Truist Financial Corp (TFC) 2009 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation fourth quarter earnings 2009 conference call.

On Friday, January 22, 2010.

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 this conference is being recorded.

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

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

Thank you, you may begin.

Good morning, everyone.

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

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

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

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

After Kelly and Daryl have made their remarks we will pause to have Cindy come back on the line 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 maybe statements made during the course of this call that express managements in intentions, beliefs, or expectations.

BB&T's actual results may differ materially from those contemplated by these forward-looking statements; however additional information concerning these factors that could cause actual results to be materially different are contained in the Company's SEC filings, and now it is my pleasure to introduce our Chairman and Chief Executive Officer, Kelly King.

Thank you, Tamera, and good morning everybody.

We really appreciate you joining our call.

I'm going to focus this morning on several areas starting with quarterly highlights, talk about performance of the fourth quarter and the full year, point out some unusual items that will impact our results, talk about the drivers of performance, talk a little bit about the Colonial integration, also want to give you some planned drivers as we head into this year, a little bit about our strategic plan and then Daryl will give you more color on margin and balance sheet activity, expenses and efficiency, taxes, and capital, and then as Tamera said we'll have some time for questions.

We feel really good about the quarter.

As you've seen, we had a $0.27 per share quarter.

Our margin increased 3.8 for the fourth quarter and our outlook for the margin has improved compared to what we talked about last time.

We're very pleased with the fact that our non-performing asset growth slowed to 7% linked quarter and we're seeing some improvements in underlying credit trends which I'll talk about.

Revenue growth more than anything else was very strong at 22.7%.

Our deposit story remains very good as our colonial transaction is working out great for us and I'll give you a little detail on that.

So when we look at the earnings for the fourth quarter, net income available to common shareholders was $185 million, diluted EPS as we said was $0.27.

It does beat the Street consensus of $0.21 by $0.06 and it is $0.04 above third quarter of $0.23 so we feel pretty good about that.

I want to make a comment about earnings power because as you know from previous calls I feel very strongly that this is one of the most important measures that we need to all look at as we're trying to evaluate our performance, so if we kind of look at earnings power being defined as pre-tax, pre-provision and in this case I'm also going to exclude purchased accounting items because those could be material but also exclude foreclosure property expense which is a credit item so we kind of are trying to get at the normalized earnings power and I'm very pleased to report to you that our year-to-date '09 earnings power and I'm very pleased to report to you that our year to date '09 earnings power was $3.977 billion versus '08 of $3.642 billion which is an increase of 9.2% which I think is very strong in this environment.

So we do have some unusual items in the quarter.

We did have a sale of a business that we consider to be not essential to our business.

We sold a little small payroll business that we had been working on frankly for several years.

We recorded a $27 million pre-tax gain on that which was about $0.02 per share.

We're very pleased with that transaction.

Frankly, we had been working on it for a number of years and while we made pretty good progress we finally realized scale was very much the driver in that business so we sold our book of business to ADP, and have an ongoing partnership forward with them which we're very excited about and think that's going to be really good for us.

This sale would actually be net accretive to us because we were actually losing money on that business.

We also had reevaluations of the original estimates associated with loans acquired from colonial and that resulted in a pre-tax earnings of about $9 million or $0.01 which really relates to the third quarter.

Remember we did this transaction August 14, and so the original bookings were based on estimates which were necessarily somewhat rough at that time because of the pace at which the deal was done and so these later trueups kind of better refined the estimated income going forward on this and you may see additional minor adjustments on that as you go forward because remember when you're marking assets to market you always are making assumptions that are going to discount rates and the net present value of the cash flows.

We also had some tax provision trueups which is typical for the fourth quarter.

We sold some additional leverage leases, we told you of in the past we're trying to move those out as reasonably as we can and so that would be tax benefit of about $7 million or about $0.01 a share and so you'll do your own calculation I'm sure but the way I kind of think about it is you'd need to take away if you want to get the kind of run rate you'd need to take about $0.02 for payroll, about $0.01 for the third quarter income, about $0.01 for the tax adjustment.

Then on the other hand we did have $7 million of or $9 million of merger charges which would be about $0.01 a share, so if you net all of that together, seems fair to take away about $0.03 so we would put core earnings in the $0.24, $0.25 range which we think is reasonable.

If you look at the year-to-date performance, net income available to shareholders was $729 million.

Diluted EPS was $1.15, which we feel very good about.

Our ROA was 0.56 and our return on common equity was 4.93.

So let's talk about some drivers of performance, looking at credit quality first.

Obviously the most important.

I want to make sure we all understand that we're going to be talking to you in some cases about numbers including covered loans and some not including covered loans, mostly I'm going to focus on the not included covered loans because those are really very very low risk asset and don't really pertain in the essence of what credit quality should look like so just to set that in numbers, our non-performance all-inclusive from three to four increased from $4.1 billion to $4.3 billion and as a percentage of total assets from 2.48% to 2.65% but I think the proper way to look at it is to look at non-performance excluding covered assets as a percentage of total assets so in that regard, it went from $3.9 billion in third quarter to $4.2 billion and the percentage went from 2.52% to 2.68% so the key number there would be non-performers excluding covered loans would be 2.68% which we think relative to the industry is a very good number.

Net charge-offs for the quarter, again excluding covered loans was 1.98% compared to 1.79% for the third quarter.

Year-to-date charge-offs again excluding was 1.79%.

You'll recall we gave you guidance early on that we thought it would come in at 1.80% to 1.85% so we're just a tick under the guidance but pretty close.

If you look at our provision for credit losses and net charge-offs, we had $725 million quarterly provision, $488 million in charge-offs so we had a net build of $237 million which I will point out is about $0.21 per share.

I'll tell you another interesting number.

For the year, our provision was $2.8 billion.

Our net charge off was $1.7 billion, so we had a little over $1 billion net build for the year which I think is pretty phenomenal and still be making the kind of money we're making.

If you look at the ratio of allowance for loans and leases to non-accrual loans, we were very pleased we were able to build the allowance so that number is now 0.96 up from 0.92.

I don't feel necessarily that you need to keep building that number at this point in the cycle as we begin to near the peak but on the other hand we want to be conservative this year, this quarter and so we were able to build the allowance and that actually increased.

If you look at our allowance to loans excluding loans held for sale in covered loans it increased from 2.49% to 2.72% which was a significant increase in our allowance.

So if you kind of look overall at the portfolio, we're clearly seeing some signs of stabilization particularly in consumer.

I'll give you some more detail in just a moment but our biggest problems continue to be in housing, lots of focus has been put on that, it's our number one priority and so our largest problems as in the past continue to be in Florida, Atlanta, and DC although we're seeing some moderation in some of those markets.

We did have some deterioration as we had indicated to you before in North and South Carolina primarily in the coastal areas, nothing that is not manageable but there clearly are some increases in that area, so importantly, we had really good stability in the early stage delinquencies in 30 day to 90 and 90 day plus.

This has really been a trend for the last several quarters.

Also, I'm very pleased with the reduction in the rate of increase in non-performers.

Just to show you how that has changed over the last four quarters, it has gone down from a 35% increase to 21% to 18% and this quarter it's 7% so clearly, a meaningful slowing in the rate of increase in non-performing assets.

So now drilling down a little bit into some of the portfolios.

If you look at our single family residential ADC, it still reflects the most stress in our portfolio, we've been working it very aggressively.

I would point out that our balances this year are down $2.2 billion and $570 million down in the fourth.

With regard to charge-offs in the ADC area, they did increase somewhat from 6.35 in the third to 7.40 in the fourth.

Non-accruals increased from 12.1% to 13.6% but related to that we upped our allowance specifically for this area from 13% to 14.1% so a very heavy allowance for that particular area which is more stressed.

In other CRE, I know there's been a lot of interest in other CRE for the industry and for us.

We are just not seeing evidence of major deterioration.

I know there's an expectation of that.

I understand the expectation because it aggregates in the industry.

It's just not happening to us.

We're seeing some modest deterioration but not major.

Our non-accruals are up from 2.35% to 2.70%.

Gross charge-offs from 1.0% to 1.21% very modest numbers and both grew at a slower pace this quarter than previous quarter.

I'll remind you the reason we think that it's true, we have a very granular portfolio with a $550,000 average note size, a $25 million straight project limit, I think very importantly we underwrite to a 1.2 to 1.3 cash flow coverage unlike many who do their advances based on a cap approach and when you run the math on that what you'll find is that if you underwrite on a coverage of cash flow, it gives you a meaningfully lower advance rate than if you use a percentage of the cap approach to value so we think that's very conservative and that's helping us as we're going through this process.

Still, we do have stress on land development loans, but it's a very diversified portfolio and again, I'll say that no signs of dramatic deterioration.

I would make one point for you just to keep you fully up-to-date on what you might see as we issue our K.

You will see that our TDRs will go up meaningfully in the fourth quarter.

The reason for that is as you know, during the early fourth quarter, we got some very specific guidance from the regulators with regard to CRE and what it really allowed us to do is to be more aggressive in working with clients to restructure their credits so they become quote, unquote, TDRs but in most cases we're able to keep them as earning assets, so it's just a question of the valuation and technically, if you don't change or increase the rate and you restructure it, it becomes a TDR, in many cases for our clients, we just didn't raise the rate but we did restructure it so it was more achievable for them to handle so it becomes technically a TDR, but it doesn't impact the income and it doesn't increase the non-accrual so I just wanted you to be aware of that as you see our TDRs going up some.

So when you take a look at our C&I , we think this is a good story for us.

We told you early on this is one of our major focuses is to try to diversify our loan portfolio by focusing more attention on C&I, relatively less exposure in real estate and so C&I was up 11%.

I'll give you a little more color in a moment on other long categories but that portfolio is performing well.

Non-performing assets are actually down to 1.91% versus 2.05%.

Charge-offs were up a little bit to 1.25% from 0.94% but still low numbers.

In the consumer portfolio, I would call it overall pretty stable.

In the home equity area, non-performers and charge-offs are basically flat.

Lot loans which we've talked a lot about in the last several quarters are performing much better than we expected at one point so if you adjust for that third quarter reversal, you remember we had where we got overly aggressive in the second in writing those down so we adjusted some in the third.

What you really see is the charge-offs go up from adjusted 5.2% to 5.8% so a modest increase and a modest increase in non-performers up from 5.3% to 5.8% so still a problem but not a disaster.

If you look at our credit card portfolio, remember it's small and if you look at all of the quality indicators they're basically flat so no challenges there to speak of, and in the mortgage area, it's really a good story for us.

We had $28 billion in origination for the year, $5.3 billion for the fourth.

Good news is 60% is refi but 40% is purchase and this is good news for the economy in general and good news for us.

We continue to see good application flow.

It's flowing some as rates tick up some but still application flow is only down 2% from the third.

Our non-accruals did go up from 4.31% to 4.94% but I'd point out that our charge-offs are flat and we had a decline in every past due bucket so that may seem inconsistent to you.

The reason is because we made a change in our process of how we determined non-accrual status for mortgages and basically what it amounts to is we now are taking a longer period of time, a meaningfully longer period of time before we put a non-accrual back on accrual.

In other words, if a loan had gone into non-accrual and three months later they start making payments on a regular basis or four or five months later we might have put it back on accrual earlier and now we have to take it longer before we put it back on accrual so it's just a more conservative approach before you put modified loans back on accrual which caused a non-accrual to go up a little bit but it's not a real change in essence of the quality of the portfolio.

Encouragingly we did not see the normal expected seasonal increase in fourth quarter past dues.

That's a real good thing.

They normally go up meaningfully in fourth quarter around Christmas, et cetera.

Our Florida delinquencies are flat.

Our non-accruals are flat in North Carolina and Virginia, and so overall, when you look at mortgage, I would judge it to be a real strong success story.

Now, take a look at OREO.

If you look at OREO ex-Colonial, the increase was 9% to $1.5 billion.

We did have a meaningful increase in OREO in North and South Carolina, particularly in those coastal areas, had a good sales quarter, $163 million, up 23% from the third so as we told you, we've got our machine up and running very effectively.

We're being more aggressive, we're pushing properties on out, and frankly the markets improving some.

70% of those sales were at one to four residential.

We do have $68 million in sales under contract expected to close in the first.

I would point out to you that because of the winter especially as cold as its been and may well be, you wouldn't expect to see a big increase in sales in the first just because of the seasonal factors even though our general momentum is building.

So to give you an update on our marks, our OREO marks on balance going into OREO for this quarter was 30%.

We had writedowns while in OREO with 14%, and then we took a 4% loss on sales, so when you worked all of the math of that from balance to sale, it was about a 42% mark on that portfolio.

Our goal continues to be to take a long term view and to optimize shareholder value.

We think that's in the best interest of our shareholders.

We think it's in the best interest of our clients and frankly, we think it's in the best interest of our communities and it's just not good to go out in these communities and dump these half way completed or three quarter completed projects, let the grass grow and none of the taxes and other things being paid, it's not a healthy part of being a community and we want to go into the community that we've made investments in and be proactive and positive as we exit those communities, which we think is a part of our mission.

So credit costs I'm sure the big question for 2010, what I would say to you is that there's still a lot of uncertainty out there in the marketplace.

I know some people are rushing to kind of call the ball and say, imply that everything is about over.

What we think is clearly the economy is improving and all of the metrics show that the recession is technically over but you would also find when you talk to a lot of business people there's a lot of uncertainty particularly out of a lot of rhetoric coming out of Washington by the day, creates a lot of uncertainty, business people are hesitant to make investment so we need to see a little bit of that conversation out of Washington slowdown a little bit and we hope that will occur.

Still, having said that, I'm modestly more optimistic looking forward than I was in the third.

We expect to see manageable continued deterioration in our commercial portfolios, particularly all this has manageable, you should expect to see higher charge-offs and some increases in non-performers early in 2010, probably at an improving growth rate in non-performers as we go through 2010.

I'd say overall trying to be conservative, charge-offs would probably be what I'd call flattish for 2010 and certainly some chance that it could be somewhat under that.

I don't think there's much of a chance to be over that but I think are conservative estimate would be flattish.

I think you will begin to see some moderation in the build of the allowance because these stabilizing indicators I think clearly justify that, so while you'll probably see some modest increase in the allowance in the first half, you're likely to see our allowance begin to flatten out in the third or the fourth because we think clearly, by the late third, fourth, we'll have enough consistency of improvement in the metrics that will give us confidence that we've found the peak and it's reasonable to not continue to build that allowance.

I will remind you that OREO writedown and maintenance expenses will remain high in 2010 and that will be an actual increase over '09 because remember in '09 it was building during the year and so when you look at the full 2010 to '09 that will be up but probably not a dramatic increase from where we are run rate but higher on a year to year basis.

So I'm sure we'll have some questions on that but that's kind of our look at this point.

The margin, switching gears, we're please about that, our margin was 3.80%, up 12 basis points, Daryl will give you better detail on that in just a moment.

Looking at some core revenues and non-interest income, we feel really good about this.

Net interest income growth on a year-over-year basis reported was 14.9%.

If you take out purchases of items we're still at 5.9% which is very good in this very slow economy.

Non-interest income growth is really good, reported 23.1%, adjusted for purchased items 13.9%, so our net revenue growth, I feel good about on a reported basis is 18.3% and adjusted basis 9% which is really good, again in this economy, and so that resulted in our fee income ratio going up on a year-to-date basis for '08 at 40.7% to 42.8% for the year of '09.

Aril more detail on non-interest income.

We had a strong quarter for the fourth being up 20.2% obviously driven a lot by 87% increase in mortgage.

We also though had 5.3% growth in insurance, mostly because of acquisitions but I'll remind you, acquisition growth is real growth and it takes a lot of work.

8.8% growth in service charges due mostly to Colonial, 24% growth in check card fees, 31% growth in other non-deposit fees, and a 19% growth in trust income which frankly I'm really glad to see.

That's a function of the market beginning to improve and organic growth and numbers of clients.

So, fee income had a very solid quarter aided by Colonial and mortgage banking and good organic growth.

I'll just make a note because I know there will be questions about service charge income.

There's a lot going on there and we and others are having to make adjustments.

You saw in the fourth quarter, we and most in the industry made some changes voluntarily so that we won't charge for more than four NSFs per day for debit card and ATM transactions.

If the over drawn amount is less than $5 a day we won't charge for that so there won't be any overdraft fees for that so when you get through with that, and you take into account the Fed's dictate that in the Summer, we have to give clients the option to opt in to NSF coverage.

It's hard to know how this is going to play out but trying to put all of that together, we think a range of effect on income would be 10 to 20%, so for our numbers that could be $70 million to $140 million.

If there are no changes in structure.

So keep in mind, we're not going to just sit by and watch all of this happen.

We're constantly looking at other ways to improve revenues but this is the kind of worst case if we kind of don't find any other ways to collect revenues which I think we will, that's the kind of range you might look at.

To give you perspective while we don't like that, it's not a major issue for us, even if you went all the way to the $140 million, you're talking about 1.5% of our net revenue so it's not that big of a deal.

We obviously don't like it or think it will be that much but we want to give you guidance into how that may look.

Taking a quick look at some loan growth categories.

This is a big big question for us and the industry as we go forward.

The market is soft.

Clients are hesitant to borrow, people are very uncertain about what's going on out of Washington and other factors, and so I know a lot of people are accusatory of the banks for not being willing to make loans.

I personally disagree with that and I think the vast majority of banks are looking for all of the good loans they can find.

I know we are, but the fact is theres very soft demand, so if you look at our average loan growth, annualized third to fourth, our total loans would be 9.7% but remember, we had the benefit of Colonial so without purchases it would be down 6.9%.

If you look at fourth to fourth, which is a better comparison because of some seasonality issues, the GAAP report number would be 8.9% and the adjusted number would be minus 1.2% so a slight reduction but not as much as third to fourth.

If you look at the year-to-date numbers, you'd see the reported would be 7.3% and adjusted would be 2.6%, so that's the challenge for us and everybody.

I will point out though in looking at our numbers, you need to look a little bit in more detail because we told you that we are on a multi-year strategic direction of the balancing out and diversifying our loan portfolio.

We are experiencing and expect to continue to experience a lower growth rate in our real estate portfolios and a faster growth rate in our C&I portfolios.

That did occur.

If you look at the linked quarters, our C&I was up 11.5% which is a very good number, and we think we can continue to have very strong growth in C&I because there's a lot of market out there that we just have not participated in that we can participate in going forward.

I'd also point out something that I think is kind of interesting at least for us.

Because of the strong balance sheet that we have, we found a lot of credits coming to us but have left some other companies that didn't have a stronger balance sheet and ratings and looking for LC coverage on their financing requirements, and so our LCs have gone up during the year from $4 billion to $6.7 billion which is a huge increase and so if you take that business loan growth for example, which adjusted for purchases is down 1.3% and if you factor in that huge growth in LCs as a proxy for loan growth then our adjusted loan growth would be 4.2% which is a more effectible number so it's going to be a challenge but we think relative to the market we're doing well.

So we do continue to focus on reducing exposure to real estate, we're not getting out of the real estate business but we are being relatively more strategically careful as we make new loans.

Huge focus on C&I and the related DDA that goes along with it.

We do have a lot of focus on small business lending.

I would point out that we are being very aggressive in terms of trying to make sure we're making all of the small business loans we can.

I know a lot of people particularly in Washington are concerned about small business lending.

We share that concern.

We know that most jobs are created in a small business space.

We want to do our part to help grow the economy.

Obviously it's to our benefit as well.

We, like some others, have imposed a very formal central second look process at our small business turndowns, so that if it's a loan that can be made we're going to make it.

I would also point out to you that we are very very aggressive in small business lending and in many of our major markets.

We are either first or high up in the rankings in terms of SBA financings which is a really good program in terms of helping small businesses come out of a difficult economic market, so we're really focused on small business as well as all the way up through the size space of C&I so that I think will be positive as we go forward.

Turning our attention to deposits is a really good story for us.

Our non-interest bearing deposits year to year are up 25.5% on a reported basis but if you adjust for purchases it's still a strong 14.8%.

Client deposits reported 17.7% up, without purchases 7.9%.

Maybe more importantly our core deposits which excludes CDs over $100,000 are reported up 20% and without purchases 10.6% and so when you look at total deposits reported is up 15.3% and without purchases 6.7% so anyway you turn it, very strong deposit growth including the fact that we've been very aggressive in terms of lowering rates to help margin and Daryl will talk to you about that.

Just a comment or two on our Colonial integration which continues to go very very well.

All of our leadership teams are in place and our new regions in Florida, Alabama, and Texas.

We've implemented our BB&T credit review process, all new loans, so we're not concerned about quality.

We've already converted our payrolls, securities, fixed assets, mortgage and collection systems.

The remainder of these systems will be converted in May and it's all going very very well.

We've already implemented deposit and loan servicing in all the branches for Colonial so clients can go back and forth to make loan payments and deposits in all of those branches.

Last weekend we did sell our Nevada branches very successfully, completed that conversion.

I would point out in terms of looking at future growth rates that that was about $850 million in deposits that left our balance sheet last weekend and so you'll need to take that into account in terms of looking at our growth rate.

Finally, the reaction of our new colleagues in those markets and their clients has been frankly very very refreshing and I think it's encouraging that since August the 14th, our deposits have increased $1.5 billion on about a $16 billion base, so that's really really strong growth and particularly in the early phases of our merger.

Now just a couple comments on our key 2010 objectives, and these are basically the same objectives we had for '09, we're trying to keep focus at this point.

Number one is to continue to effectively manage through the credit cycle.

We're doing that.

I just gave you the metrics that show that's working.

I will point out that we've added about 500 people to loan administration this year.

Mostly reallocation from production to administration but it's a huge increase in risk management.

We've achieved superior revenue growth as you saw the numbers.

A couple of other detailed numbers, for example, our fee revenue per FTE went up from $131,000 to $178,000 during the year which is a 36% increase.

Our net revenue per FTE went up from $361,000 to $424,000 which is a 17% increase so revenue growth is working.

Most importantly, we continue to focus on providing really good value in the marketplace by providing outstanding quality.

We continue to get great feedback from the market with regard to our client service quality, our outside statistical research by an outside national firm shows that our client service quality is better than our major competitors and we feel good about that.

I would point out one other thing and this isn't the kind of thing that you find maybe everybody doing in a difficult period of time but we felt it was important to invest back in the community.

Our communities are having a challenging time now and I'm very proud of our associates because we did a project called the Lighthouse Project this last several months where we gave allocated money to each of our employees and encouraged them to get in teams and go out and do projects in the community in teams.

We didn't tell them what to do.

We just said you had to take the money and do a hands-on project and we did projects with the YMCA, and Boys Club and children's homes and on and on and on and we had over 20,000 employees involved in that, we did over 1000 projects and we impacted over 1.6 million people which I believe is important for us to do in this difficult time.

So just a couple of planned drivers as we wrap up here, looking into 2010.

Loan growth is going to be tough.

It's going to be a real challenge.

I think we'll do well with regard to C&I growth.

With regard to small business growth but because of our real estate diversification, you might expect to see our loan growth relatively flat during 2010.

Deposits on the other hand will continue to grow not at a pace we had last year but still probably in the mid to slightly higher single digit growth pace primarily because we'll be focusing on improving the mix trying to really get our DDA higher and our time deposits lower.

Non-interest income is just more uncertain and a lot of factors out there are coming out of Washington in terms of what might affect different non-interest income areas and so it's hard to judge I'd say right now non-interest income would be kind of flattish to slightly up year-over-year if you exclude one-time gains.

Just as a final point I'd point out to you as we head into the fourth quarter we always have seasonality, insurance is a big seasonal business for us so we always try to remind you that don't expect our first quarter to necessarily look like the fourth quarter but it does rebound quickly into second and third but just kind of keep that in mind.

Now let me turn it over to Daryl to give you a good bit more color and detail with regard to some other items.

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 balance

Net interest margin for the fourth quarter of 2009 was 3.80% up 33 basis points from the fourth quarter of 2008 and up 12 basis points from the third quarter of 2009.

During the fourth quarter 2009, we finalized our valuation of loans acquired from Colonial which resulted in increasing the value and expected yields of the acquired loan portfolio.

In connection with risk free valuation we recognized $9 million of interest income in the fourth quarter of 2009 that related to the third quarter 2009 which added approximately two basis points for the fourth quarter net interest margin.

In the fourth quarter 2008 net interest margin was reduced by $67 million or 21 basis points as a result of our settlement with the IRS related to leverage lease investments.

Adjusting for the revaluation, the fourth quarter margin would have been 3.78% or an eight basis point improvement in margin compared to the third quarter of 2009.

As a reminder, we told you that margins for 2009 would be in the mid 3.60s and we ended the year at 3.66%.

While we were pleased with our net interest margin results, if you adjust for deteriorating asset quality including OREO compared to last quarter net interest margin would have been approximately two basis points better on a link quarter basis and nine basis points better on a common quarter basis and on a year-over-year basis.

We believe margin for the first quarter of 2010 will be relatively stable in the upper 3.70s and for the full year 2010 we expect margin to be approximately 3.80%.

The primary drivers for margins for the next few quarters will be a performance of our covered assets, rates paid on deposits, the level of loan growth, the amount of carry associated with non-performing assets and changes in the shape of the yield curve.

We have a couple of items to update you on regarding the balance sheet post-Colonial which we outlined in the press release.

With respect to loans and deposits we generated over $334 million in loans and increased client deposits by $1.5 billion, reflected continued success in the integration of Colonial.

Additionally we reduced our goodwill to $533 million following the loan valuations as well as adjustments to the FDIC indemnification asset and deferred taxes.

As Kelly said, we sold the Nevada branches acquired through the Colonial transaction.

As a result, deposits will decrease by approximately $850 million in the first quarter 2010.

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

Now let's look at non-interest expenses.

Looking on a common quarter basis, non-interest expenses increased 34.5%.

Excluding merger related costs and adjusting for the impact of purchase acquisitions, non-interest expenses increased $185 million or 15.8%.

This increase was driven by $110 million increase in maintenance costs, valuation adjustments and sales of foreclosed properties, a $27 million increase in FDIC expenses, $38 million related to Rabbi Trust and legal fees of $5 million primarily due to the credit environment.

We also incurred an increase of $17 million for pension costs and approximately $7 million primarily due to increased healthcare claims and $5 million for mortgage related incentives.

Offsetting the increase in non-interest expenses was approximately $11 million related to advertising and marketing.

We told you earlier in the year that FDIC expenses, pension, and elevated credit costs would be headwinds for us in non-interest expenses for 2009.

If you exclude these items and $159 million of growth resulting from purchase acquisitions, non-interest expenses decreased 1.2% on a common quarter basis.

Looking on a linked quarter basis, non-interest expenses increased 12.3% annualized.

Excluding merger charges and adjusting for the impact of purchase acquisitions and significant items, non-interest expenses increased $20 million or 5.9% annualized.

The increase was driven primarily by a $21 million increase in maintenance costs, valuation adjustments, and sales of foreclosed properties.

Looking on a year-over-year basis, non-interest expenses increased 26.1%.

Excluding merger charges and adjusting for the impact of purchase acquisitions and significant items, non-interest expenses increased $539 million or 11.7%.

The increase was driven primarily by an increase of approximately $67 million for Rabbi Trust, $66 million increase in pension plan expense, $29 million in mortgage related incentives due to increased production, $35 million in flex fringe benefits due to increased healthcare claims, maintenance costs, valuation adjustments, and sales of foreclosed properties of approximately $267 million, FDIC of $120 million due to increased rates and finally, $24 million of legal fees associated with the credit cycle.

Looking at 2010 excluding purchase accounting and significant items, we expect non-interest expenses to grow in the 2% area.

Turning to the impact from Colonial.

When we reported our expectations and projections following the acquisition, we based it on rough but conservative estimates given the short amount of time we had to model the transaction.

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

First, we remain confident that our estimate on cost savings of $170 million range and expect to be at the full run rate by the fourth quarter 2010.

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

We are also reducing our estimate of merger related charges to $185 million from $205 million which we communicated to you in the third quarter.

This reduction reflects our ability to repudiate contracts in branches and an FDIC assisted deal with no additional costs due 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 2010 in connection with the systems conversion.

Through the fourth quarter of 2009, we have recognized approximately $27 million in pre-tax merger related charges related to Colonial.

Overall we are aggressively managing our controllable non-interest expenses and we will continue to pursue opportunities for expense management for 2010 and beyond.

Turning to efficiency.

We did see a slight improvement in the fourth quarter.

Efficiency improved from 51.4% for the fourth quarter compared to 52% in the third quarter due to heightened credit and regulatory costs as well as Colonial's higher relative efficiency ratio partially offset by cost savings from Colonial transaction are realized over time.

The efficiency ratio will probably get a little worse before we see improvement later in the year.

Looking at our full time equivalent employees.

Positions decreased by a net 427 in the fourth quarter.

The insurance acquisition of Oswald Trippe added 114 positions.

While the Colonial related positions decreased by 541.

During 2009, excluding acquisitions, we have reduced FTEs by about 2200 good people.

We continue to expect to see significant reduction in FTEs over the next two to three quarters as we continue the integration of Colonial.

Operating leverage on a GAAP basis was positive on a link quarter basis.

Going forward we expect operating leverage to be affected by higher expenses related to credit quality issues, lower loan growth, and decreasing mortgage banking income.

With respect to taxes, similar to the third quarter, we had non-taxable gains on terminations of certain leverage leases and normal year trueups resulting in a reduction in our tax provision of $7 million.

Combined with the $13 million reported quarter tax provision, this would have produced a 10% effective rate for the quarter which is about what we expected given our lower level of pre-tax earnings and the stable amount of taxes income and tax credits.

Our current estimate for pre-tax income for 2010 should yield an effective tax rate in the mid to high teens assuming no unusual items.

Obviously, changes in our income forecast, one-time on unusual events could change this guidance.

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

The leverage capital ratio was 8.5%, tier one capital was 11.5% and total capital was 15.7%.

Our Tier 1 common ratio was 8.5% and continues to be among the strongest in our peer group.

Additionally, our tangible common equity ratio remains strong at 6.2%.

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 strong, with the acquisition of Colonial we've increased our earnings power potential, we have strengthened our capital base and coupled with the FDIC loss share agreement have produced a lower risk balance sheet.

As we enter 2010 we believe we are in a strong position to grow organically and to take advantage of strategic opportunities.

And now let me turn it back over to Tamera to explain the Q&A process.

Thank you, Daryl.

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

Our Operator will limit your questions to one primary question and one follow-up.

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

And now I'll ask our Operator Cindy to come back on the line and explain how to submit your questions.

Thank you.

(Operator Instructions) We'll take our first question from Matt O'Connor at Deutsche Bank.

Hi guys.

Hi, Matt.

I was wondering if you could tell us how much the TDRs went up versus 9/30?

Matt, we have numbers and we're going through them.

I would expect in the third quarter we're around $140 million TDRs probably for the end of the year are going to be approximately $500 million and as we continue to work with customers and work in implementing the guidance we received at the end of October I would expect another increase in the first quarter, but I would say about 85 to 88% of these TDRs are still accruing and performing.

Okay and just going forward it might be helpful to include that in the release.

You've got a lot of good disclosures but this might be another one to add.

That's a good idea, Matt.

Yes, good idea.

And then just separately you're one of the few banks to report commercial loan growth.

Another bank in the Southeast today had a sharp decline in commercial loans and I can appreciate you've probably got a little more emphasis and mix in small business but maybe you could just give a little more clarity in terms of where the business is coming from and how much is market share gain versus different products?

Yes, Matt, what's really been happening, really for the last couple of years as we've gone through this very uncertain economic period, you know, we've been very fortunate and feel very blessed that our balance sheet has been strong and so we've been very offensively in the market through the whole process looking for business and so a lot of good clients that we've called on for years that had really good long term relationships got rattled because of all of the uncertainty in the market and in some cases their financial institutions could not meet their need.

For example, in Letters of Credit, because of down grades and ratings, a lot of, some companies just couldn't, they just couldn't provide the LC, and so we've had a meaningful flight to quality up front with really good clients we've been calling on a long time and I think that's been the most material factor and the other is that we've gotten to be fairly big fairly fast and so we've decided that we need to be more aggressive in the whole C&I particularly the hiring corporate market and as some of the large institutions have gone away, a lot of the major companies need another financial provider and so we've had very good success in building relationships with really good larger companies that we just never were able to be in the considerations set before.

We'll take our next question from Craig Siegenthaler at Credit Suisse.

Thanks and good morning.

This is actually (inaudible) stepping in for Craig.

Just wondering if you could give us the sense of how the additions to non-accruals trended this quarter versus the pay downs and reclassifications?

The additions to non-accruals versus what was that?

Just trying to get a sense of the optics in terms of the increase in non-accruals, so what was kind of the additions to non-accruals?

Yes, so, the additions to non-accruals were really the very same kind of activity flow that we've experienced in the last year and a half, so it would be largely in real estate, largely in residential real estate from our ADC portfolio and as we just continue to work with our builder developer clients, some just could eventually run out of cash and become non-accrual so I'd say it's really nothing dramatic or new, it's just a continuation of the same trend.

Great, thanks for taking the question.

Yes.

We'll take our next question from Betsy Graseck at Morgan Stanley.

Oh, hi, thanks.

I had a follow-up question on the TDRs.

You indicated Daryl that you would expect them to go up again in Q1 2010.

Could you just give us some color as to why you say that and since you have a view on that, what kind of pieces change would be and also a little bit of color on to what degree it's coming from colonial and from the BB&T legacy franchise.

It's mainly coming from our CRE ADC portfolio, as we renew and work with our clients, that would probably see where most of the increase in TDRs would be.

From a magnitude perspective, it's really hard to say how much more in the first quarter but right where I sit today I'd say a like amount from where we increased in the fourth quarter.

So another roughly 360 up?

Probably, I'd say approximately 800 million to $900 million Betsy.

I really don't have the exact numbers.

I just know it's going to continue to increase and right now 88% of them are still performing.

And keep in mind, Betsy, that's really because of the new guidance, frankly we feel we have more flexibility to work with the clients to do some restructurings that doesn't become onerous for us and so we're not going to overdo it but we are trying to be reasonably more aggressive than we have been in the past.

Right and these are restructurings primarily in the form of extensions, rate reductions principle, I'm sure it's all of the above but does it skew any one way?

No, but here is what happens with the new guidance, it's kind of interesting we think, but if you do any kind of restructuring with a client, maybe extended terms or any kind of change, if -- the guidance we're getting is if we don't have a significant increase in the rate, then it becomes a TDR.

Well, we just don't do that to our clients all the time.

I mean sometimes we do because the risk went up but generally speaking if a client is challenged and you've got a good long term relationship with them, jacking the rate up right in the middle of the price is not exactly the way to build friends so we don't as a rule just go in and try to gouge interest rate risers so if it makes sense, if we feel like we have a deep return on the risks that we have and the modifications not materially changing the risk, we don't raise it but the guidance is if you change the terms, you must raise the rates so in some cases we don't raise the rate and it becomes a TDR, but it doesn't become a non-accrual.

The other thing to add Betsy is the non-performing non-accruals TDRs are already in our numbers and that's not the area where we're seeing the increase.

It's on the performing TDRs.

We'll take our next question from Paul Miller at FBR.

Yes, thank you very much.

Can you talk a little bit about, are you in the market for more FDIC transactions?

I know there's a lot of chatter out there you've made comments you would love to do another one or two transactions and so I'm just wondering how much more of assets you'd think that you're able to do in that aspect?

Well, first of all let me say that we're very pleased with our Colonial merger and we're really principally focused on that.

It's a large transaction for us.

It's going very well, but we don't want to drop the ball, so we're primarily focused on completing that merger.

I will say we're learning a lot, we're building systems in terms of how to work with the regulators with regard to doing these assisted deals so we've kind of got some invested cost in building that infrastructure so it would make some economic sense to do others but it's not like an agenda for us, it's not like a strategic objective.

It's not like we're out looking trying to make anything happen.

I want to be very clear about that.

We're trying to run our bank, keep our heads down, and so I don't want to suggest we're out trying to create that kind of activity, that's a very delicate subject.

It's between those institutions and the regulators and we don't want to get into the middle of that kind of a discussion so I would not speculate as to any acquisitions in that area.

And then can you -- and then point offer clarification, you talked about your marks on your REO is roughly 30% and I guess that's when you move it from NPA to REO, you take a charge off of 30% and then you talked about a writedown of 14% and sales of 4%.

Can you just go into more detail about that process?

Yes, so basically what happens is when it becomes a non performer and we're moving it to OREO, we get multiple appraisals, almost always two, sometimes three, sometimes more, but we get enough appraisals to where we feel really good about what the value is and we mark it because our intention is to put it in at that point is to put it in OREO at the price we think it will sell at.

We're very serious about not playing any games about that, so our philosophy has been as long as I've been with the Company, when we know we have a loss we take it, so that's the first step.

Now when you get it in OREO, you tend to learn more about it.

You get control of the property, you find out you've got to do some work on it, maybe the market deteriorates and so along the way you do additional appraisals so you take additional marks if it becomes required, and as the market has deteriorated over the last year or so, that's been relatively frequent, and then the final is just whatever you finally sell it at relative to your written down value at that point.

We'll take our next question from Christopher Marinac at FIG Partners.

Thanks, good morning.

Kelly, with the engine of SBA loans and small business growth, is that an area that could be more positive in 2010 even if some programs have changed?

Chris, I really do think it will be.

I think we're going to see a lot of frankly energy coming out of Washington in a variety of ways to encourage banks to do more small business lending.

I personally, in fact I was in Washington earlier this week and am encouraging them to support the banks in doing more SBA lending, make the process easier.

We don't need to create a lot more of these programs.

Everybody keeps coming up with the SBA programs designed for this very point and so we've always been relatively very aggressive in using the program because it makes sense and so number one I think there will be a lot of push out of Washington but independent of that we're going to be much more aggressive in SBA lending because it's the very best way for us to help clients that are credit challenged still be able to get the credit they need without taking unrealistic risk for us.

Great, and then just a follow-up just has to do with the core health economically of North and South Carolina and to what extent there's any change good or bad that you expect this year.

I really think for the rest of this year it's going to be about steady.

I don't think you're going to see any material decline.

I think it's going to take the rest of the year before you see material improvement.

Remember in these markets, they've been economically challenged for a long time with huge concentrations in furniture and textiles and agriculture and all of those industries have had major challenges really this has been going on for 30 years and so the current conditions have exacerbated that but not by the order of magnitude you would have expected in things like coastal real estate and that kind of thing, so and I'm fairly involved personally in the Triad region in chairing an economical development group so we get a lot of information, a lot of focus, a lot of companies interested coming into the markets because of the really good hard working workforce, so that's beginning to increase.

That's beginning to stabilize, the reduction in jobs from furniture and textiles so I think all of that will converge to be relatively flattish from this year and then see some positive momentum as we head into 2011.

We will take Gary Tenner with Soleil Securities.

Good morning.

I had just a quick question about the $11 million of additional losses in Colonial or sorry, the increase in the FDIC receivable from the Colonial deal.

Could you break out where the offsets were between the provision and the foreclosed property lines?

Where was this item, Gary?

The $11 million increase in the FDIC loss share asset?

There would have been offsets to that presumably in either the provision or the foreclosed property line?

Yes, it's in other income.

The FDIC receivable is a non-interest income item so it goes in our other income line item.

Well, right but the increase, that $11 million represents I assume the FDIC 80% share of the provision or foreclosed property expenses, I'm trying to figure out whether it was in the provision line or the foreclosed property line?

The FDIC, it's an asset that we accrue, it's a receivable from the FDIC.

It's just a fee become line item that actually comes into the income line and it's the result of what we think we're going to receive from the FDIC as our losses go back from the covered asset.

I don't think I answered your question, did I?

I may just call separately, thank you.

Okay.

We'll take our next question from Ken Usdin at Banc of America.

Thanks, good morning.

Just wondering if you could give a little more color on Colonial, how you're progressing with both cost saves if you're going to anticipate being ahead of trend at all and also just regards to is there any way you can size what you think accretion potential is on an EPS basis this year and next year?

Yes, Ken.

What I would tell you is for the first quarter of this year, we're probably in the 35 to 40% range of achieving the cost saves so anywhere from 60 million to $70 million should probably be in run rate for this quarter.

I would say that we are very comfortable in our original estimates of Colonial that it was in the $0.15 to $0.20 range is what we would achieve on Colonial.

We think we're going to do that very comfortably for 2010.

And then just one quick follow-up.

You mentioned the nice increase in deposits from the Colonial side franchise.

Any comments on what's happening with just the underlying on the loan side, as you start to bring people over and improve products and services, et cetera?

Yes, we're actually getting very very strong positive reaction from the clients down there, especially commercial clients.

This is happening in Florida and Texas and it's really been more vivid in Alabama because there's a lot of turmoil in that market and frankly, Colonial really didn't, it didn't do any kind of lending other than real estate in the last two years and it didn't do much of that because of its own problems and so we have a lot of relationships with clients down there that have been in place a long time with our people but we, they were never able to take care of the loan requirements, and so we're calling on all of those clients, letting them know how aggressively we are interested making loans.

A lot of those clients are calling us so we have a huge pipeline of clients coming in Alabama specifically but also in Southern Florida, so yes, we think that's going to be a pretty big marginal increase in loans for us for 2010.

We actually have run out of time for today's conference call.

I would like to turn the call over to Kelly for some closing remarks but in the meantime if anybody has any questions please call the Investor Relations department.

Thank you, Tamera.

Thanks everybody for joining us today.

I just want to summarize by saying that these are really challenging times.

I think we're all struggling to figure out what the next leg of the journey is.

I will say that I'm pretty encouraged.

I really think we're finding the bottom, you've heard us today trying to be a little hesitant about calling the particular quarter.

I just think that's a little bit too precise to be given the magnitude of what has happened but in the big picture, scheme of things, the economy is poised to improve in our judgment.

The worst is essentially over.

We'll still be working through the next year or so to clean up but the good news is the long term economic prospects for the basic banking business given what I believe is a very strong reintermediation that's going to be occurring a really really positive thing.

The balance sheets of the American banks particularly good banks like BB&T is very strong, we're poised to take advantage of growth opportunities, we're poised to take advantage of fee income opportunities, so I think as we go forward for the rest of this year and on into 2011, I think we should all feel pretty optimistic about what's coming and not let the bumps and ups and downs over the next two or three quarters get us too discouraged because I think at this stage any kind of cycle it's really more important to take a long view, understanding we've got a lot of work to do, but the long view looks very very positive.

So thanks again for you all covering us, we appreciate it and hope you have a great day.

Thanks, everyone.

That does conclude today's conference.

Thank you for your participation today.