal downdraft in the third.

So, it's really more important to look at the year-to-date, where you see, we have $2.7 billion year-to-date '09 versus $2.6 billion for year-to-date '08.

So it's up about 3%, which may not sound like a lot but I think that's very good in a really tough environment with slow growth, recessionary kind of conditions, intense focus on and the drain related to credit costs.

And remember, that even though in this calculation we've taken out the preprovision impact, there's also substantial credit related costs embedded in the earnings power number, including OREO costs and the drag of nonaccruals.

And so, we feel pretty good about that underlying strength of the economic engine, if you will, of the Company.

We did have some unusual noise in the quarter that basically washes out.

We had a $25 million pretax contingent liability on a nonrecurring item, that's about $0.025.

We did have $18 million in merger charges related to Colonial.

So, the two of those get you to about $0.045 to $0.05.

That would l be kind of to our advantage relative to kind of what you might think about as core earnings.

On the other hand, we did have about a $12 million tax advantage because of some nontaxable gains related to terminating some leveraged lease transactions and also, about $31 million in securities gains, which is about $0.05.

So our view is that the $0.23 is a pretty solid number and that the noise kind of washes itself out.

Net income year-to-date was $544 million or diluted EPS of $0.88.

Let's talk about some of the key drivers.

Obviously, credit quality is the primary focus for us all today.

I'll just make an editorial comment as we begin to look through these numbers.

You all are going to need to really focus on the impact of Colonial in some of our credit metrics because, as you know, we are required to report on a GAAP basis.

But in some cases, it makes more sense to look at the numbers excluding the impact of the $8 or so billion in Colonial loans.

Because as you will recall, those are covered loans with the loss share agreement with the FDIC, which makes them substantially risk free.

And so, when you're going through these numbers in detail, you want to just be aware of that.

So our nonperformers increased in the quarter from $3.3 billion to $4.1 billion, ending at 2.48%.

Now, just to show you an illustration of what I was just describing.

If you look at nonperformance, excluding covered assets, that number would come down to $3.9 billion versus $4.1 billion but the ratio goes up to 2.52%.

So, it's a little tricky because your numerator and the denominator changes around on you.

Not dramatic changes but just want to be sure you are able focus in on that.

Net charge-offs were $446 million, down a little bit from the $451 million in the second quarter.

The charge-offs as a percentage was 1.71% versus 1.81% for the second quarter.

And then, if you look at that excluding covered loans, the charge-off is 1.79% for the third versus 1.81% for the second.

So, a little downtick in charge-offs.

And so, if you look at year-to-date charge-offs, excluding covered loans, it is 1.73% and certainly, is reasonable given the kind of environment we're in.

Our provision for credit losses was $709 million versus the charge-offs of $446 million.

So, we had a $263 million allowance build in the quarter, which again is a significant number.

Year-to-date, I would point out that we have an $801 million credit -- allowance build, which is substantial.

So overall, the credit story is basically more of the same, kind of what we've been saying to you in the first and the second quarter.

We are pleased to see some signs of stabilization in consumer and prime rate mortgages.

I'll show you some numbers on that.

But we are having additional deterioration in our housing related portfolios, particularly our ADC builder/developer portfolios and that's deteriorating about as we expected but a steady deterioration.

The primary areas are still pretty where we've had it in Florida, Atlanta, metro DC.

Although, metro DC is stabilizing somewhat.

And we're beginning to see a few more problems in the coastal areas of North and South Carolina.

I would point out that we are seeing some signs of stabilization into early stage delinquencies.

We've seen a leveling off in the rate of change in nonperforming loans and nonperforming asset formation.

For example, nonperforming loans increased 22%, 21% and 23%, respectively, for the first, second and third quarters.

So you can see a pretty steady rate of increase, it's certainly not increasing.

The same thing in terms of nonperforming assets.

You see an actual decline in terms of the percentage increase, where the first quarter was a 35% increase, the second quarter was 21% increase and the third quarter was 18%.

So a nice trend.

Obviously, going up but going up at a slower pace, which we think is important.

I'd also point out for you to evaluate our delinquency numbers, in which case, our 30 to 89 days for the third quarter was 1.71% versus June, which was 1.70% and March, which was 1.83%.

So, a declining to stable level of delinquencies, 90 days plus, 0.33 for the September, 0.33 for June, 0.38 for March.

And so, you can see -- at least, I think we can say that there's a stabilization there with regard to delinquencies.

And obviously, what's happening is the previously identified problems are working their way through the nonaccrual and into the OREO bucket.

So, just a little bit of color on the various subcategories.

If you look at single family residential, ADC, that's where most of our stress has been and it remains.

We do, I would point out, monitor all credits in this portfolio, $2 million or above, that's about 2/3 of the portfolio, on a very intense regular basis.

The balance on that portfolio is now $6.3 billion, down $2 billion in one year, down $500 million in the second -- since the second quarter.

So, we're really moving that portfolio on through.

Charge-offs are up from 4.35% in the second to 6.35% in the third.

That's part of the resolution process.

Nonaccruals did increase from 9.3% to 12.1% from second to third.

But in response to that, we did build our allowance for that particular portfolio up to 13% from 10.7% in the second.

So, that's still the primary focal area.

We believe it's being managed very intensely and is under control but we do expect to see further deterioration in that portfolio.

Looking at other CRE, it's holding up reasonably well in the environment that we're in but there certainly are increases there, nonaccruals are up from 1.82% to 2.35%.

Charge-offs are up from 0.47% to 1%.

I will remind you though, this is a very granular portfolio, average note of $543,000.

We have a $25 million project limit.

So we just don't have the large projects.

I know there's a lot of conversation today about the CMBS portfolio and the trillions of dollars that are coming due.

And what's that going to do to the marketplace?

I would just point out to you that, for our Company, certainly, we don't have the high-rise 50 story office buildings, the huge megahotels, the big power centers.

By policy and discipline, we've just not done those.

And I'm not saying that ours isn't experiencing deterioration but it's unlikely to see the kind of significant deterioration that you might expect to come out of some of these CMBS securities as they mature.

We certainly don't have third quarter numbers, of course, but I would point out to you that we went back and looked at our performance and other CRE at the second quarter.

And our numbers, while increased, have significantly been better than the industry, at around 50% or less of what our industry peers are representing in this area.

In C&I, it's performing, I think, reasonably well.

I will comment again in a moment, it's very soft demand out there but nonperforming loans are up to 2.05% versus 1.40% in the second.

Charge-offs are at 0.94% versus 0.60% in the second.

Again, deterioration but certainly, not the kind of deterioration that we saw in the '91 period or even the '01 period in the C&I space.

And so, we're not particularly alarmed about that at this time.

I did want to make a particular point about the lot loan portfolio.

You remember we talked a lot about that at the second quarter because we had some concerns, I would say, on that approximately $2 billion portfolio.

So we had a lot of intense focus on it right at quarter end.

We took a very aggressive migration analysis approach with regard to that portfolio.

And indeed, if you'll recall, last quarter, our charge-offs spiked up because we really put a lot of those accounts on nonaccrual and took some pretty high charge-offs at the 15.5% level.

Because we've just, frankly, wanted to be overly conservative at that time.

Since then, we've had more time to study the portfolio, get more current appraisals, see how our loss mitigation process is working.

And indeed, it proves that we were overly conservative in the second.

So, we actually -- it was necessary to reverse $12 million of charges that we did in the second to be realistic.

We just overdid it.

And so, if you look at the second quarter lot loan charges, including the reversal, we only have 2.5% in the third.

But in a fair way of looking at it, if you exclude the reversal, the charge-offs in the second quarter would have be 13.8% and 5.2% for the third.

So, certainly, a portfolio that's seeing some distress but not nearly as bad as it appeared in the second quarter.

And I would say that our loss mitigation process working with those clients is going extraordinarily well.

The vast majority of those clients that we are entertaining, reworking those credits for those clients, the vast majority are taking the proposals we've made.

And we expect a very positive outcome of that for the clients and for the Company.

Home equity loans and lines, just not a material concern for us now.

It's a very stable.

Nonaccruals are up slightly but just not a major issue.

Bank cards, not a major issue for us.

A modest sized portfolio, $1.9 billion.

Past due is unchanged at 2.88, which is substantially below the industry average and actually down 36 basis points from January.

Mortgage continues to be a bright spot for us at $6.9 billion in production for the third and that was down from $8.5 billion in the second.

I think we all knew that with the rates going back up some.

Application volume was down 27% from the second but remember, the second was just a phenomenal blowout quarter.

So, we're very pleased at $6.9 billion for the third.

We did have 64% refi but the good news is 36% purchase.

So you're beginning to see the lower end of the housing market move, as evidenced by the sales figures you see and also the purchase mortgages that we are producing.

Nonaccruals were at 4.31% versus 3.82%.

So, an uptick there.

Charge-offs were at 2% versus 1.95%.

Again, an uptick but very low numbers relative to the industry averages.

Sales finance is performing very well.

I noticed there's been some commentary about what's going to happen to autos and auto portfolios.

Ours is performing very well, charge-offs declined, delinquencies are stable.

There's a small normal increase in our regional acceptance portfolio due to seasonal factors but there are really no material changes in our sales finance portfolio.

I would point out that we're getting actually improved net charge-offs.

One of the reasons is because the values of trucks and cars has come back up substantially in the last six months, particularly in the last quarter, as an awful lot of new product is not available in the marketplace because of the original manufacturers difficulties.

And so, used property is being bid up in these auctions and that's really helping us in terms of disposition underlying collateral.

OREO, of course, deserves a lot of attention.

It increased 10% to $1.3 billion.

It had some increases in Georgia.

It had a property or two increase in Maryland.

I'll remind you that our portfolio is basically made up of lot and land at about 52%, one-to-four verticals at about 35%.

Pretty good news, ORE sales were $132 million, up 28% compared to second.

We already have $82 million in new sales contracts in for the fourth.

So, OREO is moving.

That's an important take away from this.

If you look at sales, for example, in the first, we had $43 million.

In the second, we had $98 million.

And in the third, we had $132 million.

So, OREO is moving.

Obviously, not as fast as we would like it but it's certainly moving.

I also want to point this out because I think there's a lot of misunderstanding about looking at OREO.

Our OREO looks relatively high compared to some of our peers and that's been noted.

But I don't think that's the thorough and complete story.

We think what you should look at is total underperforming assets, which includes 90 days and still accruing, nonperforming assets, TDR's and OREO.

And so, ours, on that combination, is 4.48%.

We don't have the third quarter numbers of course.

But for comparison, last quarter, we were 3.73% and our peers were 5.47%.

So, the truth is we have relatively higher OREO but much lower 90 days and still accruing, and much lower TDR's.

We think that's a good story because we've been flushing our problems right on through the cycle and flushing them right into OREO, where we have control of them.

And we can start the disposition process.

We don't think it makes sense to let stuff hang around at 90 days and still accruing and loading up on TDR's when you have no practical way of really ultimately resolving the issue, at least while you're under that restructured contract.

And so, we think we're being very conservative.

I know there's been some concern about that and we'll be glad to entertain questions about that.

But we feel very comfortable about where our OREO portfolio is.

If you want to think in term of guidance for charge-offs, looking forward, we had said last quarter that we thought for the year we'd end up in the 1.80% to 1.85% range.

We're not changing that.

We still think that's the right range for this year.

We're cautious because the economy is mixed today.

Certainly, some of our data shows stabilization in credit quality metrics.

Some shows deterioration.

So, it's just too early to call any kind of an end to this cycle but certainly, there's no reason for us to raise our guidance in this area.

We're very pleased that our margin is at 3.68%, up 12 basis points.

A significant portion of that relates to the Colonial acquisition.

Daryl is going to give you some detail on that because we think that's a good story for you to focus on.

I'll call your attention to core revenue and noninterest income growth.

Remember, the most important thing to look at a company, from the long term point of view, is how much revenue you're generating.

So, our net interest income, second to third, was reported 34%.

Our reported numbers are all high now because of the Colonial impact and in some cases, some insurance impact.

Those are real transactions, though, they do take a lot of work, I'll remind you of that.

But if you want to flush those out, taking out purchases and certain selected items, second to third we're still up 6.6%.

A good number to look at, I think, is year-to-date, where on a reported basis we're up 11.6%; without items, 6.9%; which I still think is very strong given a recessionary environment.

If you look at noninterest income growth, second to third, it was down without items 29% but remember, we have a huge seasonal sling there.

So if you look at third to third, we would be up 11.1%.

If you look at year-to-date, we are up 13.9%.

Still experiencing a very strong mortgage increase of $6 million to $7 million over last year's third to third.

Other deposit fees and commissions are up $11 million.

We've been getting good results and higher commercial fees and operating lease portfolio growth.

So, feel pretty good about our noninterest income growth.

Insurance is still very strong relative to the industry.

It is beginning to -- is still suffering though some because of the prolonged soft market in the insurance space.

We think that may be on the verge of changing but certainly, right now, it's still a soft market.

So, if you look at net revenue growth, third to third, we are up without items 7.5%, which is very strong and year-to-date 9.7%, which we feel very good about.

If you look at the fee income ratio, third to third is up from 41.4% to 41.8%.

And on the year-to-date basis, it's up materially from 40.9% to 43.4%.

Obviously, mortgage is helping on that but our other noninterest income businesses are helping as well.

So, if you look at loan growth, this is a real challenge for us and I think the industry.

For example, annualized, second to third, our commercial loan growth was down 2.9%.

Now, again, I think that's going to look very, very good compared to the industry but still down.

Direct retail, which has been down for the last several quarters, is down 7.5% So, total loan growth second to third is down 4.2%.

Now, third to third is up 1.6% because we did have decent growth in the first quarter and the first part of the second quarter and year-to-date is up 3.9%.

But the more important issue here is what's going on right now.

And we are definitely experiencing a slow down in the commercial loan area.

I personally think, based on my own discussions with a lot of business people, that the business community is kind of sitting on their hands, kind of waiting.

They're apprehensive about what's coming out of Washington around health care, tax increases, trying to get a sense of clarity around the economic direction.

And so, the demand for loans is an issue.

I know sometimes, when people look at the loan growth numbers, they assume it's because the banks are not willing to make loans, that's just categorically not true.

We need to make all of the good loans we can possibly find.

I will say, we're being very diligent in terms of the quality underwriting, as you would expect, in this kind of environment but primarily, there's a reduction in demand for credit.

Our real estate portfolio is specifically reducing by our own intense focus and desire to diversify but we are seeing some flight to quality.

Now, understanding that fact that our aggregate numbers are declining, we believe that where we want to grow, we are growing, which is in C&I.

And an interesting thing is happening, that is we're booking a lot of C&I commitments through LC's because of the nature of the clientele we're dealing with, which is a higher-end clientele, relatively, than we've had in past years.

And so, if you impute a number of C&I growth, including the LC commitments, which is fair, third to third, our growth would be 8.9% versus 2% on a stated basis.

And so, we believe we are actually growing market share in the C&I area and feel very, very good about that space.

A quick look at deposits.

It's just a great story.

Noninterest bearing deposits year-to-date up 13.5%, which is very strong.

Client deposits are up 13.8%, even when you take out purchases, it's up 8.1%.

And so, the depositive market it is very strong.

We're seeing, again there, a substantial flight to quality.

We're getting lots of really good deposits, interestingly, from municipalities and state institutions from around the country because we're viewed as a safe haven.

We're continuing to grow net new transaction accounts.

We increased 17,400 during the third quarter.

A little below our goal but I would point out that that kind of growth in a recessionary environment is still very strong growth.

A comment for you about the Colonial integration.

We're very pleased about this merger, as we said when we announced it, for three reasons.

It's strategically compelling.

It has almost no asset risk.

And it's immediately accretive.

You don't get too many times in your careers to do them like that.

So, we feel very good about it.

Strategically, it improved our market share in Florida from 16 to number five, which is very, very important from a long-term point of view.

I know there's still concern about the Florida market but again, I'll remind you that there are 18 million people there and it's still warm in January.

We are very bullish on the long term for Florida when with we get through this correction.

We picked up a really strong number four position in Alabama.

It's a really good market.

I've been traveling there recently.

The opportunity for us, specifically in Alabama because of all the turmoil in banking down there, has left a pretty wide open market for a Company like us.

We're very, very excited about that.

And so, any time you can make an acquisition that meaningfully bulks up your balance sheet in an otherwise flat to down recessionary kind of environment, that's also a really good strategic advantage.

And we also picked up a nice toehold in Texas, into the Dallas/Fort Worth area.

A small operation into Austin.

There's been some question about our attitude with regard to that.

We view this as permanent, strategic move and we do not expect to materially expand in Texas right away.

We've still got work to do over here in our existing footprint but certainly, that is a really fine operation.

We're very excited about working with folks in that market.

Texas is a big state, 25 million people and it's a very important part of our long term strategic direction but again, we won't be pushing it materially in the short run.

We will do it over a longer period of time but we will be keeping and nurturing that operation and growing it in the Dallas/Fort Worth area.

I'll give you just a sense of the achievements that we've made in only about a two month period of time.

Our leadership teams are in place in all of our Florida new regions, Alabama regions.

Virtually totally in place in Texas.

We've implemented BB&T's credit review process for all new loan originations.

We've already converted their payroll, securities and fixed assets systems.

The rest of the conversions will be completed by the second quarter of '10.

We did a thorough evaluation of their mortgage warehouse business.

You'll recall there was a lot of conversation about that and sort of the part of what Colonial had, which was very bad, which we did not inherit.

We did not have anything to do with.

We did, however, take a rational look at the assets of the warehouse business done properly and determined that it is a good business for us.

We were already doing some.

And with their platform, we think we can grow that in our footprint and take advantage of the good relationships that they had.

A classic example of not throwing the baby out with the dirty bathwater.

They also had a very unique homeowners association line of business, which is one we've been thinking about trying to develop for the last five years.

They have it very well developed.

We're going to keep that and expand it.

So, that's a real plus.

We already have our signs temporarily changed on all of the Colonial branches.

Even though we're not fully converted to systems, we've developed a manual system of taking deposits across institutions.

And so, the BB&T signs are up across Alabama and further in Florida.

We did announce recently, we've reached an agreement with sales in the Nevada branches which we telegraphed early on was our intention.

We're very pleased about that transaction.

We'll be closing that in January.

And finally, I would just say to you that a response from the communities, employees, the depositors in that market has been phenomenal.

I've spent a good bit of time down there and we are very, very well received, as evidenced by the fact that our client deposits have been stable.

And we believe we are positioned to begin to grow that very shortly.

Finally, before I turn it over to Daryl, I just want to remind you that in the midst of all the turmoil that we're all going through and the negativity around recessions and all that's going on and I don't want to minimize that, it's certainly critically important.

It's got our number one focus.

On the other hand, it is important to remember that even in the midst of a difficult economy, the real good long-term surviving companies will protect and build on their value promise to their clients.

Because ultimately, at the end of the day, if you have a good value relationship with your clients, you'll be able to generate revenue.

And that still is the most important driver of long-term success.

Our value promise is based on the notion that value is the most quality relative to price.

We know, based on study and experience, that quality is a function of reliable, empathetic, responsive, competent service.

And so, what we've done is studied in the marketplace, how well we do.

And we can say, affirmatively, that we have the best value proposition in the market.

To that point, we just recently received our most recent study, performed by Maritz Corporation, an outside very well established global research firm, that does statistically independent studies of our scores and those of our major competitors.

And so, we looked at some key metrics, comparing ourselves to SunTrust, Wachovia and Bank of America.

And I am very pleased to say, that when you look at, for example, a question about likelihood to remain with us, we looked at the top two boxes.

So, in other words, how many of your clients gave you a nine or a 10 out of a 0 to 10 point scale?

And 84.6% of our clients gave us a nine or a 10.

Our competitors range from high of 71% to a low of 53%.

In the commercial area, same question.

We ranked 84.3%, top two boxes.

Our competitors ranged from 77% down to 70%.

If you look at the question, which is very pivotal, overall bank satisfaction.

In the top two boxes, we did 62.2%.

Our competitors ranged from 57% down to 42%.

And in commercial, that same question, we did 56.9% giving us a nine or 10.

Our competitors ranged from 49% down to 28%.

And so, you can see that we have a statistically valid material value distinction based on client feedback relative to our competition.

And that, I believe, is the most important question to be answered for investors and others looking at our Company from a long term point of view.

Now, let me turn it over now to Daryl to give you some more color on some important areas.

And then, we'll have some time for questions.

Thank you, Kelly.

Good morning, everyone and thank you for joining us today.

I will be discussing the following topics; balance sheet activity, margin, expenses, efficiency, capital and finally, taxes.

Let me first discuss margin and the balance sheet activity.

Linked quarter margin was up 12 basis points to 3.68%.

Linked quarter margin increase is primarily attributable to the acquisition of Colonial, which added about 10 basis points.

This is composed of; 3 basis points related to paying off Colonial's higher cost deposits and federal home loan bank advances.

3 basis points from the yield on covered securities.

And 4 basis points on covered loans.

Excluding the impact of Colonial, margin would have increased 2 basis points, which is exactly what we expected for our legacy balance sheet.

This was driven by wider spreads on loans and deposits.

Retail loan credit spreads widened by 14 basis points and mortgage loan credit spreads widened 6 basis points, offset by reduced carry-on transactions that we entered to become more asset sensitive.

On funding of spreads, both interest checking and managed rate deposits widened, while CD's narrowed a bit.

While we are pleased with our noninterest margin results, if you adjust for the deteriorating asset quality, including OREO, compared to last quarter, noninterest margin would have been 2 basis points better on a linked quarter basis and 12 basis points on a common quarter basis.

On a common quarter basis, margin improved 2 points, largely due to improved liability costs and the initial impact from Colonial.

We believe the margin for the fourth quarter will be in the low 3.70's, improving our outlook for the full year of 2009 to the mid 3.60's.

Looking into 2010, we expect margin to hover in the low 3.70's.

The primary drivers for margin for the next few quarters will be the effect of the Colonial acquisition, rates paid on deposits and the level of growth, the amount of carry associated with nonperforming assets and changes in the shape of the yield curve.

We have taken a number of actions related to the balance sheet, post-Colonial, which we outlined in the press release.

With respect to securities, we've sold $2.4 billion of agency securities acquired from Colonial.

We retained $1.2 billion of non-agency mortgage-backed securities and municipal securities.

Almost all of these retained securities are covered by the FDIC loss share agreement.

With regard to deposits and long-term debt, we executed on the following strategies as planned.

We've paid off $1.6 billion of higher costs broker deposits.

$815 million of mortgage warehouse business related escrow deposits were paid down, mostly due to the Taylor Bean run off.

We prepaid $2.8 billion of Colonial's federal home loan bank advances.

And we used approximately $4.1 billion cash proceeds from the FDIC to pay down liabilities.

The acquisition resulted in $690 million of goodwill and $176 million of core deposit intangibles.

The goodwill resulted primarily from the markup on federal home loan bank advances, the deposit interest rate mark and the valuation of covered assets and the FDIC receivable.

And finally, in connection with the Colonial acquisition, we successfully issued $1 billion of equity capital or 38.5 million shares on August 21, which further strengthened BB&T's already very healthy capital ratios.

Going forward, given soft loan demand and our desire not to reinvest securities at low interest rates, our balance sheet will remain relatively stable to down slightly for the next quarter or two.

Now, let's look at noninterest expenses.

Looking on a common quarter basis, noninterest expense increased 31.3%.

Excluding merger related costs and adjusting for the impact of purchase acquisitions and significant items, noninterest expense increased $179 million or 15.5%.

This increase was driven by a $96 million increase in the maintenance costs, valuation adjustments and sales of foreclosed properties, a $35 million increase in FDIC expenses, $18 million related to our [Ravi] trust, legal fees of $7 million primarily due to our credit environment, and an increase of approximately $6 million for mortgage-related incentives.

We also incurred an increase of $17 million for pension costs.

As we told you earlier, the FDIC expenses pension and elevated credit costs would be head winds for us and noninterest expense this year.

If you exclude these items, as well as purchase accounting and significant items, noninterest expense increased 2.7% on a common quarter basis.

Looking on a linked quarter basis, noninterest expense increased 46.7% annualized.

Excluding merger charges and adjusting for the impact of purchase accounting adjustments or acquisitions and significant items, noninterest expense increased $64 million or 20% annualized.

The increase was primarily driven by $58 million increase in maintenance costs, valuation adjustments and sales of foreclosed property and foregoing increase in advertising.

Turning to the impact from Colonial, we reported our expectations and projections following the acquisition announcement.

Those were based on rough but conservative estimates, given the short amount of time we had to model a transaction.

As the integration proceeds, we will continue to update you on our estimates.

First, we remain confident that our estimated cost savings of $170 million range and expected will be at the full run rate by the fourth quarter of next year.

We have a very strong history of achieving our cost saving targets in acquisitions and will do so in this year also.

We are reducing our estimate of merger related charges to $205 million, from our initial estimate of $245 million.

This reduction reflects the ability to repudiate contracts and branches in the FDIC assisted deal with no additional costs to cancellation.

The timing for one-time costs will be over the next four quarters, with the bulk of the costs in the second quarter of 2010, in connection with our systems conversion.

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

Turning to efficiency, we continue to see some deterioration related to costs for the current credit environment and for the initial impact of including Colonial into our Company.

Efficiency rose to 52% for the third quarter, compared to 49.8% in the second quarter.

We continue to remain intensely focused on containing controllable expenses, even in the face of higher costs associated with our problem loans.

Due to heightened credit and regulatory costs, as well as Colonial's higher relative efficiency ratio, offset as cost savings from the Colonial transaction are realized over time, the efficiency ratio will probably get a little worse before we see improvement later next year.

Looking at our full-time equivalent employees, positions decreased by 325, excluding acquisitions, in the third quarter.

Including Colonial, we expect to see a significant reduction in FTE's, mainly in the support functions over the next three to four quarters.

Operating leverage for the third quarter was negative, primarily due to elevated expenses during the quarter.

As we mentioned last quarter, higher expenses related to credit quality issues, slower loan growth and decreasing mortgage banking income have negatively affected operating leverage.

With respect to taxes, as Kelly discussed earlier, we entered into a settlement late last year with the IRS related to our leveraged leases.

As a result, we had nontaxable gains on terminations over certain leverage leases, resulting in a tax benefit of $12 million.

In addition to this benefit, we had taxes exempt income of $80 million and tax credit of $21 million.

These levels are consistent with prior quarters.

These factors, together with lower pretax income, produced a net tax benefit for the quarter.

Assuming no more leveraged lease terminations, we expect the tax rate will be approximately 11% for the fourth quarter.

Finally, taking a look at capital.

Despite the economic challenges, our regulatory capital ratios remain very strong.

The leveraged capital ratio was 8.5%.

Tier one capital was 11.1%.

And total capital was 15.6%.

Our tier one common to risk weighted asset ratio was 8.4%, among the strongest of our peer group.

Additionally, our tangible common equity ratio remained strong at 6.1%.

Our capital ratios continue to place us in the top tier of other large financial institutions and we remain one of the strongest capitalized financial institutions in the industry.

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

With our acquisition of Colonial, we have increased our earnings power potential.

We have strengthened our capital base.

And coupled with the FDIC loss share agreement, we have produced a lower risk balance sheet.

And now, let me turn it back 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'll ask that we use the same process as we have in the past to give fair access to all participants.

Due to heavy participation today, our conference call provider will limit your questions to one primary and one follow up.

If you have further questions, please re-enter the queue so that others may have an opportunity to participate.

And now, I'll ask our operator, Brandy, to come back on the line and explain the Q&A process for you.

(Operator Instructions) We will go first to Matthew O'Connor with Deutsche Bank.

Hi, guys.

Can you just give a little more color on some the sale of some of the OREO's that you did this quarter, in terms of what you got versus where it was being carried at?

And then, I assume that feeds into some of the OREO expenses that we saw this quarter?

Yes, so we've been basically selling the -- primarily focusing on the verticals during the most recent quarter.

And I think as we reported, the sales price, if you look at it from the original loan all the through the final exit value, there was a reconduction of 37%.

And so, what we do is, when we put it into OREO, we take a reduction that's usually about 27%.

And then, we write it down, if necessary based on further appraisals, during the time we have it.

And for the last quarter, it averaged about 10%.

And then, we actually sold it for about 5% less, on the average, than what we had at it.

So, now that math doesn't exactly add up because you're talking about the 10% is off of the 73% and the 5% is softer.

So, you have to kind of go through that.

But when you work through all the math, the final disposition price to us is about 37% off of the original loan balance.

Okay.

And I know it's impossible to know what the sales activity will look like this quarter but as you think about the OREO costs going forward, is this a decent run rate to start off or should we adjusting it up or down?

That's a good question and a hard one to answer but I intuitively think we are at kind of a level we'll kind of be at for the next probably two or three quarters.

I don't see it materially changing one way or the other.

Because what happens to you is you kind of -- if you've ever worked with these kind of projects, you're kind of getting the project in, you have some early costs.

You kind of have to cut the grass or you've got to get all of the up front things done.

Sometimes, there are repairs that have to be made, whether it's a house or whether it's a project.

So, you get a lot of that kind up front expense but then, when you kind of get it up to ready to sale state, you're just kind of holding it.

And then, you've just kind of got the taxes.

And then, whether or not you have any write-downs.

But I think we are kind of at a level that we will probably be able to sustain for the next two or three quarters.

Okay.

Thank you very much.

Yes.

Sure.

And we'll go next to Todd Hagerman with Collins Stewart.

Hi, everybody.

Just a couple of questions in terms of the purchase accounting for the quarter.

Kelly, could you just talk a little bit about the final marks in terms of the Colonial loan book?

And then, given that it looks like with the SOP-03 accounting effect, with the assets coming on board, can you talk a little bit about just in terms of the optics for NPA's going forward?

As those assets deteriorate, what we can expect as we think about kind of a repopulation effect?

Yes, let me just give a general answer and let Daryl give you some more color on at that.

But basically, in business terms, the way to think about that book of business is that through the whole cycle, we have about a 5% exposure.

Now, it gets real tricky into accounting because you have FDIC receivable, you took marks on the portfolio.

And then, as you begin to collect those loans, you basically assess it on a regular basis, and adjust the numbers, at least, quarterly.

And so, you are constantly adjusting the receivable and the mark based on your actual selection reality.

And so, you'll see some changes in our numbers as we go through the next several years but the next earnings impact on this, we still believe, will be very positive.

What you'll have to do though, is when you look at our nonperformers, from a GAAP point of view, we'll have to report their nonperformers.

I say 'they' because we are actually in our own Company, we're creating that book as a non legacy part of the bank.

And we've got it warehoused and circled off and we'll be managing that separately with a separate work group.

Let me ask Daryl to give you any more detail on that.

Yes, Todd, as it goes forward, as the OREO balances, as we work through the assets on Colonial, the OREO balances will go up and that will go in the nonperforming assets.

All of the other assets really won't be considered nonperforming because we have the loss share agreement with the FDIC.

So, we're going to be paid principal back plus the accrued interest on the loans.

So, it's only more of the residential mortgages will go into OREO will increase, which should be a smaller percentage because Colonial mainly had commercial mortgages on their balance sheet.

Okay.

Could you just give us order of magnitude there, just give us some context there on the resi mortgage?

If you look at our report, we showed what the number was initially.

I think it was about $150 odd million -- $151 million is what we had to begin with.

I really don't have a read on how quickly that's going to build.

Clark and his team are managing it just like they were our own existing assets.

So, typically, we would take those loans in and we'll write them down, like Kelly talked about, and then dispose of them.

Depending on what state that they're in, it's going to take some time to actually get the final products sold and take of possession of it and get it finally sold out.

It's hard to give a figure what that is but know that when it is in OREO, at least those assets that are in OREO, we had -- the FDIC loss share agreement allows us to put back the expenses that it costs to manage those OREO assets.

So, even though you're going to see increases of OREO assets from Colonial, our expense base shouldn't go up, because of that, much.

And we'll go next to Craig Siegenthaler with Credit Suisse.

Thanks and good morning.

We just had a question on the nonperforming loan valuation.

It looks like the charge-off coverage on the change in NPL balance was down a lot sequentially.

And it also looks like a lot of the NPL growth came from C&I loans, which have had historically had much higher severity.

So, I'm wondering if you could either provide the inflow of problem loan level this quarter versus last quarter?

And also, maybe a little more granularity on the problem loan valuation this quarter?

As far as the inflows, we definitely saw a larger increase in the inflows on the commercial side.

I think that's a mix of some loans on income producing CRE, as well as C&I.

We did have one large significant SNC credit that's in that number, that we believe will come out in the fourth quarter, that kind of moved those numbers dramatically.

If you take that one significant credit, it was close to about $90 million, out and you make that adjustment, then you wouldn't see as much of a run up in that category.

It still increased but not as much and we believe that we don't have any loss exposure with that asset.

Got it.

So on that shared national credit, it was a $90 million notional loan.

And you took a charge-off at a percentage of that, which you think actually could come back in a quarter.

Is that correct?

Craig, it went into our nonaccruals.

We don't believe we have a loss.

There was no loss taken.

So, even though it went in there, there's restructuring going on with that credit, that we believe that we're going to be fully secured on it.

And we'll go next to Greg Ketron with Citigroup.

Good morning.

I had a follow up question to the OREO situation.

One is, the type of property that you're seeing flow in, maybe even in the total OREO account, how much of it might be the lot loans, how much might be one of the four family and any commercial-type properties?

Any breakdown that you might be able to provide along those lines.

For the most part, there's really a mixture of both flowing in.

The vast majority is definitely residential mortgage-related.

So, it would be vertical construction, as well as land and lots.

As far as the other CRE goes, it's a lot smaller percentage.

As Kelly said earlier, the sales are mainly -- I think about 70% to 80% of the sales this quarter were vertical construction.

That is actually an increase in more sales on the land piece than we had last quarter.

It is the harder piece to move but it moving a little bit faster than it has in prior quarters.

And we'll go next to Nancy Bush with NAB Research LLC.

Good morning, guys.

A couple of questions, of points of clarification.

Kelly, you talked about on the lot loan portfolio that you were working with borrowers, etc.

Could you just add some color to that?

I'm a little bit clueless as to how you do a loan modification in a lot loan portfolio.

Yes, good question, Nancy.

What happened was, remember, virtually all of these were people from different parts of the country ultimately planning to retire in our market.

And so, they would buy a lot and get a three to five year bullet loan from us.

Expecting that, in that period of time, they would retire, sell their home, move here and build.

It's been happening that way for my whole career.

And so, what happened here is two things.

One, is they had challenges with regard to the lot value.

But more importantly, they were concerned about the 401-K's dropping, their ability to sell their house.

So, they could not execute on their plan to retire at this time.

And so, we've talked to enough people, we kind of know that's what's going on.

And so, what we did was we proactively reached out to those clients in anticipation of maturities and offered them a restructuring plan that allowed them to amortize it over, I think we typically did 15 or 20 years.

Because it wasn't realistic for them to come down and build a house now when they couldn't sell their other house.

And so, we just proactively offered them a proposal that made sense.

It still allowed them to accomplish their long-term purpose and that has been extremely well received.

The vast majority of those clients have been very appreciative, have accepted those restructuring terms and it's performing as agreed.

Does that then dictate that the loan go on nonperforming until some kind of performance target is reacher or can that just be a simple work out?

Well, it's fairly complex.

It depends on a number of factors.

One is the appraised value of the property.

Whether it's past due or not.

What's the beacon score of the client.

There's some scenarios under which that would have to become a TDR.

In many cases, it would not have to become TDR's but you have to look at it loan by loan.

Daryl, would you add any color to that?

Yes, the only thing I would add to that, Nancy, is out of all of the loans that have renewed this past quarter, only 6% really had issues that would either go nonaccrual and have to get impaired.

The other 94%, we were able to put on a new schedule and they're basically paying as agreed upon.

Okay.

And if I could just ask one other question.

On -- when you -- early in your comments, Kelly, you made a comment about $0.045 to $0.05 of special things that should be looked at.

And one of them was some special loss or something like that or some special charge.

Could you expand on that?

Yes, Nancy, you've been in the business a long time and I've got a lot of respect for you.

So, I think you'll understand my answer.

This is one of those unusual situations where I really -- it wouldn't be wise for me to give you the exact detail but it's a fairly aggressive reserving for us against something that we think will be resolved in the not-too-distant future.

And it's absolutely a nonrecurring type of situation.

And we'll go next to Chris Mutascio with Stifel Nicolaus.

Thanks for taking my call.

Kelly, your net charge-off guidance for the year of 1.8% to 1.85%, is that for legacy of BB&T's average loan book or does that also include the addition of CNB's average loan book?

No, that's the legacy BB&T.

Okay, great.

And then, Daryl, just to follow up, on the purchase accounting, you went through details on the percent, the changes in the basis point of the margin for purchase accounting adjustment.

Was there any benefit under purchase accounting on the net interest income dollar this quarter?

Yes, there was, Chris.

When we look at the impact for Colonial for the third quarter, when I take into account the net interest, there's always our fee income and expenses, they added about $0.02 to the quarter in the third quarter.

And I think if you look at it conservatively, it's probably $0.03 to 0.04 in the fourth quarter.

Margin was probably on a purchase accounting basis only and it's difficult to decide what's purchase accounting versus not because we wrote down the assets and you're receiving a lot of cash off of a base that generates more earnings.

It's probably worth about 2 basis points just on pure purchase accounting.

But obviously, but aggressively managing the liabilities and having a smaller book balance off of a bigger asset base that generates cash, you can see that you have higher potential yields on those other assets.

But I don't put that in purchase accounting.

We'll go next to Brian Foran with Goldman Sachs.

Thanks for taking my question.

Can you talk about the commercial construction book from two aspects?

First, it looks like nonperformers were up fairly significantly this quarter.

So kind of the outlook for ultimate level of stress?

And then secondly, when the balances being down several hundred million this quarter, coupled with several hundred million of growth in the permanent mortgage income producing book.

So, how much of the commercial construction is kind of moving off balance sheet and how much of it is being turned out in your permanent mortgage book?

Some of the construction portfolio is simply that structure maturing and on our own books becoming permanent.

So we certainly service the construction loan until the construction is finished and then it moves into permanent.

Some of it does move out into the external market.

We underwrite all of our construction credits so that we are prepared to hold them if that's what the client prefers.

In terms of the increase in the commercial CRE, it's kind of across the board.

What you're still seeing in the commercial CRE is some deterioration in some small office buildings, a little deterioration in some small strip shopping centers but nothing big.

It's very granular.

Remember, this portfolio has an average of about $543,000 in size.

So, you just don't have any one big answer I can give you there.

It's just a little deterioration across the board in those smaller credits.

Thank you.

And we'll go next to Betsy Graseck with Morgan Stanley.

Hi, good morning.

I wanted to turn the conversation a little bit towards some of the goals that you have for the CNB branches.

Could you just outline for us what your key goals over the course of the next one to three years?

What you're measuring, what kind of time frame you're going to be looking to hit certain goals?

And how you're going to to disclose that to us?

Yes, so, the most important in any merger but particularly a merger like this is to stabilize the market, stabilize the clients.

So, that you don't have any client loss.

This was particularly important in this case because of all the negativity around Colonial and just the nature of an FDIC-assisted transaction.

So, step number one is to stabilize the deposit base.

You don't have to worry so much about the loan side.

They're not going to run in and pay it off.

So, you stabilize the deposit base first.

We've done that much quicker than I had even hoped, to be honest with you.

It's gone just extraordinarily well.

The communities in Florida and Alabama, even Texas, have received us extraordinarily well.

The employees are on a real culture high and the clients know BB&T because our reputation is very, very positive.

So, the deposit market is stable.

The next step, Betsy, is to move that retail platform to a sales mentality.

That has already started.

We started late last week.

Our first sales program through the Colonial branches.

Early returns are very positive.

The employees are excited, finally, to be able to sell.

Remember, that the last two years, particularly in the last year, they were just on hold.

They couldn't sell anything.

They were just really held back.

And then, the third step is to basically restructure their lending machine.

They were totally focused on real estate lending.

And in many cases, the kind of real estate loans we don't want to make.

So, we said up front and I would reinforce, the real challenge in this merger is to build out for them a lending machine.

Fortunately, that's BB&T's strongest suit.

And so, we will be doing that.

So in terms of time frame, the deposits part is stable.

The sales culture, in terms of the retail side, will be I think up to full speed within a year or so.

And then, it will take a couple of years or so to get the loan machine going where you want it to go.

Okay, thanks.

And then, a separate question on the reserves.

With NPL growth stabilizing at roughly 20% Q-on-Q, how do you look at the reserve levels going forward?

Well, that's a really good one.

And I'll be honest with you, I think we're going to be thoughtful about dramatic raises in the reserves going forward.

Obviously, it's a function of what happens to your nonperforming assets.

But heretofore, there's been a real focus on building based on the absolute levels and trying to keep the allowance at appropriate levels relative to nonperformers.

My view is that as you near the end part of the cycle, which is where I think where we, then you begin to think about your allowance somewhat differently.

In that, you've already flushed out a lot of your problems and the probabilities of future problems goes down as you near the end of the game.

And so, for example, you saw at this time, allow for the first time, our allowance to nonperformers drop below 1.

Historically, in good times, you certainly want it to be above 1.

As you end the early part of the cycle, I think that's a pretty good indicator.

But as you move towards the end of the cycle, it's not realistic to expect that number to be above 1 at all.

In fact, it's not unrealistic for it to be meaningfully below 1 because, again, you've already flushed through some of your worst credits.

And you know a lot about your migration experience.

You know a lot about your ability to collect.

And so, you just don't have to have quite as many dollars in allowance for every $1 of a problem loan.

And so, I think what will happen, Betsy, for us and probably for the industry is you'll probably see the allowance continue to go up, but at a slower pace, probably for the next two or three quarters.

The one thing that I'd like to add to that is we saw our unallocated reserve increase.

It was $65 million and now, it's $100 million.

Which kind of proves the point that as you get towards the end of the cycle, you just don't even have as many direct immediate ones to allow for.

And we'll go next to Jeff Davis with FTN Equity Capital Markets.

Good morning.

Kelly, you've partially just answered my question but just sort of a follow up, then, in terms of credit losses for the industry and BB&T, are we -- and maybe looking back last week, things were somewhat of a mixed message from the large caps that released earnings.

Are we decidedly at a peak in credit losses?

Jeff, I wouldn't be prepared today to call it a peak like a peak-peak.

What I would say is and this is intuition but also based on just looking at our metrics.

I think we are nearing the peak.

If I had to stake myself out, I would say, you're certainly going to find the peak over the next two two or three quarters.

I suspect you will see nonperformance of the industry and for us continue to increase probably at a declining rate of increase.

And then, frankly, as you see the economy begin to stabilize and grow, you'll begin to see nonperforming asset sales increase because the marketplace is going to figure out when you're -- when you've hit the peak, that's when you want to start buying.

So, you'll see demand for these products go up materially, I think, over the next six to 12 months, which you'll -- So, you'll get hit on both sides, you won't be putting as many in and you'll have more going out the bottom.

And so, I wouldn't call it a peak today but I think it's not nearly as far away as it has been.

Okay.

And not -- and just maybe -- not to put words in your mouth and maybe it's obvious.

But if the economy models along 1%, 2% GDP next year, is the rate of improvement and charge-offs, just if it's just a gradual lift from here, is it a gradual improvement?

Or have we flushed as an industry so many bad credits that back half of 2010, even without the economy, credit costs start to drop notably?

Well, you framed the question well.

It really does depend on what happens to the economy.

Back in January, when we were talking all together we were kind of projecting charge-offs and so forth.

And we gave a little lower number than we're at now.

But we said, "Look, if the economy is bad enough and we start seeing unemployment at plus 10%, that begins to change things." That's occurred.

If the mood in the economy stays such that unemployment gets above 10% and hangs there, then, you'll see a stagnant level of high nonperformers for a material time.

I don't think that's what's going to happen but that would be the result of that.

So, right now, the pace at which we peak and the pace at which we decline is a function of consumer and corporate confidence.

And to be honest with you, I think that's largely right now based on what's coming out of Washington.

If our -- when we were coming out of the first quarter, I think the mood was clearly improving and people were beginning to begin to think we were getting ready to get through this thing and move on.

And then, all of the rhetoric coming out of Washington about health care and taxes and all of that has just put people on the sidelines.

I get a lot of anecdotal feedback but I sit in the Federal Reserve Board in Richmond and I'm always required to say my comments are my personal ones and not of the Federal Reserve Board.

But based on all of feedback that I see, the underlying metrics are turning.

But whether it continues to turn will be a function of confidence.

And so, we're going to need some positive leadership out of Washington to restore confidence before people are going to ahead and invest and buy.

And we'll go next to Christopher Marinac with FIG Partners.

Thanks.

Kelly and Daryl, I just wanted to clarify.

On the goodwill that you added from Colonial this quarter, will that be reassessed each quarter and perhaps can actually be declining, kind of like in the negative goodwill days of BB&T in the past?

We have to go through an assessment every quarter to see if there's any impairment.

We do that for all of our acquisitions that we have.

But the goodwill number in an of itself, the $690 million, will not change.

The CDI will get amortized.

We're going to amortize that on an accelerated basis over 10 years.

With the bulk of the expense running through in the early part of that 10 year time period.

Okay.

And then, on the $4.1 billion of the cash, Daryl, that you mentioned, was that increased from what you originally disclosed or does that include some of the cash that Colonial themselves had?

Chris, what we did, it was really the net difference between the assets and the liabilities that was acquired from Colonial.

That was the wire that the government sent to us.

And we use those funds, really, just to pay down our net borrowing position in the Company.

So, that's one of the big reasons why the balance sheet is a little smaller than maybe what people were expecting, is that we were able to just pay off our national market borrowing some by the net wire that the government sent to us.

Got you.

Very well.

Thanks, guys.

Appreciate it.

We'll go next to Paul Miller with FBR Capital Markets.

Thank you very much.

My question has to do with credit quality.

I know you're sick of talking about it.

But on your loans 30 to 89 days past due, especially in your commercial loans and leases, we've seen a pretty good improvement, from $600 million down to $365 million over the last couple of quarters.

But the NPA numbers of the nonaccrual loans continue to go up at a pretty fast pace.

Can you just talk a little bit about the process of the early stage delinquencies and how and when it's moving to NPA's?

Yes, well, what happens is if you think about the nature of these real estate clients.

When they start out, of course, they're flush with cash and flush with extra collateral.

And then, as the economy stagnates, they begin to use up liquidity.

They begin to get a little past due.

Then, as you work your way on through it, they get more past due.

And then, ultimately, they are out of cash and they become a nonaccrual.

And then, you go through process of resolving the situation voluntarily or in the core process.

So, a lot of times, it takes a long time to kind of move them through the cycle.

But that's why I think what you're seeing now shouldn't be too surprising because the clients that are going to have problems; the less capitalized, the projects that are the more difficult ones; they're well identified and they're already in the game, so to speak.

And so, they are the ones that are pushing now, they were already at the end of the 90 days and now they've pushed into nonperformer.

Then, the nonaccruals.

Then, they get pushed into OREO.

That's kind of a bucket that's kind of moving through.

And I think that's why you're seeing your 30 days and your 90 stabilize is because we've already got in the hopper the ones that are the most likely to become challenges to start with.

The other thing I would add to that is that this large SNC credit, that $90 million one, was basically paying, as agreed, throughout this whole process.

And he went right into NPL.

So, that was just a jump.

He jumped right through the past due.

And they're still paying, by the way.

Aren't they?

They still are.

The big question is, the cure rate is probably very low for these loans going 30 to 89 days past due.

Even though the defaults are down, mature rates probably are not that great.

Well, yes, I think that's right.

I think once these clients get to -- that's particularly why I was talking about some of the other industry competitors.

Once they get it -- once these real estate guys get up there to 90 days, 90 days plus, think about the nature of their business.

All they've got is house and lots.

They don't have anywhere to go.

And so, it's going to become a -- unless the market turns around real fast and they start selling lots and houses, it's going to become nonperforming asset and ultimately OREO.

Now, you do need to factor in when you're thinking about your aggregate look at the industry, and certainly to some degree us, that there are some positive signs out there, in terms of the particularly in lower end houses.

Lower end housing prices have stabilized in most markets.

Lower end volume sales is increasing.

You're beginning to see, I was just told last week in meeting with our presidents, some of the large track builders are beginning to go into some of these markets and take down lots again.

Which is a very positive sign.

So, this thing can almost turn on a dime for a lot of these clients.

Because if he's sitting there with a bunch of houses and a bunch of lots and all of the sudden a track builder comes along and wants to buy 100 lots, he's got enough cash to go for quite awhile.

So, it's a challenge to know exactly how that might work out.

We'll go next to Jason Goldberg with Barclays Capital.

Kelly, I think you mentioned that we should look at the combination of I think restructured loans, what you called NPA's and 90 days past due.

I don't think you include restructured loans in your NPA's on page 14.

Could you just let us know if you do or don't?

And then, if you don't or even if you do, what that number is?

I think we also wanted to include in there, Jason, TDR numbers, which are disclosed actually in the Q.

All right.

For the third quarter, we don't have that?

I think we normally publish that in the Q.

And I think last quarter, we were $120 million or so and we think it's going to go up a bit but nothing too significant from that.

Okay.

And then secondly, as Greg just talked to, you mentioned stabilization and delinquencies.

To what extent or maybe you can quantify the impact that loan modifications or foreclosure moratoriums are impacting those numbers?

You're seeing some impact on that in the consumer portfolio.

Remember, I talked specifically about the lot portfolio.

That's been material but only on that $1.8 billion portfolio.

The restructuring and modifications, also has an impact in the mortgage area.

But I don't think that would be what I'd call material to the aggregate stabilization of the consumer metrics.

Okay.

And then just lastly, I think I had it down in my notes that we would -- and maybe it's my own calculation, there would be some sort of kind of bargain purchase gain on the Colonial transaction.

Could you just explain why there wasn't, just given the purchase price or lack thereof?

Yes, well, we went through that, Jason.

We had really three line items that created the goodwill and when we were initially valuating the company.

The bulk of the goodwill is associated with the deposit premium that we paid, as well as the interest rate mark on deposits and then the mark on the advances.

We decided to pay off the advances because we thought that was beneficial to our earnings and to our liquidity position to do that early, rather than keep them and amortize it over time.

Okay.

Thank you.

We'll go next to Adam Barkstrom with Sterne Agee.

Hi, guys, good morning.

All my questions have been asked and answered.

Thank you.

Thanks, Adam.

We'll go next to Ed Najarian with ISI Group.

Good morning.

I just wanted to focus on the other commercial real estate piece outside of land and home development.

The 40 basis point loss in the second quarter going up to 1% loss in the third quarter.

Could you give us a little detail on what's driving that increase in other CRE losses, what types of properties?

There's not any one particular category there.

It's kind of a broad base.

Remember, this is an average portfolio size of $543,000 and so, you get a lot of small things to just kind of creep up on you.

So, I'm not aware.

Daryl, do you have any particular?

The three industries that are under more stress in that area are retail, office and hotel/motel.

Those are probably the three major segments where, if you had to pick which industries we're seeing higher increase in NPA's and charge-offs, it would be those industries.

And do you expect that to get materially worse before it stabilizes?

The issue there is back to the question of unemployment; and how long, how high it goes and how long it hangs?

Because see, the nature of our -- we don't have the super high-rise hotels and super high-rise office buildings.

We have the Quality Inns and the Wingate Inns and the Hampton Inns and that kind of thing.

And so, to the extent that the consumption patterns today, based on the consuming public's conservative view towards travelling and entertainment, stays where it is.

Then, you would see some continued deterioration in that.

If as the economy is expected to change, we see a topping out of unemployment and then things start steadily improving, you would see some continued increase in this but nothing dramatic.

And then, beginning to improve corresponding to the improvement in the unemployment rate.

Okay.

And then, just in terms of a broader question on reserves.

You're still building reserves at about the same pace in the third quarter here that you built them in the first and second quarter.

For most of the big banks that reported last week, we saw a noticeable decline in pace of their reserve build.

So, I'm just wondering, do you expect to keep building reserves at around this pace for several more quarters or should we expect a drop off in the pace of reserve build or how should we think about that?

Yes, you have to kind of take it a quarter at a time.

And remember, again, in GAAP reporting today there's a very, very scientific methodology, in terms of how you calculate the reserves, that you have to follow very strictly.

But that having been said, I think you will see an absolute increase in reserves for us but at a decreasing rate as we go through the next two or three quarters.

A decreasing dollar rate?

Probably but I'm a little clear about the percentage.

Okay.

And then, just one final quick question, the $35 million extra FDIC charge, could you remind me what that was and if that is not going to recur in future quarters or just what is that?

That's year-over-year.

If you'll recall, last year, we had actually credits with our FDIC expense.

So you're really just seeing the change in that line item between us not having to pay an expense last year due to the credits to us paying the full rate of the FDIC, plus it is up over last year a little bit.

And we'll go next to [Jamie Peters] with Morningstar.

Bullish long term on Florida but with net migration out of the state for the first time in 40 years and unemployment hovering around 11%, are you expecting a significant lag on a recovery of that market?

Could you talk about your short-term / medium-term outlook for that state?

Yes, well my understanding is, Jamie, in the last two or three months we have now reversed back to positive in migration.

And so, I think that's -- remember, the out migration, I think, was a function of the general economy but also the storms.

And memories and storms subside and people start moving back in.

So, I may be wrong but I was told recently by some people in Florida, that it has turned to in migration.

The values down there have been so deep discounted that for baby boomers that want to end up living in a place that's warmer, it's inconceivable to me that Florida will not come back fairly strong.

Now, I personally think it will be, let's take '10 for example, I think it will be kind of spotty.

For example, you're already -- we mentioned on an earlier call, what the people in Florida tell me is that that market actually deteriorates and then improves from the south to the north.

And so, you have already relatively more improvement in the Gulf Coast, for example, than you do in the north because it hit the north later.

And so, so you got that phenomena.

And then, you have the phenomena of the nature of the market.

For example, Miami has more high-rise condos.

And mostly, the biggest problems are still in those big condo projects.

So, I think I would project that '10 will be kind of a year of finding a solid bottom in Florida.

And then in '11, you'll begin to see some steady improvement.

I don't think Florida is going to be some kind of a whip around, turnaround in 18 months.

I don't mean to imply that.

I just think over the next few years, it's going to be a solid steady improvement.

And for the long-term, it's going to continue to be one of the most important states in the country.

Thank you.

We'll go next to Jefferson Harralson with KBW.

Thanks.

I was going to follow up on Jason's question just to make sure I understood what you guys were saying there.

It sounded like you were saying that you prepaid some debt at Colonial, which kind of traded near term, in addition to goodwill, in exchange for higher EPS over some some period of time.

Am I understanding that correctly?

I think Jefferson, the way to think about it, is the goodwill that we have basically gives us the ability to accrete earnings, more so over the next five years or so.

So, it's a hit to our tangible equity capital.

But it's a positive to the run rate of the earnings.

Okay.

And can you quantify that and/or in combination with that how you accretive do you think that Colonial was, even though you only had it for 1/2 a quarter this quarter?

I would say, Jefferson, right now, conservatively -- when we did the deal, we said about $0.15.

And I think we're able to go from maybe $0.15 to $0.20 right now.

And as we get more clarity in the acquisition, we can maybe update guidance a little bit further.

We'll go next to Heather Wolf with UBS.

Hi, two quick questions on the Colonial balance sheet, the loan volumes that you consolidated.

First, can you tell us what the carrying balance was at closing?

And also, can you talk a little bit about how much of that you expect to run off over the next couple of years and how quickly you might be able to get some of these credits that weren't underwritten to your standards off your books?

That was a good question, Heather.

One thing I'll tell you before answering your question, we will publish an unaudited beginning balance sheet from Colonial before October 30.

So, you'll be able to see that.

But the loans before the mark were about $13 billion.

They were about $300 million lower than what we thought when we were bidding on the transaction.

But remember, we were bidding on a June balance sheet.

After we take the fair value mark, it's about $8.3 billion is what the amount is.

And the way we model these assets is that these assets would probably pay down fairly aggressively.

Probably about 50% to 60% over three years or so.

And then, the rest remaining be in a longer tail.

That's perfect.

Thank you very much.

We'll go next to Vivek Juneja with JPMorgan.

A couple of questions.

The reserve for commitments, that was up pretty sharply.

Is that separate from the contingent line with your reserve?

If you're on the press release, there was about $70 million adjustment, Vivek, that went through purchase accounting.

When we got the unused lines from Colonial, that mark didn't go through earnings.

It just through purchase accounting.

That's why you saw the big increase in that unused line.

Okay.

Great.

And then secondly, on lot loans, so you talked about, either you or Kelly can talk about this, NPL's were up 25%.

You talked about doing a lot of restructuring of these lot loans.

And the ones that were not working out going to TDR's.

So, despite that, can you talk about what drove such a large increase in NPL's, 25%?

Are you talking about specifically in the lot portfolio?

Yes.

Well, that's just a process of working through the restructuring process, as well as the nonrestructured.

Not all clients were candidates for restructuring based on our assessment of collateral and beacon scores and that kind of thing.

And so, it's just a combination of what flushed out of the restructuring process and what didn't -- wasn't eligible for the restructuring process that then became nonperformers.

Thank you, Vivek.

Although we have a number of callers with questions remaining in the queue, due to time constraints, this will conclude today's question-and-answer session.

If you have further questions or need further clarification, please don't hesitate to contact the BB&T Investor Relations department.

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This concludes today's conference call.

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