Truist Financial Corp (TFC) 2010 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the BB&T Corporation Third Quarter Earnings 2010 Conference Call on Thursday, October 21, 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, Tamera.

Thank you, Andrea, and good morning, everyone.

And thanks to all of our listeners for joining us today.

Of course, this call is being broadcast on the internet from our website at BBT.com.

We have with us today Kelly King, our Chairman and Chief Executive Officer, Daryl Bible, our Chief Financial Officer and Clarke Starnes, our Chief Risk Officer, who will review the results for the third quarter of 2010, as well as provide a look ahead.

We will be referencing a slide presentation during our remarks today.

A copy of the presentation, as well as our earnings release and performance summary, is available on the BB&T website.

After Kelly, Daryl and Clarke have made their remarks, we will pause to have Andrea 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 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 on slide one of our presentation and in the Company's SEC filings.

Our presentation includes certain non-GAAP disclosures.

Please refer to page two in the appendix of our presentation for the appropriate reconciliations to GAAP.

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

Kelly King.

Thank you, Tamera, and good morning, everybody.

Thanks for joining our call.

Let me just start by saying I would describe our overall quarter as improving performance in credit quality and very strong performance in most other areas which we'll describe.

So, a few quarterly highlights; a strong improvement in earnings compared to `09, third quarter net income available to shareholders is $210 million, up 38.2% and EPS was $0.30, up 30.4%.

I felt good about our revenues, net revenues up 4.2%, up 1.1% annualized linked quarter if you exclude securities gains.

And importantly, our pretax pre-provision earnings was up 61%, excluding security gains.

You recall a couple years ago, we told you that we were pursuing a five-year strategy of overall balance sheet improvement as we went to diversity our asset and our liability side.

We'll explain to you good progress with regard to that.

So in the loan area, we grew annualized linked quarter in all non-real estate loan areas.

In fact, growth accelerated in most of the portfolios in the quarter.

We'll show you some detail on that.

Had 6.1% growth in mortgage loans, annualized quarter and very strong mortgage revenue growth.

In fact, our originations were $6.7 billion in the third quarter compared to $5 billion in the second.

Very pleased about average non-interest bearing deposits increasing 15.4% on an annualized linked quarter basis.

Our very strong balance sheet and capital levels continued to improve, our Tier 1 common was 9%.

We had a 130% allowance coverage of NPLs held for investments, if you exclude covered loans.

Importantly, we want to discuss with you the substantial progress in disposing of problem assets.

We told you last quarter we were embarking on a more aggressive disposition strategy which we started in second and substantially progressed on into third and we mentioned intra-quarter that we would be transferring over $1 billion to help ourselves.

We did that; so we transferred $1.3 billion in non-performing loans to help a sale and we have written those down consistent with actual sales experience in terms of the mark.

Very good sales activity, we sold $207 million of NPLs in the quarter.

We also sold $244 million of other real estate owned and we currently have more than $350 million of NPAs under contract to sell.

So, a lot of really good activity and all that activity is consistent at the marked level that we expected.

Importantly, our TDRs, our NPAs, our NPA inflow and foreclosed property expenses all declined during this quarter.

If you're following along on the deck, we'll go to slide four.

Securities gains, unusual items for the quarter, we did take $239 million of security gains in the quarter, which is an unusual income item, obviously to -- in conjunction with some other unusual items that we've had.

That was a $0.21 positive impact.

We did have a $321 million or $0.28 negative impact related to the transfer of NPLs.

And then we had a small remaining Colonial merger charge of $10 million or $0.01.

So the way I think about this, I always try to get back to kind of what I feel like our normalized earnings rate is.

So if you take the $0.21 in securities gains away and then if you add back the $0.28 in unusual earnings impact because of NPL transfer and the $0.01 on merger-related charges, so you start out with 30 -- you add back eight -- so I think about kind of normalized run rate of about $0.38.

Obviously, we can debate that.

But that's the way I kind of think about it.

If you look at our underlying community bank performance, we're making really good continued progress.

We continue to have the best value proposition in the market where our community banking model delivers the best service and reliable, empathetic, responsive competent service.

We know that because we continue to evaluate that in terms of outside, the market research that we have provided for us by Maritz Corporation and our most recent data shows that we have a substantial improvement in a very high level and also a substantial improvement in terms of the gap over our major end market peers.

So we know that our value proposition is the best in the marketplace because value's a function of quality relative to price.

Our community bank has been working really hard in terms of efficiency improvements and so their discretionary expenses decreased by 4% compared to last year.

We're making good progress in terms of building out our community bank presence in Texas.

You'll recall through Colonial, we picked up about $830 million in deposits, 22 branches in Dallas/Fort Worth and Austin.

We're now building out a corporate banking presence across the state, particularly focusing in Houston with a lot of emphasis in the energy space.

Now, the Colonial acquisition continues to provide very significant growth and cross-sell opportunities, particularly in Alabama and Florida where hawse have such large presence.

To give just a little bit of color on that, we had a 53% increase in retail production per relationship manager in the Colonial market during the third quarter.

And a substantial improvement in net new account openings from a negative 10,000 in third quarter of `09 to a plus 2,400 in the third quarter of 2010, so nice momentum there.

We also had net new transaction accounts that increased from 17,400 in the third quarter of '09 to 37 -- excuse me -- 37,000 third quarter of 2010.

I think a lot of that is because of our very low turnover, which continues to improve, so we feel good about the quality and service delivered.

If you look at tab -- page six.

We continue to have really good improvement in our C&I and CRE mixed improvement.

Now, on the balance sheet side, that's one of our key objectives.

In fact, our percentage of C&I to total loans improved from 30.7% in the third quarter of `09 to 31.4% third quarter of 2010.

I know that's not a major increase in actual outstandings, but the actual production, the commitments are even much greater than that.

So as we get funding, that will materially change that.

On the deposit mix, our DDA percentage of total deposits increased from third quarter `09 from 16.2% to third quarter 2010 of 19.4%.

So really nice improvement there.

Really good progress in small business area.

20% growth in total households compared to last year, 4.9% even if you exclude Colonial.

We had double-digit growth in most services.

We're spending a lot of time now in our bundling sales efforts, which were 34% more effective compared to last year.

So that's really getting traction for us, which is the real key to long-term sales results and profitability in small business.

Our corporate banking emphasis is really getting traction.

We had a 20% annualized growth in our large corporate banking outstandings and commitments.

That's growing very, very well.

As I said, we're developing a Texas-based energy team which has a lot of promise.

So, really good corporate banking progress.

A lot of progress in various lending niche areas.

I'll show you in a minute.

So I have some really good numbers in terms of diversified growth in those lending areas.

Our wealth strategy is working very well, record revenues of 29% on an annualized linked quarter basis.

We continue to add producers in the wealth division area.

We've recently launched an ultra-affluent strategy in the wealth area.

So, we're doing a really good job there.

Been working on this hard for the last four or five years and really doing really well.

In insurance, we continue to do really well relative to the market.

As you know, insurance continues to be a soft market.

However, we had record revenues of 1% over the year.

That may not sound great, but it's much better than the industry, which we think is down 8% to 10%.

And our insurance revenues are now consistently over $1 billion and we recently improved to sixth-largest market share, sixth-largest broker in the United States and in the world.

If you look at tab -- slide seven, give you a little color in terms of our non-real estate loan portfolios.

If you look, you'll see that our loan portfolio from 3Q `09 has been essentially flat.

That's what we told you would happen.

We said that it would be basically flat as we grew non-real estate areas and allowed the real estate areas to run off.

So our C&I, third quarter to second quarter annualized was up 6%.

Other CRE, as we planned, was down 5.5%.

Sales finance, automobiles prime paper was up 10.4%, revolving credit was up 9.1%, mortgage was up 6.1%, specialized lending, I'll give you a little detail in a minute, which is up 20.8%.

I would point out in direct retail, it was down 3.6.

We, like everybody else, are still struggling in direct retail.

We are seeing a little momentum because the rate of decline is slowing materially, but it will probably be another two quarters or so before we see that turn to positive.

I point out to you that our ADC portfolio was down third to second $771 million and third to second annualized reduction of 59%.

Obviously that's a substantial reduction, very much in line with what we had planned to do.

So overall, if you exclude the loan sale -- transfer of help a sale, our loan growth was 3.6%, which we think is very good.

So in summary, all the non-real estate loan portfolios grew, the pace accelerated in almost all areas, loan production for the third quarter was $18.4 billion, up an annualized 20.8% compared to the second quarter of 2010.

So that's very encouraging I think to see that the loan momentum is beginning to pick up.

I don't know that the overall market has been picking up that much, to be honest with you, but I think we've really moved in market share in a lot of cases, particularly in the large corporate market and in specialized lending.

On slide eight, just to give you a little color about our specialized growth niche areas, I mentioned that our prime sales finance automobile paper was up 10.4%.

We do have our smaller non-prime portfolios going 5.9%.

More importantly, delinquencies are really good, profitability is improving, really, really good program there.

Our revolving credit card is up 9.1%.

Insurance premium finance is up 55%.

Now, that's -- that's organic and some acquisition growth in there.

We were able to acquire a good price portfolio during the last year.

So that's worked very well.

Small ticket finance through our small finance area has increased 38%.

There's really good granularity there.

We've financed for example, all-terrain vehicles, lawn mowers for commercial operators, et cetera, so that's really good paper.

Asset-based lending is growing very fast, 21% increase.

And our mortgage warehouse lending operation, while small, is gaining traction and is a real market opportunity for us there; it's growing 43%.

So, you see in all these areas, we had strong benefits from these previous investments.

We've been investing in these areas for the last ten years and it's really beginning to come home now, we've had a very, very good time.

By growing these areas, it improves our diversity in non-real estate segments, it improves our overall granularity, geographic and product diversification.

And one thing I would mention to the group, just for us all to watch over the next few years, this is substantially the way I think you're going to see re-intermediation occur.

We talked about it over the last 25 years how we dis-intermediated out of the banking system with market share went down from 80% to 30%.

Well, you're going to see over the next several years, in my opinion, a process of re-intermediation where a substantial amount of those previous assets that were bowed out through the (inaudible) banking system will come back to the bank.

That will be a very good thing.

And you will see a lot of that occur just organically, but a lot of it will occur in a different kind of organic approach in that we'll buy paper from originators that would have historically taken their paper through a securitization process.

They'll now bring it more directly to us, which is a really good growth strategy for us and I think you'll see that in other institutions as well.

If you look at page nine, just a little bit of detail on our deposits.

We're very pleased about this.

Our non-interest bearing deposits, DDA, increased 15.4%.

I will point out, you see that our interest checking was down 43%.

A couple of points there.

It's just a small portfolio.

And it's mostly municipal funds and so we basically price that based on what our funds needs are.

So, with loan growth being slower and other DDA going well, we just didn't need as much expensive municipal funds so we pulled back on pricing.

Other client deposits are growing 2%.

CDs are down 39%.

That is absolutely by design.

We have been managing our margin and holding rates back on single service, more expensive CDs, particularly in some of our markets like Florida, where the pricing gets very, very sensitive.

We're not losing the relationships, we simply are not carrying those CDs at a time when it's relatively more expensive than makes sense for us.

So our total deposits were down, but I want you to please understand that the net underlying areas that we're interested in growing are growing very nicely.

For example, we've been really pursuing transaction accounts, which are up 17% compared to third quarter '09 and an annualized 5.6% compared to second quarter 2010, so really nice growth there.

Our mix is improving in terms of CD pricing and municipal pricing.

We increased our net new transaction account development from 17,400 in third quarter '09 to 37,700 in third quarter 2010, so a really big increase there.

And we increased net new transaction accounts by 111,000 this year, an 87% increase over 2009.

So, if you look through the underlying numbers on the loan side and on the deposit side, what you see is really nice improvement, really strong momentum and we feel very, very good about that.

So, let's go to Clarke now and let him give you some color with regards to the loan area.

Thank you, Kelly, and good morning, everyone.

If you'll begin with slide ten, I'll share some thoughts regarding our overall credit trends for the quarter.

As we discussed many times, our primary credit issue throughout this cycle has been the stress in the single family ADC portfolio.

Just -- if you guys do the math, you'll see as a frame of reference this portfolio represents today about 4% of our loans that have generated almost 30% of the nonaccruals and losses even this quarter.

So as a result, we've been aggressively liquidating this portfolio, as you see on the chart, from a peak of nearly $9 billion in Q1 2008 to the current total level of $4.2 billion.

If you exclude the ADC loans we transferred this quarter to held for sale, we have about $3.8 billion remaining in the portfolio.

So, if you look at that for Q3 and what's left in the held for investment portfolio was down $600 million and we've reduced it almost $2 billion over the last four quarters.

So we think we're making substantial progress in this liquidation strategy.

You can really see that in the stressed markets and geographies where we've had our biggest severity.

For example, Florida is down over the last 12 months 55%; Atlanta down 58%; and DC Metro down 76%.

So we believe the remaining exposure in the portfolio will have a less relative severity than these higher stressed markets and we're very focused right now on continuing the acceleration strategy to dispose of this segment as quickly as possible over the next several quarters.

On slide 11, Kelly indicated we're very pleased with the overall results of our problem asset disposition strategy and the momentum we are building towards this effort.

In Q3, we actually assembled a team of about 12 sales specialists, together with some significant operational and marketing support, to begin a sales program for about $1.3 billion in commercial NPLs that were transferred to the held for sale category.

And the way I think you ought to think about this -- our effort consists of a four-pronged strategy and it's in this priority, it's short sales to the borrowers, third-party direct, third-party bulk and then some auction.

And so, the way to think about that is we get our best pricing execution when we're dealing more directly to the borrowers, but it takes a longer time to do that.

And so, in auctions you can do it much quicker, but you've got a bigger discount.

So what we're really trying to do is blend these various liquidation alternatives to achieve the best execution that we can while balancing the time to liquidate.

And so, we also will continue to work on this strategy along with our current and previous ORE liquidation strategy, which I'll talk about in a moment.

So as a result of these efforts for the quarter, our credit quality metrics improved on a linked quarter basis with the second consecutive quarterly reduction in NPAs, which were down 4.2%.

And if you actually exclude the NPLs that we moved to the warehouse, total NPAs remaining and held for investment were actually down almost 21%.

The way we did this, we sold about, as Kelly said, about $451 million of NPAs for the quarter, approximately $207 million in commercial NPL notes out of the warehouse and $244 million of OREO.

And we're very pleased that we've got about $350 million of problem assets under contract as we move into the fourth quarter.

And we also have pending LOIs for a large segment of the assets.

So, we're very pleased with the interest we have in these assets and our ability, we think, over a reasonable period of time to have these things liquidated at reasonable pricing.

The pricing for the NPL sales for the quarter were within our targeted range, so it was approximately $0.55 on the original unpaid balance.

And so we marked the remaining NPLs in the warehouse accordingly, consistent with those sales efforts.

On slide 12, you'll note that our GAAP charge-offs for the quarter were 3.54% in total.

That does include the impact of the portfolio marks in the warehouse, the previous nonaccrual write-downs and the release of the specific reserves or transferred reserves related to that $1.3 billion of loans.

So, we're very pleased if you think about it this way -- our core losses, which we define to exclude the impact of the write-downs related to the warehouse assets, were approximately 1.8%, which is actually a little better than our previous guidance of 2%.

And I think it's important to note that while we'll continue -- we may continue to incur total GAAP losses in excess of 2%, if we continue to accelerate the sale of nonperformers, we're not changing our guidance for core losses outside that liquidation strategy at this time and that remains in the 2% range.

It's also noteworthy, we think, for Q3 that this is the first quarter since the recession began that our provision, total provision, did not cover total charge-offs.

And the results of our allowance model and our view of underlying credit trends supported the release of the reserves related to the loans held for sale and we didn't have an incremental allowance build.

And additionally, we're very pleased the allowance coverage of NPLs held for investment actually went up to 130% versus 98% in Q2.

So what we would think about, is looking ahead, we'd expect near-term provisions to continue to fund the core losses, but we don't expect that we'll need to replenish any allocated allowances related to held for sale, as long as the economy continues to hold up.

So I guess the main point about reserves is that we will remain prudent and conservative regarding our allowance until we're convinced the economy is on a firm footing and we've worked through our real estate exposure.

On slide 13, we'd like to share some data with you regarding our OREO portfolio.

We actually had a 5.9% decrease on a linked quarter basis and another strong sales quarter at $244 million.

And the mix again was very good for us, almost 30% of land and lot inventory.

And I'm very pleased that -- we sold four of our top ten properties for the quarter and we have a very strong pipeline under contract already, about $116 million.

We continue to see very active investor interest in all our properties.

Our mark for the OREO sold for the quarter in total was about 48%, not materially different.

That's against original unpaid principal balance, that's not materially different from what we've seen in previous quarters.

Another noteworthy fact is that our land and lot inventory is the lowest level since Q2 2009.

So I think that's more evidence that we continue to methodically work through these land exposure issues.

We also discussed last quarter that our foreclosed property and maintenance expenses were elevated in Q2, primarily due to an aggressive revaluation effort on appraisals.

Therefore, we feel very good that we had a significant decrease in total write-downs and maintenance expenses for the quarter and yet, our average age of property in inventory and age of appraisals actually improved.

So we feel very good about the current valuations we have for the portfolio.

Turning to slide 14, our early stage results on delinquency also generally support the improvement that Kelly talked about in stabilizing trends in the overall portfolio.

Very pleased that TDRs, which we know has been a big discussion in prior quarters, were actually down almost 9% compared to Q2.

While we continue to believe there are times that appropriate loan mods can support our clients and ultimately help us reduce problem loans and reduce losses, we do have a strict standard in categorizing modifications as TDR.

So we feel like we're very conservative in what we call a TDR.

And that's evidenced by the fact that nearly 80% of our TDRs are performing and of those performing TDRs, 86% are actually current.

So, we think that's reflected in very good re-default rates relative to what the industry's seeing.

I would say, however, we do not expect to see significant increases in our TDR levels in future quarters.

We're working very hard to prevent new TDRs unless necessary.

Regarding early stage 30-89 and 90 plus, we did see some increase in 90 days.

That was primarily related to our residential mortgage area.

Those were mod attempts for government-insured FHA and VA loans, so we feel fine about that.

There was some bumpiness in the 30-89.

That's not unusual as we move through the second half.

So you had a little bit of seasonal uptick in the consumer area including the mortgage area around the governmental loans and then a little bit in the commercial area.

Again, we don't think there's any pattern there, it's just typical variation you would see quarter to quarter.

On slide 15, as part of our NPA reduction efforts, we're also working very hard to reduce the rate of new inflow.

So what we've shown you this quarter is some information about our total inflows.

And so a positive development for Q3 is that we did see a little bit of a turn in total inflows, which I'm particularly pleased about because we did see reduction in the commercial portfolio despite the fact that we were doing less TDRs for that book.

So we certainly could have had less inflows had we done more mods and we didn't choose to do that.

So the majority of the inflows really, we think, reflect our efforts to more aggressively manage the liquidation of previously identified watch list credits.

So, I think the point there is that the inflows we are experiencing are not surprises to us.

They're on our watch list and we're taking aggressive efforts to recognize that and liquidate these credits at this point in the cycle.

And as a result, we're beginning to see in the spring our watch list, total watch list accounts peaked and were stabilizing and we're seeing less new additions to the bank's overall watch accounts.

Inflows for consumer in the specialized lending portfolios have been very stable over the last year or so and a definitive improvement in the resi section.

So, again, our issues are on the commercial side, and we're working very hard to improve that.

And we think we'll hopefully see lower inflows as we move to future quarters.

On slide 16, I would like to close my section of the presentation by talking about the residential mortgage business in light of the issues facing the industry.

I think you'll see on this slide that we're trying to demonstrate our long-term approach to this business, which we think is different.

And it's helped us avoid the negative impact that foreclosure concern or liability risk are having on some of our competitors.

The way we think about this, is that residential mortgage is a critical service for our long-term banking clients.

Therefore, we've never viewed the business as an independent line of business, so it's fully integrated into our banking model and we don't have a separate mortgage company on a stand-alone basis.

So our overall company values and cultural imperatives drive how we view the business, so it prevented us from participating in many of the aggressive mortgage practices and we didn't really participate in the private label market where so many of the problems have spawned.

And in fact is evidenced by, again, a repeat recent award from J.D.

Power for top-rated mortgage servicing.

So, what all that means is from a foreclosure standpoint, we thoroughly reviewed our practices and we do not believe we have any issues of concern.

We have a small group of very knowledgeable specialists who prepare our affidavits and there's no [robo] signing.

We had no assignment issues because frankly, we didn't participate in the hyped-up securitization of the area and we primarily originate loans for the GSEs and for our own portfolio and we retain the servicing.

We have a very strong belief about offering [loss] appropriate for every borrower.

And then we didn't use MERS to do our foreclosures, so we do not plan at this time to have any moratorium on our foreclosures.

From a repurchase risk, we have a very manageable risk in this area.

We only had $35 million in 2009 and $45 million year-to-date through this year.

We've got about $14 million in reserves, which were up a little bit in the third quarter, but we believe this is very modest compared to a $60 billion investor servicing portfolio and relative to the industry.

And then finally, I do want to tout our mod program.

We never did the mass mods, we've always done them on a client basis consistent with our values, very targeted, fully underwritten HAMP mods, for example.

We've got excellent results.

We did 4,000 trials in 2010 and we have over a 70% conversion rate.

And from what we've seen, the industry's at about 20%.

So overall, the mortgage story for BB&T, we believe is very good.

So, with that, let me turn it over to Daryl for his comments.

Thank you, Clarke, and good morning, everyone.

I'd like to continue on page 17.

Net interest margin for the third quarter was 4.09%, down 3 basis points.

The primary reason for the decrease in net interest margin was the result of reinvesting securities [sold] into lower yields.

However, looking at our core fundamentals of our operating businesses, we are benefiting from positive asset mix changes, positive funding mix changes and expanding credit spreads.

The positives help neutralize the reinvestment into lower yields resulting in a net interest margin drop of 3 basis points.

Our adjusted net interest margin, which reflects the FDIC indemnification asset as an earning asset like some of our peers do it, improved slightly to 3.83%, up 1 basis point.

The improvement was driven by our forecast of covered asset cash flows resulting in a net $6 million increase in interest income, a $35 million improvement in the FDIC receivables and additional impairment, partially offset by recoveries, resulting in an increase in provision of $29 million in this quarter.

Given the current level of nonperforming assets and interest reversals, if you adjust these figures for a more normalized level, our net interest margin would have been approximately 12 basis points higher.

Looking into next quarter, and assuming our balance sheet performs in a similar fashion with loans and deposit and the interest rate environment stays at current levels, I would expect net interest margins to drop 10 basis points plus or minus 3 basis points.

The primary driver, again for this, is a decrease in the reinvest in securities at lower yields.

Turning to page 18, during the third quarter, we continued with our strategic de-risking of the securities portfolio by selling $10.7 billion of securities at a give up yield of 3.55% and purchasing $12.4 billion high quality, short average life securities and floating rate securities yielding an average of 1.8%.

This generated net gains of $239 million for the quarter.

For the past two quarters, we have sold a large amount of pass-through securities and generated over $450 million in gains.

Given today's low rate environment, many of these gains would have evaporated due to the high refinance activities that we are seeing in the mortgage-backed securities.

As a result of our reinvestments, the duration of the investment portfolio changed from 4.0 years to 2.9 years.

In addition, and as the securities pay down, we will receive approximately $1.5 billion in cash each quarter from this shorter life portfolio.

We hope this -- we hope that, as interest rates rise, we will be able to invest in either higher-yielding loans or securities.

We remain within our stated size target for the securities portfolio of 15% to 20% of earning assets, currently at 17.8%.

This strategy will result in less OCI risk associated with this portfolio.

Due to the smaller size and shorter duration, the risk of having large negative unrealized losses is cut in half in a fast-paced rising-rate environment.

Lastly, as you can see, our interest rate sensitivity remains slightly asset-sensitive.

So while the Fed is not expecting to raise rates in the next year or so, when they do raise, our net interest margin will be in a position to benefit.

In the long term, we strive very hard to maintain a relatively neutral interest rate position so that we can produce a constant and stable net interest margin.

Turning to page 19, our fee income ratio improved to 42.3% from 40.8% in the second quarter of this year.

Insurance income was down due to seasonality and pretty much spot-on from last year.

Service charges on deposits decreased $17 million from last quarter due to Reg E changes that were implemented midquarter.

You can see that we are performing better than original estimates, due to some initial fee changes that are rolled out.

We will continue to adjust pricing of our products well into 2011 with the goal of minimizing as much as possible the loss of revenue.

We will update you more in the future quarters as our changes are implemented.

Mortgage banking income for the third quarter was $184 million, compared to $110 million in the second quarter, up $74 million primarily due to higher production levels, wider mortgage spreads on sales, and mortgage servicing rights.

Other non-deposit fees and commissions increased 69.3% on a linked quarter basis, primarily due to strong results in our T&I lending activities.

Check card and bankcard fees both remain strong due to higher activity and increased production on common quarter basis.

In the FDIC loss share amount of a negative $43 million, reflects a net offset of additional accretions identified during the cash flow assessments.

This was mainly driven by a change in interest on securities and the additional provision of certain impaired traunches.

On page 20, our efficiency ratio increased slightly to 54.1% from 53.7% last quarter.

Remember, we used SNL's definition of efficiency, which is not factoring in expenses related to foreclosed property and other selected items.

Personnel expense decreased $7 million or 4.3% annualized link due to individuals reaching their annual limits for social security and unemployment and decreased production of Scott & Stringfellow due to economic conditions.

Additionally, our FTE decreased 272 on a linked quarter basis from 1,490 on a common quarter basis, primarily related to Colonial.

Additionally, regulatory charges increased due to deposit and supervisory-related costs.

In the second quarter, we told you foreclosed property expense would begin to come down.

We were pleased to report that foreclosed property expense decreased $73 million due to a decrease in write-downs and losses on foreclosed property as well as maintenance cost.

Excluding special items such as security gains, merger-related changes, valuation adjustments on MSR and other miscellaneous items, noninterest expenses were down 17.6% annualized for the third quarter.

Our effective tax rate was 11%, which is very similar to last quarter.

We expect our tax rate to be about the same in the fourth quarter.

Finally, given the growth in revenues coupled with lower expenses, we had positive operating leverage on a linked quarter basis.

Total revenues increased 4% on an annualized basis and expenses decreased 24% led by lower write-downs on foreclosed properties.

On the next page, all of the capital ratios remain very strong with industry leading numbers -- tangible common at 7%; Tier 1 common improving to 9%; Tier 1 capital at 11.7%; leverage capital improving to 9.3%; and total capital of 15.7%.

Regarding Basel III, all of our capital ratios are already above the Basel III limit after making all the appropriate adjustments.

Based on what we know today, they are -- Tier 1 common of 8.2%; Tier 1 capital of 8.7%; leverage capital of 5%; and total capital of 15%.

We're waiting for US regulators to weigh in with any additional adjustments they might make.

We feel pretty confident that we will not have to raise any common equity to meet required capital levels.

With that, let me turn this back over to Tamera to explain the Q&A portion.

Thank you, Daryl.

Before we move into the Q&A process of the conference call, I'll ask that we use the same process as we have in the past -- to give fair access to all participants you will be limited to one primary and one follow-up question.

If you have further questions, please re-enter the queue.

And now, I'll ask Andrea to come back on the line and explain how to submit your questions.

Thank you, Tamera.

(Operator Instructions) Our first question will come from Betsy Graseck with Morgan Stanley.

Good morning.

Hi.

The basic question I have is on asset disposition strategy.

And I know that you took a mark to market as you moved loans to the held for sale category.

The question that I get this morning from folks is, how do we know that that's an appropriate mark?

And if you weren't able to sell it, why shouldn't there be some forward -- incremental mark going forward?

So maybe you could just give us some color as to how you'd address that question.

Hey, Betsy, this is Clarke.

I'll take that.

As we told you, we feel very comfortable about our current mark at $0.55 blended, because that's basically what we've actually sold the NPLs for and have under contract for the quarter.

So, we think right now based on our -- the four-pronged strategy, I would say we're not out there just to liquidate all of these in bulk at auction with high liquidity premiums.

So the four-pronged strategy is important for us to get the blended rate that we want.

We've also got good response from the investors.

We've worked very hard.

They have been very complimentary about our documentation and the files and the actual assets themselves and said it was better looking than what they had seen in other purchases they had made.

So we feel good about what we're selling and how we're selling it.

And so, I guess the proof will be in the pudding around whether we can continue to sell at these rates.

And if we're not able to, obviously we would have additional impairment through future quarters against other income.

So, again, we feel good where we are right now and we're very confident we'll get these assets liquidated over the next several quarters.

The follow up is on the flows -- the inflows to nonaccruals -- seemed to be still elevated, I suppose, in 3Q.

How do you see that trajecting and how far along do you think you are in this process?

Well, I mentioned to you that we were pleased that they turned down from 2Q particularly in the commercial area.

Actually, if you look at it, commercial was down, residential mortgage was down, home equity was down and we were basically flat in sales finance and specialized lending, which they have seasonal impact in the second half.

So we feel good -- you've got some seasonal influence there, but going against that seasonality was a real improvement, particularly in the commercial area.

I think what gives us the best confidence there is the fact that our watch list is not incrementally going up.

So as long as the watch list is stabilizing and the inflows there are going down, then we feel confident that we would see lower nonaccrual inflows as we moved forward.

Thanks.

With that, we'll move to our next question from Jefferson Harralson with KBW.

Thanks, guys.

I wanted to ask you on the -- when I see you guys quantify the $321 million of impact of loans moved to held for sale -- should we take that as the actual mark on the $1.3 billion that were moved to held for sale or is that $321 million a different number?

The $321 million is really the earnings impact to get it to the price of $0.55 that we have it on the book plus any sales that we did for the quarter.

That's a combination of both of the pieces.

Remember, some of the loans were already written down and some of them already had specific reserves attached to it.

Okay, thank you.

And the follow-up on the repo warranty -- you guys said you have $60 billion of originated and sold.

What percentage of that is -- do you think is delinquent?

And why don't you think that you'll get a decent amount of putbacks on the delinquent loans?

Jefferson, this is Clarke.

Again, we're -- our mortgage delinquency runs lower than the industry average.

So again what we've produced is principally prime conforming and sold to Freddie and Fannie.

We have a little bit of FHA -- we have about $9 billion of governmental FHA and V.A.

So again, we think our delinquencies are less.

Our discussions with the agencies kind of support the fact that they view our credit better than the industry.

And we've not seen a huge increase in the repurchase requests at this point and we still resolve a number of those even before any sort of repurchase activity.

So I think our relationships with the GSEs is very good now and there's no indication through those discussions that we have any impending significant increase.

Okay, thanks.

Moving next to Bob Patten with Morgan Keegan.

Good morning, guys.

How are you?

Just a bigger picture question for Kelly or Clarke, what are you gauging as the general health of the Carolina markets right now in terms of the cycle?

Are you seeing any change from where you were first, second quarter?

Also, in terms of the sale markets, are you seeing a pick up in activity or seeing liquidity coming in from new sources?

Just give us some color there, please.

Bob -- yes, I think the Carolina market is pretty similar to what we see across the board.

If you take the non-real estate sectors, what you'd see is that in the first five or six months we had a pretty good increase in activity.

Then, frankly, it's kind of been stalled in the last -- let's say, three months or so.

When you talk to people, it's really about hesitancy about the uncertainty coming out of Washington, people are just waiting for the election.

But there's a pretty strong pent-up demand and the people need to invest, they need to expand plants, they need to buy equipment, so they're just waiting for the election.

Now my own sense is, based on the polls and from talking to people, I think we are going to get a positive change in the election, in which case I think confidence will be restored.

So I think you will see momentum picking up.

So, I feel like the Carolinas -- excuse me -- kind of in lockstep with the rest of the mid-Atlantic and southeast.

In terms of our sales activity, it's been very encouraging.

Even though the general economy stalled some in the last few months, the investor appetite has not changed.

One of the things I've observed over 38 years is when you go through these cycles, the smart money knows when to act.

And the smart money is out looking today.

They know, I believe, that we're at the inflection point.

They know we're likely to see, after the election, a renewed level of confidence because a lot of uncertainty will be removed.

They know with trillions of dollars of monetary and fiscal stimulus put into this economy that you're going to see a round of inflation and higher interest rates.

So smart money moves to buy real estate at this point in the cycle.

They've done it in other cycles, they're doing it here, and I think they will continue.

Okay.

Thanks, Kelly.

And Clarke, just a quick question on NPA inflows.

Obviously you guys are making a lot of progress.

I think it's the right strategy, but we've had another $1.3 billion of inflows.

Can you talk about the composition of the inflows and when do you think we're really going to see it fall in a substantial way?

Is it one quarter, two more, three quarters out?

What's your sense here?

Fair question.

Just to give you some color, NPA inflows were of our $1.262 billion for the quarter, $934 million was in the commercial area.

That was down from $1.05 billion in the second quarter.

Our mortgage was [145], down from over [200] and our home equity was about [58], down from [62].

So you see, the big number is still the commercial inflows.

And again, we were actually pleased for the quarter because we purposely did less mods, TDR mods, and we were more aggressive in forcing stuff to nonaccrual or through liquidation, particularly into the warehouse on the held for sale.

So I think you see all that reflected in the number, which is still higher than we'd certainly want it to be.

But it's still down.

And so, again, it goes back to the watch list is improving.

That's the acid test.

And so, I think for us, we would suggest that the trajectory ought to start coming down over the next several quarters and the absolute levels will be more dependent upon how strongly the economy engages here.

And if things continue to hold up, hopefully it'll be sooner than later.

Okay, thanks, Clarke.

Appreciate it, guys.

Yes, sir.

And next we have Craig Siegenthaler with Credit Suisse.

Thanks, good morning, everyone.

Good morning.

Just to build on that last question, if we change the topic from inflows to nonaccruals to net charge-offs, how many more plus 2% net charge-off quarters do you think we have here?

Do you think it's more like one to two?

Or do you think it would be a little longer like four to five?

I'm just trying to gauge the timeline here.

We believe, unless there's an unforeseen significant shock in the economy in our view of these real estate markets where they are today, we would be hopeful that you're probably talking about one or two, not a number of quarters.

Got it.

And then just maybe if you could help me quantify on slide 15 -- you have the watch list there.

What was the actual decline in the watch list sequentially?

We don't typically disclose our internal watch list.

I would just tell you it was a meaningful reduction, particularly over the last 60 days or so.

But again, what we said and feel good about is that it peaked in the spring and it's very much stabilizing despite these more aggressive efforts to identify and liquidate these assets, given the market timing issues we've talked about before.

And Craig, I would just add to that -- that given what Clarke had said, that's pretty important because we are very conservative in terms of putting them on the watch list.

We always have been.

We don't want to fool ourselves, don't want to fool anybody else.

And so, if we have concerns, we put it on the watch list.

And so, the fact it is stabilized and coming down is a really important point.

Great, thanks, Kelly.

Yes.

And next we'll go to Gerard Cassidy with RBC.

Thank you.

Good morning, guys.

Daryl, in regards to the net interest margin, what do you see it doing going forward in 2011?

I know you pointed out what it's going to do in the fourth quarter, but do you still see continued pressure because of these securities reinvestment yields that are much lower than what you had on the books prior to the sale of the securities?

Gerard, as you know, that's a very different forecast to make.

I would probably say we'd give you much better color next quarter when we do our -- go through our targets for 2011.

What I would tell you is as long as we continue to get momentum on the balance sheet as our loans are growing and we're having favorable mix changes there and we're executing on our deposit strategies, all those are positive.

As we dispose of our nonaccrual assets, that's positive.

So I don't want to give you a forecast yet, but the trends are looking good and better.

So we've just got to get through the next quarter and then we'll be able to give you a better outlook.

Okay, and then the follow up -- obviously this has been a challenging year for BB&T from a credit perspective.

Traditionally, banks have used the fourth quarter as a so-called cleanup quarter, throw in the kitchen sink, put them on steady footing for the following year.

What do you guys see in the fourth quarter?

Could we see another quarter similar to this one where you very aggressively attack the nonperforming assets and follow the strategy you just announced today?

As Kelly indicated, we moved $1.3 billion of NPL assets in and aggressively marked those, which really drove up the total losses for the quarter.

We don't see anything on the underlying core losses, as we said, that would change our forecast and it's not our intent to move a slug that large in the fourth quarter.

So we don't intend or see any big fourth quarter seasonal cleanup, if you will, at this point.

Thank you.

Thanks.

Our next question comes from Vivek Juneja with JPMorgan.

Hi, Clarke.

Question on the marks that you've taken.

So, you've brought these down -- just to -- since there's a lot of moving parts here.

You brought these loans up to -- you said $0.55 on the dollar?

Is that correct?

That's correct.

Between the initial nonaccrual marks to the time we put these in the nonaccrual -- the transfer and charge down of the allocated reserves and then the final charge-off mark we took all totaled about that 45% range.

And $1.3 billion was transferred, that's the gross amount?

That was transferred to held for sale?

Or is that the net amount?

The gross amount, which we would call the unpaid principal balance.

The client view, what the client actually owes us, was roughly $1.7 billion.

The book balance after initial write-downs, but prior to reserves, was approximately $1.3 billion.

Okay.

And then on the new inflows that you have, how much have those been marked to?

Typically at the time of nonaccrual, we are generally pinning on the asset class, but I know your question is probably more concerning commercial -- it's approximately 25%, can be as high as 30%, so it's very asset-specific.

But it's generally going to be in the 25% to 30% range.

That does not include our allocated reserves.

That's just the nonaccrual mark.

We have additional reserves obviously on those loans, so the combination is very similar to the 45%.

Okay.

And in terms of geography, the stuff that you've sold -- any color on what you have sold versus what's sitting there in the portfolio that's to be -- that's remaining to be sold?

That's a good question.

As you would suspect, a fair amount of inventory in the Atlanta area and the Florida markets.

And just because of the sheer size of our portfolio, we have some Carolinas presence in there as well.

A good mix of that, all of those -- those would be the three largest markets for what we put in and it would be similar, a similar story on what we've been able to sell or put under contract thus far.

I would say this -- we are seeing considerable interest, back to Kelly's point.

Investors particularly, despite the late deterioration in the Carolinas markets, they're coming in now and buying the -- particularly some land and lot inventory in anticipation of a better market ahead.

Okay, great.

Thank you.

Sure.

Next we'll go to Christopher Marinac with FIG Partners.

Thanks.

Good morning.

Daryl, I noticed an increase on the interest income on the covered loans and the average balance sheet -- I was curious if that income is all accretable yield and would that number be possibly higher in future quarters?

Yes, Chris.

So we had a $6 million increase net, so loans were up $18 million, securities were down $12 million.

If you actually look at the accretable yield piece, that actually also improved.

We were at $2.9 billion last quarter, now we're at $3 billion for accretable yield.

Okay, great.

Thank you.

And Kelly, just a big picture question -- do you expect or are you seeing any change in terms of other banks' behavior towards you from an M&A perspective?

Are you getting more requests for discussion?

Do you expect that to change in the next six to 12 months?

Chris, I think right now what's happened is everybody is kind of still hunkered down focusing on getting through the end part of the cycle.

I think everybody that I talk to at various meetings in general believes that, as we head into certainly the mid-part of 2011, you're going to begin to see a lot of merger discussions.

I think there's settling in a pretty clear reality that we are going to go through a pretty substantial level of consolidation just because major things have changed.

I mean it's going to be tough to generate revenue for a lot of institutions in a sluggish economy.

We have huge increase in technological and regulatory costs.

And so, the economics of producing superior terms is changing.

I think that's settling in on people's minds.

And so I think what you will see is a lot of discussion in the early part of the year, probably more activity in the mid- to latter part of the year.

We think we are well-positioned in terms of future merger opportunities.

We think we are one of the best positioned, if not the best positioned, in the mid-Atlantic and southeast in terms of being a consolidator, just because of the cost-save opportunities, as well as the fact we think our story plays well in terms of revenue generation through the cycle which has been the best in our peer group.

And so, it's hard to know.

We're not out today running around trying to beat the trend and create mergers, I'll tell you that, and I don't think anybody else is.

But I do think that we will be very positive with regard to having discussions in the next 12 months or so.

Great, Kelly, thanks very much.

You bet.

Our next question comes from Kevin Fitzsimmons with Sandler O'Neill.

Good morning, everyone.

Good morning, Kevin.

Hey, Kevin.

Kelly, most of my questions have been already asked and answered, but one quick one.

You have talked before in prior quarters about wanting to be out there on the forefront of returning capital to shareholders and that the dividend is of particular interest for you all.

Is that -- where do you gauge that right now, given the M&A opportunities that are out there and the continued working through the MPAs?

Thanks.

Yes, Kevin, obviously that's a major discussion issue for us and probably most good companies.

As you well know, dividend strategy is very important to us just because of our substantial level of retail clients.

So, we want to be one of the, frankly, one of the early ones to see some type of dividend increase.

I would remind you that we have the second-highest dividend yield in our peer group today.

Unlike a lot of our peers, we were the last to cut and we cut it to only to $0.15, so we already have a 2.5% dividend yield.

But I think you can begin to think about us being probably one of the earlier ones to raise -- our actual incremental raise may not be as much though just because of where we already are.

That having been said, the issue, as you well know, Kevin, that we've got to look at is we need to continue to see more clarity in the economy.

I think you'll see a lot better clarity post-election, at least from my point of view.

I think you'll need to see continued improved loan quality trends, which we are seeing.

But we still have to see this regulatory capital issue resolved around Basel III.

We're getting more information, kind of almost by the day, but we need to kind of let them settle in on what it's going to be before anybody can really make a decision.

So I'm pretty optimistic as we head into next year.

Over the next few quarters, we'll be in a position to consider a small dividend increase that will keep our yield at probably a very attractive level relative to others.

And we just have to take it a quarter at a time.

I don't want to mislead anybody.

Truth is, today we just don't know.

There's still uncertainty, but it's a lot more certain today than it was six months ago.

Okay.

Thank you.

And our last question today comes from Peter [Ganushu] with Carlson Capital.

Kelly, Daryl, Clarke, thanks for taking my call.

Hey, Peter.

Are you there, guys?

Okay, great.

I think I understand the disposition strategy and I definitely think it's the right move.

But help me -- and we talked a lot about inflows and I appreciate the slide.

So, inflows almost $1.3 billion.

So they're up linked quarter, right?

If I exclude the $300 million to $400 million that we had last quarter for kind of the one-time review of the top loan accounts, that was the number, right?

The number last quarter was $1.50 billion.

No, no, right.

But you had the $400 million -- it was added because it was a one-time kind of true up for the top loans?

What we said was -- what we did is we looked really hard at our large watch list accounts, as we always do.

And we aggressively, as we began this disposition strategy, forced those accounts towards liquidations which resulted in the nonaccruals.

That process continues today and so that's why the inflows aren't down more and we're doing less modifications.

But it's the same watch list accounts that we're working through.

Right.

So here's what I'm trying to figure out.

Okay.

You have $1.3 billion coming in and $451 million sold and then you charged a good amount, right?

That was helped by -- we funded that with securities gains and a chunk of the reserve and that makes sense.

But I'm trying to look -- I hear you on the trajectory being in the right direction.

But what I'm looking for -- and you can see further up the pike than we can on the migration -- what I'm looking for is a real substantial inflection and do you see it that way?

Or it is more kind of -- you know, steady progress?

It's all going to depend on the economy and the markets and how these individual clients perform against those variables.

But we need to see inflows, probably more in the $500 million range to hit that inflection.

So we don't believe we're that radically far from it, particularly with the aggressive actions we're taking.

We think we can get there in a reasonable period of time.

Okay.

And last question, guys, as a follow up.

How much of the $1.3 billion was ADC?

I know that maybe the season was weaker than a couple of the homebuilders were hoping for.

It was over 50%.

Okay.

Really almost two-thirds because we had a little bit of commercial ADC in there as well.

Okay.

Thanks for the color, guys.

Thank you, Peter.

Thanks, everybody, for your questions.

Let me just make a couple of wrap-up comments.

First of all, we consider this as overall a very, very good quarter.

The under lying performance of our business is strong.

Our client service metrics are at historic highs.

And I'll remind you, that's the most important issue I think, about any company, moving forward is what kind of value proposition are you offering the marketplace.

Our loan growth accelerated during the quarter in non-real estate areas, that's a really big deal.

We're maintaining positive revenue growth in a very challenging environment.

In fact, through the second quarter, we had the best in our peer group from 6/08 through 6/10.

So very strong, relative positive revenue growth.

Our primary challenge relates to the late-cycle issues, primarily ADC, which Clarke has addressed very well.

We are convinced we will outperform through the full cycle and emerge through the whole cycle when you look at our ultimate shareholder construction of value.

And we're very confident we'll be able to execute the disposition strategy.

I do understand people have questions about it.

This is nothing new.

We've said all along that our clients would lag through the recession.

We said that our NPAs would increase in a lagging fashion and we simply decided that it's time, because of the increased investor appetite, to dispose of a meaningful level of nonperforming assets, which is exactly what we're doing and the execution is very consistent with what we expected.

So we're very confident it will be executed appropriately.

And finally, just to remind you of the strength of BB&T -- because I don't want this -- all this focus on real estate to overshadow the most important issue, which is the real important strength of BB&T.

We have significant revenue growth strategies going forward.

We've talked about wealth, we've talked about large corporate, we've talked about our specialized lending areas, we've talked about our DDA improvement.

Just huge, huge relative opportunities for us.

This re-intermediation process for us and others that have the capital strength to be able to pursue it is going to be huge.

We are already seeing that happening.

Our community banking structure continues to be the best strategy in the marketplace in terms of providing the best value propositions.

There will be merger opportunities as we merge out of the cycle.

We will be appropriately (inaudible) with regard to that.

We have growing markets -- even though Florida and Atlanta are subdued today, I will remind you those are fantastic markets from a long-term point of view, still 18 million people in Florida and still warm in January -- don't forget that when you think about the future.

And we believe we have the best overall team on the field today and so we're very confident about the future.

It's easy in the depth of the summer storms to forget that on the other side there's typically a really pretty rainbow.

At BB&T, we are looking forward to the rainbow and we are excited about the future.

Thanks to all for your support.

We hope you have a great day.

Thank you.

And ladies and gentlemen, with that, that does conclude today's earnings call.

We do thank you for your participation and ask that you have a great day.