Truist Financial Corp (TFC) 2010 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation first quarter earnings 2010 conference call, on Thursday, April 22nd, 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.

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

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 Chairman and Chief Executive Officer, and Daryl Bible, our Chief Financial Officer, who will review the financial results for the first quarter of 2010, as well as provide a look ahead.

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

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

BB&T does not make predictions or forecasts.

However, there may be statements made during the course of this call that express 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.

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

Thank you, Tamera and good morning everybody.

Thanks for joining our call.

As we typically do, I'm going to cover some quarterly highlights, talk more specifically about performance of the first quarter, talk about a small number of unusual items, drill down into the drivers of performance, give you an update on the Colonial integration, and then Daryl will give you some more color on margin and balance sheet activity, purchase accounting issues, expenses and efficiency, taxes and capital and then of course we'll have time for questions.

So overall, we think it is a really solid quarter.

We made $0.27 versus a consensus of $0.23.

It was flat to the fourth quarter, but that's really a positive, because as you know, we typically have a downdraft in the first quarter, because of seasonal reasons, so that was good.

Margin is up to 3.88, which is a nice increase, and looks to have upward pressure going forward.

Daryl will give you some detail on that.

Non-performing assets grew slower, as we expected as 5.6%, and overall, we have some much better consumer trends which I'll give you some detail on.

Net interest income was up 14.7%, which was good.

Deposits slowed, but that was really by design because, frankly, we've not had as much loan growth, so we've been able to slow deposit growth some and control our costs and overall Colonial is exceeding our expectations.

I'll give you a little more color on that.

So if you look at the earnings, we did make $188 million, $0.27 a share.

The ROA was 0.48, and return on common equity was 4.59.

Obviously those are down from normalized levels, but I will point out they are meaningfully positive.

If you look at our earnings power, we try to focus in on that each quarter.

It's a little complicated to look at now to try to get at the real purpose of that, which is to kind of underline earnings power of the organization.

So if you kind of look at earnings power, excluding bond gains, you remember Q1 last year, we had large bond gains, excluding that, purchase accounting and OREO expense, it's kind of flattish, primarily because of a substantial reduction in mortgage, which of course we all expected.

So I wanted to kind of see how it looked if you take out the mortgage effect.

So if you also take out the mortgage effect, it's interesting, from Q1 to Q1, our earnings power went up from 788 to 888, which is a 12.7% increase, which I think is more reflective of the kind of the underlying earnings of the Company, which is reflective of good margin and good expense control and other factors.

We did have a small number of unusual items.

I would mention to you, we did settle a contingent liability during the quarter, so we had a recovery of legal reserve of $11 million.

We did have an adjustment of the estimate of Colonial occupancy expenses, which reduced our run rate of expenses of $16 million.

And then on the other side, we did have $17 million of pretax merger charges.

So the way we think about that is if you take away the $11 million on the contingent liability, the $16 million on the occupancy expense, although I think that's debatable, and then you deduct the $17 million or add back the $17 million on merger charges, you can kind of come to something like about a $10 million take-away which would be about $0.01 a share.

I'm sure you all will do your own analysis but that's kind of the way we look at it.

Looking at some of the drivers of performance, let's look at credit quality.

As we mentioned, our nonperformers, we thought would continue to increase so excluding covered assets, they increased from $4.2 billion to $4.4 billion.

That's a 5.6% increase, which is a decline.

As a percentage of assets, that's 2.86, up from 2.68.

Charge-offs, excluding covered loans, were 1.99, just a basis point higher than the fourth quarter's 1.98.

So we felt good about that.

In looking at the provision, you'll notice that our provision is down because of better credit quality.

Provision was 575, but we did cover charge-offs of 475 and added another $100 million to the allowance which is about $0.09 per share.

If you look at the allowance to non-accrual loans, which is certainly a key measure, ours is 0.93, which is really very strong at this point in the cycle.

If you look at allowance to loans excluding loans held for sale and covered loans, it's up to 2.84%, a meaningful increase, up from 2.72%, which was available in terms of relatively strong earnings, and certainly reflects the quality of the portfolio, and our conservative nature in terms of trying to keep that allowance very strong.

We do see meaningful contingent signs of improvement, especially in the consumer and specialized lending portfolios.

There are some ups and downs in various categories, so it's not exactly totally up in every category, so little ups and downs.

In fact, interestingly, the growth in non-performing loans in the builder, developer, the ADC book, actually slowed during the quarter.

So we're clearly seeing some positives, and a few negatives.

Very importantly, we had the fourth consecutive quarterly growth decrease in nonperformers, so if you look at the last five quarters, that has gone down steadily from 35 to 21 to 18 to 7 to this quarter's 5.6.

We think that's very, very meaningful.

We've said before that we thought because of the nature of how we do our business, that we would be kind of later in the cycle in terms of our issues maturing.

We would be a little later coming out of the cycle.

I'll remind you the reason for that is because of the nature of our underwriting and client selection.

We think it is superior, which means we pick better clients, underwrite them tougher, which means they're stronger going into the cycle.

That simply means that that they hang on and we work harder with them, than maybe some portfolios, and then so it takes a little longer to kind of work through the cycle with them.

That having been said, I still don't think we'll be a laggard much more than a quarter or two, but you may see us lag just a little bit.

As in the past, the ADC was the most stressed, but we continue to work that very aggressively.

Balances are down another $428 million since year-end.

ADC charge-offs were up from 7.4 to 7.82.

And non-accruals were up from 13.6 to 16.4.

So it continues to deteriorate, but we continue to work it very, very aggressively, and moved it down over $2 billion in the last year, so it's becoming relatively less important day by day.

In terms of other CRE, we did have other CRE non-performing assets and charge-offs up, as we expected, but very manageable.

No dramatic deterioration here.

I know there's been a lot of conversation about big time deterioration.

We're clearly not seeing that.

Incremental and very, very manageable.

Non-accruals, for example, increased from 2.7 to 3.2, so no big number.

Gross charge-offs from 1.21 to 1.74.

I'll remind you that we think the reason for that is this is a very granular portfolio, $557,000 average note size.

We have a firm policy limit of $25 million on projects and so, you know, as we've explained before, we just don't have the big hotels, big box centers and so the nature of our portfolio is smaller strip centers with a good anchor, drug and some locals, food.

We have three or four store office buildings with lawyers and doctors in it so it's just a different kind of portfolio.

Also, remind you with regard to that portfolio, we underwrite based on cash flow coverages with 1.2 to 1.3 coverage.

We do not use the cap approach.

Most people do.

Frankly, our approach allows for a much lower loan to value than a cap approach does, which we think is very conservative, and so that whole area is performing well.

Interestingly, we did actually have other CRE growth of 2.2% during the quarter.

We're beginning to see some of the positive effects of reintermediation, where we are seeing some really good permanent income producing properties with really good coverages, strong debt to value relationships, so that's a potential positive for us as we go ahead.

The C&I portfolio performed well.

Non-performing loans in this portfolio are 1.83 compared to 1.91 last quarter.

And 2.05 in the third quarter, so a nice decline there.

Gross charge-offs in the quarter were 0.9 compared to 1.25 in the fourth, so nice decline there.

These are really good trends in our largest portfolio, so we feel really good about that.

While I'll talk in a minute about our aggregate growth being slightly down, I was pleased that our C&I growth on average was up 4.8%, fourth to first, so we're executing on our strategy of ratcheting down some of of our real estate exposure and ratcheting up our C&I exposure.

In our consumer portfolios, I would call it stable to improving in credit quality.

Home equity, non-performing assets and charge-offs were up a little in linked quarter, but early stage delinquencies showed a marked improvement.

The loss run rate is leveling out and in fact our expectations for losses are coming down.

Retail credit card delinquencies and charge-offs declined portfolio and the card portfolio is showing solid growth.

They're small but they're still doing well.

In our sales finance, our auto portfolio, we had record production in March.

All categories had better delinquency, losses are down, due to some tougher underwriting standards we put into effect about 18 months ago, and frankly, the auction values of used vehicles is up meaningfully from a year ago, which of course helps improve your ultimate collection amount.

In terms of mortgage, we obviously had slower production as expected.

We had $4.8 billion, down about 10% from the fourth quarter.

You could have some seasonality in that but obviously mortgages are down from a year ago, pretty substantially.

67% of that was refinance.

The growth in non-accrual slowed and were 5.2% versus 4.9, so while up absolutely, the growth rate declined.

Charge-offs were flattish at about 2%, so that's performing well.

Early stage delinquencies improved.

Interestingly, the 30 to 89 day, which is still on mortgage now is the lowest since June of 2008 and total delinquencies was the lowest since June of 2009, so pretty encouraging mortgage numbers.

Specialized lending, it's doing very well.

Delinquencies improved from 5.37 to 3.75 linked quarter.

Non-performing improved from 1.91 in fourth quarter 2009 to 1.53.

Charge-offs improved from 3.80 to 3.67.

So some nice improvements in the consumer area, and in specialized lending, which we consider to be part of our whole diversification strategy.

Now let me talk to you about restructured loans.

We told you last quarter we would have a significant increase in restructured loans.

But we were working through the recent regulatory guidance, and we weren't sure of the magnitude of increase.

In fact, we determined this quarter we should revise our restructured loans from prior periods.

The amount of performing restructured loans at March 31st increased to $1.7 billion, because our application of the updated regulatory guidance, remind you, which is more of an art than science, while we are proactive in restructuring loans to assist clients, we do not do significant or liberal modifications.

And for this reason, we did not historically view these restructurings as TDRs.

Obviously, the updated guidance and the further discussions with our regulators resulted in a more conservative view of that, which is what you'll see.

It's important to note, we've not changed our approach to loan modifications.

We've not done mass modifications.

By that I mean, we reunderwrite each borrower and ensure that they have the capacity and willingness to pay rather than offer a modification package to an entire group.

We still do not do big rate cuts.

You see that in the numbers, and we don't do big forgivenesses of principal and interest.

I point out at no time do non-performing loans migrate to performing status simply as a result of restructuring.

This is just not something that concerns us, frankly.

In fact, working with our clients, particularly in challenging times, remains an important part of our mission.

It does not affect accruing decisions and all of the expectations for redefault are in our nonperforming guidance.

To give you a little color, in a typical BB&T mortgage modification, we reduce the interest rate to the then current conforming market rate, plus a premium.

But because these clients would not normally be eligible to refinance even at a premium rate, the loan qualifies as a restructured loan under this updated guidance.

We underwrite each mortgage loan to a 31% debt to income ratio and confirm income.

Average rate on our modified mortgage loan is 5.36, not much below the rate earned during the quarter on the total mortgage portfolio of 5.51.

So can you see we just didn't do the big rate reductions.

We just didn't raise it enough.

Also, only about 10% of our mortgage modifications are past due more than 60 days which we believe is about half the industry rate.

Also, last quarter we discussed our commercial restructurings.

The majority of commercial loan TDRs are because we extended a commercial loan, almost always less than a year, without a sufficient corresponding rate increase, or we defer the payment of principal.

I told you before, when we're working with our clients in these kind of conditions, we typically do not raise the rate.

You can argue we should, but we think it's more consistent with our mission of working with our clients in difficult periods.

We don't cut the rates typically, and we might have a small increase.

We just don't go in and do big rate increases, which is driving part of this TDR issue.

So the average rate on our modified commercial loans is 4.09 compared to the first quarter return on our commercial total portfolio, 4.25.

So again, not a significant modification in rate.

Given the updated guidance, we may have continued growth in TDRs.

It's been a successful strategy, keeping people in their homes, paying their loans, assisting our commercial clients through economic downturns, we consider to be a part of our mission.

So I'm sure there may be some questions on that, which we'll answer when we get to the Q&A.

But it's just not a major concern to us.

With regard to OREO, excluding covered assets, OREO increased 4% in the first to $1.6 billion, slower increase than in recent quarters.

That's a good sign.

Majority of the increase was in South Carolina and Georgia, around the coast.

To give you an update, the portfolio consists of land at about 51%, residential at about 32%, so really no change there.

We did have relatively a strong sales quarter, $140 million.

That was 12% below the fourth quarter but remember we told you the first quarter we thought was going to be soft.

I was very pleased with $140 million.

We do expect an increase in sales in the second quarter and to that point, as of March 31st, we already had $102 million under contract.

So we really are optimistic with the signs we're seeing in terms of pick-up in momentum.

Our average mark on problem loans from unpaid principal balance to OREO was 31% in the quarter.

Write-downs of OREO while in the portfolio was 10%.

And we're taking about a 4% loss on the sales.

So when you get through all that math, from unpaid principal balance to OREO sales, about 45%.

Write-downs and losses on the sale did increase on this portfolio did increase to $134 million in the first quarter, but we do not expect that this level of increase going forward.

We had some portfolio accounts that we wanted to make a meaningful change on, frankly, to enhance some negotiated sale activity and so we did that.

We do expect lower OREO cost going forward.

Meaningfully, we did have a 13.4% decrease in inflows into OREO compared to the fourth quarter.

So with regard to guidance looking forward, I would just say the economy is still I'd call it somewhat uncertain, kind of trying to find its legs.

Clearly, if you look at all the econometric data, it's positive, no doubt, we're technically out of the recession.

We're in a recovery.

We find clients to be still unsure about expanding their business.

Frankly, when we talk to them and I talk to a lot of them personally, there's just a lot of concern about what's coming out of Washington.

Hopefully, some of that will abate.

I will say on a positive note, in talking to people, there's a pretty material pent-up demand for technology spending and plant capacity spending.

People are just waiting until they get a little bit more certainty in terms of the economic outlook.

Hopefully that will be forthcoming.

So I'm cautiously optimistic that we've not only turned the corner but we may see a meaningful turn as we go forward.

We certainly are more confident with regard to our credit outlook, particularly in consumer and specialized lending.

We try to be conservative on these calls, but we generally see underlying trends that are stable to improving.

I would remind you, we will continue to see some manageable deterioration on our commercial portfolio.

There will be some ups and some downs, and so while nothing dramatic, I think you will just see some spottiness, which is to be expected as you near the end of the cycle.

We do see a reducing rate of increase in nonperformers as we go forward.

We still affirm that our charge-offs through 2010 will be about flat to 2009, in the 1.80% range and that is excluding covered assets and so be clear about that.

So kind of consistent with 2009.

Little higher in first quarter, so obviously that suggests a declining rate as we go forward through the rest of the year, which we feel good about.

So we've said in the past that kind of the order of things would be as you approached into the cycle, slower NPA growth, slower charge-offs and slower OREO growth.

So what do we see this quarter?

Slower NPA growth, slower OREO growth but flattish type charge-offs, so two out of the three, some slower allowance build and so we still think as we said before, that this thing will peak in the kind of third quarter, maybe early fourth quarter, but certainly a meaningful change in direction by the end of the year.

With regard to the margin, it was up to 3.88%, up 8 basis points.

Daryl's going to give you some real color on that in just a moment.

If you look at core revenues, non-interest income, in terms of net interest income, annualized fourth to first, without purchases, it was up a little bit, which is good, 0.3.

First was up 1.9.

That's not a lot, I know, but in a relatively sluggish economy that's just coming out of a deep recession, frankly feel pretty good about that.

Non-interest income is just -- it's just challenging now, because mostly what's happening in mortgage.

If you look at fourth to first, it was down 32% without purchases.

That's two factors, that's the mortgage impact and that's your seasonal impact.

So if you look at first to first, it's only down 5.4.

That's your mortgage impact.

So again, if you exclude decisional fact of the mortgage impact and you have a reasonable positive scenario.

So if you look at net revenue growth, annualized fourth to first, is minus 13.

But without mortgage banking, is minus 3.8.

But again you've got your seasonal impact.

The more meaningful number is you look at first to first.

If you do that without mortgage banking, it's up 4.2%.

Our fee income ratio is down.

That's due to the mortgage effect but still up long-term.

On non-interest income, first to first, our non interest income decreased 18% but that was led by $153 million decrease in securities.

And $99 million decrease in mortgage banking.

Insurance was about flat on a common quarter basis, which is actually very good because we're still in a soft market and insurance premiums are down overall significantly, so we feel like we're still moving markets there.

We had 5.1% growth in service charges.

Most of that was due to Colonial but it's real growth.

24% in check card fees, 22% in other non-deposit fees.

A lot of that was due to letter of credit fees.

18.8% growth in trust income, which is very good.

We put a lot of effort in the last couple of years on our wealth management and trust business.

That's beginning to come home for us.

If you kind of look forward, the first quarter's seasonally typically low so we would expect to see some improvement, particularly in insurance.

Little difficult to see what's going to happen in mortgage and service charges.

Specifically on service charges, this is a big issue right now for all of us with what's happening regulatorily and in the marketplace, so just to update you.

We said before that we would implement April 1, which we did, what's called the four, five program which means we're limiting services charges, NSF charges to four per day and we don't apply a service charge to a client that overdraws less than $5.

We estimate these changes will cost about 35 to $40 million annualized.

Then we have the new opt in rules which become effective July 1.

It's hard to know what that's going to do.

We and I'm sure everybody else is trying to figure out what's happening.

Obviously we really think most of our clients when it all settles down are going to opt in because of our customer service, and it's good service.

It's hard to see.

So we have said last time we thought this whole range could be $70 million to $140 million, we feel a little better now so even including the opt in, I would say we would be down at the lower end of that range, maybe $70 million to $80 million annualized impact on the combination of those two which is not as bad as I at one time thought it could be.

If you look at loan growth, that's kind of the big challenge as we look forward.

So we did have positive growth in sales finance, revolving credit and mortgages excluding held for sale, so that was positive.

But commercial was down a little bit, minus just 0.3.

I'm talking fourth to first.

That was without purchases.

That was really a function of our ADC contraction, by design.

Our direct retail is down 6%, to give you a little color on that.

That's mostly our lot loan portfolio running down by design, and so our home equity line's performing better.

Not robust growth, but better.

So that decline is mostly because of lot loans.

So if you look at total loans held for investment excluding covered assets, we are down fourth to first minus 1.2, so slightly.

But that is very good compared to the industry numbers that we've affirmed which are down 6.6.

So while we're not happy about minus 1.2, we feel good relatively, and feel that we are continuing to move market share.

So that's going to be our challenge as we go forward, as we think it will be for the industry.

I'll talk a little bit more about our strategies in just a little bit about how we think we'll continue to make that look good relative to the marketplace.

In deposits, deposits have really been overall very, very strong.

We've actually managed deposit growth down somewhat, particularly in the CD category, because of corresponding slower loan growth.

We simply didn't need the liquidity.

So if you look at non-interest bearing deposit growth, first to first, without purchases, was up pretty strong 13.3.

If you look at the annualized link, it's down 6, but that's a seasonal effect.

Interest checking without purchases was up 48%, even on a linked basis, 41%, so strong numbers.

Where you see the change is when you take into account the CD effect.

So if you look at client deposits without purchases, first to first, we're up 4.8, and seasonal annualized link we're kind of flattish.

So we feel very good about our deposit growth and have managed our costs there.

So we think the challenge on the balance sheet side is asset growth, not deposit growth.

I would point out that we're very pleased about our progress in net new transactions.

That's kind of a good measure of sales activity.

So that net new transaction number is up about 38% first to first.

So that's very strong.

When you're analyzing these numbers, I would remind you that during the quarter we did sell our Nevada branches that we inherited from Colonial and that did reduce deposits about $850 million.

In terms of the Colonial integration, I would characterize it overall as going great.

We are beginning to adjust CD pricing down a little more aggressively than we did in the beginning.

Net new activity in that group of branches is very strong.

For example, most recent quarter the net news was 4.72 positive per branch, per month.

Typically at this point in the cycle of a merger you'd still see a decline in numbers of net numbers of accounts.

We're seeing a nice positive increase.

So it's settled down.

Leadership is doing well.

The employees are very comfortable with our culture.

The markets like us a lot.

It's turning out to be a really good merger.

We will have a second quarter conversion.

Everything is on track.

Daryl will talk about our conversion charges, which are less than we thought so it's overall looking really good.

Now, before I turn it to Daryl, just a couple of points on our key strategic objectives.

As you recall, we have four, first is mitigate credit issues.

We are focusing an intense amount of effort on doing that.

That's obviously job number one.

We are focusing on the portfolio.

We are focusing on improving systems.

We think it's very important when you go through a tough period like this to learn what you can learn.

We learned some things we can do to improve as we go forward.

So we're putting a lot of effort on that.

But it's very important to turn your attention to revenue growth.

A lot of people focus on the problems.

Most forget revenue growth.

We do not do that.

We're tightly focused on revenue growth, particularly our C&I strategy where we are adding significant numbers of corporate bankers and we're seeing that strategy play very effectively for us.

We have continued to pick up really good long-term health accounts from some of the major competitors, kind of a flight to quality issue continues.

Not as much as it did early on with Wachovia, but certainly still continues.

Client service quality continues to improve.

It has never been better.

For example, in the last 90 days or so, we got our outside statistical data from Merits Corporation, our service quality is better, materially better than our major competitors.

JD Power rated us best in mortgage origination.

Greenwich & Associates, which is the best national, in terms of rating banks with regard to middle market, small business, they told us it's the first time this has ever happened.

We got 20 out of 20 national awards.

So our service quality is great and I know you know this but just as a reminder, the real key in terms of looking at the future is to think about how well your value proposition works in the marketplace.

Value's a function of quality relative to price.

Our quality's gone up substantially, therefore our value proposition has gone up substantially and I think that will play very well for us in the future.

We focus a lot of attention on controlling cost.

Excluding items and purchase accounting, our expenses are down 1%.

Daryl will give you some color on that.

But I think that's very important because we're controlling what matters and we're investing for the future on what matters.

So we're really focused on that area.

So let me turn it now to Daryl for some more details and then we'll have some time for questions.

Daryl?

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 sheet activity.

Net interest margin for the first quarter of 2010 was 3.88%, up 31 basis points from the first quarter of 2009, and up 8 basis points from the fourth quarter of 2009.

Recall, our fourth quarter included 2 basis points due to approximately $9 million of income for covered loans that related to the third quarter.

So linked quarter margin improved 10 basis points.

Overall, earning asset yields were up 2 basis and total interest-bearing liabilities were down 7 basis points, driving a significant margin increase.

During the first quarter of 2010, we performed our first cash flow assessment on 41 loan pools acquired in the Colonial transaction.

The analysis determined that most but not all of the loan pools are performing better than originally estimated.

Resulting in loan accretion of $21.8 million, of which 80% was offset by decreasing income on the FDIC indemnification asset.

To clarify, because this was our first assessment, we waited later in the quarter to test the cash flows so that we could obtain better information.

For that reason, the $21.8 million only represents one month's accretion.

Going forward, we will have two month impact from the prior assessment and one month from the new assessment.

We also determined that a few loan pools were not performing as well as expected, this required a $19.1 million in impairment that was recognized in the provision for loan and lease losses.

Again, 80% of this is offset by income on the FDIC indemnification asset.

The net result of the impairment assessment and the rerun of the expected cash flows resulted in less than $1 million pretax positive impact on the bottom line.

The results of the reassessment added 6 basis points to the margin for the quarter.

Adjusting for deteriorating asset quality, including OREO, compared to last quarter, net interest margin would have been approximately flat on a linked quarter basis, and 5 basis points better on a common quarter basis.

If you normalize NPAs, interest reversals, and OREO to a more reasonable level, net interest margin would have been 10 basis points higher than reported.

We told you last quarter that first quarter 2010 margin would be in the upper 3.70s, and for the full year, margin would be approximately 3.80%.

Due to better than anticipated accretion on Colonial assets, lower deposit rates, changes in the shape of the yield curve, and improved credit spreads on loans, we are revising that guidance higher.

We currently believe that margin for the second quarter and for the full year will be in the mid-3.90s.

Over the long run, we managed the bank's interest rate risk to be relatively neutral.

Currently, we are slightly asset sensitive and margin should benefit as short-term rates increase.

On a linked quarter basis, yield on earning assets improved 2 basis points, driven by improved yields on commercial loans, specialized lending, and other acquired loans, offset by lower rates on consumer loans and investment securities.

On the right-hand side of the balance sheet, we saw costs on interest interest bearing liabilities decrease 7 basis points.

The primary drivers was a 12 basis point drop in managed rate deposits and 11 basis point drop in short-term borrowings.

Looking forward, we expect the yield on acquired loans to increase and expect the rates paid on client deposits continue to decrease somewhat.

Turning to the Colonial acquisition, a couple of items to update you on, regarding the balance sheet.

With respect to deposits, we increased client deposit balances by $1 billion, adjusted for the Nevada branches, Reflecting continued success in integration of Colonial.

Rates paid on deposits should now closely match the rates paid for BB&T deposits.

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

Now let's look at non-interest expenses.

Looking on a common quarter basis, non-interest expenses increased 25.4%.

Excluding merger related costs, purchase acquisitions and other significant items, non-interest expenses increased $162 million, or 13.6%.

The increase was driven by $136 million due to maintenance costs, valuation adjustments, and losses on sales of foreclosed properties.

$12 million related to our rabbi trust and $12 million increase in FDIC expenses.

These increases were offset by a $14 million decrease in pension expense.

With respect to the two unusual items reflected in non-interest expense that Kelly described, we settled the contingent liability recorded last year, resulting in $11 million pretax gain which was reflected in other non-interest expense.

Secondly, we adjusted estimated rent expense associated with the Colonial acquisition, resulting in a $16 million pretax reduction of occupancy and equipment expense.

The expense was somewhat elevated in the fourth quarter, and lower this quarter than it will be going forward due to this change in estimate.

We expect the occupancy and equipment expense to be about $155 million for the next quarter.

Looking on a linked quarter basis, non-interest expenses decreased 6% annualized.

Excluding merger charges and adjusting for the impact of purchase acquisitions and other significant items, non-interest expenses increased $13 million or 3.9% annualized.

The increase was driven primarily by a $37 million increase in maintenance costs, valuation adjustments and sales of foreclosed properties.

Offsetting the linked quarter increase in non-interest expenses was a $5 million decrease in legal fees.

Looking to 2010, excluding purchase accounting and significant items, we expect non-interest expenses to grow in the 3% area.

Turning to the impact on expense from Colonial, we remain confident in our estimate of cost savings in the $170 million range and expect to be at the full run rate by the third quarter of 2010, earlier than previously estimated.

As you know, we have a very strong history of achieving our cost saving targets in acquisitions and we expect to do so here as well.

We are again reducing our estimate of merger related charges from $185 million communicated to you in the fourth quarter to $140 million.

This reduction reflects our ability to repudiate contracts in branches in an FDIC assisted deal with no additional cost due to cancellation.

We are working diligently to control costs and being as efficient as possible throughout the integration of Colonial.

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

Through the first quarter of 2010, we recognized approximately $44 million in pretax 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.

Efficiency for the first quarter was 52.1% on an adjusted basis compared to 51.4% for the fourth quarter.

Due to heightened credit and regulatory costs as well as Colonial's higher relative efficiency ratio, partially offset by cost savings from the Colonial transaction are realized over time.

Efficiency ratio will probably get a little worse before we see improvement later this year.

Looking at our full-time equivalent employees, positions decreased 465 in the first quarter.

The majority of the decrease was related to Colonial.

We continue to expect to see significant reduction in FTEs over the next one or two quarters as we continue to integrate Colonial.

With respect to taxes, our effective tax rate for the first quarter was 19.8%.

At the high end of the guidance we gave during the fourth quarter earnings call.

We continue to expect taxes in the general range going forward.

Of course, changes to our income, forecast, one time and unusual events could change this guidance.

Finally, taking a look at capital, our capital ratios remain very strong and all improved from the fourth quarter of 2009.

The leverage ratio was 8.7%.

Tier 1 capital was 11.7%, and total capital was 15.9%.

Our Tier 1 common ratio is 8.7%, and continues to be among the strongest in our peer group.

Additionally, our tangible common equity ratio remains strong at 6.4%.

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 and our credit outlook is improving.

Our acquisition of Colonial has certainly exceeded our expectations.

We have strengthened our earnings power potential.

We have further improved our capital base and coupled with the lot share agreements we continue to produce a lower risk balance sheet.

We are in a strong position to grow organically, and to take advantage of future 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 Q&A segment of this conference call, I'll ask that we use the same process as we have in the past to get fair access to all participants.

I have instructed our conference call provider to 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 Barbara to come back on the line and explain how to submit your questions.

(Operator Instructions).

We'll take our first question from Brian Fitzsimmons of Sandler O'Neill.

Hi, it's Kevin Fitzsimmons, actually.

My question's related to the TDRs and maybe you can give us some sense of comfort on this.

It's a few questions on this.

Number one, if you can just give us a little sense on what was the main driver for the sharp difference between what you said last quarter and this quarter in terms of restating what it was at year end.

Was it simply a case of not -- it was too early to give an accurate estimate of that and as you went through you got a much better idea?

Because it was a much bigger number.

And then on a related topic, the growth we saw from the year-end number to -- from a billion to a billion seven, is that just continued realignment with the updated regulations or is it reflecting deterioration?

Like is it simply a big pile of loans that you have to get through and it just takes time, or is it just this is something we should view as deterioration?

Lastly, if you could give us a sense on the redefault rate.

I know it's kind of early for the TDRs but any kind of sense on how they're holding up.

Thanks.

That's an obvious good question.

So basically it's kind of some of what you said.

So we got the guidance in the fourth quarter, during the fourth quarter, and on into this quarter, we had continued discussions in terms of how we should apply the guidance.

So that was -- that took part of it.

And then the other thing was just the time to go through in the case of mortgage, all the loans we did in 2009.

We made a very -- I think very conservative decision to go back into 2009, so that just takes time.

So it's really about process and a very conservative interpretation of the guidance, and then applying that through the process, so it is not an indication in my judgment of any kind of material deterioration.

We haven't changed anything, Kevin, in terms of how we work with our clients.

This is just a change in interpretation of the recent guidance and our effort to be really pristinely conservative in terms of the application of that.

The actual redefault rate is very good.

We have -- you got the number, Daryl?

I do.

So in our mortgages, I think people usually talk about missing two payments.

Our portfolio for the last couple quarters is about 10% redefault rate and we think the industry average of what we've seen is closer to 20%.

Our DRL home equities along those same percentages, maybe slightly better than that as well.

So Kevin, most of this is about where for very long-term strategic reasons when we work with our clients, we don't typically go dramatically raise the rate.

We just never have.

Our interpretation in the past has been if you go in and renegotiate and don't lower the rate materially, maybe have a small increase, that's not a TDR.

The current guidance says that is a TDR.

That's all that's changed.

We don't intend to go in and change how we deal with our clients.

We think it's the right thing to do.

We're not giving them super low rate.

The average on the portfolio is slightly over the conforming rates, but it's just not high enough to pass the test of not being a TDR.

Kelly, is this effect of realigning or getting your definition of TDRs in line, is that now fully baked in or do we see more -- you mentioned TDRs will probably grow in coming quarters.

Is that the continued realignment, or is that just due to deterioration that you see out there?

I think that's mostly just contingent realignment.

To be honest, now that we know exactly what the rules are, we'll probably be a little more conservative in terms of -- we may -- -- we're not going to dramatically change our business practice, but some of these probably would not have been a TDR if we would have known exactly what the interpretation of the rule was.

We could have raised a little higher rate.

That will be an offset.

I think you will continue to have some newly created TDRs.

All that you're seeing here, Kevin is basically about catch-up.

All right.

Thank you very much.

Next we'll go to Brian Foran of Goldman Sachs.

Good morning.

Good morning.

Can you elaborate on the comments around the trajectory of your residential construction NPAs relative to the industry?

I would have thought seasonally you would have gotten a benefit and we've seen other banks have res construction NPAs down 10 to 15%.

Maybe elaborate on that comment about stronger builders staying in the NPA bucket longer.

Yes.

So, we do have the stronger builders as you pointed out.

We do tend to work with our builder clients and so as we work through that, we work through that cycle, it probably takes us a little longer than some do, just because we remain committed to working with our clients through the cycle.

We don't carry -- if it gets to the point they can't make it we don't carry them when they shouldn't be carried.

But we have some really good clients, have been in business a very, very long time.

This has been a tough recession, and so we're committed to working with them all the way to the point that we're clear that they can't make it going forward.

And where you'll see that really benefit us, Brian, by the way is on the other side of this.

Is those folks remember the people that work with them in the tough times, so that's all you're seeing there is us taking the time to kind of work with those clients through the cycle.

And then one follow-up.

FDIC deals seem to be getting more competitive, Colonial's gone very well for you.

I guess how should we think about potential additions to the franchise, FDIC deals likely, are you starting to think about open bank transactions, et cetera?

Yes, so definitely, the competition has heated up.

Everybody in the world, small and large, now wants to go do a deal.

This is not unexpected, when you have opportunities out there and people perceive it to be wonderful and all positives.

They all tend to line up.

So for example, we priced a deal recently, what we considered to be consistent with what we said.

We've been very clear, we're interested in deals that are meaningful size, strategically important, no meaningful asset quality and immediate accretion.

And so we bid it that way.

We missed it.

And I'm happy with that.

We're not going to fall into the trap of what others may, which is follow the herd all the way to the point where it becomes bad deals.

That's what happens in almost every scenario.

Probably going to happen here too, so I wouldn't rule out a possibility of us doing other deals.

We're certainly going to look at every one that's meaningful that's in our marketplace but we're not going to do anything crazy.

We're going to stay committed to what we said.

We're committed to building shareholder growth.

We don't feel like growth just for growth's sake makes any sense for our shareholders.

With regard to unassisted deals, we are beginning to head into a zone as the economy continues to improve and we get more visibility with regard to asset quality, we're beginning to enter a period where it will make sense to look at unassisted deals.

But the criteria is still the same.

You've still got to be able to contain the asset quality.

Now, you can do that with marks, as you know, but the more you mark it, the more capital you require, which means puts more downward pressure on EPS.

So we'll have to see what the market allows.

But we're not opposed to looking at unassisted deals at this point but we are remaining firm in terms of having a conservative view with regard to the economics of it.

Next we'll go to he Kevin St.

Pierre at Bernstein.

One follow-up to Brian's question.

On the ADC portfolio, while you did have a significant increase in non-accruals, you had sort of a flattish net charge-off rate.

Can we read anything into that regarding the adequacy of the marks on the non-accruals?

Do you think we've found a bottom here in terms of the net charge-off rate?

Yes, I really do, Kevin.

It's interesting.

What we had said a year ago was that we didn't want to rush out and deep dive and let the bottom fish scavengers take this stuff at deep discounts.

We thought there was an overreaction and it would come back.

I don't want to sound overconfident but I'm fairly sure that's what's happening.

We're seeing it in our own anecdotal information.

There are clearly, we've moved almost to a point where there's very little availability of supply of lots.

And you can find plenty ample anecdotal feedback to suggest where the big builders are really almost getting panicky to find lot availability.

I'll refer you in case you missed it yesterday to the Wall Street journal, page A-5, there's a full page great article on land prices jump as home builders move in.

Really talks about what's going on.

And so we're seeing that bleed through in terms of the net charge-offs because obviously we're getting better collateral values.

Okay.

Great.

And then just separately on mortgage, the decline in revenues seemed to be larger than what would be implied by the decline in originations and I saw there was no real change in the net valuation on the MSR.

Is there something else that we don't see?

Was there any repurchase reserve or any other thing that would drive those revenues down?

Kevin, I'll take that one.

In the fourth quarter, we had a $24 million gain in MSR this quarter.

We only had about a $3 million or $4 million gain.

And we did establish a $4 million reserve for buybacks from the GSEs.

It's not material, but the first time we established that reserve.

Next we'll go to Craig Siegenthaler of Credit Suisse.

Just on the updated Regulation E guidance, can you provide us with the levels of revenue directly impacted.

We're looking for the point of sale debit and ATM overdraft fees.

What I'm just trying to see is what's really -- can we back into that $70 million to $80 million updated guidance.

What's kind of the revenue offset there from either opt in or higher checking account fees?

Well, okay, so what's happening today to be honest is we're all trying to figure out what the impact of it's going to be.

Remember, it's very fresh.

We just made the market changes April 1, so we've got 20 days of data.

So we're trying to figure out what that will do.

Our early indication is that's not nearly as bad as we thought it was going to be.

With regard to the opt in, which is effective July 1, we're in the process of disclosing to our clients what the change is, giving them the opportunity to opt in, if they prefer.

It's very important from regulatory guidance and our own sense of what's right and wrong to not go out and brow beat people and talk people into opt in.

We have to see how that plays out.

So it's a little too early to know exactly what the negative effect of revenue will be, but as I said, based on what I've seen in the early returns, I'm willing to say at this point it will be in the low end of 75 to 80.

To your question of what's the make-up on that, we are already in the process of doing a complete review of all of our products and processes and no doubt, we will be making adjustments.

Whether we fully recapture that 75 or 80, will go over it, is too soon to tell.

But we will definitely make changes that will recapture a meaningful portion of that.

I personally think, Craig, what will happen is we'll go back to where we were 20 years ago where there will be kind of a certain number, $5, $8, $9 stated charge for having a checking account every month and move away from a lot of the free.

I think the market will see the wisdom of that and that's where we're all kind of go back to.

So we'll have to see, but I don't think when it's all said and done -- you'll see a dip for us and I think everybody, two quarters or so, in that service charge income.

I suspect by the end of the year, first quarter, you'll see restoration of that substantially, if not fully, by changes and it will end up not being a material impact.

Kelly, just to quantify what you said, not bad as initially thought.

What's really driving that?

Is that just running the scenario and seeing what we can raise the checking account fees here and we'll get this amount on the opt in, is that's really what's driving?

What we're really doing right now is we're literally collecting day by day data about what our clients are doing when we approach them about opt in.

We're getting literal data.

Don't have enough yet to be statistically accurate.

For example, if the vast majority opt in, then the July effect will be nothing.

There's an absolute effect with regard to what went into effect April 1.

That's because we literally capped the number of items to four, which is the big change, and then we said if they just overdraw their account less than $5, we won't charge them.

So that's kind of -- you can't really do anything about that today.

This opt in, opt out thing is a bigger item and we'll just have to see but my optimism is based on some very, very current data from what our existing clients are saying.

For example, just -- this is not statistically accurate yet, but just up through yesterday, our existing clients are opting in to the tune of about 75%.

We'll go next to Bob Patton of Morgan Keegan.

Good morning, guys.

Hey, Bob.

Good morning.

Real quick question.

I wanted to talk about foreclosed property expense number.

Obviously, $178 million, it's triple what it was a year ago and I'm hearing you on where we're going with because of the nature of how they service their customer The last part of the question is do you see BB&T, maybe the three major components of the contribution expenses going away.

So if you think in terms of the categories, the to that line, where you cost of actually owning the projects, you know, the taxes, cutting the grass, et cetera, that kind of peaked up here, built up as we were bringing in new properties that needed a lot of up front work.

Because what happens with a lot of these, you pick them up, nobody's cut the grass in six months, you've got some curb and guttering that wasn't finished.

A lot of that up front stuff is fairly expensive.

Most of that's kind of been done in terms of any major impact.

So what you will see is the ongoing cost of carrying these things will probably be coming down.

You saw a ramp-up in the write-downs because, frankly, we chose to be more aggressive in terms of writing these properties down, simply to accelerate moving them out into the market.

We sensed that we are converging on a time when the market's appetite is improving significantly as I referred to, and, therefore, it makes sense for us to meet that increased demand with an aggressive positioning of our properties.

So we've taken some additional hits so we can go ahead and offer at a lower price and move it on out.

I think as you look forward you'll think in terms of the cost of carry of those being kind of on a declining basis, as we go forward, and because of increased demand I think the acceleration will pick up because there's just simply more demand for good product and much of what we have in our portfolio today is really good product.

Okay.

And then the last part of it, do you see BB&T sort of lagging coming out of this because of how you do things or have you really captured the costs and should start to decline from here?

We might lag a little bit, Bob, a quarter or two, which we think it's more important to do the right thing with our clients than exactly who comes out first.

We are in this for the long haul, so we could easily lag a quarter or two.

I don't consider that to be meaningful.

It's more important that it's the direction which is positive, and that we do the right thing for our clients.

Thank you.

Unfortunately, we are out of time for questions today but I will turn over the call back to Mr.

King for closing remarks.

We thank you for your participation today.

Thank you, Tamera.

Thanks everybody.

Let me just close by saying we really feel like this is overall a very good, solid quarter.

Credit quality's clearly improving.

The market is positioned to grow.

We're quite confident of that, based on our talks with a lot of clients.

There's a question about all the rhetoric out of Washington, but we think that will subside so as we head through the spring and summer we think the market is positioned to grow.

Our value proposition we believe is the best on the market based on very good outside statistical data.

Our earning power is strong.

Our capital is very strong.

We think by the third or fourth quarter as we said we remain clear that you'll see kind of a peaking of nonperformers.

You'll begin to see a peaking and heading to the peak, a reduction in allowance build.

You'll begin to see we think a reduction in charge-offs.

All of that sets up improved earnings as we head into the third and fourth quarter and into 2011.

We didn't get a question on dividends, so I'll just make a comment about that.

We do -- are already contemplating a question of a dividend increase.

We said before we'll consider that when we see -- have clarity with regard to the economy, clarity with regard to our own assets and our cash flows.

I'm feeling relatively optimistic about that.

We're not going to rush and try to be one of the first.

Remember, we didn't take ours way down to $0.01 like everybody else did.

Some of those that talked about raising it.

We took ours $0.15.

Still got a 2% yield.

Nonetheless, we think fourth quarter is a time we can begin to think in terms of a small dividend increase.

All in all, we're not crocky, we're not calling it over.

We think it's a time to be calm and patient, stick to your knitting but feeling certainly more optimistic and certainly absolutely feel that our best days are ahead.

Thanks for your support and have a great day.

This does conclude today's conference call.

Thank you for your participation.