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BB&T Corporation (NYSE:BBT)

Q1 2009 Earnings Call

April 17, 2009 11:00 am ET

Executives

Tamera Gjesdal – Senior Vice President of Investor Relations

Kelly S. King – President and Chief Executive Officer

Daryl Bible – Chief Financial Officer

Analysts

Jason Goldberg - Barclays Capital

Christopher Mutascio - Stifel Nicolaus & Company, Inc.

Brian Foran - Goldman Sachs

Kevin Fitzsimmons - Sandler O'Neill and Partners, L.P.

Nancy Bush - NAB Research

Betsy Graseck - Morgan Stanley

Mike Mayo - CLSA

Paul Miller - FBR Capital Markets

Thomas Mitchell - Miller Tabak & Co., LLC

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

Edward Najarian - ISI Group

Albert Savastano - Fox-Pitt Kelton

Operator

Greetings ladies and gentlemen. Welcome to the BB&T Corporation first quarter earnings 2009 conference call on Friday, April 17, 2009. (Operator Instructions) As a reminder, today’s 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

Good morning everyone. Thank you Steve 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 today this morning by webcast or by dialing in directly, we are very pleased to have you with us.

We have with us today Mr. Kelly King, our President and Chief Executive Officer and Mr. Daryl Bible, our Chief Financial Officer who will review the financial results for the first quarter of 2009 as well as provide a look ahead. After Kelly and Daryl have made their remarks we will pause to have Steve come back on the line and explain how those who have dialed into the call may participate in the Q&A session.

You will notice that the format of our earnings release is a bit different. We are trying to simplify our disclosures and provide a more commonly used format. For example, we have eliminated the concept of operating earnings from the earnings release. Our disclosures focus on GAAP and provide a couple of cash basis members. We have provided a significant items schedule which reflects unusual income items on a pretax and after tax basis, and indicate where they are reflected on the income statement. Additionally, we have provided a full balance sheet in the income statement. Previously certain line items were combined and now we have broken them out in a presentation format consistent with our SEC report.

Before we begin, let me make a few preliminary comments. BB&T does not make predictions or forecasts. However, they 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, 2008. Copies of this document may be obtained by contacting the company or the SEC directly.

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

Kelly S. King

Thank you Tamera and good morning everybody. We really appreciate you joining us today for our call. These are obviously interesting and dynamic times and we are pleased to have I think a really good report to share with you today, although I’m sure there’ll be some questions because it’s certainly a very interesting and changing period for our industry and for our economy.

So I’m going to cover a performance of the first quarter results, take a look at a couple of unusual items, try to spend most of the time talking about some drivers of performance. Talk a little bit about the Treasury CPP Program and the stress test. A few thoughts on the dividends. And then Daryl will pick it up and give you some more color on margin, expenses, taxes, capital and operating leverage. And then as Tamera said we’ll have some time for questions.

We feel really pretty good about the quarter. It’s what I call a relatively strong quarter given, you know, significant reserve build and a meaningful increase in loan losses. As you could see from the information you’ve received we made $271 million for the quarter which was down 36%, but still substantially better than many have reported in previous periods.

Our diluted EPS fort the quarter was $0.48. That was $0.17 greater than the consensus estimate, although it was $0.03 below the $0.51 for the last quarter. We did have cash basis EPS of $0.51 which was 37% compared to last first. I know that many if not most of you are going to immediately extract the bond gains. We’ll talk some about that. I would simply say that even if you do that, we would calculate that we would show $0.32 and then there are a couple of unusual items that I would ask you to consider.

One is that we do have netted out of our bond gains about $36 million in OTTI reflected in that net number. And also there is $11 million in severance costs embedded in the numbers. This is where we are placing a lot of emphasis on cost control as you would expect. We are having some reductions in workforce. And the way that works is when you have the beginning of the process in reducing workforce you have to take a severance cost accrual, although in many cases, in our case before the full process is completed, most of those people end up having jobs. But we did have an $11 million severance accrual in the first quarter, realize again I think a half or more of that back in the second. But that is a number that is in the first. So if you take the $0.32 and add back $0.01 you would arrive at an adjusted non-bond number of $0.33 which would still be $0.02 above the $0.31 consensus.

I will remind you that even though it’s quick to some were quick to take the bond gain out, they are real cash gains and in my mind are similar in that they are large and unusual, certainly similar to the large and unusual credit costs that we are experiencing. So you know you can kind of do what you want to with that, but certainly we are pleased with the $0.48 of GAAP earnings.

Likewise we are pleased with our returns. Our cash ROE is 8.2 – I mean our [inaudible] common equity is 8.29, and cash return on common equity is 15.62 so we feel pretty good about those. Obviously they’re down from last year but pretty strong in this environment.

Feel real good about earnings power which we define as pretax, pre-provision. Our first quarter I have 12.6% compared to first quarter ’08 excluding securities gains and then also excluding purchases and other items on an annualized lean quarter basis it would be up 20.7%. So pretty strong earnings power which I still believe is the most important issue to consider in looking at financials in this environment.

Taking a look at asset quality, our non-performers did move up materially during the first quarter from $2.030 billion to $2.750 billion. That’s an increase from 1.34 to 1.92. Net charge-offs were $388 million compared to $314 for ’08 and charge-offs as a percentage of average loans were 1.58 versus 1.29 for the fourth quarter. I saw earlier that some had done a preliminary look at this and was comparing 158.89 which was the average for the entire year of ’08 which would not be an appropriate comparison. So if you want to make a lean quarter comparison, you would compare it to 129 in the fourth to 158 in the first. I would also point out excluding specialized lending that our first quarter charge-off rate is 1.31.

Credit provisioning was 676, so it was a big number. And charge-offs were 388. So as you can see we had a material net reserve build of 288 and then if you look at our ratio of loan and leases to non-accrual loans, we feel good that that is at a very healthy in this environment 1.08. Obviously down from the good times but in this environment, you know, anything over 1 is a healthy number so we’re pleased with that 1.08.

Our allowance to loans excluding loans held for sale had a significant increase from 162 to 194, which was we thought appropriate given a number of activities that we have taken which I would like to explain to you.

A little more color on asset quality. We obviously are continuing to experience credit deterioration which we had told you we expected. So the deterioration we are seeing is very much in line with what we thought. Most of it is focused on housing as you would expect in ADC mortgage home equity. Most of the material deterioration continues to be in Florida, Atlanta and metro DC.

I’ll give you just a little color around those markets, although it’s really hard for any of us to get an exact handle on it. I spoke recently to our president in that area, and he characterized it as the beginnings of stabilization. He said clearly inventories are being cleared. There is a net inventory reduction, so we’re seeing net absorption in the marketplace. Sales of new homes have increased meaningfully, largely due to lower rates. Some kick because of the $7,000 tax credit but certainly a lot of activity in that market. And frankly overall as we see through our mortgage activity which I’ll comment on in a minute.

The big negative still in Atlanta is lot inventories which are going to take a while, but frankly while the current projected years to clear are pretty high, that can change very quickly you know once the denominator changes which will change once the inventory starts going down. He gave me some information which I thought was pretty helpful. He does business with a couple of the very largest builders in Atlanta. In fact, one of them controls about 5% of the market and the other one controls about 7% of the market. And in both cases they describe in the last 60 days a significant increase in activity. Traffic is up. More activity. They’re definitely selling houses. So it is moving, which is very good news I think for the Atlanta market. It’s much better inside the beltline where you’ve got good activity and frankly not had that much price decline. Outside the beltline as you would expect you’re having more.

A little color now on Florida. As you probably know the way it works and has historically worked in Florida, it usually starts in the south and works north, so Palm Beach, you know, Miami area got hit first; Tampa Bay, Orlando, Naples, Fort Myers got hit first and it’s kind of moved its way up to the Jacksonville area. Clearly, sales in Orlando and the Tampa Bay area are up over last year. I think that’s a very good sign. Prices are down 20% but still things are moving. Just got some recent information that we now have again positive in migration in Florida. The governor’s prediction which, you know, you might have to discount some, but his prediction is that there’ll be 25 million people in Florida by 2015. I sort of would discount that some, but I will remind you there are 18 million people there today. So it’s a big market and a lot of people creating households still. And so there’s going to be a demand for housing in that market.

So what you’ve got in Florida is that you can’t come up with one summation in Florida. You’ve got to look at the markets. Fort Myers is still a mess. Tampa, Orlando is moving. You know, condos in Miami-Dade are a problem, single family are beginning to move better. So it’s spotty, but certainly not in an aggregate overall freefall like it was a year ago.

DC, northern Virginia is not as bad as Atlanta or Florida. Obviously we’ve got the stabilizing effect of government which is increasing at a rapid pace. Based on the budget projections I think in about six months we won’t have any problems in metro DC. But certainly the market seems to be stabilizing. Prices are stabilizing. Some single family, the further out you go like in [inaudible] County seems to be still declining some but overall they seem to be finding a stable level. So that’s just a little bit of color on those markets.

So what we are seeing is a significant and certainly material increase in non-performers in charge-offs but it is consistent with the absolute level that we had expected. We continue to ramp up our focus, our collection efforts. I mentioned to you earlier in January we, during the latter part of the fourth and going on into the first, we engaged ourselves in a pretty major review of our entire real estate portfolio, particularly focusing on ADC. And that resulted, I think appropriately, in a significant number of downgrades of builder developers. That certainly forced in a number of cases those loans into nonperforming status and pushed on in in many cases to OREO which is really a good thing because it gives us control of the property.

So we do have a higher OREO and non-accruals, but I will also point out to you that as a result of that and some other factors, our 30 to 89 day past dues are down. Our 90 day category is past down as well. I think there are probably four factors that are causing that. One is certainly some of those credits have moved into OREO which again is good. We certainly have put an ever increasing effort into the process. Tax refunds are certainly helping some, and this huge re-fi boom we’re going through creates cash flow at a systemic level and it certainly helps everybody in terms of being able to service debt that they have.

We continue to work with our clients as we always have, trying to work through these difficult times, but frankly we are having to be aggressive when they can’t service their credits we are being aggressive to identify it, corral it and move it into a posture that we can dispose of it. We’re working really hard to stay ahead of the deterioration that we, you know, expect going further we expect will not be at an increasing rate but there will certainly be some contingent deterioration.

We feel good about our 32 basis point allowance build and did that in order to try to make sure we had sufficient allowance. I would point out that in the most difficult area, ADC, our fourth quarter reserve was at 7.7%; we raised it to 10%. I would also point out that our ADC is down $500 million in the first and down $1.3 billion from last year. So not only are we increasing reserves but we’re moving it down at a pretty rapid pace.

The provision expense of, you know, 288 build it was obviously very good. Obviously we substantially [seeded] charge-offs and ended up with a coverage of non-performance at 108 which again is a very healthy level. I would point out that other CRE is holding up well. I know there’s been a lot of questions about where that’s going but for us it’s holding up well. Non-accruals are up to 1.21% but charge-offs were at 0.32 for the first versus 0.70 for the fourth. This is a very granular portfolio for us. The average note size is $515 thousand. You recall from previous discussions we’ve had for a long time a $25 million project limit that we stick to very rigidly and we have had several stages of tighter underwriting standards as the economy has deteriorated.

CNI is doing well in growth. It’s up $3.1 billion first to first 12.7%. Nonperforming loans are 1.24. Here again charge-offs were 0.50 in the first versus 0.68 in the end of fourth. And residential mortgage loans and equity lines, you know we still get some continued deterioration, particularly in Florida, Atlanta and DC. We are like most people actively working in the refinance program with the government’s program with Freddie and Fanny loans. That’s getting underway now. I feel pretty good about that. We have our own re-fi program for our own portfolio, which we are being very aggressive about in terms of working with clients. We’d rather have them find a resolution when they are in difficulty. We have about 70 people working on loss mitigation and resolution mitigation, which may not sound like a large number compared to some institutions but it is a very large number for us.

Retail bank card is performing, I think, very well. Charge-offs are increasing, up to 6.4% versus 4.7 but much better than the industry average. We started seeing that being impacted by unemployment and bankruptcies. That’s likely to have some continued pressure as we go forward. Past dues were down, however, 3.18 versus 3.24 in the fourth. We get some seasonal benefit there out of tax refunds. But I would point out that our bank card portfolio is only $1.2 billion so with some deterioration it’s not a major factor for us.

Autos are doing well given that the auto market is in a crisis. Our past dues are actually down. Even our sub-prime regional acceptance portfolio is down. And on a positive note used car sale prices are actually up at auctions which is a really good, really good sign.

OREO is up significantly as you can see, up to a $958 million. That’s a good thing because we need to get it into OREO when it’s clearly distressed so we can have control of it. It’s mostly in residential ADC. For that reason, we have formed a special group to manage that portfolio, taken one of our senior managers, one of our best starts, put him in charge of that and is kind of running it as a business. So as I’ve described it to him he’s got a $1 billion real estate business to run for the next couple of years and he has built his staff, continues to add to his staff and so for any of our larger loans or complex real estate loans that special group will be handling that, because we found it was important to break out the handling from the routine kind of difficult loans to the more complex, which is what their group is doing.

The good news is when you study the OREO portfolio, houses are moving. And that’s a very good sign. Again the low rates are really helping and so we’re seeing movement out of our inventory just like we are seeing nationally. So it is a problem, I don’t want to understate that, but it’s moving and I think that’s a very good sign. I would remind you that while our real estate challenges are up, it is not unexpected. With the nature of our portfolio, you know, we select really good builder developers, local developers and builders, but you know even the good guys when things stay slow as long as they have, you know at some point they begin to have difficulty. So I would point out to you that just because you have a substantial increase in difficult loans for the BB&T portfolio it does not correlate directly or certainly not 100% correlation with charge-offs because of our underwriting and better collateralization and personal guarantees, etc.

Over the long cycle, and I’ve been at it 37 years now, you know in these times our portfolio deteriorates. But we continue to do significantly better than our peers and I believe that’s exactly what we will do this time. We didn’t do any of the crazy stuff during this whole period. We didn’t do a lot of crazy stuff out of market. We’ve just been doing what we’ve always done which is our bread-and-butter lending to good local builders and developers and we think we will continue to be able to work with them, and have a very good resolution when it’s all said and done.

I will remind you again because there’s seems to be a little bit of confusion that when you look at our charge-offs at 158 you should compare that to 129 for the fourth, and 0.89 for the average of the whole year last year. Obviously it was increasing during the course of the year.

We had said in January that we look for our charge-offs to be in the 150 type of range. We thought it would start out a little heavier and get a little better as we moved through the year. You know, it’s certainly hard to know where this economy’s going. You know, everybody’s beginning to see some green shoots or glimmers here and there. I personally agree with that. I think we’re a long way from being through it, but still as recently as earlier this week when we looked at our projections in terms of charge-offs they still look at that same basic level for the year. So while our non-performers are up our charge-off expectations have not changed materially based on what we now see.

Now, a couple of comments on margin. You will see that our margin shows on the report up 3.57, up 10 basis points, but you remember last time our margin was understated because of the LILO effect. So really you have to compare 357 to 368 so it’s actually about 11 basis points decline. Daryl’s going to give you some real color on that but we still think we’ll be in the 360 range for the year.

Taking a look at quarter revenues and non-interest income, we’re very pleased with our revenue momentum. Net interest income reported was up 32.1%. If you adjust for some purchases and some selected items, it actually when you first calculate it, it would show 1.7% but then if you adjust for that LILO effect in the fourth quarter, remember that was a $67 million net hit to interest income, a positive $17 million to profit because we got the advantages of that in the tax line. So adjusting the net interest income is really up 26%. Non-interest income is on a fourth to first reported basis is 112% but if you adjust for purchases and selected items it’s still a very strong 49%. Even looking first to first it’s 33% reported and 15% on an adjusted basis. The action in there is largely around bonds, insurance purchases, and then of course obviously a very positive change fourth to first with regard to mortgage activity.

So our net revenue growth was very strong, fourth to first on an adjusted basis 20%, first to first on an adjusted basis 13%. Our fee income ratio last first quarter in ’08 was 41.4%. We are very pleased it has moved up to 42.1%.

Just another comment on earnings power. On a reported basis our earnings power for the quarter was $1.061 billion. That’s a lot of money. Even if you take bond gains out its $911 million. So we have a very very strong earnings power engine. If you look at the change from fourth to first, reported is 108%, without bond gains it’s 58% and even excluding purchases it still is a strong 27%. So very strong earnings power.

If you look at non-interest income on a first to first basis, we’re very pleased. We really had improved pricing in two major areas. Business loans are being priced better. We’re clearly seeing an improvement in spreads, particularly on the larger end, as we’re going through a period of re-intermediation from a global perspective. And that’s creating certainly a greater opportunity for pricing. We’ve been very successful in putting in floors while rates are so low and they have been well received and they’re sticking. And then we’ve done a really good job in controlling our deposit costs because frankly because of flight quality and the soundness of our institution, we’re just having a lot of deposit inflow and so we’re able to manage our costs pretty effectively and feel real good about that. That’s obviously helped us substantially in this period.

As we said earlier, great mortgage activity, $188 million for the quarter. If you take out the $28 million of inventory gain, still up 162% versus first quarter ’08. We had a whopping $7.4 billion in originations in the first quarter versus $16 billion for all of ’08, so really, really strong. It’s kind of interesting, application flow slowed a little bit towards the end of March but then it’s come roaring right back in April. So we feel really good about mortgage activity as we head into the second quarter as well.

Other non-deposit fees were up 15.2%, very strong. Service charges were only up 1.3% but remember that that’s good relative to the seasonal decline that we always see in the first. Trust and investment advisory fees were down $8 million. That’s really because of market conditions. As you know, as the market has gone down we simply collect less fees on the adjusted base.

Insurance was up a strong 18.9%. We did have a lot of really good purchase activity during that period of time, but if you look at our growth on a same store basis it’s still at 3.3%. That is really good in that we’re still in a soft market which is down, premiums are down about 10 to 15% so you can see we’re clearly moving market share. Also I’d point out that the first quarter is always our seasonal low point.

Also good news. We are just beginning to see the sunlight with regard to the hardening market returning. We get to see that early because we have a large wholesale operation in CRC and we’re already seeing those prices firm out which is very good.

Investment banking had another steady quarter. Strong debt activity, equity activity is down like it is in most shops. As I said we had have $150 million net security gains net of OTTI and Daryl’s going to provide more detail on that.

If you look at loan growth, we feel pretty good about overall loan growth. Commercial was very strong at 9.9 fourth to first. Direct retail is down frankly. The consumer is pulling back and so certainly we’re seeing a softness there with regard to equity line production and general consumer purposes. Sales finance is about flat. That’s actually pretty good relative to what’s going on in the market and some seasonality with regard to that. Revolving credit is pretty strong at 7. Specialized lending is up a lot at 49.7. There’s some purchase accounting impact in that, in that we found some really good opportunities to buy some very seasoned, very well performing portfolios. That has certainly helped that.

So when you look at loan growth overall, I’d say commercial is very good. Some slowing down at the end of the first quarter. You saw that in the point numbers, but it’s coming back. In April we’ll have to see how that goes. We’re still experiencing strong CNI growth. A really nice flight to quality, particularly in some very, very diverse areas for us like healthcare. That’s because of a lot of the dislocations in the market.

Retail just continues to be soft. I think it’s frankly going to be soft for the rest of the year. Sales finance will just be driven largely by what happens to all the market, but I am convinced that we are moving market share.

I would point out that while we may have some challenges in terms of loans growth for the rest of this year, we’ll see how the economy does, but over time when we get through this glacier I believe there’s going to be a huge opportunity for really good commercial banks like BB&T. Because of this re-intermediation of the commercial bank balance sheets as a huge amount of volume that moved away from us over the last 30 years into capital markets is certainly making its way back at this time, and I think that will go on for 8 to 10 years anyway.

Switching to deposit, that’s a great story for us this quarter. Non-interest bearing deposits first to first was up 9.1% on a link basis, annualized a strong 16.2. [Inaudible] up 7%, link up 34.1 so you can see a lot of momentum there. Client deposits are up 9.4, link up 11.2. So core deposits which excludes client cities over 100,000 is up 10.8, 13.7 on a link basis. So we really feel great about our client growth we’re seeing in both personal and business. Our DDA was up $1.2 billion during the quarter. That’s 9% growth first to first and an annualized 16.2% first to fourth, which is the strongest DDA growth we’ve had in a long, long time.

We continue to do well in organic growth adding 22,000 net new accounts during the quarter. So our really balance sheet story is very strong on deposits, just really no [flies] on it at all. On the loan side very strong commercial, CNI, good diversification. Some softness in the retail space which we’ll have to continue to focus on.

Now let me make a comment about the CPP and stress test. With regard to the CPP I’ll say it’s frankly frustrating that some many people in Washington want to complain about banks not making loans. I don’t know who they’re talking about. I do know that the national numbers show that the aggregate commercial banks grew loans last year, a little over 5%. And if you take out the 8 or 10 very largest banks, the other banks which include BB&T grew over 8%. And we grew stronger than that. We have big, big banners hanging on all of our branches that say, “Still Strong, Still Lending” and we are. Through you know the last couple of quarters we averaged making about $6 billion in new loans every month. With regard to CPP specifically, we’ve added in addition to that a marginal about $1.9 billion in loans where we specifically looked for opportunities to leverage the CPP money in the spirit of the program.

I will say categorically to you that our plan is to repay the CPP as soon as it is humanly possible. I frankly consider the CPP investment in our company to be destructive. It creates excessive controls. It is having negative impacts on our people and strategies. And I think from a systemic point of view and certainly for us it runs a great risk of politicizing the lending process, which is very, very unhealthy. So we consider that investment in our company to be not good and one that we should extricate ourselves from as quickly as possible.

We do have to have regulator approval to do so. I’ll be very clear about that. And so we are building a capital plan that will allow us to do basically thee things. One is to remain strong through the cycle. The second is to be strong capital to take advantage of this huge organic growth we think is coming our way because of re-intermediation and the fact that a number of our competitors are crippled or have gone out of existence. And also importantly to retire the CPP investment.

As to the stress test, we really can’t say much. I think you probably know that. This is a formal bank exam. We’re not allowed to speak about any details with regard to formal bank exams. I can say that we have provided all of the data that has been requested on a very timely basis. We feel good about our presentation of information, and our own projections would expect to losses going forward and including looking forward in adverse economic conditions we feel that we are well capitalized.

Now a comment with regard to dividends, as you know we declared a $0.47 dividend in February. We’re pleased that we covered that with GAAP earnings in the first quarter. As you all know, the dividend issue is a tough issue for us. We have over 60% of our shareholders are retail, many of them have lived on our dividends substantially for a long time. We have a long history of paying a dividend and a long history of increasing our dividend, so it’s just a very, very tough issue for us.

There are many factors that our board will have to consider as we make the next decision. Certainly one of those is the economic projections in terms of what’s going on and certainly recognizing that there still continues to be while some green shoots economic deterioration. Our desire to remain capital strong through the whole process. I would point out to you, by the way, as someone just handed me this morning that Global Finance Magazine’s April issue they just listed the top 50 world’s safest banks, and I’m very proud that BB&T is one of those, and in fact 1 of only 5 U.S. banks in the top 50 world’s safest banks. So we feel good about that.

Certainly the board has to consider the issue of regulatory and governmental uncertainties. And certainly in our capital planner we have to consider our strong desire to pay off CPP. So the board will be considering all of these factors and deciding this quarter’s dividend decision and obviously we will let all of you know at the same time whenever that decision is made.

Now let me turn it to Daryl for some more color on some of these detailed areas and then we’ll have time for questions. Daryl?

Daryl Bible

Thank you Kelly. Good morning everyone and thank you for joining us. I will discuss the following topics with you today, balance sheet management; net interest income; margin; expenses; efficiency; operating leverage; capital and taxes.

Let me first discuss balance sheet management and the margin. As Kelly discussed earlier in the call, link quarter margin was up 10 basis points on a GAAP basis. [Core] margin was down 11 basis points when you exclude one-time adjustment from leverage lead settlement that occurred in the fourth quarter of 2008. The link quarter core margin decrease is attributable primarily to higher volumes of earning assets and particular investment securities that provided a lower spread offset by strong control over liability costs.

Asset yields were down 38 basis points while liability costs decreased 55 basis points. This improvement in liability costs is split evenly between deposits and non-deposit funding categories.

Net interest income on an FTE basis increased $86 million or 32.1% on an annualized link basis. The growth in earning assets, both loans and securities, drove the majority of the increase in net interest income.

On a common quarter basis, net interest income increased $140 million or 13.5%. The net interest margin increased 3 basis points compared to the first quarter 2008. Net interest income was driven by average earning asset growth of $14.9 billion. The margin expansion can be attributed to control over liability costs and asset volumes, offsetting lower asset yields, plus a favorable mix change in both deposits and funding.

On a common quarter basis, client deposits more than funded loan growth on both an average and point to point basis. The last quarter we discussed a strategy to keep the balance sheet at a fairly constant level of approximately $150 billion with mixed change in favor of loan growth over the course of the year. In the first quarter, fervent efforts to drive down mortgage rates created a situation where our longer data investment became much more likely to prepay. We saw an opportunity to shorten the duration of the portfolio and lock in gains in these securities. We sold approximately $12 billion at 30 year MBS in a gain position and reinvested the proceeds in shorter duration securities.

The gross investment gains of $186 million we took OTTI of $36 million which included $21 million of impairment of non-qualified benefit plan. This resulted in a $150 million net gain. This strategy was in process over quarter end which reduced our balance sheet significantly below our target level, but we reinvested most of the proceeds in April and expect our total assets to average approximately $147 billion throughout the year, slightly de-leveraged from the initial guidance last quarter, resulting in stronger capital ratio. We told you in the fourth quarter earnings call that margin would be in the 360 area for the year with the first quarter being slightly below this and building throughout the year. We are right on to slightly above our projection and we continue to feel good about the 360 area margin guidance for 2009.

In the second quarter we may be a couple of basis points below what we achieved in the first quarter, but we expect to see expansion in margin in the third and fourth quarters. So we are pleased with margin results for the first quarter.

We said last quarter that the primary drivers to margin were loan growth, prepayment of mortgages and rates paid on deposits. All three drivers positively contributed to margin in the first quarter. In the second quarter the drivers will be the same and will determine whether we can maintain or improve our margin forecast.

Now let’s take a look at non-interest expenses. Looking on a common quarter basis, non-interest expense increased 14.3%. Excluding purchases and other special items, non-interest expense increased 7.3%. The increase was driven by $29 million in additional FDIC insurance expense, $22 million due to increased write-downs of foreclosed property and repossession expense, $16 million on pension plan expense, and $17 million on credit related legal and professional fees.

Offsetting these increases are a decrease of $10.2 million in advertising and public relations expense.

Looking on a link quarter basis, non-interest expense increased 22.8% annualized. Excluding purchases and other special items, non-interest expense increased 10.1% annualized. The increase was driven primarily by $21 million due to changes in the market value of Rabbi Trust, $20 million in FDIC insurance expense and $20 million in pension expense. Offsetting the increase in non-interest expense was $17 million in cost containment for advertising and marketing, $8 million salary and $8 million in professional expenses.

As we mentioned in the fourth quarter earnings call, our plan includes a 2 to 4% increase in non-interest expense. Adjusting for the Rabbi Trust expense, which offset equally as other non-interest income, non-interest expense grew 2% on an annualized link quarter basis. So we hit our first quarter target. And at second quarter, a special FDIC assessment while challenge BB&T to keep our expenses within the 2 to 4% target range.

Looking at full time equivalent employees, positions decreased 561 in the first quarter through a combination of attrition, job eliminations in connection with strategy changes, and cost control efforts. This decrease excludes FTE’s added in acquisitions. Also we closed net seven branches in the first quarter in conjunction with normal branch consolidations. For example, combining two branches into one location.

So we are pleased with our non-interest expense control in the areas of controllable expenses such as core salaries, travel and supplies. We have favorable variances compared to our 2009 plans.

Turning to efficiency, we are pleased with our progress in this area. GAAP efficiency improved from 50.9% for 2009 compared to 52.3% for the first quarter of 2008. Cash efficiency improved from 52.6% in the fourth quarter to 49.8% in the first quarter, due largely to strong growth in revenues. Breaking the 50% level on cash efficiency is a nice achievement and we are pleased with this result. We remain focused on containing controllable expenses and even in the face of higher costs associated with our problem loans.

We are pleased to have generated positive operating leverage in the first quarter of 2009, both on a link quarter and common quarter basis, especially in light of the challenges facing all financial institutions in this economic environment. This continues a nice trend from 2008. We remain focused on achieving positive operating leverage throughout 2009 and consider the impact of operating leverage carefully when making strategic decisions.

With respect to taxes, our effective tax rate for the first quarter was 26.4% which is consistent with lower pretax earnings. In addition, we have a higher portion of our pretax earnings being derived from tax exempt loans and securities, and an increase in tax credits. For the remainder of 2009 we expect the effective tax rate to be in the 26% range.

Finally, taking a look at capital, our regulatory capital ratios remain very strong, including the investments by the U.S. Treasury in conjunction with their capital purchase program. Our leverage capital ratio was 9.4%, Tier 1 capital was 12.1% and total capital was 17.1%. Excluding the CPC investment our Tier 1 capital ratio was 9.3% and total capital was 14.3%, both significantly above low capitalized minimums and above our own capital targets of 8.5 and 12% respectively.

Our tangible common equities or risk related asset ratio was 7.1%, which is above the 6% Tier 1 minimum for well capitalized banks, and obviously excludes our preferred stock and hybrid securities. These ratios place us in the top tier of other large financial institutions. Additionally, we saw improvement in our tangible common equity which came in at 5.7% compared to 5.3% at year end. So we continue to be one of the strongest capitalized financial institutions.

I did want to mention that we did not adopt a change in fair value accounting this quarter, but we plan to do so at second quarter. This change should provide modest improvement in OCI by the end of June.

In summary, let me say that even though we continue to face credit related challenges, our underlying performance remains strong. Our balance sheet growth and margin trends are good. Liquidity and capital are very strong. Deposit growth and mix are very positive, and we are focused more than ever on expense control and generating positive operating leverage.

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 Q&A segment of this conference call, I’ll 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 inquiry and one follow up. Therefore, if you have further questions please re-enter the queue so that others may have an opportunity to participate.

Steve, could you please explain the process?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Jason Goldberg - Barclays Capital.

Jason Goldberg - Barclays Capital

I guess I was a little bit unclear on your charge-off outlook. I think you mentioned last quarter 140 dips, with first half being higher than the second half. Is that through your view you reiterated or you thought it would be something different?

Kelly S. King

Say that last part again, Jason?

Jason Goldberg - Barclays Capital

Is that the view you reiterated this morning or was it intended to change it?

Kelly S. King

No. That’s basically fine. We basically said last time that we thought it would be in the 140 to 50ish kind of range. We thought it would start out higher earlier in the year and then it would moderate some towards the end of the year, and frankly that’s basically the same kind of numbers we’re looking at now.

Jason Goldberg - Barclays Capital

And then when looking at the EDC book, I guess MP is up about 100 bips and charge-offs I think were kind of you know in the sub-2% last quarter and now I guess over 5% this quarter. How should we think about that figure going forward?

Kelly S. King

Well, I think first of all that portfolio is declining and will continue to decline so the percentage of charge-offs is mathematically, you know, you’ll see a little bit of that. I don’t think you should think in terms of that rate of change from the fourth to the first as being a curve or linear kind of expectation. Frankly, as I alluded to during the latter part of the fourth and the first, we did a very, very intensive review of all of our ADC portfolio and we consciously decided to be very aggressive, you know, because we did not want to get behind the curve on this thing. And so we were very, very aggressive in terms of pushing these loans to a resolution, so that did two things. It drove the charge-off rate up and did also drove the non-accruals, the nonperforming assets up.

Daryl Bible

Jason, one other thing just to point out is if you’re comparing our credit supplements from this quarter those are first quarter numbers. And if you look at the fourth quarter, that credit supplement, those were year-to-date numbers. If you calculate the fourth quarter charge-off rate for this portfolio it was 2.81% in the fourth quarter.

Jason Goldberg - Barclays Capital

Kelly, you mentioned a couple of times in the call here your desire to repay TARP. I guess, what’s holding you back?

Kelly S. King

Well, good question, Jason. Right now we are not allowed to apply to pay it back until after the stress test is complete. So, you know, the top 19 banks are involved in that stress test and we’ve been told we could not apply until asset resolution of that stress test. So that’s the main answer.

Operator

Your next question comes from Christopher Mutascio - Stifel Nicolaus & Company, Inc.

Christopher Mutascio - Stifel Nicolaus & Company, Inc.

I had just a follow up to Jason’s question, I guess. Kelly when your comments on the call this morning typically were pretty bullish on Georgia and Florida and Virginia, I think, from a residential housing perspective. I’m having a hard time reconciling that with the charge-off levels you see in the ADC portfolio from the fourth quarter levels to today. Is there going to be a lag effect? In other words, will your charge-offs continue to go up even though as you say you’re seeing stabilization in all three of those markets?

Kelly S. King

Well, what happens is in terms of the market itself you see a – when it first starts out, the process starts out, you have a building in inventory as projects are being completed and sales are going down. Then as the market itself moves along towards recovery, you see lower building first and that begins to slow your inventory build. And then at some point you see actual exiting inventory, and then you begin to have net absorption.

So what I was saying is we now are seeing net absorption for the market, okay? And that’s very good, although at lower prices. And in terms of our own inventory, you know, because we do select the better builders and we do have stronger builders or builders that [guarantee] etc., they can hang tough longer. But even as it gets worse some of them begin to experience problems. So what we saw into the latter part of the fourth and this first was a number of those builders had kind of hit the wall and needed to be resolved, and that’s what drove our charge-offs and our non-performers up during the first.

So frankly given that the market is now in an absorption space that does two things for us. One is it helps us move our OREO portfolio out and we already see that. Secondly is it will improve the odds of some of those that are still hanging on making it because they’ll begin to see some cash flows from inventory moving. So I think, Chris, it’s too hard to say if this is an exact bottom. You know, everybody’s got their projections. But my own sense is the second quarter will be pretty tough, but by the time we get into the third and fourth I really think you’re going to begin to see some meaningful improvements across the entire economy and certainly even in these distressed markets. Does that make sense to you?

Christopher Mutascio - Stifel Nicolaus & Company, Inc.

It does. My follow up question is kind of unrelated. If I did my math right, the gross security gains and I think it was just reiterated on the call was about $186 million and look at the MSR was another $28 million kind of net right up with the hedging gains on top of the valuation write-down. And a couple of those together is about $214 million. It looks like that’s about 50% of BB&T’s pretax earnings this quarter came in those two, I guess because they’re non-core items. Are you comfortable kind of paying your dividend out with those non-recurring gains contributing that much to the pretax line item?

Kelly S. King

Well, you know, if you’re going to take out those gains, Chris, it’s fair to also look at unusual reserve build in the period. It’s also fair to look at the $36 million or so in OTTI. It’s also fair to look at the $11 million or so in severance costs. So I think it’s unfair to just pull one or two positive items out and not look at the others.

Christopher Mutascio - Stifel Nicolaus & Company, Inc.

Well, I think that’s fair, but I guess I was looking at it –

Kelly S. King

But your underlying question is still a fair question. So your real question would be okay, even if you consider all the positives and all that you made $0.48. If you want to take all the positives out you’re down to $0.33, you know, how do you feel about dividends? So what we’ve said in the past and what I would reaffirm is that when we look forward, if we don’t feel comfortable that our projections allow us to fairly comfortably cover our dividend, that is a significant reason that our board would have to consider a reduction.

Christopher Mutascio - Stifel Nicolaus & Company, Inc.

I guess my follow up to that was do you project investment security gains like that going forward then?

Kelly S. King

No.

Operator

Your next question comes from Brian Foran - Goldman Sachs.

Brian Foran - Goldman Sachs

What unemployment rate are you assuming in your credit outlook?

Kelly S. King

Well, if you look at the aggregate national level, you know, you’re at 8.5% now. We think it will likely peak at around 9.5%, some people think 10. We think it’s around 9.25 to 9.5%.

Brian Foran - Goldman Sachs

And then I guess I think you assumed 8.4 at your investor day but now your charge-off guidance hasn’t changed. So what are the offsetting macro factors?

Kelly S. King

Well, you are seeing a quick resolution of the non-performers. They’re moving through the system frankly a little faster than we had thought at one point. And the unemployment rate going up doesn’t impact us as much as you might think in some portfolios. For example, when you look at some of the very largest institutions, you can correlate 1% increase in unemployment creates X amount because of huge credit card portfolios. Our credit card portfolio actually correlates at about 0.83 increased charge-offs to 1% increase in unemployment. But we only have a $1.2 billion [inaudible] portfolio so you’re talking about $10 million.

Brian Foran - Goldman Sachs

When you talk about the resolution of MPAs and when we look at the foreclosed real estate line item up $420 million in the quarter, can you give us the inflow and outflow to OREO this quarter?

Kelly S. King

I don’t have those exact numbers in terms of actual inflow and outflow. Obviously what you saw was the net increase. The outflow I can tell you has in the last just few weeks has increased significantly. It’s been kind of interesting over the last let’s say four or five weeks, what we’ve seen is the first wave of this huge mortgage quarter was huge re-fi. Then in the last five or six weeks you’re seeing a much higher percentage of purchases as people are moving into particularly first home purchases. So what that’s doing for us is moving a lot of our inventory out. So we can get you the exact number. I’ll have Tamera follow up with you. I don’t recall those exact numbers.

Operator

Your next question comes from Kevin Fitzsimmons - Sandler O'Neill and Partners, L.P.

Kevin Fitzsimmons - Sandler O'Neill and Partners, L.P.

I’m just curious. I want to take a step back. I know you’re talking about how your expectations for the different parts of the portfolio, you know, your expectations for the economy. The fact that your confidence in your underwriting, how the same degree in nonperforming doesn’t translate in the same amount of losses. Just wondering, you know, you had this quarter such a big, nice and a lot of banks are going to get this, such a nice boom in mortgage related business, mortgage related revenues and you had the bondings.

Just trying to reconcile the thinking, why not take the opportunity to take a bigger chunk of that and really increase reserves more meaningfully? It seems like when I talk to some investors out there the main issue that they’re just less comfortable with is that the degree of which the reserve has been increased. And so why not just take that opportunity in case you’re wrong, in case it ends up being the expectations for the second half of the year end up proving too optimistic? If unemployment ends up going a lot higher, if North Carolina commercial real estate ends up deteriorating a lot more than you think, why not take a quarter like this and focus less on the bottom line number and just really bulk up that reserve? Just one follow up after that.

Kelly S. King

That’s a fair question, but here’s the reality. Two points. One is you really can’t do that in today’s – if you follow GAAP and you follow your accountant’s advice you can’t just arbitrarily say well let’s just throw in a few hundred million dollars in there. Your reserve is built up loan by loan, literally, up through your risk adjusted mathematical modeling analysis. And it – I mean it creates the number. So even if we said well let’s just go ahead and take another $0.10 and throw it in, you can’t do that. So I’m not saying a few haven’t looked like they’ve done that, but it is not proper GAAP handling.

Kevin Fitzsimmons - Sandler O'Neill and Partners, L.P.

Well, I guess to be fair, though, it is – does all come down to your model and if you guys made the conscious decision to let’s, you know, we think this; this is our base case, but it may very well come in much worse than our base case and let’s base our model on that.

Kelly S. King

Yes, you could make that argument. You’ve got to have substantiation, but sure you could. And then the other point though, I think, Kevin, which is I think it’s kind of an interesting one, I don’t frankly want to build a reserve even as you said I can’t control it, let me qualify that. I don’t want to build a reserve any higher than it needs to be because I think whatever we all get it up to, it’s going to be locked in there for awhile. See, we’ve got to resolve this underlying philosophical question which unfortunately is now [leafed] on the table for discussion about how the reserve ought to really work. Which as you know we really ought to build it up significantly in good times and let it come down in bad times. We do it exactly the opposite.

So my concern is if you build that reserve too high, just to add this super extra protection, it’s just a huge dent. Every loan you make is at that additional reserve level. You’re just dragging earnings and it’s not fair to the shareholder. So we will do whatever is required, earnings not considered in terms of building reserve as we think appropriate. But we’re not going to over build it because it’s not fair to your shareholder looking forward.

Kevin Fitzsimmons - Sandler O'Neill and Partners, L.P.

It seems like you’re being very clear about the fact that the board is going to really consider the fact that you want to get out of TARP as soon as humanly possible, the fact that I would think the regulators in approving you for that would look at are you doing everything you can to preserve capital and whether you’re earning your dividend. When does the board next consider that? Time wise, when is that going to come up?

Kelly S. King

Well, it would considered no later than June.

Operator

Your next question comes from Nancy Bush - NAB Research.

Nancy Bush - NAB Research

Two C income questions. Deposit service charges went down fairly substantially sequentially and I’m just kind of thinking here you’re saying that you’re getting a lot of deposits in and accounts are increasing, and it’s not just a problem for you. I mean, I’m seeing this throughout the industry. How come deposit service charges aren’t going up?

Kelly S. King

Are you talking about link quarters?

Nancy Bush - NAB Research

Yes.

Kelly S. King

Yes. Well, you always have a huge seasonal impact the first quarter because what happens is people get, you know, in the fourth quarter particularly around the end of December you get a lot of fees and all because people use their cards and all for Christmas. And then they get their tax refunds and they pay it down, so you don’t have as many service charges. And then about April or May it starts going right back.

Nancy Bush - NAB Research

So you expect it to start climbing from here?

Kelly S. King

Oh yes.

Nancy Bush - NAB Research

And also the insurance commission’s number actually was bigger than I expected in the quarter. You actually were up sequentially and I expected you, because you know you get the year end payment of commissions, etc., I mean what’s going on there?

Kelly S. King

That’s really, really good purchase activity. We had a number of deals during the year and two very large ones towards the end of the year. And so that’s what that is.

Nancy Bush - NAB Research

Could you just kind of comment on the tenor of just the pricing markets right now?

Kelly S. King

For insurance?

Nancy Bush - NAB Research

Yes.

Kelly S. King

We’re trying to figure that out right now, Nancy. Frankly it is adjusting down because the industry is in a prolonged period of a soft market. And while everybody expects it to come back, and we do too, you know we are being more conservative looking at deals today in terms of our cash flow expectations because if you miss it by just the first two or three years in terms of net [inaudible] the value, it makes a lot of difference. So we’re being more conservative and I think others are too. I think you’ll see some downward pressure on insurance prices as we go forward. There also were accounting changes at the beginning of the year with regard to how you do insurance deals. Before you could do them and you could do earn out arrangements and those earn out which in some of our cases were significant actually accreted to goodwill. And now it has to be – you have to compute the net present value of the future expected earn out and amortize it from day one.

Nancy Bush - NAB Research

Is it still your impression that you’re picking up market share?

Kelly S. King

Absolutely. See the premiums are down still close to 15% and on a same store basis we’re up 3%.

Operator

Your next question comes from Betsy Graseck - Morgan Stanley.

Betsy Graseck - Morgan Stanley

I had one question I just wanted to understand your answer to on the reserve and I completely agree there’s still [difficulty] as to how we’re going to reserve going forward, but I just wanted to understand. Are you suggesting that let’s say you end up at, you know, a 2% reserve that all new loans going forward you think you’d have to reserve that 2% against? Or you’re just going to have to match your, you know, provisions with net charge-offs?

Kelly S. King

Today that’s just the reality.

Betsy Graseck - Morgan Stanley

But you’re anticipating that – your kind of worse case scenario is that you’re going to have to just maintain that ratio going forward?

Kelly S. King

Yes. Right. I think it’s risky. My best case is if we’ll keep the rules the way they were, then when we get through this correction we’ll recapture them, right?

Betsy Graseck - Morgan Stanley

Sure.

Kelly S. King

If we revisit it philosophically, we’ll be at a new level. And frankly you may even build it through the good times. If the new GAAP and SEC pronouncements are that we can bring it back down in bad times.

Betsy Graseck - Morgan Stanley

Sure.

Kelly S. King

We’ll have to see. But for right now, I have to plan on what reality is which is when I build it to 2, the next loan I make I’ve got to put it in at 2. And it kills margin. I mean, it’s not fair to your shareholders if you push it too up. I think people are making some big mistakes with regard to that.

Betsy Graseck - Morgan Stanley

I’m just wondering if there’s a thought that your new loan would be made with a general reserve that would reflect the credit losses over the life of that reserve which is incremental to what was going on in the past several years, but it reverts back to how we operated in the early 90s at least.

Kelly S. King

Well, in theory, you kind of look at loan by loan and you kind of grade it and risk assess it and create a reserve based on that risk assessment. But the reality is, in the marketplace you look at it just like the questions you’re raising. Right? So even if we were booking loans, super high quality loans right now, do you think in this environment people would feel good about me reducing the reserves?

Betsy Graseck - Morgan Stanley

Not yet.

Kelly S. King

So you see there’s an overriding psychological factor that’s not mathematical.

Betsy Graseck - Morgan Stanley

My separate question is on your new loan growth and where you’re making new loans. Can you give us a sense of the type of borrower that you are lending to? It’d be great to understand what kind of risk bucket they fall into.

Kelly S. King

Well, I will say that across the board the new borrower is much better risk relative to the average risk of the current portfolio. Okay? Frankly because we’re underwriting tighter and we are improving our mix. So for example, you know, a good bit of our CNI growth over the last year has been in the healthcare industry. So we’re making loans to some of the very, very best hospitals, universities. You know, the largest and best. We’re getting a huge total. We’re only doing it if we get the total relationship, so we’re getting huge checking accounts and deposit accounts and insurance service revenues, etc.

On the other CRE, we’re certainly not making today real estate loans. But there are some – there’s been thus huge flight to quality, and what’s happened is typically and many times I’ve seen over my 37 years, some large institutions just shut down everything. And so everybody [obviously] is not bad. So we’re getting some really, really good deals in some hotel properties and some apartment properties, which are performing extraordinarily well. And based on demographics, we think will continue to perform extraordinarily well. Good cash equities. Good guarantees. And so forth.

On the consumer side, we’re getting really good traction now in our whole kind of refocused wealth management strategy, which is creating some really nice much better risk consumer loans for us for wealthy clients. And then the new loans in terms of average portfolio clients that we’re booking are probably a better quality just because the current underwriting with regard to equity lines and that kind of thing is just tighter than it was some time ago.

Betsy Graseck - Morgan Stanley

And when you say that you anticipate it’s an eight to ten year trend for on boarding of loans back onto bank balance sheets off of the capital markets, is there any – what are you thinking through to get to those numbers? The eight to ten years?

Kelly S. King

Well, here’s what happened, Betsy. 35 years ago when I first started making loans in Charlotte, North Carolina at that time the commercial banking system, now you can include in it thrifts way back then, made about 80% of all the loans. And the same loans that I made then up until recently we lost 300 basis points in price. And all of that occurred and the last year or so the commercial banking system only made about 30% of the loans down from 80% 30 some years ago.

So what happened over that 30 year period of time was we had this huge dis-intermediation into the capital markets which was under reserved, under capitalized, created a lot of the problems we have today, and that’s gone. And so we’re going to see – I mean, it may be 25 years but it’s at least eight to ten years of re-intermediation because those capital markets while they will recover some I don’t believe - it’ll be a long time before the memory of this disaster goes away. So even though we do everything we can to create – you know get the [inaudible] conduit market moving, it’s going to only move with better capital structures and better reserves. They wanted to capitalize under reserved and under pricing. That’s what drove the prices down 300 basis points. That was the problem.

And so I think even if it starts back up, it will be priced more similar to what we price it at. So we’ll still get our share of the volumes. So I just think that – see we had the contact with all those clients and always have had. It’s just that the capital market took – the contact we had couldn’t overwhelm a 300 basis points difference. Now that the points are at pure volume, capacity’s gone; certainly the spread’s going to be gone. We’ve got the relationships. We’ve got the checking accounts. We’ve got their insurance. We see them at church on Sunday. We control the volume.

Operator

Your next question comes from Mike Mayo – CLSA.

Mike Mayo – CLSA

How much has the OREO been written down to?

Kelly S. King

Okay, so what we do with OREO is when it goes into OREO we are very disciplined and conservative about marking it to this approach. We get one, two or three appraisals depending on the size of the loan, the variation between the appraisals. So for example we’ll get two and if there’s a big variation between two we get a third. And then whatever we judge to be the final appraised value then we write it down another 10 to 30% depending on the class of the loan. So when it goes into OREO it goes in discounted below the then existing market price.

Mike Mayo – CLSA

So you have about $1 billion of OREO. How much has that been written down?

Kelly S. King

Well, probably – we could get you some exact numbers on that, but probably on average probably 20%.

Daryl Bible

This is Daryl. I would say it’s probably in the low 30% range, Mike. Because we first take a mark when it goes into nonperforming and then we take – this is the valuation that Kelly talked about, when it goes into OREO.

Mike Mayo – CLSA

And then on the $7 billion you have in construction loans, you have 10% reserves. What’s your cumulative mark that you’ve taken on that part?

Kelly S. King

I don’t remember that number. Daryl do you?

Daryl Bible

I don’t have that specific one, Mike. We can get you that.

Kelly S. King

We’ll get you that.

Mike Mayo – CLSA

Just as a side, you had a foreclosure moratorium, so wouldn’t that have made it easier to absorb property? You seem a lot more bullish on the housing market than an expert I just had on a conference call. I’m trying to reconcile the two. So how do you see the foreclosure moratorium having had an impact this quarter?

Kelly S. King

Well, I think the foreclosure moratorium, you know, certainly slowed the amount of inventory hitting the street. But it’s hard to know exactly how much that did, because keep in mind in a lot of these cases, like in Florida for example it takes a year from the time you start, it takes a year and sometimes more to get through the process and put it on the street. So, you know, it’s only been like 60 days these moratoriums were in place. I don’t think it’s a big – some people are saying that was a big impact. Now we turn it back on. Now we’ll go flood the market. I think that’s over stated.

Mike Mayo – CLSA

I wasn’t clear on another answer you gave. So your expectations for unemployment were at 8.5% and now they’re at 9.5%, but your expectations for losses and credit quality is the same? Or did I misread that?

Kelly S. King

Yes. We said basically in the beginning of the year I think we actually said the losses would be 140 to 150 and now we’re saying it’s going to average into 150. So you could argue that that’s up a little bit, but as I think I mentioned earlier maybe I didn’t complete my point earlier, the rise in unemployment does not correlate with our charge-off performance as directly as it does a lot of the larger companies where they have huge credit card portfolios, different underwriting standards with regard to purchased equity line portfolios, out of market, etc., etc. Don’t get me wrong; it does affect us. But it doesn’t have the same proportion effect to us that it does others.

Operator

Your next question comes from Paul Miller - FBR Capital Markets.

Paul Miller - FBR Capital Markets

With the mortgage banking, because everybody’s been including yourselves reporting very favorable mortgage banking income, I was wondering can you talk about the sustainability of that income going forward? And also what type of servicing value are you booking on new servicing rights?

Kelly S. King

Well, I think the sustainability of it is relatively strong. I think we’ll have a very strong second quarter. You know, so let’s say we did 7.5 bigger in the first. You know, we might do 6.5 in the second. It’ll certainly start slowing some as we go through the year. I mean, you know there are only so many loans out there to be refinanced. But keep in mind that as rates stay down and as the economy continues to improve, as this several trillions of dollars of monetary and fiscal stimulus moves in and the psychology improves you begin to get [inaudible] purchases accelerate. So I think you’re going to have a very strong year in total. I don’t think it’ll be 4 times 7 is 28, you know, but it’s going to be really, really strong versus the $16 billion we had all of last year.

We can get you the detail on the exact booking of the MSRs. I can tell you in talking to our people that we very consciously booked the MSRs very conservatively in terms of our expected duration and the convexity of the mortgages, so we intentionally book it very conservatively.

Operator

Your next question comes from Thomas Mitchell - Miller Tabak & Co., LLC.

Thomas Mitchell - Miller Tabak & Co., LLC

I was just trying to look at your reserving policy slightly differently and maybe you can provide a little more detail. At the end of the first quarter of 2008 your loan and lease loss reserve was 144% of your non-accrual loans and leases. So we’re excluding the OREO. Now it’s 108%. It seems like there shouldn’t be a rule that requires you to do that in the accounting profession that says oh, well, as your non-performers go up your reserve to non-performers goes down. So I’m a little confused about why you feel driven by the accounting rules not to put up more in reserves.

Kelly S. King

Well, the accounting rules don’t deal specifically with the ratio of reserve to non-accruals. The accounting rules deal with the ratio of reserve to loans. And so the purpose of the reserve is to deal with expected [audio impairment] and you run these calculations to derive that number. So that’s how that drives. Then your ratio to non-accruals moves kind of moves up and down. There’s always been a little bit of kind of an unwritten industry rule that you’d like to try to keep it around one, although in past histories for us and for others it has gone below one. Because as you hit the bottom of the market, you don’t expect your reserves relative to your non-accruals to be as high. I mean even when it’s - you take for example [data] at 108, I mean that’s assuming that all of your non-accruals are going to be 100% loss. I mean, that’s ridiculous.

Thomas Mitchell - Miller Tabak & Co., LLC

I respect that. I understand that.

Kelly S. King

So it’s not – the GAAP thing is not about the recovers to non-accruals.

Daryl Bible

The other thing to remember is from an accounting perspective, once the assets in OREO if there’s any other further mark that is required to get it off the balance sheet, that becomes an expense and does not go through reserve.

Thomas Mitchell - Miller Tabak & Co., LLC

And then a totally unrelated question, when you took the money from the federal government, didn’t they get warrants to buy stock?

Kelly S. King

Yes, they did.

Thomas Mitchell - Miller Tabak & Co., LLC

How do you account for that and how do you get out from under the potential dilution of that?

Kelly S. King

Well, you don’t get out from under the potential dilution. That’s the reason when we said before, remember, it’s 5% after tax, so keep them. We calculated the implicit cost for that preferred stock, it’s about 5.8 which is the implied cost of the warrants. So when you exit, you can retire the warrants or you can actually leave the warrants outstanding. And then they have certain terms on which they can convert. So you just run the math in terms of the future cost of capital of the increasing stock value versus the penalty to retire the warrants up front.

Operator

Your next question comes from Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

I wanted to ask you a question on paying back the TARP. What do you think that most likely looks like? Is it possible to pay that down piecemeal or do you pay it down with cash or do you replace it with a preferred or do you replace it with a common?

Kelly S. King

Well, Jefferson, that’s exactly what I think everybody’s trying to figure out now. Part of that is just financial evaluation. Part of it is what form of payment the regulators or the Treasury will allow. For example, we could argue that we could just write a check for $3.1 billion today and pay it back period, because we view ourselves to be well capitalized and viewed ourselves to be well capitalized before we got the $3.1 billion. So we have to see what kind of expectations they put on us in terms of any reconstitution of that capital as we go forward. And at this point that’s indeterminable.

Jefferson Harralson - Keefe, Bruyette & Woods, Inc.

And Daryl one question for you. On the OTTI mark can you tell us generally what the OTTI mark was on and with the new accounting rules next quarter can you get a recovery on that? Or do you split it out between the liquidity and the credit loss of the OTTI?

Daryl Bible

Sure Jefferson. The OTTI mark was a total of $36 million. I said 21 was in a non-qualified OTTI mark which were basically equity [piquity] securities in that pension plan. The other portion of that was just equity securities held in the investment portfolio. As far as when we looked at adopting the new fair value accounting mark, we have models that price the securities as well as the pricing service. When we looked at it in a lot of detail, it really comes down to how you weight the two prices and we might see a slight benefit there, but it really comes down to how you do the weighting. So right now we don’t see it as a huge benefit. It might be a tenth at most of a basis point.

Operator

Your next question comes from Edward Najarian - ISI Group.

Edward Najarian - ISI Group

I guess my first question kind of follows up on Mike’s question where he asked about the write down of the OREO. Are you able to give us more broadly how far you’ve marked down approximately on average the whole $2.75 billion of nonperforming assets?

Kelly S. King

You mean like a dollar number or percentage?

Edward Najarian - ISI Group

Yes, like a percentage number would be fine. Just like an average percentage number for the write-down on that $2.75 billion.

Kelly S. King

I would say that probably on average for the total portfolio would be more between 20 to 25% level.

Edward Najarian - ISI Group

And then my follow up question is you’ve spoken a lot on the call today about the idea of charge-offs potentially declining in the second half of the year, or at least the ratio of decline in the second half of the year. And it seemed like a lot of that was driven around on the idea that you’re ahead of the curve on your residential construction portfolio. But as I look at the charge-off detail, on all the different loan categories, see pretty noticeable increases link quarter across every loan category in terms of the credit loss ratio.

And I guess my question would be what gives you the confidence that your charge-off ratio can go down in the second half of the year when number one, you’re still seeing increases in credit losses across all loan categories? Number two, real estate prices are still depreciating. The unemployment rate’s still rising. And pretty much every other bank we talk to is indicating that they expect charge-offs to be higher in the second half of the year than the first half of the year. So I’m just trying to understand where you guys are different versus everybody else.

Kelly S. King

Well, you know, everybody bases there – I assume their projections based on their then existing analysis of their portfolio. Everybody’s portfolio is different. Ours is based on our portfolio. I think the general factors that give us optimism when we go into that is as I reported we did have a reduction in the first in 30 day to 90 day past dues and 90 day plus. That’s certainly a positive.

We are certainly seeing positive indications in several markets that are most distressed as I indicated. I personally think that while things look pretty gloomy right now, I don’t want to gloss over that, but I believe that again you can’t forget that we’re just putting trillions of dollars of monetary and fiscal stimulus into this economy. I mean, M2s for the last six or seven months were on a 20% annualized growth rate.

You know, based on all the econometric models and certainly based on my own practical experience, that really begins to get things moving after a while. And so yes, we saw a big run up in the first quarter. That’s the nature of the kind of portfolio that we have. You know, these builders, the ones that are weaker they kind of run together as a group and they just kind of run into a wall. So whether or not our forecast becomes true or not is a function of whether or not our thinking in regard to the economy turns out to be true.

If you think the economy is just going to really, really tank in the second half then we’re wrong. If you think the economy is going to – so we had a 6.3% negative GDP in the fourth. Most people I see are projecting around 5% for the first. The projections that I’m looking at show moving on down to into 2 to 3 range in the second and then moving positive into the whole year of ‘010. If that occurs and Fed keeps rates low, which I’m convinced they will, I say that by the way I always have to say this since I’m now on the Federal Reserve Board in Richmond, I’m giving you my personal opinion not a member of the Board, then that’s very stimulative in terms of housing sales. As housing sales improve, it is really good across the board for any bank and it certainly is very good for us because of our real estate concentration.

Daryl Bible

One point to add, Ed, is if you look at the detail on the credit supplement, and if you look at the fourth quarter charge-offs versus first quarter of this year, our other CRE category’s actually down. It went from 69 basis points to 32 basis points. You are correct in the other three categories. They did increase. But we did have that one category that decreased.

Operator

Your next question comes from Albert Savastano - Fox-Pitt Kelton.

Albert Savastano - Fox-Pitt Kelton

On the loan review that you mentioned that started in the fourth quarter going to the first quarter, it sounded like you were surprised a little bit there. Can you explain to us exactly what happened?

Kelly S. King

Well, you really had two things. One was during that period of time the economy really slowed a lot. It was really interesting. From like mid-November through February, March, there was a marked significant change in the rate of decline in the economy. I personally think what happened was you remember back then, mid-November, that’s when Paulson, Bush and everybody trying to get the stimulus bill passed, they were on TV about every other day telling everybody that the world was coming to an end. And it scared everybody to death. And I think you’re heading into the winter, the President of the United States says the world is coming to an end, people just stuck their hands in their pocket and they stopped spending dead.

So yes, you know, the market deteriorated much more rapidly than I think anybody thought during that period of time. And then secondly we charged our people to be really aggressive. We wanted to try to, if possible, get ahead of the curve and so we charged them to be really aggressive in terms of evaluating the credits in the moment as they call it, and grade it the way it is based on right now, not what you think it’ll be a year-and-a-half down the road when they get through the cycle. You’ve got to grade it what it is today. And that kind of a focus accelerates your charge-offs in some cases and it certainly accelerates your nonperforming loans.

Albert Savastano - Fox-Pitt Kelton

That review was on the entire ADC book or is it just Florida?

Kelly S. King

That was the entire ADC book.

Tamera Gjesdal

Although we have a number of callers remaining in the queue that do have questions, due to time constraints this will conclude today’s Q&A session. If you have additional questions or need further clarification, please contact the BB&T Investor Relations department. And we thank you for participating in today’s conference call. Have a great day.

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