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BB&T Corporation (NYSE:BBT)

Q4 2008 Earnings Call

January 22, 2009 11:00 am ET

Executives

Tamera Gjesdal - SVP, IR

Kelly King - CEO

Daryl Bible - CFO

Analysts

Paul Miller - FBR Capital Markets

Matt O'Connor - UBS

Chris Mutascio - Stifel Nicolaus

Nancy Bush - NAB Research, LLC

Adam Barkstrom - Sterne Agee

Chris Marinac - Fig Partners

Betsy Graseck - Morgan Stanley

Jaime Peters - Morningstar

Jefferson Harralson - KBW

Brian Foran - Goldman Sachs

Operator

Good day, ladies and gentlemen, and welcome to the BB&T Corporation fourth quarter earnings 2008 conference call on Thursday, January 22, 2008.

(Operator Instructions).

It is now my pleasure to introduce your host, Ms. Tamera Gjesdal, Senior Vice President of Investor Relations of BB&T Corporation. Ms. Gjesdal, you may begin.

Tamera Gjesdal

Good morning, everyone and thanks to all of our listeners for joining us today. This call is being broadcast on the internet from our website at bbt.com/investor, whether you are joining us this morning by webcast or by dialing indirectly, we are very pleased to have you with us.

We have with us today Mr. Kelly King, our Chief Executive Officer, and Mr. Daryl Bible, our Chief Financial Officer, who will review the financial results for the fourth quarter of 2008, as well as provide a look ahead. After Kelly and Daryl have made their remarks, we will pause to have Nicole come back on the line and explain how those who have dialed in to the call may participate in the question-and-answer session.

Before we begin, let me make a few preliminary comments. BB&T does not make predictions or forecasts. However, there may be statements made during the course of this call that express management's intentions, belief 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, included, 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 SEC or the company.

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

Kelly King

Thank you, Tamera, and good morning, everybody. We want to cover today a number of items. I will be focusing on earnings of the fourth quarter and the full year, talk a little bit about some unusual items that created a little bit of noise. Then I want to talk a little bit about the 2008 drivers of performance, spend a little bit of time with you on our four key strategic objectives for 2008 flowing into 2009 and then some drivers for 2009 performance.

Talk a little bit about the capital purchase program based on the treasury injection of capital into our company, talk a little bit about our acquisition strategy and dividends. Then Daryl will provide some more detail on margin, expenses, taxes, capital, and operating leverage, and then we will have some time for questions.

If you look at the overall quarter, we are pretty pleased with it frankly, given the extraordinary environment in which we are operating.

Our GAAP net income available to common shareholders for the fourth quarter was $284 million. Operating earnings to common was $243 million. GAAP diluted EPS for the fourth was $0.51, and the consensus last numbers I saw was $0.47, so we felt pretty good relative to that. Now, of course, some will immediately look at our cash basis, operating EPS and that's $0.46.

So, we're either over a little or a penny less depending on how you want to look at it, but still right in the ballpark of the consensus. If you look at returns, our cash ROA was 0.81, cash ROE was 13.45, obviously much lower numbers than we have historically reported, but acceptable numbers, given the unusual credit costs that we are experiencing, as I'll describe in a moment.

We do think it's helpful in a time like this to try to push back away a little bit from the current critical issues and look at the ongoing earnings power of the organization. So if you look at our pretax pre-provision, our earnings for the quarter; it is up 10.6% compared to fourth quarter 2007, including the cost of CPP.

If you look at the full year, GAAP net income available to common was $1.498 billion. Our operating earnings to common $1.376 billion, so we had GAAP diluted EPS for the year of 271, operating in 249.

I would point out that cash EPS operating for the year was 260. All of these numbers are down from previous common quarters, of course, because our credit costs have increased over the course of the year.

If you look for the year, our cash ROA was 1.11 and cash ROE was 19.3. Obviously, with the third and fourth quarters, it's seeing the largest increase in terms of building our credit costs.

Again, looking at pretax pre-provision for the full year, it was up 11.1%, which we think is very important and indicative of a pretty strong underlying economic engine.

Looking at some of the unusual items for the quarter, we did have some noise. For the quarter, basically, we had net of taxes, securities gains of 66 million. We did have about 39 million in OTTI losses, and an after-tax positive adjustment for the finalization of our settlement on LILOs with the IRS. So we had a net positive $41 million for the quarter. Again, some noise in there, but it was net positive.

Likewise, for the full year, we had $132 million positive that was made up of a number of items. You'll recall we had the Visa related gain earlier in the year of $60 million, federal home loan bank extinguishment gain of 22, security gains of 101, LILO adjustment again was 17 and OTTI losses for the year were 65. So that nets out to a positive of 122 that you would certainly call unusual. I would point out however, that of that 122, 101 is securities gains, and over the years, we have very consciously, maintained a very liquid and strong securities portfolio.

We have kept it relatively large, considering the risk in our credit portfolio. And so, we believe that those, those securities gains are there in times like this to help cushion some of the challenges you have in tough times. So it is certainly real cash income and it is there and did help cover some of the unusual credit costs.

Now, let's take a minute and look at some of the drivers of 2008. Obviously, the number one driver was asset quality. If you take a look at the numbers, our nonperformance as a percentage of assets went up from the third quarter from 1.2% to 1.34%. Net charge-offs as a percentage of average loans went up from 1% to 1.29%.

Now, I should point out that excluding specialized lending, it went up from 0.82% to 1.06% and for the year, our charge-offs were 0.89% and excluded specialized lending 0.69%. So, certainly continued deterioration, but pretty much inline with what we had expected.

We had a substantial increase in our provision for the quarter. We provided $528 million and after netting out $314 million in charge-offs, we increased the allowance by $214 million. And for the year, the provision was $1.445 billion, against charge-offs of $851, netting an increase in the allowance of $594.

So when you run those numbers, you end up with the ratio of allowance for loans and leases, lease losses to 1.26% to nonaccrual loans at 1.11% and the reserve to loans excluding loans held for sale at 1.62%.

I would point out that that is up from 1.45% in the third quarter and 1.10% in fourth quarter of 2007. So we saw a 52 basis point ramp-up in the allowance during the course of the year, which we think is a strong increase and appropriate with the credit deterioration that we saw.

If you kind of look at what's happened, it's not anything other than what you would expect; kind of a slow methodical deterioration in the portfolio, centered around housing-related credits in the ADC, mortgage and home equity areas. We have intensified during the course of the year and on into the fourth quarter, our efforts to resolve problem credits.

We are pursuing more friendly foreclosures, deeds in lieu of. We continue to work cooperatively with our borrowers to help them resolve their problems and doing everything we can to help our clients stay in their homes and avoid foreclosures, which is certainly lose-lose for everybody.

Nonetheless, we have a responsibility to our shareholders and we work diligently to collect all of the loans that we possibly can. We are very consciously trying to stay ahead of any further deterioration and that's why we had a 17 basis point build in the allowance in the fourth quarter. I would point out that our residential ADC reserves did increase from 5.3% in the third quarter to 7.7% in the fourth, so we continue to build that at a pretty rapid level.

Our problems continue to be primarily focused in Florida, Atlanta and metro Washington. The Carolinas, I know, there has been concern about that; has experienced some deterioration, but continues to perform materially better than the aggregates and certainly dramatically better than some of the most notable problem areas.

Our CRE other portfolio, which is about $11.5 billion, continues to perform relatively well. We have during the course of the year tightened the credit standards in terms of any new credit extensions and any renewals. We are being very diligent in terms of managing that portfolio in anticipation of the fact that the residual fall over from the residential issues in the market and unemployment will certainly have some impact on the commercial area.

Interestingly, our auto portfolio is holding up reasonably well. Even our non-prime auto lender regional acceptance has not seen a big run-up in default rates, which one might expect. Although, I was talking to the gentleman, who runs that area the other day and he said, you’ve got to understand, we start from a pretty low level. So, you wouldn't expect us to deteriorate at the rate that others in the prime area would. So, we are pretty, pretty pleased with that. So, overall, our credits continued to perform about like we expected, not what we would like, and seem to be on a manageable pace.

Looking at other drivers, our margin, we are very pleased to say continues to creep up. The margin increased two basis points to 3.68 link and 22 basis points in the fourth quarter of 2007. Daryl is going to give you some more detail on that in just a few moments.

In looking at our core revenues and noninterest income, our net revenue growth, we think, was strong, and frankly we think this is one of the most important factors folks should be focusing on, during a challenging time, is whether or not your underlying revenue engine is still strong. And so our fourth quarter performance fourth to fourth was 11.3% year-over-year. It was 10.8%. Third to fourth was only 7.4%, but we always see a little seasonal decline there.

Our fee income ratio did decline slightly from 2007 to 2008 from 41.3% to 40.3. Frankly, that's probably good news because what really happened was our margin grew at a faster pace than our noninterest income did and, and so that's kind of the mathematical effect of that.

Looking at noninterest income, just a couple of high level points, because there is a lot of noise in that. On a common quarter basis, excluding purchases, noninterest income was down 4.8% largely due to lower revenues in trust and investment advisory income of about $10 million. We simply have less assets as the market has declined. And then there were a number of categories locked in other income that was down $48 million, again excluding purchases. $31.9 million of that was changes in REBA Trust and remember that's neutral to net income because it affects the income side and the expense side.

Likewise, we had decrease of 9.7 million from operating losses from pass-throughs of low income housing investments, which provides an offsetting tax benefit. We actually get a positive kick on that, but it does impact other income.

On the very good news side our investment banking and brokerage had a record quarter and with 96 million in noninterest income, up 14.3%. Capital markets had just absolutely great quarter, some very large deals closed in the quarter, strong derivative income and strong fixed income business was very, very strong.

Service charges on other deposit fees and commissions were up 3%. Mortgage has a lot of number – a lot of noise in it, so when you get through all of it, mortgage banking was up 5.4%, excluding material MSR swings. But I would point out that it is up 21.9% with purchases and we consider this area, a kind of the line of business as purchasing some mortgage business and it does take a lot of work. So, I don't think it's fair to totally exclude that, but anyway, it was 5.4% excluding that.

If you look at it on a linked-quarter basis, GAAP basis noninterest income was up 7.5, but down 5.6 on an operating basis. Excluding purchases, our noninterest income was down 14.9, primarily, due again, to the REBA Trust that was $22 million. It would really only be down about 3% if you exclude the rev by impact, and again, that's neutral to net income.

Insurance was up 15%. Investment banking and brokerage had a strong performance trust; as I indicated was relatively flat.

On a GAAP basis noninterest income was up 15.2%, up 10.3% on an operating basis. So, overall, noninterest income was okay, not what I would consider to be great, but not as bad as it may appear once you kind of flush through some of the numbers.

Let's take a minute to look at loan growth, which I think is a strong story for us. If you look at commercial loan growth third to fourth, we had 10.7% increase. Direct retail is still soft; it's actually seeing some decline. It's down 2.4. Sales finance is still strong at 3.8, I say strong relative to what's going on in the marketplace. As you know, auto sales are at kind of an all-time low. But we are moving market share from the captives and others that have exited that business, and so 3.8% growth is actually pretty strong there.

Revolving credit is strong at 11.5. Specialized lending is still solid at 7. So we feel pretty good about third to fourth. If you look at four to fourth, you get similar numbers, commercial up 12.4, retail kind of flattish, revolving credit double digits, specialized lending is double digits and same kind of thing if you look at 2007 to 2008.

So our growth rates are strong in commercial, weak in retail, solid in sales finance, revolving credit, and specialized lending.

So, overall, is a pretty good story in terms of lending. We are really continuing to see a strong flight to quality. We've seen really good growth in C&I, which as you know is one of our focal areas. We saw a 20% growth rate in that space in the fourth quarter. A lot of good relationships are moving to us, because their previous provider has become weakened and/or not available, not having credit available, and in some cases, just out of concern for quality they have chosen to move to us.

We did continue to make progress on our efforts to reduce our residential ADC, which is down $350 million in the fourth quarter and almost $750 million in the last three quarters. As I said, direct retail is soft. I don't, frankly, see that changing very much in the near-term, because there was so much focus on equity lines, that until mortgage production changes substantially, that's likely to be very soft.

We did see a significant ramp-up in mortgage activity in the last few weeks. As, you know, the Fed and Treasury, have taken some pretty bold actions in terms of lowering mortgage rates. Now that's beginning to have an effect. For example, in 2008 our average applications were $2 billion a month, in December, it was $5 billion, and in January, we are on a run rate of between $7.5 billion and $8 billion.

So, we are making very good progress with regard to our lending activities. I would make a comment about the CPP programs written and a lot talked about with regard to our banks holding the money; or they, what are they doing with it? I don't know about everybody else. I'll speak about us.

We have during this entire period been eagerly looking for all the good loans we can find. We find that to be kind of normal, that's the business we're in. And we have not had capital liquidity limitations that have changed our strategy throughout all of this.

That having been said, in the spirit of the CPP program, we certainly did have an additional investment in our company in the fourth quarter of $3.1 billion, which gave us an opportunity and a challenge, in terms of deploying of those funds. So we have been consciously looking at a number of initiatives to aggressively make loans across the entire loan strata.

We've made some additional loans in the traditional areas, particularly in corporate lending initiatives, equipment leasing, insurance premium finance. It's a little awkward to track exactly what you've done. I know folks in Washington want a lot of detailed specificity and we're trying real hard to get that.

But it's not exactly precise, but we're pretty sure, we can track a minimum of $1.6 billion in marginal lending that we have done since receiving the CPP investment and we think that's pretty good, given that our level was $3.1 billion.

So the bottom line is we're making loans. We want everybody to know it. I mean, we even have banners hanging on the outside of our branches, saying we're making loans. And so if you see somebody that says, they can't get a loan, give them my number.

In the deposit area, a good story relative to what's going on in the environment, our noninterest deposits, which as you know are very, very sticky in this kind of a recessionary environment. We did see a 2% growth fourth over fourth and then, in terms of core deposits, we grew 6.2%, client deposits, 6.3% and then total deposits, 7.9% which is very strong growth in this environment. We are clearly seeing some flight to quality with regard to deposit activity.

It continues, although not at quite the pace it did earlier on around the Wachovia, Citi, Wells transition. But our deposit activity is very strong and recognizing that we are very aggressively managing our deposit cost, which was a significant contributor to our fourth quarter margin improvement. So, our net new transaction accounts were up about 15% in 2008 and we think that's a very, very strong performance. Our service charge income was up 9.4%, so some pretty strong deposit numbers.

Now, just a comment or two about our strategic plan. Looking into 2009, as we told you before, we have four primary areas we are focusing on. Number one, by far is managing through the credit cycle. We continue to work diligently in this area. We continue to move resources to handling this area. We continue to work with our clients to help them get through these difficult times.

It's obviously very important during this time to avoid adverse selection and focus on diversification, so we are keeping all of those out in front of all of our lenders. Achieving superior revenue growth is very important. We commented before, one of the mistakes institutions make during difficult times, as they focus on their asset problems, they forget the revenue side. We are not doing that.

I am very, very pleased with what's going on with regard to restoring pricing discipline. You know, we had an interesting thing for the last 20, 25 years. We disintermediated the banking industry as a huge amount of traditional banking loans left the banking system and went through securitization into various conduits and other investment areas, which caused two things to happen.

One is we lost the volume and it put an enormous amount of pricing pressure on loans because a lot of these investors didn't have the capital and reserve requirements that we do. And so, I started making loans 36 years ago and over that period of time, we have lost about 300 basis points on the same kind of loans. We haven't gotten it all back yet. It will take a little while, but on the larger size credits, we have already seen a 100-plus basis point improvement just in the last three or four months. We are beginning to install floors on credit because absolute rates are so low and there is a lot of receptivity to that in the markets. So, we are very encouraged about restoring some pricing discipline.

Our integrated relationship management strategy is working very well. Our fee revenue per FTE increased over the last four years from 90,000 to 131 per FTE, or 45%. Our [five] plus service households has increased from 31% at the end of last year to a little over 34% currently, which is very, very good. We continue to focus on client service quality. Our CSI numbers continue to come in at all-time high levels at 9-plus on a 10-point scale. We are very pleased. We recently got a Greenwich Excellence Award for distinguished service in overall satisfaction in the middle market.

Cost control is an important focus now. We are, like everybody, I suppose, spending a lot of time on trying to save the nickels, dimes and pennies we can; a lot of focus on productivity. We certainly are going to see some and are seeing some reduction in FTEs. Daryl will comment on that in a little bit.

I am very pleased that our GAAP efficiency ratio improved to 52.1% for 2008 versus 53.7% in 2007, and again, Daryl will spend a little bit more time on that. And looking at our planned drivers for 2009, as you know, we do not give earnings guidance, but we do try to give you some driver indications. I would say this is predicated on our economic forecast, which is that things are continuing to deteriorate. We think we will have higher unemployment rates throughout the first half of this year, but then some modest improvement as we head towards the end of the year and all of that, of course, is subject to whatever comes out of Washington.

If the economy is materially weaker, then these expectations would obviously affect our projections. So our drivers would be loan growth 5% to 7%, deposit growth 4% to 6%, noninterest income growth 5% to 7%, noninterest expense growth 2% to 4%, and Daryl will give you a little more detail on that. Margin into 3.6 area, and net charge-offs, we think will be in a range of 140 to 150, higher in first half of the year, improving somewhat in the second half of the year.

In terms of acquisitions, just a comment about that. Our overall long-term strategy is growth into 90s and first part of this decade, the metric was such that acquisition growth worked well economically. In the last few years, that just didn't work.

Looking forward, we think there will be a tremendous round of consolidation, kind of after the worst part of this storm passes. We will continue to look at deals and our footprint that are economically attractive, but we are going to be looking for minimum, if any asset exposure, and meaningfully accretive.

Our target range would be, as we said before, 3 to 15 billion. If we consider anything larger than that, it would have to be very strategically important and very, very accretive. We simply have a tight set of constraints on our appetite today. We're not interested in increasing the risk in our balance sheet. We think we have enough, and we're not going to take a bunch of dilution. That likely says that in this kind of environment, mergers are unlikely, until we get better visibility on the other side of this correction.

With regard to dividends, I know this is an important topic. I would point out that we are primarily a retailed-owned company and our shareholders count on our dividends. We view our dividend policy as a very important responsibility. That's why we paid a dividend since 1903. We've increased our dividend for 37 consecutive years. Our capital position is very strong, substantially stronger than last year. But these are extraordinary times, and frankly the uncertainty is higher than I have ever seen it in my 36 years of experience and I suspect probably, hardly anybody on the phone has seen.

So, predicting the future is always challenging. Predicting it in this kind of environment is really impractical. So the reality is making long-term or even intermediate term predictions in terms of dividend strategy and is more difficult than it has ever been. As you know, dividend decisions are made at the Board level. Our Board will be looking at it on a quarterly basis. And we also do not give earnings guidance. I would say, however, that our plan based on what we can now see for 2009, gives us confidence in our current dividend strategy.

We've refreshed our loan stress analysis and taken a hard look at our earnings power and our strong capital position, and we think it supports our current dividend strategy. Obviously, material changes from economic projections would cause us how to reconsider all of these factors.

I will note for your consideration, that our first quarter is our seasonal soft quarter and coverage will be very challenging for us in this first quarter. I would also point out that in this interim period, we are focusing more on GAAP earnings for dividend coverage as opposed to operating.

On the long-term, we focus more on operating and obviously a much lower ratio than we are now experiencing. However, we believe in unusual times, when you have unusual expenses, higher credit costs and hopefully unusual income; in our case security gains, we think it's appropriate to look at GAAP.

Nonetheless, we will have to be looking at this closely as we go forward. Our Board will decide. But, again, based on what we now see, our plan gives us confidence in our current strategy and we will look at it as we go forward on a quarterly basis.

Now let me stop and ask Daryl to give you some more detail on some of these other areas. And then, we'll be available for questions. Daryl?

Daryl Bible

Thank you, Kelly. Good morning, everyone and thank you for joining us. I want to discuss the following topics: balance sheet management, net interest income, the margin, expenses, efficiency, operating leverage, capital, dividends and taxes. Let me first discuss the margins.

As we discussed, link quarter margin was up 2 basis points, excluding the one-time adjustment for leverage lease settlement. The increase is attributed to wider credit spreads on loans, wider funding spreads on deposits offset by our asset sensitive positions, given a significant drop in interest rate.

Net interest income increased $46 million or 16.5% on an annualized link basis. The increase in balance sheet growth drove the majority of this variance. On a common quarter basis, net interest income increased to $147 million or 14.6%.

Net interest margin increased 22 basis points, compared to the fourth quarter of 2007. Net interest income was driven by balance sheet growth of $9.1 billion. The margin expansion can be attributed to increasing credit spreads on loans, plus favorable mix change on deposits and funding.

On a link quarter basis, client deposits more than funded loan growth, both on an average and point-to-point basis. Per common quarter client deposits substantially funded loan growth on a point-to-point basis and funded the majority of growth on an average basis.

As Kelly said earlier, our 2009 net interest margin is expected to be in the 3.6% area. Given the large increase in the investments late in the fourth quarter of 2008, we expect net interest margin to start out below 3.6% area and build throughout the year, as loans replace securities on the balance sheet.

The goal is to keep the balance sheet constant level through between $148 billion and $150 billion in total assets. This will allow us to achieve a favorable mix change on deposits, plus build our tangible equity base. The primary factors that will impact this forecast will be the amount of loan growth achieved in 2009, prepayment speed the mortgages and mortgage-back securities and interest rates paid on client deposits.

I want to share a few more thoughts about noninterest expenses. Looking on a common quarter basis, GAAP noninterest expense increased 7.6%. On an operating basis, noninterest expense was up 9.2%. Excluding purchases, noninterest expense was up 4.5%. The increase was driven by $12.8 million in legal fees primarily associated with problem credit resolution, $9.8 million in additional FDIC expense, and $15.5 million due to increased write-off and foreclosed property and repossession expense. Offsetting this increase is a slight decrease in personnel expense.

Looking on a linked quarter basis, GAAP noninterest expenses were increased 2% annualized. On an operating basis, noninterest expense was up 4% annualized, excluding purchases, noninterest expense increased 2.4% annualized. Personnel expense decreased $19 million, or 13.9% on an annualized link basis. However, the occupancy and equipment expense was up $8 million.

Legal fees and professional expenses primarily related to problem credit resolution increased $14.6 million and income from the sale of other real estate and other fixed assets were $6.9 million lower than in the third quarter. And lastly, FDIC expense increased $6 million. For the full year on a GAAP basis, noninterest expense increased 7.8%. On an operating basis, noninterest expense increased 9.7% for the year; excluding purchases noninterest expense increased 4.3% for the year, very close to our 2008 planned goal of 4%, which Chris Henson shared with you early last year.

Personnel expense was down $28 million. Occupancy expense and equipment expense increased $23 million. Cost associated with revenue producing activities increased $50.7 million. Write-downs on foreclosed property increased $31.8 million. Legal fees and professional fees associated with problem credit resolution increased $39.1 million, and FDIC insurance expense increased $15.3 million.

As Kelly mentioned, our plan includes a 2% to 4% increase in noninterest expense. Going into 2009, some of the headwinds we are facing include an increase in FDIC expense. We will increase $90 million to $100 million in 2009. In prior years, we benefited significantly from FDIC credits due to past acquisitions. We have depleted these credits, combined with the cost of new government programs, will cause this increase.

In addition, such an expense will increase $70 million to $80 million due to changes in market rate assumptions as of 12/31. Also, planned credit-related costs primarily legal and other professional will increase, as we continue to aggressively deal with problem credit. On a full-time equivalent employee decreased 185 in the fourth quarter and by 330 excluding acquisitions for the full year. BB&T also opened 10 new net branches for the fourth quarter and 19 for the year.

In terms of our efficiency, we are pleased with our progress in this area. On a GAAP basis, efficiency improved from 52.1% for 2008 compared to 53.7% for 2007. Cash efficiency improved for the third consecutive quarter and was 50.6% in the fourth quarter, a drop from 51% in the third quarter.

On an ongoing basis, we have generated positive operating leverage every quarter in 2008 and for the full year. This was the goal at the beginning of the year and we are very pleased to have achieved it, especially, in light of the challenges facing all financial institutions in this economic environment. In 2009, our operating plan continues to achieve positive operating leverage by growing revenues faster than expenses.

Now let me share a few thoughts about taxes. Our effective tax rate in the fourth quarter on a GAAP basis was 7.6% and on an operating basis was 26.7%. We have agreed to an IRS's propose to settle leveraged lease transaction and revised our FAS 13-2 calculations. This resulted in 67 million reduction in interest income and an 84 million reduction in income tax expense.

Looking ahead, our plan for the full year tax rate of approximately 28%. The primary drivers of this rate are lower pretax income, increase in tax-exempt income from municipal investments, tax-exempt loans and BOLI, and increased tax credit.

Turning to capital, our regulatory capital ratios remained very strong, including the investment by the U.S. Treasury in connection with their Capital Purchase Program. Our leveraged capital ratio was 9.7%. Tier 1 capital was 12% and total capital was 17.1%. These ratios placed us in the top-tier of other large financial institutions.

Excluding the impact of trade date accounting which includes securities purchased and sold over 12/31, which totaled 4.2 billion. And tangible equity ratio would have been 5.5% rather than 5.3% reported, and total equity ratio would have been 7.6% rather than 7.4%.

You will recall that as Chris mentioned in previous earnings calls, our capital stress scenario takes our current quarter's loan migration and projects the current trends over the next four years. We have included these test results in an overall capital stress scenario with charge-offs of 175 and the allowance for loan loss of 3%.

Let me emphasize that this is not what we expect to happen, but simply what we use for our capital stress model. Under this scenario, we remained well capitalized in all regulatory capital ratios, but fall below the 5.5 tangible equity target. However, we believe it is manageable. And from a capital perspective, this scenario includes us maintaining our dividend.

In summary, let me say even though the industry is facing severe credit issues and BB&T is not yet into these factors, we believe that our credit metrics compare favorably to our peers, our underlying performance is reasonably strong, our balance sheet growth and trends are very positive, and we are more focused than ever on expense control.

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

Tamera Gjesdal

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

Due to the heavy call volume today, our conference call provider has been instructed to limit your questions to one primary inquiry and one follow-up. Therefore, if you have any further questions, please reenter the queue, so that others may have an opportunity to participate.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we will take our first question from Paul Miller with FBR Capital Markets.

Paul Miller - FBR Capital Markets

Thank you very much. Going back to the dividend policy, can you talk about the economic conditions that would allow you to maintain the dividend, i.e. like, what type of employment rate you're looking for or things like that?

Kelly King

Well, I don't think the unemployment rate would directly drive the dividend. But to the point of your question, obviously, the higher the unemployment rate goes it's clearly correlated with many other factors that drive our income statement. The ultimate driver of our dividend strategy is the availability of cash income to pay it.

Certainly to the extent that, unemployment goes dramatically higher than we are currently experiencing, then you would expect to have substantially more credit problems, and probably slower loan growth and all of those factors would put downward pressure on earnings.

There's sometimes a lag effect between the unemployment rate and those other factors, so it's hard to pin it down in terms of a quarter-to-quarter look. But I think it would take a meaningful deterioration in the unemployment rate to have a material deterioration in the metrics that we are looking at, that give us some comfort with regard to our dividend strategy.

Paul Miller - FBR Capital Markets

This is a follow-up. I'm not trying to pin you in a corner. But material deterioration, I mean, on your economic, when you talk about like, where our margins going to be, my growth's going to be, are you looking at 9% unemployment rate for those things to come true or when you say meaningful high, are we talking north of 10%?

Kelly King

No, no, no. I think our projection and everybody's got their own projection about unemployment. But we think unemployment will continue to rise. We'll likely peak out around 8%, 8.5%, it could go to 9%. I think if you start talking about an unemployment rate north of 10%, you're talking about an entirely different economic scenario.

So, unemployment in the range of up to 8%, 8.5% is kind of a manageable account of unemployment rate, and part of it depends on where it occurs; you can't look at the national number, you have to look regionally. But I would say, you would need to see a significant, and significant to me, would be in that 9%, 10% plus range to have a dramatic impact on our scenarios at this time.

Paul Miller - FBR Capital Markets

Okay. Thank you very much.

Kelly King

Sure.

Operator

We will take our next question from Matt O'Connor at UBS.

Matt O'Connor - UBS

Hi, everyone. If we look at your exposure to the residential construction, the roughly 8 billion of ADC, can you give a little more color in terms of why it's only come down, say 8%, 9% versus a year ago? I guess I was under the impression that the duration of all these loans is 2 to 3 years. I would have thought we would see more either paydowns or charge-offs by this point.

Kelly King

Well, that's a good question. Remember that one of our key strategic objectives is to work with our clients during a difficult period of time. We philosophically and conceptually believe that the best way to run a business from a long-term point of view is to, stick to your values and to stick to your long-term strategies. We've always felt that in difficult times, it is important to work with your clients and try to help them get through it as best you can. Obviously, you can only go so far in that regard.

And so we don't, go into a difficult period as some institutions do and say, this SIC Code is out, this product class is out. We tend to continue to work with our clients. We do, as we've talked about, tighten up in terms of lending restrictions, particularly in terms of new clients.

But over a period of time, like you're describing, you have a number of projects that are already committed that you're continuing to advance up on. You have some projects that have multiple phases that continue to be developed. So, you get some natural growth in that portfolio just as the existing commitments mature. You get some natural run-off as they normally or naturally payoff and then of course you get some through problem resolution.

So, I think that's the answer; just you got some natural continuing upward pressure on that volume. At the same time you've got downward pressure and, again, the nature of our clientele is such that while they encounter the difficulties in the market, we tend to have relatively stronger builder developers. They tend to have more staying power and so we tend to have the ability to work with them during a difficult period of time.

Matt O'Connor - UBS

Okay. Appreciate that. Then just as my follow-up question, your comments on M&A were helpful and I guess you're essentially saying large bank deals right now don't really make that much sense. Would that change if there was government assistance related to an acquisition?

Kelly King

Well, we've looked at some deals and there are deals out there. The interesting thing today is, if you look at a deal, let's say it's a somewhat distressed situation. From our point of view, we are not going to take any asset exposure. So, if it's FDIC, for example, that takes all the assets or there is some type of very, very strong sharing arrangement, you can figure out a way to work yourself through the asset issue, but the interesting thing is that when you look at even a deposit acquisition, and even if you take it at no premium.

We run numbers, and we are pretty conservative, but we run numbers and you can't make the numbers work. And the reason is because today, what are you going to do? Let's say you buy $5 billion institution deposits only, most of the institutions that are stressed half deposit rates, you’re going to take that money and paid down Fed funds at 0.25% operated and secured as a 2%, the numbers just do not work. You can not even take an institution and make the numbers work without deletion in the short-term.

So, now if you are looking at a healthy institution that had a normalized asset structure with normalized yields and normalized liability structure, it gets to be more doable. But even there in this environment because of the difficulty in looking forward in asset quality, you end up deep discounting the mark on the assets so much that you destroy so much capital that it puts you into position of having to go out and raise a bunch of capital, which is not a real desirable thing to do in this environment. So it's a fine line. I mean, it's tempting now to say, let's go buy a bunch of companies because they are available. But I think the better judgment is to be very conservative in this environment.

We've been around for 136 years. We plan to be around a lot longer than that going forward. And there will be a time to do acquisitions. There will be a time to take advantage of opportunities. We're not sticking our head under sand, but we're going to be very careful. We're not going to take meaningful asset exposure and we're not going to take meaningful dilutions and I'm just saying as a practical matter, I don't think that's going to create a whole lot of deals.

Matt O'Connor - UBS

Okay. I appreciate the thought. Thank you.

Kelly King

Sure.

Operator

Let's take our next question from Chris Mutascio with Stifel Nicolaus.

Chris Mutascio - Stifel Nicolaus

Good morning, all.

Kelly King

Good morning.

Chris Mutascio - Stifel Nicolaus

Daryl, a quick question. You may have said this and I didn't catch it, but any guidance on what the taxable equivalent or fully taxable effective tax rate would be in 2009?

Daryl Bible

Yes, that was 28%.

Chris Mutascio - Stifel Nicolaus

So it will be 28 for a full year 2009?

Daryl Bible

Correct.

Chris Mutascio - Stifel Nicolaus

Okay. Thank you. That's all I needed.

Daryl Bible

Okay.

Operator

And we'll take our next question from Nancy Bush with NAB Research, LLC.

Nancy Bush - NAB Research, LLC

Good morning.

Kelly King

Good morning.

Nancy Bush - NAB Research, LLC

Kelly, could you let us or give us any insights into whether you're having success in shedding foreclosed real estate through auctions and whether your residential development clients are having any success there? I understand there is huge foreclosed real estate auction coming up in Atlanta in early February and I just wondered if you would be participating in that or any of your developers would?

Kelly King

Nancy, I know a lot of people are beginning to look at that strategy; to good thing, bad thing dumping into corner and see if you can sweep it out real fast. We've never really tried to do that and do not intend to do that now. There are investors that will buy those properties today, but when we're looking at them, they are looking at 30% to 40% return rate in a 90 day period, and so there is deep discount to generate that kind of return is enormous, far greater than we think is required.

We did one little block [sell] just to test it, just to see what it look like and that kind of confirmed what we were talking about.

We've been much more successful, managing our own book aggressively and we are very aggressively marketing our book, but we find it to be more effective to market it through our various tentacles out in the marketplace and avoid the panic of running out trying to auction it off tomorrow.

Nancy Bush - NAB Research, LLC

Yes, my follow-up question is this. And I realized it's probably a little early to be looking to the other side of the thing we're going through right now. But when you're looking at the developments in your credit portfolios, I'm sure you're sort of going through a mental – okay, could we have done this better, what could we have done differently. What are the implications here for the future, particularly as it comes to financing residential real estate development, etcetera?

Kelly King

Well, I think that's the key question to me that everybody ought to be asking. The way I frame that is, what does the economic engine look like going forward? Here's an interesting thing Nancy, to me, and you may not agree with this. But I think it's rational. I mentioned earlier this 20-plus year period of disintermediation as huge amounts of assets left the banking balance sheet and went into the capital markets.

That's gone for a long time; it may be back one day. I think it's gone for a long time. We also, by the way, saw it on the liability side. We saw huge amounts of traditional deposits, CD type deposits leave our system, go into mutual funds and very sadly, nothing wrong with mutual funds; we manufacture them.

But very sadly, particularly senior citizens say, well, I would never put my money at risk and put it in the stock market. I'm putting it in mutual funds, and never even understand what they are doing. So now they've lost a lot of their money they were counting on to live on. You are seeing that money come back in the CDs, albeit at lower rates. So we're getting more deposit inflow at lower rates. We're getting more loan inflow at higher rates. Spreads are improving, they will continue to improve. So I think going forward, even with lower aggregate economic activity, which I believe will be the case, good banks will have very good balance sheet growth and very good spreads resulting in very good margins.

Now, I don't think any of us ought to be sitting here thinking about going back to the 90s and looking for 15% to 20% growth rates. I don't think that was healthy then. It wouldn't be healthy now and it's not going to happen. But for the first 10 or 15 years of my career, if you could grow loans 6% to 8% deposits in the same kind of category and get good pricing and control your costs, you could make a lot of money. And I believe we are heading into that period.

Once we get through this cycle, 12 to 18 months, we are in for 8 to 10 years of really good operating conditions for good spread lending institutions like us. Now, some institutions that had, way over half of their income coming from C businesses, but the kind of C businesses in the capital markets, etcetera, that have evaporated or they had the strategies of buying all their business around the world, those strategies didn't work and they won't work. Our strategy has not changed.

And so as the markets slowly improve, the volume will improve. We'll get market share move from this re-intermediation and we specifically will get market share move, for at least two or three years. We have the Wachovia, Wells things. Wells is a good institution, but not as good as us, but they are a good institution and it will take them two or three years to get settled down. We've done enough mergers to know. I mean you just don't do it overnight.

Now you have got to be in a bit of [mirror] thing, I mean, and who knows where that's going. But in terms of capital markets business and wealth business, looks to me like a lot of opportunity is out there, not to mention some of our other competitors that certainly have their own challenges. So, I think Nancy, as I look forward and I've tried to be brutally honest with myself about this, I really believe when we get through this, we're going to see some of the best times in basic commercial banking that we've seen in a long time.

Nancy Bush - NAB Research, LLC

Okay. And get here soon enough.

Kelly King

Yeah, amen to that.

Nancy Bush - NAB Research, LLC

Thank you.

Kelly King

Thank you.

Operator

We'll take our next question from Adam Barkstrom with Sterne Agee.

Adam Barkstrom - Sterne Agee

Hi, everybody. Good morning.

Kelly King

Good morning.

Adam Barkstrom - Sterne Agee

Can you hear me?

Kelly King

Yes. Good morning.

Adam Barkstrom - Sterne Agee

Hey, question, just sort of shift gears from credit for a minute and looking at the TARP funding and then looking at your investment portfolio. I'm just curious, you're fairly significantly levered up on a link quarter basis I guess you added $10 billion, $11 billion from the investment portfolio, so kind of levering the TARP portfolios 3 to 1. Was just curious, is that I mean the way you model that out, I’d assume that's more than accretive here one and then, two. What would be your appetite for further investment securities leverage from here?

Adam Barkstrom - Sterne Agee

Let me give you appropriate action. Daryl may want to add some detail to that. We would not have an appetite to materially lever that equity in the securities portfolio meaningfully from, where we are. We levered it to what we thought was an appropriate level pretty quickly, which we thought made sense. Because we levered it in safe, relatively short-term securities and it did turn it from meaningfully dilutive to slightly accretive, but that was a temporary move.

The real strategy is to, redeploy those signs in to our normal asset mix, which we are very encouraged about, because as I said, we've already in the last, let's say six weeks, produced 1.6 or so billion dollars of marginal asset opportunities that, without that additional funding, we probably would not have been able to do. So, as we go forward over the next 6 to 12 months, we think we're going to be able to redeploy those securities and as Daryl said, keep our asset structure relatively flat, change the mix, improve the margin, and of course have better profitability.

Daryl Bible

The only thing I’d add to that Adam, is that if you look at the cash flow from the securities we have, it's north of what the longer of is, so if our plan has loans growing $7.5 billion to $8 billion in 2009. We should have ample cash flow coming off the portfolio, 10-plus billion to handle more of all of that loan growth. So, we should be fine from that perspective and we will maintain the 5.5% tangible common equity.

Adam Barkstrom - Sterne Agee

Okay.

Daryl Bible

Yes, and we did it basically to cover the costs of the TARP. We still want to return a good return to our shareholders, so that was the focus of that.

Adam Barkstrom - Sterne Agee

Okay, fair enough. Thank you.

Operator

We'll take our next question from Chris Marinac with Fig Partners.

Chris Marinac - Fig Partners

Thanks, good morning. Kelly, I was curious about the profitability in the insurance business and to what extent that may be changing either positively or negatively in this environment.

Kelly King

The insurance business is somewhat immune to the specific economic factors that we're spending most of our time talking about now. Obviously some businesses fail, but until you get that, businesses still need insurance. So, the big story in insurance is not that. It is this soft market we've been in for several years. Of course we've been growing organically by moving market share and then we've been growing at a pretty rapid pace with acquisitions.

The good news is, we are just beginning to see the silver lining on the soft market. Fortunately for us, we do business in the wholesale and the retail market and we are already seeing hardening up of premiums in the wholesale market through our CRC operation and we know, based on past experiences that flows into retail.

And the fact is, most of the insurance companies have had a substantial degradation of their capital position and this soft market hard thing. If you look at it over cycles, when there is a hard market, the insurance companies make a fortune. They bill their capital. They have excess capital. They have lowered their rates. If there is a soft market then they go through the thing again.

Coming after 9/11, we had a strong hard market. They made a fortune. They built their capital up then we went through several years of soft markets. But now we have an unusual degradation of capital, which usually comes from extraordinary events like hurricanes, etcetera. This time it came from asset deterioration.

Doesn't matter, the fact is the capital have been depleted there could be raising rates and that will be tough to some of our clients, but it will be good for us, because as you know we get our commission based on premiums. So, I'm actually very optimistic about insurance as we look forward.

Chris Marinac - Fig Partners

Great, Kelly. Thanks very much.

Operator

Our next question comes from Betsy Graseck with Morgan Stanley.

Betsy Graseck - Morgan Stanley

Hi, I had a follow-up on the discussion around leverage and the TARP. So, if I understand correctly, you feel like its fully leveraged, the TARP's fully leveraged at this stage, but you could get incremental profitability as you deploy into your loan mix?

Kelly King

Yes, that's exactly right, Betsy.

Betsy Graseck - Morgan Stanley

Okay.

Kelly King

While Daryl, he's the best in the business in terms of running treasury, but the fact is in this environment, unless you're willing to take credit risk in the investment portfolio, which we are not, you can't get very good returns in your investment portfolio. So, we parked it there and we'll redeploy it as quickly as you can, not in a panic.

We're not going to make a bunch of bad loans, but our run rate in terms of loan production, because of the market share movement we're seeing, as Daryl described, is such that we'll be able to redeploy that over the course of this year and it will meaningfully improve our spreads and margin.

Betsy Graseck - Morgan Stanley

Okay, and then just separately, how do you think about the timeframe for the TARP Capital? It's your option as to when you pay the government back and if you could give us some color as to how you're thinking about that timeframe? And how you would…

Kelly King

Yes, the drop dead time as you know is five years because that's when it goes from 5% to 9%.

Betsy Graseck - Morgan Stanley

Right.

Kelly King

But candidly, we want to roll it out as quickly as possible. Now, I will tell you that practically I think that means two to three years because the capital markets are just not such that even a good institution like us can go out and raise capital at a reasonable price. So the way it works with the CPP.

And by the way, for the group, I'm making a clean distinction between CPP and TARP because there have been so much tarnish on TARP. TARP was the Troubled Asset Repurchase Program. We have not participated in that. We are in the CPP capital program.

Betsy Graseck - Morgan Stanley

Right.

Kelly King

But, we believe over the next two to three years, the markets will stabilize. When it does we think there will be a strong appetite in the marketplace for sound institutions like ours, for common and preferred equity and when the time is right in terms of reasonable costs, we will move quickly to replace that capital.

Betsy Graseck - Morgan Stanley

Okay, thanks.

Kelly King

Yes.

Operator

We'll take our next question from Jaime Peters with Morningstar.

Jaime Peters - Morningstar

Hi. I was curious about how sticky you're finding the deposits from your Haven Trust Bank acquisition?

Kelly King

They are about as sticky as clean water. Meaning they are not sticky at all, frankly, because we wanted to be a part of the solution and to support the FDIC. We then do it with our eyes open, knowing the nature of the institution, but the truth this is what we expected. Most of the deposits are very price sensitive.

It's a young institution, most of these kinds of companies have only been around a few years anyway, so we are used to having relationships with clients for 20, 30, 40 years. These institutions only opened a few years ago, so by nature, they don't have the depth of relationship and by nature of how they operate it; they paid up really high margin on rates. And so when you bring those rates down, you just simply have a very quick run-off.

So, we're not far enough into it to give you any real good solid numbers in terms of attrition, but it will be significant and it will be okay because we didn't pay anything for it. We picked it up two or three locations in Atlanta, so we just view it as a de novo strategy, so it's not meaningful in terms of that.

But it does confirm what we expected, which as these institutions are really, really operating at an unsustainable level, and the FDIC is really going to have their challenges in terms of resolving those going forward because it's really not into best interest of most institutions to acquire those kinds of banks.

Jaime Peters - Morningstar

Well, thank you.

Kelly King

Sure.

Operator

Our next question comes from Jefferson Harralson with KBW.

Jefferson Harralson - KBW

Hi, thanks. I was going to go back to credit just a little while. On the construction lending, you guys haven't really talked too much about cumulative losses, but it seems as if you don't think that losses are getting a lot worse from here. Do you think that the economy is hitting some sort of wall and that the construction losses are about to spike or how do you think about cumulative losses within that construction portfolio?

Kelly King

Well, we do our stress test and we run cumulative losses. We run it all the way out through four years, and we apply various factors to it. But based on what we now see, we don't see anything that implies a big spike, in fact anything over the next six months or so, you may see a little bit of a reduction into spike. The spike came for us and I think for institutions as these really inflated markets hit the wall a year ago, the Atlantas and the Floridas, and Nevadas, and Arizonas and so forth. So you kind of get that big spike hit and most of it that's really bad just comes at you in one fail swoop. And so, those have already spiked and may be actually even on the cusp of some relative decline.

The other markets, the Carolinas, West Virginias, etcetera; they never saw the spike up. So one wouldn't expect to see the same kind of spike down in values nor spike up in credit problems. It's more of a methodical slow deterioration that is a function of, unemployment, and the decline in housing prices.

So really to answer your question, we have to ask another question. The question is, when our housing prices are going to stop declining? Interestingly, that's the great question that everybody in Washington, ought to be focusing on in terms of the aggregate financial dilemma we're facing because underpinning all the CDO, CMBS, and CD squares and everything else is the fundamental question of when are house prices going to stop declining, which is why we have been speaking to everyone we could speak to about, that there are two things you can do.

One, they've done, I'll give them credit and that is, reduce interest rates, it would make it easy for people to buy inventory off the market. The other is of putting the fact of meaningful tight credit to encourage people to get off the sidelines and buy houses. I am encouraged by the way, there is a bill being considered that does have a meaningful tax credit in it for new home purchases.

So if we get some movement out of tax legislation and certainly if rates stay down like we think they almost certainly will, you're going to see some increase in housing demand. Remember, the housing capacity curve is still about 80% intact; that was about 20% of the capacity curve that went away through the fictitious capacity, we the industry created out of, sub-prime etcetera. Virtually, all the demand curve went away, but 80% of the capacity curve is still there; would feed the demand curve.

So when people get off the sidelines with regard to being afraid prices are more, or afraid of losing their jobs, you'll see, you'll see demand come back. And so I think that it is unlikely, you're going to see these huge spikes just keep popping up. I think you're going to see more of a slow deterioration during the course of this year and then, with a little luck and some help out of congress, we'll begin towards the end of this year, begin to see some bottoming and a little bit of improvement in some of these markets.

We're already beginning to see the beginnings of that in Atlanta, as bad as it has been. We've seen several months in a row now where our net housing inventories are declining. Housing prices seem to have stabilized, people are beginning to come back out and buy again with these low rates. So it's not widespread yet, and the loss of lights out there, but we're beginning to see a little bit of light at the end of the tunnel.

Jefferson Harralson - KBW

All right, and I'll ask kind of a dividend question. So you guys are growing your balance sheet, you guys are growing loans you're taking advantage of opportunities, that is putting some pressure on your TCE ratio. How would you weigh the importance of the dividend versus the importance of this market share takeaway strategy, would you pull back some of the growth of the balance sheet in order to keep the capital ratios higher that protects the dividend?

Kelly King

Well, if we do the market share movement right, that won't be required, because if we do it right, we will grow the balance sheet and grow the income statement at same time and provide income power to cover dividends. You could put a little pressure on TCE in that, and we may have a little bit of room on TCE, although our clear goal now is 5.5, that's a superior level relative to the most of the industry today.

And with our very strong total capital level, you could have a little bit of room around there if it came down to that one ratio versus your dividend decision. But I really think, the market share movement is going to be accretive to the concept of paying the dividend versus dilutive.

Jefferson Harralson - KBW

All right. Thanks.

Daryl Bible

The only thing I'd like to add to that is that we're in the strategy to keep the balance sheet constant. So it's going to be a mix change on the asset. So our securities are $32 billion. If we get $8 billion of loan growth, they are going to go down $24 billion and total asset isn't going to change. So actually, well as long as we're making more than what our dividend is, you're going to see accretion to equity and to the tangible equity.

Jefferson Harralson - KBW

All right. Thank you, guys.

Operator

And our final question comes from Brian Foran with Goldman Sachs.

Brian Foran - Goldman Sachs

Good morning. I apologize if you talked about this earlier and I missed it. But you've had NPAs kind of steadily growing $300 to $400 million per quarter and then you had a $500 million or so step up in early delinquencies. So should we think about as we roll NPAs forward, a lot of that ultimately ending up on NPA in the first quarter or is there something one-time in those early delinquency numbers that we should think about backing out?

Daryl Bible

Well I think when you look at the third to fourth delinquency numbers, you need to go back and look at the seasonal factor. If you go back and strike that overtime, what you'll find is about half of that increase in delinquencies in the fourth was seasonal, kind of happens in the slowness of the period of cold winter and all that. But part of it, about half of it was actual deterioration, and that part you would expect to have some percentage flow into NPAs as we go forward.

The more significant buildup in NPAs in the fourth quarter was somewhat seasonal. But was also a function of the fact that we took on a pretty extensive special review of our ADC portfolio and accelerated frankly. Some movement in terms of downgrades which through our migration process created reserve requirements and certainly push some of those over into the NPA categories.

So, there was a little bit of unusual bill there just because we got really aggressive in terms of really scrutinizing portfolio because, frankly, we wanted to know, I mean, we wanted to know, to make sure we weren't fooling ourselves in terms of what the quality portfolio was.

Brian Foran - Goldman Sachs

And then lastly just, there is a lot of speculation in the Carolinas that the coasts are going to be a lot worse than the rest of the state. I don't know if you agree with that. But if, A) do you agree with that? And, B) is there any sense you can give us as how much of the North and South Carolina exposure would be kind of coastal, second home type deals versus the rest of the state?

Kelly King

Well, the coastal areas are today more impacted than the rest of the state for two reasons. One is, relative to the state, they did have more building activity and more price escalation, so they had more room to contract.

But the big story on the coast is the tremendous growth over the last 20 years in the coastal part of the Carolinas, especially, has been out migration out of New England down into this area. And so what you are seeing now is those folks still want to come down here, because it's still a whole lot warmer. But they can't sell their houses up there. So as rates come down, as other stimuli kick-in, and those folks can start to sell their houses, you will see them move right on back down here just like they had been doing for a long time. And that will put a floor kind of under the decay in the coastal area.

So, I think it will; it is decaying, will decay more than the state as a whole. But I don't think you will see, the kind of collapse that you might think because we've got this natural, out migration and by the way, this has some application to Florida as well. I keep trying to remind everybody and myself that it's so easy to get on a panic and so Florida is going to float away.

But I'll tell you this, it's pretty cold in North Carolina today. It's still pretty warm in Florida and there is still a lot of water around there. There are still a lot of beaches; still a lot of fun to sit on when it's warm. So, yet to come, a kind of back away a little bit and look at the long-term factors driving these kind of issues. So, I don't expect the Carolinas coast to crash, although I do think it will continue to deteriorate during the course of this year, but it will be manageable.

Brian Foran - Goldman Sachs

Thank you.

Kelly King

You bet.

Tamera Gjesdal

Thank you for your questions and thank you for your participation in this teleconference today. We certainly appreciate it. If you need any clarification on any of the information presented during this call, please contact BB&T's Investor Relations Department. Thank you and have a great day.

Operator

And this does conclude today's conference. We appreciate your participation and you may disconnect at this time.

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