Truist Financial Corporation
Q3 2008 Earnings Call Transcript

Published: 16 Oct 2008

[Operator:]

Greetings ladies and gentleman and welcome to the BB&T Corporation third quarter earnings 2008 conference call on Thursday October 16, 2008. (Operator Instructions) 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 Gjesdal:]

Thank you, Mitchell and thanks for all of our listeners for joining us today. This call is being broadcast on the internet from our website at bbt.com/investor. Whether you are joining us this morning by webcast or by dialing in directly, we are very pleased to have you with us. We have with us today John Allison, our Chairman and Chief Executive Officer, Kelly King, our Chief Operating Officer and Chris Henson, Chief Finance Officer, who will provide a look ahead as well as a review of the financial results for the third quarter of 2008. After John, Kelly and Chris have made their remarks, we’ll pause to have Mitchell come back on the line and explain to those, who have dialed into the call, how they 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, including but not limited to the company's report on Form 10-K for the year ended December 31, 2007. Copies of this document may be obtained by contacting the company or the SEC directly. And now it is my pleasure to introduce our Chairman and Chief Executive Officer, John Allison.

[John Allison:]

Thank you, Tamera and good morning and thank all of you for joining us. The areas that I will discuss include our financial results for both the third quarter and year-to-date especially focusing on credit quality then we share with you a few thoughts on what we believe the impact of this recent government programs are on BB&T and share with you a few projections or thoughts, I guess is the better word about, where we are in terms of future performance. Chris will give you some in depth into the number and performance areas and then we’ll talk about the executive transition with Kelly giving you an overview of strategy going forward and of course the Q&A afterwards. Looking at the third quarter results, there wasn’t ways; we had $35 million in after-tax security gains, which actually were greatly timed in this market. We had $26 million in after-tax charges related to the impairment of debt and primarily equity securities and $6 million in other charges, which are all excluded from operating earnings. GAAP net income was $358 million down 19.4%, operating earnings $355, so not much difference in the two, but down 20.8%. GAAP EPS $0.65, operating EPS $0.64, the $0.64 was equal to the consensus estimate of earnings. Cash basis EPS was $0.67. A number that you have focused on and we think is the interesting and important number in the context of the current environment is pre-tax pre-provision operating earnings were $865 million up 12% indicating strong core performance. Cash ROA for the quarter was $112. Cash ROE was 19.77. Year-to-date, our GAAP net income is $214 billion down 8%. Operating earnings was 133, down 15%. Our GAAP diluted EPS is $220, operating diluted EPS 206, and cash EPS 214. Our cash ROA for the nine months is $122 and cash ROE 21.33 all good performance numbers in a very difficult environment. Looking at the factors driving our earnings. We continue to have good news in terms of our margin. Our margin improved from 365 in the second to 366 in the fourth, it’s up from 345 in the third quarter of 2007. Challenging environment with regards to margin and Chris will discuss that with you in some more detail. Noninterest income second to third, if you take out nonrecurring items, fair value accounting related to mortgage servicing rights and mortgage servicing impairment purchase acquisitions, annualized second to third were actually down 20.7%. Third to third, we were up 4.8% and year-to-date 3.4%. We do have a little extra noise in the third quarter in that we have REBA Trust for our executive serve plan, which goes up and down with the stock market and we had a pretty big, $15 million fluctuation in that trust, which reduced revenue, but also reduced the expenses. It has very little effect on the bottom line, but it makes your revenue growth look a little weaker. If you take out that fluctuation, the annualized second to third noninterest income growth was 13.2% down and third to third up 5.3%. Looking at various sources of noninterest income and excluding nonrecurring items and purchases, insurance income a third to third was essentially flat. It’s essentially flat year-to-date. Annualized link it was down 20.6%. Most of that is seasonality. Usually the second and fourth quarters are strong quarters in insurance. Also the insurance market continued to weaken. We are doing extremely well. Those of you that follow the industry because of the very sharp decline in property and casualty insurance rates all of our competitors are having down revenue and we have been able maintain essentially flat revenue, which I think is a real evidence of a pretty significant market share in our insurance business. Service charges on deposit accounts remained strong. Third to third up 12.1% annualized link up 9.3%, up 11% year-to-date. We are having a great success in attracting new clients. We added 31,000 net new transaction accounts in the quarter and 101,000 year-to-date and anything our client acquisition is accelerating. Non-deposit fees and commissions, which are mostly our debit cards and our bankcard fees, third-to-third up 6.2%, down annualized link 5.7% reflecting I think a weaker economy and some natural seasonality, year-to-date up 8.6%. Investment banking and brokerage, third-to-third down 4.5%, down 18.1% annualized link basically flat for the year. Obviously investment banking is a tough market to be in but relative to the market we are pleased with our results. Trust and advisory, investment advisory revenues third-to-third down 7.5%, down 10.5% annualized link and 4.2% year-to-date reflecting again the market situation. Mortgage banking income has been good news even if you take out mortgage service rights and the change in fair value accounting for mortgage banking, third-to-third we were up 43.8% annualized link up 18.1%. Residential mortgage originations in the third quarter were $3.7 billion compared to $3.2 billion last year in the third quarter and year-to-date mortgage originations are $12.9 billion compared to $8.7, we are obviously having a pretty major market share move in our residential mortgage origination business. Net revenue growth, annualized second-to-third taking out purchases and this other items I mentioned before was down 4.5%, third-to-third up 8.8%, year-to-date 6.7%. Noninterest expenses, which Chris will talk about in a little detail annualized second-to-second down four tenths of a percent, third-to-third up 7.8%, year-to-date 4.3% pretty effective expense control and we continue to improve our efficiency position. Loan growth annualized second-to-third on a GAAP basis was 4.5% you can takeout purchase and leverage sales, the total growth was 4.7%. But we were pleased with growth in certain categories; commercial loans were up 9.2%, direct retail was essentially flat as it has been pretty much the whole year. Sales finance 6.7%, revolving credit 14.7, mortgage is down 8.8% part of that’s the warehouse, if you take out the warehouse, mortgage would only be down 2.2%, specialized lending has 20.7% growth rate. And if you take out the warehouses, our second-to-third annualized growth rate was 6%. So, pretty decent growth given the kind of environment, we are in. Third-to-third on a GAAP basis 7.7% total loan growth, commercial third-to-third 13.6, direct retail continued to be flat, sales finance 4.8, revolving credit, 13.7, mortgage 3.1, specialized lending 7.3 and total of 8.2%. So, you see some slowing of loan growth, but given the economic environment we are pretty pleased with the loan growth numbers. We are seeing what I would call some flight to quality. We are able to reduce (inaudible) adding very high quality relationships. Our C&I growth has been particularly strong. It's started to slow recently given the economic environment. We have had some growth in commercial real state independent of our residential lending portfolio. We have actually been able to upgrade quality there because the markets are so tight we have been able to get some real good quality relationships. Direct retail has been a challenge, a lot of that is simply people don't have equity in their houses to loan against and also a lot of apprehension in the consumers. Sales finance is probably some good news, we have been gaining market share in a very slow automobile market and we have been growing our boat and RV business with real high quality relationships because there is not much competition in the market today. Revolving credit we have had healthy growth. We have had some rise in charge-offs as you can see from the numbers but not, way better than the industry and our revolving credit like our credit card business is only with our clients and basically people that have checking accounts etc cetera with us. Specialized lending most of the growth was in Regional Acceptance and in AFCO; CAFO our premium finance business has corporations need more premium finance in this kind of market. The mortgage portfolio, we are experiencing very strong production, but we are letting our own Alt-A portfolio liquidate in the normal process because Freddie and Fannie are offering such great rates it's a great opportunity to sell into the Freddie and Fannie marketplace our new production. Good news is on the deposit growth very encouraging in that regard noninterest bearing deposits taking out purchase acquisitions are essentially flat third-to-third, annualized link up 2.9%. Our client deposits, however, without purchases third-to-third up 4.6% but the annualized link growth rate was 16.5% and if you exclude client CDs over $100,000 and what we call core deposit number, third-to-third up 4.4%, annualized link up 19.6% and total deposits that’s again without purchases up 6.9% third-to-third and 15.3% annualized link. Clearly our strategy worked. We were not very aggressive on deposit pricing because we thought it was out of line in the spring. We are clearly seeing the flight of quality resulting in very strong deposit growth, which is continuing to have post the end of the quarter. We are having a very rapid growth rate, new accounts. We are clearly gaining market share. So, good news on deposit side. Asset quality, I know is the big issue and it continues to be the challenge for the industry. Our problems and focus is on the residential real estate market, where most of the deterioration has been occurring. Our non-performers did increase to $1.638 billion, as a percentage of assets that was an increase from 0.95 to 1.20. Our charge-offs increased to 242 million from 170 million in the second quarter and as a percentage of loan charge-offs increased from 0.72 in the second quarter to 1% in the third quarter. If you take out our specialized lending operations, charge-offs in the second quarter were 0.53 and 0.82 in the third quarter. If you look at the provision for credit losses in the quarter was 364 million, it was $122 million more than charge-offs so continue to provision substantially more than charge-offs. Year-to-date, we provided 917 million charge-off, 537 million and we provided $380 million more than charge-offs. The ratio of the allowance to non-accrual loans declined from 124 to 115, but we do have over 100% coverage of non-accruing loans. We raised the reserve again at the end of the third quarter, last year it was 105, at the end of the second quarter was 133 and at the end of the third quarter 145, so very systematic increase in the reserve. There was some positive news, while 90 day past due is still accruing. It went up slightly from 0.29 to 0.31. 30 to 89 day past dues were flat at 1.63 and we are all having a lot of success in moving non-accrual loans into foreclosed real estate, which enables us ultimately to be able to sell. Let's focus on the real estate related credits which are for those of you that have the press release are covered in the credit supplement and I'll refer you to page one in the credit supplement that looks at our residential acquisition development and construction loans, which is our primary focal area in terms of real estate lending risk. First, good news, I think from a risk perspective, we have been systematically reducing this portfolio. At the end of the first quarter, we had $8.768 billion in this category. In the second quarter, it was $8.611 billion and at the end of the third quarter $8.328 billion. So, we have reduced the category by about $440 million in the last couple of quarters. You see, it continues to be very diversified; we are having rising non-performers and charge-offs in every category. At the end of the quarter, our non-accrual loans in residential development and construction were 5.02% and charge-offs 144. We do have a 5.5% reserve against the non-accrual loans. So, our reserve is more than 100% of the non-accruals in that category. We really are seeing very similar trends in terms of where we are having challenges. If you look at the distribution by markets, I do think that BB&T has done a very good job of underwriting in this category. I think, we did better than the industry, but we have certainly benefited by our distribution. You can see our problems are focused in Atlanta, which is Georgia, which is primarily Atlanta, in Metro DC, which impacts the Virginia numbers and in Florida. But if you look at Florida, you can see that we are 12.48% non-accruals and 2.24% charge-offs and in Atlanta we are 8.42% non-accruals and almost 4% charge-offs. So, the markets that have been giving us the biggest challenge continued to so. Fortunately, we are continuing to do well in North Carolina and South Carolina, which have a lot of our business and in Virginia outside of Metro DC, which is a little bit more difficult to see in these numbers. So, a lot of our core markets continue to perform well particularly in this environment and while we are seeing some deterioration, we are still not seeing major deterioration in those markets. Looking at other commercial real estate loans, which are basically the non-residential real estate related loans in the next category. You'll see that they are $10.847 billion that's actually an increase from 10.569 billion at the end of the second quarter. We had some growth in that category. The new loans are very low risk. We have been able to underwrite very high standards in this market because it is very hard for people to get financing in that category. We are having a little bit of a problem in commercial land and development loans, which is a small lending category, 2.8% of our loans, where non-accruals have gone up 2%. But overall other commercial real estate continues to do well is at 0.90 non-performers and 0.11 charge-offs. So, we are not experiencing problems there and obviously we could if the economy deteriorates but so far that category continues to do well and we really just not seeing evidence of increasing problems. Again to a degree that there are problems, they are pretty focused in Atlanta and in Florida. In fact, Florida is the only place where we have got meaningful issues and they are 4.69%, but fortunately Florida portfolio, it’s a small portfolio for us. Looking at the next page on credit supplement two, it talks about our residential mortgage portfolio. First you'll note that we are primarily a prime lender with $12 billion prime portfolio. You will also note that in every category, we have very high credit scores and low loan-to-values, even our Alt-A portfolio has a 67% loan-to-value. The only area that we are having, well, in a certain sense we are having rising non-performers and non-accruals in every category, but the only area that the numbers really are of any material concern is construction and development lending, where we have gone to 3% and 0.88 gross charge-offs. Basically what's happening in that portfolio is people are having a difficult time selling their old house, so they can't really afford the new house that's been in construction. If you look at the distribution by markets, our challenges are the same there in Florida, Atlanta, and the Metro DC market. Florida numbers are not good with 5% non-accruals and 1.30 losses. But on the total portfolio non-accruals are 1.75, which is high for us, but still much better than what's happening in the markets in general and gross charge-offs are 0.42, which again is high for us but much better than the markets in general. Looking at our home equity portfolio, we have two components. One is the home equity lines, which I think most people think of as home equity and then home equity loans, which are really loan [zone] peoples’ houses that usually don't have extra advance features. They are fixed amount and repayable on a monthly basis. You will note that our home equity line portfolio is not very big. It has very high credit scores 759, a 23% of our home equity loans are first mortgages and the average loan-to-value is 67%.that was on our lines. On our loans, again, high FICO scores, 77% of our loans are first mortgages and 67% loan-to-value. If you look at the home equity portfolio in terms of lines, non-accruals are low but charge-offs are high for us at 0.89 and that's basically recalls, when we have a problem with the home equity line today we are just having to charge the whole thing off because there is no equity in the houses. Although, our default rates on a particularly high, we are just taking a lot of losses per default. In home equity loans, 0.54 losses, 0.63 charge-offs again high for us but certainly much, much better than you are seeing in the marketplace. In the total portfolios, non-accruals were 0.50, charge-offs 0.66. To a degree that we have any problems again, Atlanta, Florida, and Metro DC with Florida being the only really the bad numbers but still those numbers look extremely good versus the industry. Looking at some of our other portfolios, we have not seen a significant deterioration in quality in the C&I portfolio, but obviously economic conditions are of concern. Our sales finance losses remain high for us at 0.76% but they are extremely good relative to the industry and we aren’t seeing a big rise in losses in sales finance. What we are seeing is not high repo rates, but we do repo particularly in SUV, we get a big loss because of what's happening in the used car markets. We are seeing a number of competitors’ exit that business, which we think will help us. Regional Acceptance are high risk auto business, loss ratio increased a little, second to third, but it's flat relative to third last year at 7.5%. It's clear that GMAC/Ford were primarily doing a lot of high risk auto loans at low rates, it has allowed us to actually improve our quality while keeping the same yield in that portfolio. Regional remains profitable and we expect it remain so. We are having increasing success in migrating non-accruals to foreclosed property and are having reasonable sales activity in the foreclosed property. While we have experienced some losses in selling foreclosed real estate, the losses have been there immaterial. Our goal is to write non-accrual loans down to liquidation value and we put them in other real estate, and we've been successful in doing that. In every portfolio segment, the new loans we're making are less risky than our existing portfolio as we tighten lending standards. With that said, let me change direction and talk a little bit about the impact on the recent government programs. First, looking at the HOPE program, we see very little, if any benefit to that program to us. In fact we're a little worried about it because we think it could actually hurt real estate values and could be detrimental to the high quality lenders. The original entire program, and I'd call them two program and another one but the original entire program has very little value to us. In fact again, it is not clear whether this will help or hurt real estate markets and how it would be executed effectively. Obviously, the stock market voted against both of these programs. It's a little more difficult to evaluate the impact of the new car program. It certainly helps us absolutely by stabilizing markets, but it is far more beneficial to weak banks versus strong banks, and again the market reflected that fact. We have not had any liquidity problems, in fact, we've had terrific amount of good liquidity that's been a flight to quality and we've been able to fund overnight at very low cost. So we weren't experiencing some of the problems that other people had. In terms of participating in the new car program, there are four main components. First is, commercial paper borrowings. Our commercial paper borrowings are small and at very favorable prices, so we doubt we would participate in that program. We will participate almost surely in the FDIC insurance and non-interest bearing deposits. It's really simply not practical to not participate given our competitors will have the insurance. So again, we would had a positive inflow of deposits to us, but we think if our competitors have FDIC insurance we'll have to. The third component we're looking at is the FDIC debt program, or we will basically decide whether to participate in that program based on cost. Again, we haven't had any funding problems, but when you can get an FDIC insurance guarantee even with a C, it's probably, at least in some cases would be potentially advantageous to us on a cost basis. So we'll just look at that on a cost basis. We are still studying the capital investment program. We are in a very strong position from capital as you know. However, it's going to be difficult not to participate, so we will probably participate, and the regulators are certainly encouraging us to. Secondly, it does have some favorable capital costs as we understand it today. Thirdly, our competitors will be taking advantage of the program. Finally, it just provides us a potential for capital for acquisitions if those are realized. So we haven't made a final decision, but given the whole set of circumstances, we will probably participate. Having more liquidity and less fear, and the financial system is obviously beneficial to all financial institutions. However, the net of these programs is probably slightly negative for healthy banks, with some of the opportunities which would have been created or no longer available, and we do not get them any direct benefits. I had to admit that I am concerned and kind of amazed, that despite all the amount of resources devoted to rescue programs, none has dealt with the fundamental problem. Deflation in residential real estate markets, which is causing the problem in the capital markets. We strongly believe that some form of tax credit for residential real estate purchases is needed to stabilize the real estate market, and with it, the mortgage market. Problems in the financial system again are primarily reflected in problems in the real estate markets. Change direction, again, let me comment on the Wachovia-Wells merger. Wachovia is our number one competitor in many of our markets, while we would have preferred Citigroup to bow Wachovia because we think they had been a little bit easier to compete against. We're quite ready to compete with Wells. Wells is certainly a well known company and we have a very high regard for them, learned a lot from them over the years. However, Wells has no brand equity in our core markets, the typical mid-sized small business and retail clients are not familiar with Wells. In the Gulf, we're in North Carolina; Lynchburg, Virginia’s, where BB&T and Wachovia together absolutely dominate markets. We have extremely strong brand equity. We will continue to gain market share. It appears that Wachovia has violated a trust with its clients and as shareholders it's hard to repair. Also this is a big deal for Wells and will pose some integration risk. We have gained at least $1.2 billion in deposits from Wachovia, and probably more. We are continuing to move Wachovia clients to BB&T. Today, BB&T service quality is considerably better than Wells. We have a strong sales program and we have an excellent cross-sell ratio. So we look forward to the new competitive environment. Let me make a few comments about the future and obviously, anything I say about the future could easily be wrong and this is a very difficult environment to even speculate about the future. I have personally never experienced this much uncertainty when talking to business owners and individual clients in the community. The strong sense of uncertainty has got to affect economic activity. We have plenty of money to lend but loan demand except for high risk borrowers has slowed considerably. Will the stabilization of the capital markets eliminate this uncertainty and cause a return to more norm conditions? Your guess is good as mine. Obviously what happens in the economy will have a big impact on our business. My guess is that we are already in a recession. The issue is how long the recession will be. Given that background based on what we know today and obviously they are subject to change. We expect loan losses in the fourth quarter to be about 1 to 1.25%, and non-performers to continue to rise. We’ll continue to raise our loan loss reserve reflecting this environment. For the year this will result in loan losses of about 0.85% which actually is, I thought some of the write-offs that 0.85 was a year projection. So, we are actually, we think going to be consistent with the upper end of the range we shared with you last time at the last call. For 2009, we are guessing and I do mean guessing. We think loan losses in the first half of the year will remain in the one maybe up to 1.25% range and hopefully decline in the second half of the year as we continue to work through the real estate market. We are seeing some stabilization in some real estate markets, if the economic environment is not detrimental. Despite the challenges there is some good news and we do not have any material exposure to the CDOs, CDSs, et cetera and our core markets did not have the accesses in residential real estate prices, which have caused so many problems. I mean the reason that some of the North Carolina markets aren’t having the problems; we just didn't have the appreciation in those markets. Also, BB&T is growing market share on practically every front. We have a very strong accelerating deposit growth. Our pre--tax pre-provision operating earnings for the third quarter were $865 million, an increase of 12%. So yes, this is a challenging environment, but I think our relative performance is strong. With that said, now let me turn it over to Chris for some insights into several very important core performance and measurements.

[Chris Henson:]

Thanks, John. Good morning. I also like to welcome you to the call. I would like to speak to you briefly about net interest income, net interest margin, noninterest expenses, taxes and capital. I first look at net interest income based on our operating earnings. If you look at year-to-date, earning assets were up a healthy 7.1% adjusted for purchases. Produced income of net interest income of $3.233 billion, a 9.1% increase over the prior year adjusted for purchases. Look at linked quarter, earning assets were up 4.2% adjusted for purchases and produced net interest income of 1,109,000,000, 7.3% annualized increase over linked adjusted for purchases. On a common quarter basis, earning assets were up again a healthy 6.1% adjusted for purchases and 11.7% increase over the prior year. John already commented briefly on margin, but we were pleased with the stability of the margin actually up a basis point from 365 in the second to 366 in the third. I'm really pleased with the progress we have made over the last year and so the common quarter comparison up 21 basis points from 345 third a year ago to 366 currently and on a year-to-date up 7 basis points from 354 to 361. During the third quarter, we did continue to benefit slightly from the decline in rates that occurred earlier in the year as we had told you our CD portfolio re-priced accordingly. As mentioned last quarters call though we continue to hedge against rising rates that were anticipated in 2009 repositioning the balance sheet to neutral to slightly asset sensitive earlier in the quarter and as you know, you got late in the quarter that direction of the curve moved. While we experienced an increase in non-accruals, obviously we continue to experience healthy loan growth and improved new loan spreads. We continue to see those widen and despite increased deposit competition as John pointed out our client deposit growth was really strong during the quarter and our funding mix also shifted towards lower cost alternatives. In fact on an average balance basis, client deposits grew three times faster than loans on a linked quarter comparison. So, we are really pleased with the deposit growth overall. If you look at yields and rates on a year-to-date basis, you can see total earning assets were down 94 basis points while total interest bearing liabilities were down 122. So, we actually got spread improvement of 28 basis points. On a linked quarter basis, total earning assets were down nine basis points, while total interest bearing liabilities decreased at a faster rate, 11 basis points created two basis points spread improvement. The elements of that you can see the securities portfolio actually improved two basis points, primarily as a result of higher investment yields and mortgage-backed securities. While loan yields again declined due primarily to a 17 basis point reduction in commercial loans and leases. Just to point that, that portfolio is 74% variable and then also a reduction in direct retail loan deals. Total interest bearing liability costs declined as a result primarily of the CD portfolio re-pricing down 40 basis points in the smaller deposit and other interest bearing deposits and then Fed funds and other borrowed funds. The margin performance in the third quarter, I would call solid given the environment. The main drivers are the one basis point improvement really was the effective control of our deposit and funding cost, primarily the re-pricing of the CD portfolio, and also improvement in our funding mix; first quarter we've seen that over the last several. Our curve model, it’s currently based on the forward curve, currently assumes that Fed funds will decline to 1.25% later this month at the Fed meeting and remain flat until mid 2009 and increase thereafter which is a difference in the curve from a quarter ago of about, overall about 75 to 125 basis points lower than what we saw about a quarter ago. Looking forward, we are obviously managing many variables in what I call a very difficult operating environment and therefore we do expect a slight decline in our margin during the fourth quarter in a range of two to three basis points primarily a result of four items. First, increased deposit costs due to heightened competition; potential for increased borrowing costs due to dislocation in LIBOR; while we haven’t seen that come in some, it's still fairly wide. Increased costs associated with our trust preferred issuance that we executed in mid-September. I will speak about the impact of that in a minute, and then also just being slightly asset sensitive to declining rates. If you turn attention to non-interest expenses, we were pleased with our overall expense control results once again in the third quarter. Non-interest expense growth rates adjusted for purchases were favorable on both a year-to-date and linked quarter basis. While the common quarter non-interest expense growth rate appeared somewhat high, it was driven by higher than normal growth rate in the other non-interest expense category which was also the case for year-to-date linked quarter comparisons. The other non-interest expense category is unusually high, primarily as a direct result of the current credit environment. In that category, you have expenses such as legal expenses, write downs on foreclosed property, maintenance on foreclosed properties, repossession expenses et cetera which were really driving the category and would be anticipated during the environment such as this. And I think it's still important to note that we again achieved positive operating leverage on a year-to-date and linked quarter basis and maintained a strong operating efficiency as evidenced by the improved cash basis efficiency ratio of 51% during the quarter. Also want to point out that the number of end of period FTEs in the third quarter compared to second decreased by 405 excluding acquisitions while at the same time opening 12 net new branch offices during the quarter. So, pleased overall with the expense growth. If we drill down just a moment, first looking at year-to-date, you can see there was a 4.3% increase in non-interest expenses which equated about 120 million after purchases and driven really by occupancy and equipment expense and other operating. Occupancy and equipment, was really increases in IT equipment, communications expenses, rent expense excluding de novo locations, and then also de novo occupancy expense as well. Other operating was up about 120 million and the drivers there were increase in professional services, retail and bank card expenses, and those were primarily the revenue producing or cost saving in nature. And then also we had write downs on foreclosed properties, legal fees, maintenance on data process and software, decreased gains on sale of fixed assets, maintenance expense on foreclosed properties, loan repossession expenses et cetera and there is a small bit of charge-offs as well; operating charge-offs. Then on a common quarter basis, you can see that we were up 7.8% which was about $73 million after purchases and driven by three areas, personnel, occupancy and equipment and other operating. Personnel was really primarily driven by increase in salaries due to salary increases that kick in April 1 in our company and then also promotions. Also it had equity-based comp increase due to investing requirements for retirement eligible employees and that's not new to expense dollars or increase in margin dollars, it really historically was all realized in the first quarter in the month of February and because we have changed the eligibility, it's now spread over the second and third quarters, so we changed it in 2008, so comparing back to 2007 when it would not have been in the third quarter, it would have been in the first. Then occupancy, it was the same items I had mentioned before; rent, IT and communication and then other operating up 60 million and again professional services, advertising and marketing effort to take advantage of sort of window of opportunity we see and then retail and bankcard expenses, all of those revenue producing items. The non-revenue producing items again write downs, foreclosed property, legal fees, maintenance foreclosed property, same items I mentioned with the addition of FDIC insurance expense. Linked quarter looking at the detail, we actually had a decrease of 0.4% and the driver there was really personnel which was down 15 million and that's a function of change in market value of REBA Trust as John had commented on and then, an increase of about 13 given the total non-interest number being down $1 million. The other operating ??word missing?is really the same items that we have already covered those related to the credit environment. So overall, I would say very pleased with overall expense control in the quarter. Looking at taxes very briefly, just wanted to comment on the effective tax rate and what to expect in the fourth quarter. You can see the effective tax rate went from 27.64% in the second to 29.14% in the third. Going forward we would expect the effective tax rate to be in the 30% to 31% range for the fourth quarter. Looking at capital, I'd just like to mention three items before reviewing the ratios. First, just a reminder that we did issue 450 million in Tier 1 qualifying hybrid capital, it was a retail deal with a coupon of 8.95% which was really an opportunistic ways to support organic growth, and we were exceptionally pleased with the execution on that issue. Secondly, we have updated our credit stress test at 930 where we assume 1% losses and 2% reserves in 2008, and then 150 basis points of losses and 3% reserves in 2009. And as a result, anticipate continuing the current dividend of $0.47 a quarter, we still feel very comfortable with our capital being able to absorb the stress. Finally, I just wanted to point out that as you may know there is a regulators joint proposal to lower risk rates on Freddie and Fannie Guaranteed Securities, and if that's approved, just wanted to give you idea of the impact. It would have a positive impact on our Tier 1 capital of about 13 basis points and to total capital of approximately 18-19 basis points, just wanted to mention that. Then look our ratios, briefly, equity to total assets in entire period was very strong at 9.4%. Our risk-based capital in the period ratios had nice increases, Tier 1 went from 8.9% in the second to 9.4% in the third, with total going from 14% to 14.4%. Both improved significantly as a result of the retail trust preferred issue that I have mentioned a moment ago that we did in mid-September. Leverage capital actually also increased from 7.2% to 7.6%, well ahead of our 7% target. Tangible equity also increased to 5.8% above our 5.5% target. Finally, as a reminder, I just want to point out we have not repurchased any shares in 2008 and do not plan to repurchase any in the near term. So that concludes my comments. So I'd like to now turn it back over to John for some additional comments.

[John Allison:]

Thank you, Chris. We want just to take an extra minute and talk about management success and which is obviously, an important issue. As I'm sure all of you know, I announced my retirement as CEO effective at the end of this year. I will remain as Chairman of the Board for a year and then on the Board thereafter. I admit this is an awkward time, and frankly, if I had waited and gotten this environment I'm not sure I would have announced my retirement, but I've already announced it and it's been a very long-term process. I have observed, as I'm sure you have that many CEOs don't plan for their retirement, and either the company gets sold or more likely, a weak successor or an outside heir takes leadership, which is very detrimental to both, shareholders and employees. We had a unique situation in BB&T. There were five of us that had worked together to take BB&T from a small firm bank to a multi-stake financial institution. We were all in the same age group and we were likely to retire in a short period of time. Given the circumstances, five years ago, we've began a very systematic management succession process with several of the individuals in that original five group retiring at their own plans. During that time, we added six new members to Executive Management Team. All six are proven leaders at BB&T. All have over 20 years experience, several 30 years experience in BB&T, yet are relatively young, in their 40s or early 50s. This is a strong team for the future. I do believe the process itself should give you confidence as an investor in the systematic way we run BB&T. I'm particularly pleased that Kelly King will be taking my place as CEO. Kelly and I have worked together for 36 years. He has reported directly to me for 27 years. People have asked me what advice I am going to give Kelly as I retire, and my answer is that I've already given it to him. I have probably given it to him 100 times. Kelly has been in our Executive Management team for 25 years. He is involved in every decision that matters over that period of time. He is also a very dynamic, very strong leader. He will do an outstanding job leading BB&T. Before I turn it over to Kelly, I did want to thank all of you for your feedback and support over the years. Some of you I have known a long time and certainly consider to be friends. I appreciate these relationships greatly, and hope to see in the future. I do thank you for your support over the years. Now let me, I ask Kelly to share our strategy in this very challenging environment.

[Kelly King:]

Thank you very much, John and let me say for the benefit of the group how great the experience has been to work with John and our entire team for all of these years. John is a outstanding mentor, great CEO as you all know, and I feel we have all benefited from his experience and his leadership. I’ll say as John mentioned very, very confident in our team. Our average years of service of our executive team going forward is 28 years of service with BB&T. The age ranges from 41 to 60 and average is 50. So, it's a relatively young team. They are very experienced, well-trained, very energized and we are ready to go. I would also mention as we go through this transition that one should not expect dramatic or material changes certainly in the short-term with regard to our strategies and objectives. I have been a very close part as John mentioned working with him and the rest of the team in developing the strategies. So, it would be unreasonable to expect a lot of changes would come out of this just because of change in leadership. I would also mention that as we go forward there are really three nonnegotiable at BB&T from my perspective. One is our vision, we have a vision of creating the best financial institution possible not because you have to but because that's achievable and something we want to do, it’s motivational. Our mission of helping our clients through the economic success and financial security is not negotiable and our values are not negotiable because that's the way we choose to live our lives and why we choose to lead the company. Everything else is strategic and tactical and does change from time to time and you would expect to see some changes in strategies as conditions change. Let me mention the four key strategies as we go through the rest of this year and into '09 to effectively manage through the credit cycle. Secondly, to achieve superior revenue growth. Third, create a perfect client experience and fourth to control costs, so we maximize the economic profit. Just a couple of comments on each one. Obviously, job number one today is managing through the credit cycle. It is an extremely difficult environment. It is very dynamic and therefore incumbent on all of us to be tightly focused on making sure we get through the cycle, minimizing loan losses, but at the same time working with our clients because we do not intend to do what a lot of companies do, which is to throw out our good long-term clients just because they hit a bump in the road. Obviously, our number one objective is to protect our shareholders and generate a good long-term return. However, we’ll be working with our clients and we find that it actually optimizes their results and ours over the long-term. We have allocated a large amount of resources to dealing with our problem credits. We’ll need to allocate probably more as we go forward. We have gotten our regional presidents and all of our relationship managers highly focused on dealing with loan losses so that we mitigate the challenges that we have and that is going extraordinarily well. When you think in terms of working through the credit cycle, obviously deposits, liquidity and capital are very, very important. As has been mentioned our deposit base is very strong with client deposits growing 16.5% for the third quarter annualized, 31,000 net new transaction accounts. At the same time, we have been able to manage the costs so we can produce a stable margin. I feel like the deposit acquisition program is a real strength for BB&T. I would say that as the FDIC Guarantee of Debt program rolls out, many companies that have been deposit poor and capital poor have been raising rates very rapidly in order to attract deposits and we expect that to be mitigated some as we go forward because of the additional risk guarantee from the FDIC. Likely also with the addition of capital injected into the system, liquidity should improve for the whole system. Although, I’ll say for us liquidity has not been an issue. Interestingly, over the last several weeks we have been funding ourselves overnight at less than 1% and in some cases borrowing overnight for zero, which has been very, very attractive to us. One of the most important challenges is to go through this environment is to avoid adverse selection. We are certainly very focused on that. We don't want to pickup the problems that other people are trying to kick out. And importantly one of the things we are trying to do and this will be a continuing objective for the next few years is to diversify our balance sheet and one of the opportunities for us is to become somewhat relatively less dependent on real estate and more dependent on C&I relationships. We’ll be pursuing that very aggressively as we go through the cycle because a lot of the C&I companies are really being jerked around by some of their previous suppliers because of capital and liquidity concerns. We think that will prove to be very successful for us in terms of diversifying the asset side of our balance sheet and simultaneously it will help us towards the liability side because frankly as you grow more C&I small business loans you get more deposits particularly in DDA because real estate clients typically do not provide a lot of deposits and certainly not much DDA. Our second objective is to focus on superior revenue growth. It's very important in this kind of environment to not turn totally inward; a lot of companies do that. But revenue growth is very, very important in this kind of environment. If you think about it there are really only three ways to focus on revenue growth, get better prices, i.e. better margins from your existing products that you are selling to your existing clients, sell more products to your existing clients, i.e. cross sell and then try more relationships. We have key strategies in place with regard to all of those. I personally think in terms of restoring price discipline for the survivors out of this process we are going through. I believe that will be over time once the dust settles upward pressure on the margin because an awful lot of the pricing pressure we've had over the last few years has been because of a disintermediation of our bank balance sheets into the capital markets where because of less capital and less reserve in pricing has been very, very thin. As that process moves through and we re-intermediate the balance sheets of the banking system, we think that that will restore better pricing, and frankly there will just be less competition and lot of the weaker competitors are being weeded out. We have as you know a very effective sales culture at BB&T. We focus on what we call IRM, Integrated Relationship Management. It is a very, very effective program for us and we expect that to continue. I would mention to you that over the last four years our fee income per FTE has increased from 90,000 in '04 to 130,000 this year-to-date annualized for a rate of increase of 44% which is a pretty significant change and that process continues to improve as we make it more effectively executed in our newer regions that have joined the BB&T family over the last several years. We will be focusing on organic and acquisition growth. Obviously the organic growth opportunity coming through this correction process is enormous. John spoke to the tremendous results we’re already having with Wachovia, we are having it to a lesser degree but also with other institutions as well. As competition weakens and some competitors go away because of our strong balance sheet, our strong liquidity position and our very stable and effective sales culture, we would expect that our organic growth would continue to be very strong and actually accelerate. On the acquisition side, as we look forward, we believe there will be some excellent opportunities after the dust settles. Frankly, right now, it's unlikely that many people are going to be willing to do mergers, because they are probably or properly keeping their head down trying to get through it. But on the other side of this, we believe that there will be companies that would like to join an organization like BB&T that has proven strategies that are enduring and effective and capable leadership has proven that it can lead in difficult and good times, and we will be aggressively interested in such combinations on a basis that will not be materially diluted to our existing shareholders. We simply think there's an opportunity to combine with other institutions and make it mutually beneficial to both sets of shareholders and that would be our philosophical approach as we go forward. Our third objective is to create the perfect client experience focusing on quality. We believe that value as a function of quality relative to price; and the primary emphasis on quality today is reliability. I'll tell you today, after talking to a lot of clients and a lot of our client managers, people get it. They understand quality. They understand reliability. While over the last 10 or 15 years quality hasn't mattered as much and people have been more price sensitive, we clearly think that to-date and going forward, reliability, responsiveness and competency becomes the driver in relationships and therefore price becomes relatively less important. Fortunately for BB&T, we have 20 years experience in developing and executing on our community bank model. It is the best bank model in the industry. We believe today because it puts highly experienced, well-trained, empowered local leadership close to client so that they can provide excellent quality relative to the pricing that we charge. I do have some results to report to you which affirm that it is working for us. Each year we have an outside research firm, [Merit’s], which is an international and well recognized firm to do client service quality studies for us. We recently got updated reports for this year and our branch satisfaction survey; these are amazing numbers to me. On a one to 10 scale, our retail increased from already high 9.18 to 9.25 which is a statistically significant increase and our business increased from 9.12 to 9.17. Those are absolutely unbelievable quality scores and speaks for the value proposition we offer. Greenwich is an international firm that focuses on business relationships and do business survey studies. They recently completed their '08 studies. We are very proud of the fact that we were only one of 14 banks in the country that got the National Award for Overall Satisfaction which put us in the top 2% of all banks survey. We got three national awards in overall satisfaction, personal banking satisfaction and treasury management satisfaction and we believe those results plus the [Merit] results affirm that we are delivering the best value proposition in the market. Finally in order to focus on revenue and service quality and be able to afford the additional costs that is required to focus on mitigating credit risk issues, it's very important in this environment to focus on controlling costs. Chris mentioned the very good results we are seeing on the third quarter annualized basis. We are very tightly focused on that. We expect to have as we go forward through the rest of this year and next year flat to decline in FTEs. We do not is expect to have any material layoffs but we simply are able to deal with any reductions we need through attrition. Although I will tell you that a very important thing is happening at our company, and that is, our overall turnover rate is declining very, very rapidly, and we have one of the best turnover ratios in the business. Nonetheless, there is sufficient turnover to be able to reduce staff if necessary, so we will be moving forward focusing on a tight control of cost, and we will be doing such things as focusing on simplification. I'll mention one thing to you, you may find interesting. In this environment with all of the conversation from various parties about how to make the credit decisions and all the sophisticated mathematical models that have been developed, that's the kind of complexity that creeps into organizations that often times does not deliver the desired results. I tell our lending folks sometimes despite of all this models, if you get write-down to it, on the two questions you are trying to answer. One is, can they pay you and the other is, will they pay you. I think sometimes if we just focus on those two we will get better results than in looking at sophisticated mathematical models. We are in addition, focusing on eliminated non-essential activities with a sharp focus on client centric activities. As you grow in an organization, sometimes activities creep in that aren't directly correlated with client relationship growth and we're taking a sharp look at eliminating any non-essential activities, we think there is some opportunity there. So, when you get through with those objectives, I believe you will see that we are very tightly focused on managing quality of assets and focusing on revenue simultaneously, which we believe will at the end of the day organize the relative returns to our shareholders and will produce best long-term optimum returns in terms of share price. These are very very difficult times, I will admit that. But I believe with the support of our employees, our Boards and our communities, and our various client constituencies, our best days are ahead of us. Before I conclude my remarks, I do want to recognize John. I know you would all want to do this. So maybe on behalf of all of you, certainly on behalf of all our employees and our Board, John Allison is a phenomenal human being and an outstanding CEO. I think you only have to look at the results of 26 years of consecutive increases in operating earnings, 37 consecutive increases in dividends; a 20-year compound increase in EPS of 10% which is phenomenal. Certainly in the current environment, which is yet another time that our/John's leadership has been tested, I think most people would agree our performance, while absolute and not what we would like, is relatively superior. So I would simply say to you that while John will be absolutely missed as a friend and an associate, he has earned his well-deserved retirement. We wish him the best, and his family. And keep in mind that he will remain our Chairman and will remain on our Board, so we will certainly have his counsel as we go forward. Tamera, that concludes my remarks, and I'll turn it back to you.

[Tamera Gjesdal:]

Thank you very much, Kelly. Before we move to the question-and-answer segment of this conference call, I ask that we use the same process as we have in the past to give fair access to all participants. Due to heavy call volume today, our conference call provider will limit your questions to one primary and one follow-up. Therefore, if you have further questions please reenter the queue, so that others may also have an opportunity to participate. I will now ask our Operator, Michele, to come back on the line and explain how to submit your questions. Thank you.

[Operator:]

(Operator Instructions) And we will take our first question from Brian Foran with Goldman Sachs.

[Brian Foran:]

Hi, good morning, or good afternoon. I guess there’s a lot of confusion right now about what is the appropriate level of capital, and I'm not sure tarp has really helped matters. So when you think about capital today, what is the appropriate level you think about? Is it only Tier 1, or is there a minimum tangible common ratio that you feel comfortable with? And if you were to raise capital via the tarp program, would you view that as capital to be deployed, or would you simply do that as capital to strengthen ratios but ultimately not to redeploy?

[John Allison:]

Chris, do you want to answer the first question? I may talk about the second one.

[Chris Henson:]

Obviously, we feel like we have adequate Tier 1, and the capital raise we just did on September 10th was primarily an opportunistic raise to take advantage of growth opportunities that we saw occurring, and potentially growing in the near future. So we feel very well capitalized, and adequately, currently. In terms of your question about common, about 18 months or two years ago, when it was not looked at very hard, we implemented a tangible common minimum ratio of 5.5%. Currently in the third quarter, we stand at 5.8%. So we feel like we are positioned very well from a capital perspective to deal directly with the question how John referred to you and to deal with it going forward.

[John Allison:]

We are properly capitalized, we think. Having too much capital wouldn't be a problem in this market because it's just the fear and apprehension that's out in the marketplace. We looked if we were to participate in this program, a part of my motivation would be that the regulator wants to, and you’ve got to keep regulators happy. The second would be, we think it would give us some extra security in this kind of environment, but also give us some extra flexibility. We think that there are going to be some acquisition opportunities either now or in the near future and this is a relatively inexpensive way to raise capital for acquisition opportunities. We have got plenty of lending capacity and hopefully, if the economy stabilizes, so we can grow our loan portfolio and this is still again relatively cheap capital for that purpose the way it has been presented to us to this point.

[Operator:]

And we'll our next question from Betsy Graseck with Morgan Stanley.

[Betsy Graseck:]

Hi, good afternoon. How are doing?

[John Allison:]

Great.

[Betsy Graseck:]

Could we talk just a little about how you are thinking about your construction portfolio? I know you went through some of the details there earlier, but it would just be helpful to understand how you're thinking about incremental loans that you're making to that group. and dealing with some of the stresses that you've seen in that portfolio, and how you're thinking about the reserving in it as well?

[Chris Henson:]

In terms of the residential construction development portfolio, we’ve basically been working to reduce the size of portfolio. We've reduced it from 8.768 billion at the end of the first quarter to 3.28 at the end of the third quarter. We’re still making loans to builders that we’ve got long-term relationships, where they are doing okay. In a number of markets our builders are doing okay; in places like Winston-Salem we might have a few people struggling, but the house prices never went up. They didn’t build too many houses. There are few people still buying houses. So, there are some markets where things aren't anywhere near as bad as in Florida. So, you have to make some market-by-market decisions. But we are working on reducing that portfolio. We are giving advice to our builders not to start new houses. When they don't start them, obviously we’ll not finance any new developments. So, it's a very systematic process. In terms of problems, we’ll work with builders if they have reasonable economic expectations that they can work through the problems; if they got caring assets. Remember, we had a long period where builders did well, and some of the more cautious builders had pretty major reserves, recognized that cycles come, and they have a very high probability of making it through the cycle. Other builders weren’t cautious, in markets and places like Florida, where it's just devastating. And so, it's not practical to help them through this cycle. We’re working on that. When it becomes clear to us, and at that point typically clears the borrower, we’re trying to get the property as quickly as we can. We’re foreclosing if necessary. A lot of cases were taken (inaudible) foreclosure, and then as soon as we get it we’re trying to sell. Once we can't work with the builder, we’re trying to get it through the process as quickly as possible. We’ve had one past sale that we came out pretty well in. The sales process, and the number of bigger problems we do have, have interested buyers because there is still activity in the market. A lot of these things have been already discounted pretty significantly. We’re working through the cycle. I’ll be honest

[Betsy Graseck:]

And bringing the loans down, is that anything more than just not making new loans and allowing the portfolio to payoff over time?

[John Allison:]

Generally speaking, obviously you're foreclosing on some and [they get] end up in other real estate and sell. But generally speaking it's not making new loans and selling the property in the normal course of business, plus some cases in which you're having to liquidate them.

[Operator:]

And we’ll take our next question from Steven Alexopoulos with JPMorgan.

[Steven Alexopoulos:]

Hi everyone.

[John Allison:]

Good morning.

[Steven Alexopoulos:]

I was curious. I know that average deposit growth was strong and you guys highlighted that a couple of times. When I look at the period end balances, they were essentially flat and if you were growing, I don't know why that wouldn't show up in some of the period end balances, just wondering how do you reconcile that?

[Chris Henson:]

We had a big surge in period end balances at the end of June. A fair amount of it actually came out of large investment banks, and I'm not really sure why that happened. Since then we had some of that runoff, but it wasn’t there during the whole quarter and we've had very strong individual deposit growth rates and very strong true core business client growth rates. June 30th [has been] a lot of the FDIC market share data and we tend to have money move around a lot of banks on that June 30th date. So, we’ve had a pretty big run up at the end of June, but it wasn't reflected in the second quarter. Our average growth was not that strong on purpose. We were not being competitive because we thought the CD prices didn't make any sense at that time.

[Steven Alexopoulos:]

I'm sorry, I missed that, what was behind that surge last quarter that runoff this quarter?

[Chris Henson:]

The FDIC, there is a deposit market share at the end of June 30th. Banks have pretty big flows in and out from investments, and other people are around at the end of that actual date, the June 30th date.

[Steven Alexopoulos:]

Okay. And just a quick follow-up, when we look at the reserve right now, I know you said you feel like we are in a recession, is that based on a recession scenario in terms of the level of reserves you have for some of your consumer portfolios?

[John Allison:]

We think so. Obviously we are moving – we are facing moving targets, in which you can see why our consumer portfolios are not doing anywhere near as well as they have in the past. They are doing well, very well relative to the industry. We keep constantly updating new important projections, but you are chasing a moving target and it depends on where the economy goes from here. We have a very sophisticated model, but you have to make assumptions in any of those kind of models, and based on that model we are absolutely property reserved.

[Operator:]

And we’ll take our next question from Jefferson Harralson with KBW.

[Jefferson Harralson:]

Hi, thanks. I want to ask a question on the construction credit. The gross loss numbers there, the credit supplement lines; I wanted to make sure those are year-to-date loss numbers, and not Q3 loss numbers?

[Chris Henson:]

In the supplemental sheet…

[Jefferson Harrelson:]

1.44% gross charge-off as a percentage of outstandings...

[John Allison:]

Those are year-to-date.

[Chris Henson:]

Yes.

[Jefferson Harrelson:]

And so, if you look at your North Carolina loss rates for construction versus your non-North Carolina loss rates, that the rates are so far apart, do you think that the North Carolina economy has just done better, do you think it's your legacy of lending in North Carolina, or do you think that you’re possibly more aggressive in your non-North Carolina lending? How do you think about the wide difference in the results of that construction lending?

[John Allison:]

Well, I think it is multifaceted. One, we have been here a long time so we know the client relationships, and almost everybody we deal with have been long time clients with us. We understand the markets very well, so we tend to avoid overbuilding in a situation. I think that the North Carolina economy is doing fairly well, but the main thing is we just simply didn't have the appreciation that happened in Florida, in Georgia, in Atlanta, or in Metropolitan DC. If you could get into Virginia, outside of Metro DC in these numbers, you see that the numbers look very good. Virginia and most of South Carolina looks very good, so it's not just North Carolina, it's North Carolina, South Carolina and Virginia. We also have really big shares in some of the smaller markets

[Jefferson Harrelson:]

And just a follow up, do you think that the North Carolina loss rates that are so low, are they going to start to catch up with the non-North Carolina loss rates, or do you think they can stay at or near this level?

[John Allison:]

I think they don’t go up. The loss rates are unusually low. I’d be really surprised if they went anywhere near Atlanta or Florida or Metro DC, because we just didn't have the appreciation and the affordability factor; it’s a huge factor in actual loss ratio and we didn't have the overbuilding. In Atlanta, you do have so much appreciate but you built the house. So are they going to up, and they are going to get worse, yes. Are they going to get anywhere near the Atlanta and Florida and Metro DC? I’d be stunned if that happens. I just think that would be highly unlikely.

[Operator:]

And we’ll take our next question from Matthew O'Connor with UBS.

[Matthew O'Connor:]

Hi, everyone.

[Chris Henson:]

Hey.

[John Allison:]

Good afternoon.

[Matthew O'Connor:]

John, did you indicate that BB&T would be eligible for treasury capital? I’m just wondering of if there is any sense that you have in terms of what the criteria is and whether all the bigger banks you think will be eligible or just the strongest ones like BB&T?

[John Allison:]

All we really have is probably the press releases that you have, and even our regulators haven't been fully informed. We have talked to a number of our peers and I think everybody is kind of in the situation that we are, based on what we've been told. It looks economically attractive and it's clearly that the regulators want us to do it. They add a bunch of bells and whistles to become less attractive; we wouldn't be willing to do it. It's hard for me to know about the availability issue, but it's interesting that Morgan Stanley and Goldman and Citigroup were all under tremendous stress, and got allocated in the first allocation. It seems a little bit of an odd thing to say, ”Well, this is just going to help the institutions,” if you look at the stress that was on all three of those companies before this allocation. So I don't know, there may be some magic way they decide to do it but, and I don't know if there is any legal protection or how it's done [equitably], but all three of those companies were really struggling before they got these capital allocations and their stock prices and burn allocation reflected that. So to say, it's just going to strong institutions seems odd, it was included in the first group. Let's put it that way.

[Matthew O'Connor:]

Okay. And then as my follow-up question, Kelly, to elaborate a bit on your M&A comment, how do you think about small deals versus larger deals? Really, there are pros and cons to both. And the end, of course, out of market as you look out over the next couple of years, when are there some deals that might be interesting to you?

[Kelly King:]

Well, I think there are several factors that drive the attractiveness to us. First is, the overall market characteristics. Second is the company characteristic, particularly around strategies and culture, but specifically owned size in another market. I think today after some type of FDIC assisted deposit-only deal which might be smaller, we would tend to be looking for fewer, larger deals, and maybe our history would indicate simply because the amount of effort that goes into doing any acquisition, what we want to make sure as we crank our acquisition engines back up is we do not want to dilute our organic growth machine which is now doing extremely well. So, we would lean towards the larger size. Now in terms of larger size, I'm talking preferably in the $3 billion to $15 billion size. Would we consider something larger? Maybe, but you wouldn't expect to see us going out and doing a lot of very large acquisitions, larger than 15, unless it was something really, really unusual, and potentially have some type of an assistance program with it. Certainly, over the next three to five years, virtually all of our acquisition activity in the banking space will be end-market. We certainly have a lot of opportunities in the greater Maryland area and the greater Georgia area. And even though Florida is not something we are looking to grow today for obvious reasons, long-term there is an enormous opportunity for us in Florida. So I would say most of it will be end-market.

[Operator:]

(Operator Instructions) And we'll take our next question from Scott Valentine with FBR Capital Markets.

[Scott Valentin:]

Good afternoon, and thanks for taking my question. Just on the outlook for losses, you mentioned I think the one to one and a quarter percent level for net charge-offs in the first half of '09. And I think that's pretty substantially below peers. What they are running today, just curious to what maybe your outlook is for the economy in terms of a rough estimate of GDP or employment, some sense you can give us as to maybe how severe you believe the downturn could become? And how that factors into the loss guidance?

[John Allison:]

Well, we don't have an answer to that. Assuming we're in a recession. We are assuming, in terms of that kind of guidance, that the recession needn't terrifically deep, but it may be fairly long. Some of these stabilization factors a huge amount of liquidity that's being pumped into the community that reserve will keep us from having a really deep, really long recession, and at least some measures are taken to effectively work on the housing market. If we have the great depression and all bets are off, I don't know how you manage through against that kind of economic activity. So we're assuming we're in a recession and we're assuming it's a pretty tough recession, but we're not assuming a disaster from an economic perspective. But I don't know how anybody, including a professional economist, knows to answer that right now.

[Scott Valentin:]

Fair enough. Just a follow-up question, in terms of loan severity, you mentioned that when a loan gets put into REO, there is a fair value done. The actual realization price when you dispose off the asset has been pretty close to the fair value place. Can you talk about maybe the size of the write-downs you are taking or maybe that just one or two asset classes?

[John Allison:]

It varies across the whole spectrum. If you look at some of the retail portfolios where we're getting the big write-downs relative to our actual default rates, say in our automobile finance business, our sales finance business, they really haven't gone up much, but we repo an SUV, we might take a $20,000 loss, There is just literally no .market for it. On home equity lines, because we are pretty much an A grade lender, we're not getting a big increase in default ratios, but on home equity lines, because housing prices are falling. most of our defaults are occurring in Florida, Atlanta and Metro DC. You don't buy it and so you lose your 100% or whatever is on the home equity lines. At the other end of the spectrum, in our traditional mortgage business, we're doing 70% loan-to-value when it starts out even if the price has fallen 20%, we're not getting big losses per house in that business, we're just getting more houses back. With a few exceptions because you've had such radical declines in Florida, that's the only place we're getting a big loss per house because you might have done 75% loan-to-value. Now the house is worth 50% of what it was last year, so with a few of those exceptions in the mortgage side we are not getting big losses per houses. Interesting enough, on the residential construction and development side, typically we're not getting high percentage losses, again because we normally had equity in those projects, 25% equity to start, builders that have some own equity didn’t do. People didn't have some other equity they've been pumping in it. So, the loss for foreclosure, you get some big ones that you did a mistake. But I would say the loss severity in that case might be 10 to 15, 20% when we end up foreclosing.

[Operator:]

And we'll take our next question from Todd Hagerman with Credit Suisse.

[Todd Hagerman:]

Good afternoon everybody. Kelly, I just wanted to do ask you a question in terms of the reserve coverage. You mentioned in your remarks just in terms of the expectation for reserve bill to go up on a go forward basis. And just thinking about kind of the recession scenario if you will how should we think about the reference that you made to kind of the coverage of non-performing loans, it came down again this quarter presumably with an increase in MTL, it’s going to continue to decline on a go forward basis. But how should we think about that coverage as you think about it and expectations for reserve increase going forward?

[Kelly King:]

That's a good question but one is not easy to answer. We actually have a very sophisticated, comprehensive, formula for how you project your reserves. And the formula really doesn’t look at reserve coverage relative to non-accruing loans. You work it on loss expectations, and so the reserve coverage on nonperforming loans ends up being a consequence. It’s not a driving factor. We don't have accounting rules, you have to use that process, you are obviously making judgments in the process. I don't think we have a magic answer of the loan loss reserve in relation to non-accruing loans. It will go down some, but I don't know that it's a result not a driver in the formula.

[Todd Hagerman:]

Okay. And then maybe just as a follow-up, could you give us a better sense of again just in terms of the A&D portfolio and the 5.5% reserve coverage there, just in terms of how that might break out particularly within the land portion?

[Kelly King:]

I don't know if I have that off the top of my head. Chris, do you have that?

[Chris Henson:]

No, I don't. But land would be a bit higher than single-family construction just because embedded loss expectations would be larger in land. But I don't have an exact number for you, Todd.

[Kelly King:]

We could get that for you, if you want to call in. I don't have it with me.

[Operator:]

(Operator Instructions) And we'll take our next question from Al Savastano with Fox-Pitt Kelton.

[Al Savastano:]

Hi guys. How are you?

[Kelly King:]

Hello.

[Al Savastano:]

Just curious, a lot of pressure in the auto sector. Can you remind us what your exposure is to auto dealers?

[Kelly King:]

We have a lot of auto dealers that we’ve got long-time business relationships. We have a small wholesale portfolio. We've never been a big player in the wholesale market, mostly because of the rates have been too cheap in wholesale. We’re not going to have material losses because of the shakeout in the automobile dealerships. It’s not going to be a big issue for us. We’ve a lot of people that that have been in the business a long time that aren’t too debt heavy. We’ve a few that are leveraged and we could have a few problems related to the shakeout, but it’s not a material issue for us. We're much bigger in the actual sales finance business with automobile dealers, but they don’t borrow a lot of money to run their businesses [themselves].

[Al Savastano:]

Okay. Thank you.

[Kelly King:]

All right.

[Operator:]

And we will take a final question from Kevin Fitzsimmons with Sandler O'Neill.

[Kevin Fitzsimmons:]

Good morning to everyone.

[Kelly King:]

Hi, okay.

[Kevin Fitzsimmons:]

John or Kelly just wondering if you could address the dividend you mentioned that you did the stress test again on the dividend and is that something we can kind of expect every quarter? And kind of how do you reconcile the two options of why don't we do like a lot of the banks have done and do everything we can to preserve capital and cut the dividend versus obviously you have a large retail shareholder base that probably values that dividend if granted. They are probably watching the news everyday and they know the pressure the industry is under. I’m just curious how you reconcile those two outcomes and what will it, what we need to get to a stress test, where it would indicate you would be under well capitalized for you to make them move or are there other factors at play? Thanks.

[Kelly King:]

(inaudible) we are actually about every month. We are stress testing looking forward, looking at the dividend. It's obviously an important issue to us. As you saw, our capital ratios were actually rising. We think we are going to be continuing to raise those capital ratios, and I think this goes back to the fact that there was issue of pre-provision, pre-tax operating earnings of $865 million. We got a pretty strong business going on here even in this kind of environment. Our retail shareholders’ dividends are very important; many of them live on it. It’s part of their lives. We've seen that in contrast of what Wachovia did and we see it a lot here in Winston-Salem, if you remember this is where the original Wachovia started. It's really hurt a lot of people's lives, so the dividend is important to our client base. Frankly for our typical retail shareholders, they focus a lot more on dividends they do on share pieces. Most of them have no basis in the stock; they got it long time ago and so the dividend is really important. Obviously if we need to cut the dividend to protect the institution that's a (inaudible), but as long as we are in strong capital position – as our forward projections show we can continue to pay the dividend, we’re going to do that. Now if we ever got to the point that we thought it was in jeopardy, if we can get into a really severe recession, then we’ll deal with it, and we are looking at it every month. But right now our forward projection is under it. What we think of the worse case scenario, unless this thing is a lot deeper than we hope it will happen, we can continue to pay the dividend and can plan to continue to do it, unless we get some surprise.

[Kevin Fitzsimmons:]

Okay. Just lastly, John, how would you – you mentioned the Wachovia integration with Wells; I mean, how would you characterize that? Is this really a huge opportunity for you guys or is it we’re not in the days of First Union and CoreStates any more it’s just the – banks do a better job generally of integrating, is it going to be just something that you’ll get some benefit from but not something that will be really significant, how do you look at it?

[John Allison:]

I think it's going to be significantreally significant. I don't think it's just the integration issue. I think if it had been a normal merger of Wachovia by Wells that would have been one thing. Remember Wachovia was having very visible problems for months leading into this and making lots of people frenzy. They had a lot of shareholders who are disappointed with how it was handled and felt betrayed for lack of a better word. So, I don't think Wells is coming into a normal integration situation. I think as they were they are really a good company, they really do a great job and we would get some peripheral benefit but it wouldn't be material. I think it's going to be a challenge given what happened pre-acquisition in the mindset that's been created for them. I might be surprised, but we are still picking up business. I just happened to meet with our Regional Presidents first thing this morning; they’re saying we're still bringing up a lot of business. Now it's slowed some, but I mean it was an avalanche of business for a few weeks. It's slowed some, but I think we will continue to get a lot of business.

[Operator:]

And with no further questions in the queue, I'll turn the call back over to our presenters for any additional or closing remarks.

[Tamera Gjesdal:]

Well, thank you, Connie, and thank you for those questions. We appreciate your participation today in this teleconference. If you need clarification or any of the information on this call today, please don't hesitate to call the Investor Relations department. Thank you and have a good day.

[John Allison:]

Thank you.

[Chris Henson:]

Thanks.

[Operator:]

This concludes today's conference. We thank you for your participation and you may now disconnect.