Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

BB&T (NYSE:BBT)

Q2 2009 Earnings Call

July 17, 2009 11:00 am ET

Executives

Tamera Gjesdal - Senior Vice President, Investor Relations

Kelly S. King - President, Chief Executive Officer, Director

Daryl N. Bible - Chief Financial Officer, Senior Executive Vice President

Analysts

Craig Siegenthaler - Credit Suisse

Chris Mutascio - Stifel Nicolaus

Nancy Bush - NAB Research

Brian Foran - Goldman Sachs

Greg Ketron - Citigroup

Paul Miller - FBR Capital Markets

Christopher Marinac - FIG Partners

Jordan Heimowitz - Philadelphia Financial

Gary Tenner - Soleil Securities

Todd Hagerman - Collin Stewart

Jefferson Harralson - Keefe, Bruyette & Woods

Jamie Peters - Morningstar

Al Savastano - Fox-Pitt Kelton

David West - Davenport & Company

Operator

Greetings, ladies and gentlemen and welcome to the BB&T Corporation’s second quarter earnings 2009 conference call on Friday, July 17, 2009. (Operator Instructions) It is now my pleasure to introduce your host, Ms. Tamera Gjesdal, Senior Vice President of Investor Relations for BB&T Corporation. Please go ahead.

Tamera Gjesdal

Good morning, everyone. Thank you, Gwen 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. Whether you are joining us this morning by webcast or by dialing in directly, we are certainly very pleased to have you with us.

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

Before we begin, let me make a few preliminary comments. BB&T does not make predictions or forecasts. However, there may be statements made during the course of this call that express management’s intentions, beliefs, or expectations. BB&T's actual results may differ materially from those contemplated by these forward-looking statements. Additional information concerning factors that could cause actual results to be materially different is contained 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.

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

Kelly S. King

Good morning. Thank you, Tamera and welcome, everybody to our call. We really appreciate you joining us. As Tamera said, I am going to try to cover some key metrics around performance for the second quarter and a look at six months, talk about a few unusual items and their impact on results. I’ll talk a little bit about some of the drivers of performance. We’ll talk a little bit about the stress test and the TARP repayment, just to bring everybody up to date on that. Then we want to talk a little bit about some unique opportunities that we see before us at BB&T as we move through this [fresh] process. Darryl will then pick up and talk about margin, expenses, taxes, capital and operating leverage, and then we’ll have some time for questions.

If you kind of look at our numbers this quarter, overall we are very, very pleased especially in the context of a very challenging credit market. Revenue growth was strong at 13%. As you can see from the numbers, we made $200 million before the preferred dividend requirements, so our net income available to common was $121 million, or $0.20 a share. That was down from $0.48 last quarter. You’ll recall last quarter we had significant bond gains which we used to move into our loan allowance and so this quarter was cleaner in that it did not have that.

I would point out with regard to our earnings power, which as you know we feel very important to focus on was down slightly from first to second in 09 but I would point out positively that it is up meaningfully for year-to-date. The year-to-date earnings power was $1.743 billion compared to last year’s $1.64 billion for a 6.3% increase.

We did have a lot of noise in this quarter. As you know, we had the $71 million pretax FTIC second quarter special assessment charge, which equates to $0.07 per share. We also recorded an after-tax charge of $47 million on the TARP repayment, which represented $0.08 on a diluted share basis. And then if you take away from us the gains, we had some security sales and extinguishment of debt of $0.06, then you can see that the net unusual items would be a positive of $0.09 and so I think a fair way to look at our core run-rate numbers for this quarter is $0.29.

For the six months, we did have $0.67 diluted EPS, which was down from last year.

Let’s talk about some of the key drivers. Obviously the big story is asset quality, as it was last quarter. You’ll notice that our non-performers did increase meaningfully from $2.7 billion to $3.3 billion. We had indicated that as we moved through this cycle, we would expect to see a meaningful increase in non-performers and that is occurring. The percentage increase from 1.92 to 2.19 for the second quarter. Our net charge-offs for the quarter were $451 million, up from 388 last quarter and so that brought the percentage to 181, which was a meaningful increase from last quarter and I’ll explain to you a little detail around why that was.

Our provision for the quarter was a very significant $701 million, and so you can see that we had a $250 million reserve build over and above charge-offs, which I will point out is $0.25 a share, so it’s a very meaningful contribution to building our reserve as we continue to go through this cycle.

Our ratio of loans and leases to non-accrual loans, we are very glad to say still remained at 1.01. I think we are one of the very few companies that still has a ratio to non-accrual loans at 1 or above. And so we had a meaningful increase in our allowance to loans held for sale from 1.94 to 2.19. We are trying to be frankly very aggressive in terms of staying ahead of the curve in terms of building our allowance as we continue to move through this correction cycle.

So what we really had was kind of a continuation of what we’ve seen in credit deterioration, mostly in housing, in our ADC portfolio, our mortgage portfolio, home equity portfolio, and in consumer real estate, still concentrated in Florida, Atlanta, Metro D.C., as we’ve seen before. We are beginning to see a little bit of deterioration in the coastal Carolinas and in the mountain areas, primarily around resort areas where people had planned to move in from primarily the Northeastern area and of course those plans have been put on hold as everybody is having difficulty selling their homes.

I would point out importantly that our past dues continue a very positive trend. In our 30 to 89 category, our past dues were 1.70, down from 1.83 in the first and 2.07 in the fourth. Our 90-day plus was 0.33, down from 0.38 in the first and 0.44 in the fourth. So very significant positive trend there, which we take some encouragement from.

Digging a little deeper into some of our portfolios, because I know there’s a lot of concern about our real estate exposure, in the single family residential ADC portfolio, we mentioned last quarter that we had done a deep analysis of that single family ADC portfolio. We have seen basically it deteriorating consistent with our expectations. The balances are declining -- in fact, meaningfully down this quarter from $7.5 billion to $6.9 billion, and so it’s performing about as we thought it would as we continue to see some deterioration as the economy continues to slip and unemployment continues to rise.

We did take a special look this quarter at our lot portfolio. We did have some meaningful deterioration in that portfolio, so we’ve taken a very aggressive approach to it. We did identify it in the schedules for you for complete transparency. You will see that it’s a modest portfolio, about $1.9 billion, less than 2% of loans. But we are moving aggressively with that portfolio, moving accounts past dues pretty aggressively, in many cases moving to non-accruals, taking losses. For example, we had $77 million of charge-offs in that quarter, in that portfolio this quarter.

I would point out this is not an all-bad portfolio. Basically what this is is people primarily in the New England area and some up in the Midwest, who have had long-term plans to move to the Carolinas and further south, and they have come down here and bought lots, typically with a three to five-year billet loan, expecting to sell their house, move down here and build a house. All that worked well for a long time. We’ve been doing this for a long, long time. But obviously now people are handicapped because they can’t sell their houses, and the lot values have gone down so some people are balking at continuing their payments and we are trying to be conservative in dealing with those.

I would point out that most of these are good hard-working men and women who planned to retire, probably will still retire here. It’s just taking longer than they planned. This is not lots to developers or any kind of bulk lot programs. This is just people that just want to retire down here and ultimately probably will.

In terms of our other CRE, I would point out that we did a targeted review of it this quarter. Non-accruals are up from 1.21 to 1.82. Charge-offs are up from 0.32 to 0.47, which is not to be unexpected in this challenging environment. I would remind you, however, that our CRE portfolio is very different than a lot of the stuff you read about. It’s a very granular portfolio, averaging outside of the $539,000. We for a long, long, long time had a $25 million project limit which we stick to very carefully. So we don’t have the big office buildings, the big high-rise hotels, you know, the big box shopping centers that you see a lot of conversation about in the big CMBS security pools. We just don’t have that kind of portfolio.

Ours is more typically smaller office buildings, or a small strip shopping center with a major anchor tenant, or -- like a [Bell], or a Walgreen, with a handful of local tenants. And they are underwritten to cash flow off of the primary tenants. We don’t do spec deals like that. We have it pre-leased and so while we will have some challenges in this portfolio, we don’t expect it to be some kind of disaster like some people are talking about in the general CRE portfolio.

And our CNI portfolio is performing well. Non-performers are up but only 1.39. Charge-offs went up a tick from 0.50 to 0.60. Demand is slowing somewhat in the CNI, and there’s a low utilization rate by businesses but the portfolio is performing well.

There’s been a lot of conversation about bank card. I’ll simply point out we have a very modest size bank card portfolio because we basically only do bank cards for our clients. We don’t do all the national and international mailing. So ours is about $1.8 billion, retail is only $1.2 billion. Charge-offs were only up a tick from 6.46 to 6.48, substantially lower than 9% or 10% charge-off rates you hear from some of the monolines and some of the large institutions. Past dues [inaudible] are down 2.88 versus 3.18, so it’s performing very well.

Our mortgage business is doing great. We had another great mortgage quarter, $8.5 billion in originations. We are at $16 million year-to-date in originations. We only did $16 billion all of last year, so it is really booming.

Applications as we move through the second quarter, which of course feeds us into the third, did begin to slow some as rates popped up, now they are coming back some, so that kind of ebbs and flows. But even at a little bit slower level, they are still 90% higher than last year.

We are seeing some increases in non-accruals and our mortgage portfolio, as unemployment creeps up and we would expect to see some continuation in that as well.

Our sales finance portfolio is doing really well. Past dues and charge-offs are better than previous quarters, so it’s actually improving. Our ORE portfolio, I’ll comment on, it is up meaningfully from the last quarter, 26% increase to $1.2 billion. A little detail for you on that -- it is 52% land and lots. It’s 36% one-to-four residential vertical structures. I mentioned to you last quarter we’ve set up a special ORE group with some of our very top real estate lending professionals, running that as a separate business. They are making excellent progress. We did have $98 million in sales in the second quarter, which was twice what we had in the first quarter. And I am very pleased to see that we already have $73 million in contracts heading into the third quarter and of course, we are just really kind of getting into the quarter, so we are seeing momentum. We are seeing turnover. We are attacking it very aggressively and so we know that as a concern about it rising in aggregate levels and what are we going to do about it, but we have a very aggressive remediation program and I am quite satisfied that it is working quite well.

You know, all of our challenging credit situations are difficult. We continue to try to work with our clients and we will continue to do that. It’s really challenging, to be honest, right now, because on the one hand, there are some of our constituencies they want to force us to charge off everything as fast as we can and non-accrue it as fast as we can to kick the clients out; on the other hand, some of the constituencies, particularly out of Washington, want us to really work with the clients. We try as best we can to ignore both of those. What we try to do is live out our mission, which is to help our clients achieve economic success and financial security and we continue to work with our clients and will continue to work with our clients and do the best we can to help them mitigate their way through this difficult period of time.

So in aggregate, we are working really hard to stay ahead of the curve with regard to the deterioration that we are having, that we expect to continue to have. That’s why you saw us again make a material increase in our allowance of 25 basis points. We made a material increase in our reserve for our residential ADC portfolio, which is now up to 10.7%. Again, we exceeded charge-offs by $250 million and our allowance to non-performance is 1.01, which is a very strong number.

If you look at the consumer portfolio that we have, it’s overall a good portfolio. We are having some challenges, as I said in the lot portfolio. But I will remind you that over the long cycle, and I’ve been at this for over 37 years now, and all of the cycles, while we have challenges like everybody else does in the difficult period, we tend to outperform our peers in the down cycle. We believe we will do the very same thing in this cycle.

So our year-to-date charge-offs are 1.7. That is higher than we had expected in the beginning of the year. There’s frankly, you know, we said then as I will say now, any projections in terms of charge-offs and non-performance is obviously a function of the economy and I’ve not yet seen anyone that has a real clear crystal ball with regard to predicting the future. We have lots of opinions given [inaudible], but it’s really difficult in this kind of uncertain environment to really know. The best you can do is gauge it kind of a day at a time and make the corrective action that is required as you go forward.

But given that we are seeing somewhat more challenges in our consumer, the land portfolio than we had expected, we certainly think at this point that our charge-offs for the year will be at a higher level than we had previously contemplated. Again, any numbers we give you are subject to the economy and we certainly could be wrong but I’ll be quite transparent with your -- our actual internal projections today showed that for the year, we’ll be at about 170 for the year. But because of all of the uncertainty that there is out there and the difficulty in projecting with clarity, I personally think we should think in terms of a range of around 180 to 185. Now that’s up meaningfully from where we started the year at but I will remind you that the year has gotten a lot worse than certainly we expected and so we are trying to look forward now and be conservative in terms of what we think. We certainly could beat that, we certainly could miss it but that’s the best guess I can personally make in terms of what that will look like.

Changing gears, our margin is strong at 356. Darryl will talk to you about that. Looking at revenue, we feel good about revenue. Net interest income, growth is up 8.4% year-to-date over year-to-date, very strong in this environment. Non-interest income is strong. It was actually annualized, [first second] up 46% which is a very strong number. Of course, we have a strong kick-back or improvement in insurance, as you know. But year-to-date over last year-to-date, we’re up 16.1%, which is strong.

Net revenue growth is strong, year-to-date over year-to-date, 11.6%. Our fee income ratio, which is something we stay focused on, is second quarter, 44.9% and year-to-date is 43.5, which is up meaningfully over 42.2 for last year-to-date, and is one of the stronger fee income ratios in the business.

So our non-interest income business is doing well, up 17% over last quarter, last second quarter excluding purchases and gains. Mortgage is great, income at $184 million is up 223%. Even if you net out the MSR mark, you still have 156%, and of course that’s driven by the $8.5 billion of originations.

We certainly think that will slow as we head through the third and fourth quarter. A lot depends on rates. In the last several weeks, rates popped up and we saw applications slow and then they came back down some and they went back up, so it’s very, very rate sensitive.

But we will end up with a very good second half in mortgage but it will almost certainly be slower than the first half.

Some other details on [inaudible] income, our non-deposit fees and commissions were up 12.8, which is strong. Service charges were down a little bit because we have slower consumer spending. Trust and advisory fees were down a little bit just because of market conditions. Insurance had a great quarter -- of course, they come back stronger in the second. Insurance was up 18.6%. Some of that is acquisition but even on a same-store basis, we’re up 3.5%, which is clearly moving share because we are still in an insurance premium soft market and most premiums are down 10-plus percent, so we’re on a same-store basis up 3.5, which is obviously moving market share.

The good news is we are beginning to see some hardening in that market, especially on the wholesale side of the business and so we expect over the next year or so to see some improvement in that.

Investment banking business continues to do well and it’s very steady, which I personally really like. Investment banking income is up 4.5%, primarily driven by debt sales and trading. We don’t have the whopping kind of gains that Goldman and some of those guys do. We’re just not in that business. We also didn’t have the whopping losses they had, I’ll remind you. But ours is a good steady client oriented investment banking business and it works very good.

We did take $19 million in security gains in the second primarily because we wanted to shorten our maturities in anticipation of what we’d feel certain is going to be rising rates as we head through the latter part of this year and into next year, and so we wanted to position our portfolio for that.

If you look at loan growth, I would have to characterize it as saying year-to-date, it looks pretty good. If you look at total loan growth year-to-date, it’s 5.6%, which in a recession is pretty good. Year-to-date commercial loan growth is 10%, revolving credit is 10.5%, specialized lending, 7.5%, so those numbers look pretty good.

But I will say to you that annualized first to second is just as flat as pancake, so we’ve clearly seen a slowing in the last 60 days especially in the commercial area. Frankly I don’t have a really good handle on that. I think what it is is people are really nervous and when I travel around and talk to people, they are very concerned about all of the policies and initiatives that are coming out of Washington, which are simply, completely unaffordable and astute business people are very concerned about that. And I think it’s given them some pause in terms of being willing to step it up and buy equipment and make plant expansions, et cetera.

So we’ll have to keep a good eye on that. I feel fairly confident we are moving market share. We continue to see a slight equality to BB&T because of our strong capital ratios, the fact that we are one of the safest banks in the world, we are one of the best rated banks in the country, and so we feel good about our productivity relative to the marketplace, but I’m a little concerned about where the marketplace is going to be for the next six months or so.

So our retail portfolio continues to run off some, consumers are just not spending. They are saving. Our sales finance portfolio is doing well, relative to the market but not a lot of cars being sold. We are able to buy some auto portfolios at very attractive yields because some companies are needing to unload their portfolios to preserve capital, so that’s an opportunity for us.

Likewise in our specialized lending businesses, we are able to make some nice acquisitions, so our specialized lending in this quarter was up 29.6%. Good organic growth but also we had a really nice acquisition in our AFCO [KFO] insurance premium finance business, which was very, very pleasing.

In the deposit area, it’s just basically all really good news. Virtually all of our categories are growing really strong, with the exception of CDs, where it’s kind of flattish and that’s because we are consciously managing our price to protect our margin. We know that most of those CDs are very interest rate sensitive and frankly we simply have better sources of funding.

To that point, our annualized link growth in non-interest bearing deposits or DDA was up 46%, which is just a whopping number. Even year-to-date over last year-to-date, it’s up 13.7%. Client deposits are up 10.5%. Core deposits are up 12.6, and total deposits are up 8.7%. So what’s happening is we are clearly experiencing a very strong [slight quality] as huge disarray in the marketplace and so we are seeing just a phenomenal increase in our non-interest bearing deposits. Candidly, we are even seeing recently, someone showed me a report, some states and municipalities way out of our marketplace are moving significant dollars over to our bank because we are considered to be a safe haven and that’s certainly very pleasing. We don’t count on that as core deposits but it is a very inexpensive, obviously it’s going to DDA at no interest and something that helps us in the short-run.

So we opened 19,700 net new transaction accounts for the quarter, which was very, very good. So our balance sheet is kind of a mixed message. On the loan side, it’s been strong first quarter, slowing into second. We’ll have to see. Liability side has been strong throughout, continuing to improve our mix and improve our margin relative to the cost of some of the pricier types of deposits and grow net transaction accounts, which is ultimately really, really important.

Now I’ll make just a couple of comments about the whole issue of TARP and the stress test and equity, just to bring everybody up to date.

We were very pleased as the stress test rolled out that we were one of only two traditional commercial banks to pass the stress test, meaning we did not require any capital. We have had a number of questions from analysts about did, in order to accomplish that, did we do a lot of push-back, a lot of negotiating because apparently, based on what we’ve been told, a lot of institutions did a lot of negotiating and the regulators apparently made changes and reduced the amount of capital that they had to have.

We did not push back at all. We did not negotiate at all. We passed on the first results and frankly, we did not think it was worth our time, candidly, to go spend a lot of time fighting the government over whether or not we could have even more capital when we already had more than sufficient, so ours was a very pure pass, which we feel very good about.

Following that, well, as you know, we raised $1.7 billion in the market. I think it was very reasonably priced, it was very well accepted. It’s been trading really well since then, so we feel good about that. Part of that was to cut our dividend from $0.47 to $0.15. We obviously struggled over that for a long, long time. It was an extraordinarily difficult decision but it was the right decision.

I will point out that at $0.15, while way down from our previous percentage, it’s still one of the best dividend ratios out there in the business today.

So after our capital raise, we paid off TARP, which was a glorious day, and after about three or four days, we came down off the ceiling and got back to running the bank, but it was a really seriously a really good feeling to have that done. We are announcing today that we have agreed on retiring the warrants that the government received as a part of the preferred stock investment. We have negotiated to retire them for $67 million, which is not cheap but it’s not high. It’s a reasonable number, we think, and we think it’s very, very important to complete the transition of completely exiting the government from our business and this absolutely does that.

And of course what it does for us is it removes the uncertainty in our business, which was our primary concern about TARP. There was certainly a lot of specific things that were done around meetings and all kinds of things you could and couldn’t do and it created a lot of uncertainty for your higher paid people -- not your executives but mostly your producers. And so this eliminates all those clouds.

But frankly the main advantage to me is that it eliminates the possibility of the government politicizing lending in our institution. It still disturbs me that other institutions still have it and I am certainly pulling for them to be able to get out as soon as we can because we do not need to politicize the lending process in this country, which would be horrible for our total economy.

So this removes our uncertainty, positions us to take advantage of future opportunities. You know, we are one of the best capitalized companies in the country. We are one of the very few best rated banks in the country. We are seeing lots of [flight to quality] because of that and so the future looks really, really bright for us, beyond this correction. We are not naïve. We are not through this. The economy is still deteriorating. We think it will still deteriorate for some period of time. We kind of agree with the blue chip economic forecast that we will probably see a bottoming of this and some improvement by the fourth quarter.

And so we are anticipating slowness and some deterioration through the end of this period, probably finding a bottom around the fourth and then a slow recovery over the next two or three years.

Frankly, I think that can be a very good environment for commercial banks and certainly one like us because we don’t need an immediate robust return to the 90s. It wouldn’t be sustainable.

So in wrapping up, let me just mention to you that in addition to obviously spending a lot of time on credit, that’s the number one thing we have to do, but it’s very important in this kind of environment to not forget running the business for the future. That’s all about focusing on quality service to our clients. We continue to do that. The most recent numbers show that we have the best service quality we’ve ever had, best in the market. We continue to focus on revenue generation with our clients and with prospects. We are growing revenue at 13%, which is very good.

We continue to focus on cost control to allow us to invest in quality and revenue. And if you ex out all the unusual items in the -- this year-to-date period, well, our expenses are basically flat, which means we are controlling all the things that we can control.

And so I would just leave you with several reason that I think continuing to invest in BB&T is a good thing and certainly one that we think makes it a reason to feel very positive about the future for BB&T.

First, we have the best culture and values system we believe in the business. We have had it for a long time. We preach it, we live it every day. It is extraordinarily important in leading our company.

We have a really great experience and talented executive management team. They have been with BB&T a range from 20 to 37 years, with an average of 28 years, and yet they are young. Their ages run from 41 to 60, with an average of 50 years old. So we’ve got 50-year old average but 28 years of experience, which is the best of all worlds. This group has been through the battles together. We’ve seen multiple cycles. Most of everything we all have in this world, everything we own is tied up in BB&T one way or the other. It’s kind of our life. We’re just a bunch of achievers. We’re driven to achieve and focus on shareholder value, so we think that’s good for shareholders.

We’re fortunate that we operate in the best markets in this country, probably the best markets in the world. And we have a tremendous opportunity right now, a huge disruption in the marketplace, virtually every one of our major competitors have big time issues, even in terms of huge mergers that they are trying to assimilate and/or internal organic challenge issues, and virtually all the small banks that have been nuisances for us in the past are struggling and so there’s really not much able competition out in the marketplace today, so we feel very blessed about that.

And then generally, we and all remaining commercial banks to survive are going to face a really positive 20 years of re-intermediation as we move from 35 years of dis-intermediation of commercial banking balance sheet out into these capital markets, we are getting ready to go through 15 years of re-intermediation, which is going to be a phenomenal opportunity.

It will be particularly good for us because we have the best model in the market in terms of providing value. Our community banking model is a 20-year experience model that works in good and bad times.

If you think about it, we are one of the few banks in the country that has had a set of proven strategies that have worked in good and bad times and proven leadership has been tested over a long-term and is eager to create shareholder value.

And to support that, I’ll simply point out that for 15 years, we’ve had a 22.4% compound growth rate in our earnings power, which is pretax, pre-provision, which is very strong. That portends good cash flow generation in the future, which will be very good for our shareholders. And in the past, our shareholders have done well. Certainly the last several years, no one has done well but I would point out to you over a 20-year period, we’ve had an 11.2% compound total return to our shareholders versus 8.4% for S&P and 8.7% for peers and if you compound that difference over a 20-year period of time, that is a huge creation of wealth which we think is very good for our shareholders.

Let me pause now and turn it to Darryl to give you some more color on several important items and then we’ll have time for questions. Darryl.

Daryl N. Bible

Thank you, Kelly. Good morning, everyone and thank you for joining us. Today I will be discussing the following topics -- 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, as expected linked quarter margin was down one basis point. The linked quarter margin decrease is attributable to lower yields on the investment portfolio, partially offset by wider credit spreads on loans and wider fundings for [inaudible] on deposits. Business loan credit spreads widened by 10 basis points and mortgage loan credit spreads widened nine basis points, offset by retail loan spreads narrowing 6 basis points.

On the other side of the balance sheet, funding spreads on [many trace] deposits widened while CD spreads narrowed a bit. While we are pleased with our net interest margin results, if you adjust for the deteriorating asset quality compared to last quarter, net interest margin would have been three basis points better and on a common quarter basis would have been six basis points higher.

Last quarter, we stated that the primary drivers for net interest margin would be loan growth, pre-payment on mortgages, and deposit costs. While the loan growth factor was negative, the other two drivers were positive, especially the ability to lower our core deposit rates in the face of more rational competition.

We continue to believe the margin for the remainder of 2009 will be in the 360 area, up modestly in the third quarter and continued improvement in the fourth quarter. The primary drivers for margin for the next few quarters will be rates paid on deposits, maintaining wider credit spreads on loans, the amount of carry associated with non-performing assets, and changes in the shape of the yield curve. Overall, we are pleased with our margin results.

Net interest income on a taxable equivalent basis totaled $1.2 billion for the second quarter, an increase of 7.1% compared to the same quarter in 2008. The growth in earning assets plus loans and securities and the intense focus on liability costs drove the majority of the increase in net interest income.

On a linked quarter basis, net interest margin was slightly down, driven by a flat margin and a decrease in earning assets. Client deposits more than funded loan growth on both an average and point-to-point basis. As a result, we continue to decrease the amount of national market funding and replace it with client funds.

We also sold $1.6 billion in 30-year mortgage backed securities in the quarter, generating a net $19 million in security gains, continuing to sell our longer dated securities using both [convexity] and the duration of our portfolio.

Now let’s look at non-interest expenses. Looking on a common quarter basis, non-interest expense increased 23.1%. Excluding $46 million in expenses from purchased acquisitions, and a $71 million special FDIC assessment, non-interest expense increased 10.4%. The remaining increase was driven by the higher FDIC expense. Recall that BB&T's FDIC insurance credits expired last year, so that our FDIC expenses of $32 million excluding the special assessment.

In addition, we had $43 million increase due to foreclosed property expense, $13 million operational charge-offs and legal settlements, and $16 million in pension plan expense. We told you at the beginning of the year that FDIC, pension, and credit related costs would be headwinds for us in the non-interest expense this year. That has really turned out to be true. Excluding these items, non-interest expense was essentially flat.

Looking on a linked quarter basis, non-interest expense increased 42% annualized. Excluding purchase acquisitions and the $71 million FDIC assessment, non-interest expense increased 30.9% annualized. The increase was driven primarily by $27 million due to changes in the market value of our [RABI] trust, which does not affect the bottom line; $9 million for VIVA expenses; $4 million for loan and lease expense; $21 million in foreclosed property expense; and $13 million in credit related legal settlements.

Offsetting the increase in non-interest expense was $11 million for restructuring charges, $6 million for social security and unemployment taxes, as employees begin to reach their [inaudible] limits; $4 million in salaries due to decrease in FTEs; and $31 million in gain on early extinguishment of debt.

Looking at our full-time equivalent employees, positions decreased by 733 in the second quarter, through the combination of attrition, job eliminations in connection with strategy changes, and cost control efforts.

Overall, we are aggressively managing our controllable non-interest expenses and we continue to pursue opportunities for expense management.

Turning to efficiency, we saw some deterioration related to both one-time expenses and costs associated with the current credit environment. [GAAP] efficiency worsened to 53% for the second quarter compared to 50.9% in the first quarter, primarily due to seasonality and the FDIC special assessment. Excluding special items, efficiency was 51.4%.

We remain focused on containing on controllable expenses, even in the face of costs associated with our problem loans.

Operating leverage for the second quarter was negative, primarily due to the FDIC special assessment and expenses related to the current credit environment. However, we are pleased to have positive operating leverage on a year-to-date basis excluding special items.

Given the effect that the economy continues to deteriorate, we expect our expenses related to asset quality issues to continue to climb. While we remain focused on achieving positive operating leverage throughout the remainder of 2009, the goal will be more challenging given the non-interest expense headwinds we discussed.

With respect to taxes, our effective tax rate for the second quarter was 16.5%, which is consistent with lower pretax earnings. For the remainder of 2009, we expect the effective tax rate to be in the 23% range.

Finally, looking at the capital, despite the economic challenges, our regulatory capital ratios remained very strong. The leverage capital ratio was 8.5%, tier one capital was 10.6%, and total capital was 15.2%.

Our tier one common to risk weighted asset ratio was 8.4%. Additionally, we saw improvement in tangible common equity, which came in at 6.5% as compared to 5.6% at the end of the first quarter, due to the equity issuance that Kelly discussed.

Even though we repaid the TARP investment in the second quarter, our capital ratios continue to place us in the top tier of other large financial institutions and we remain one of the strongest capitalized financial institutions in the industry.

In summary, let me say even though that we continue to face credit related challenges and heightened costs, our underlying performance remains relatively strong. The margin remains stable. Liquidity and capital remain very strong. Deposit growth and mix are very positive and we continue to be intensely focused on expense control and getting back to generating positive operating leverage.

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

Tamera Gjesdal

Thank you, Darryl. Before we move to the Q&A segment of this conference call, I will ask that we use the same process as we have in the past to give fair access to all participating. Our conference call provider has been instructed to 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 the opportunity to join the call.

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

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Craig Siegenthaler with Credit Suisse.

Craig Siegenthaler - Credit Suisse

Thank you. Good morning. My first question is on the other real estate owned portfolio. I was just looking at the sequential increase in size relative to your loans in capital, which you mentioned. I’m wondering, are there any constraints out there where regulators could provide push-back and say let’s look to bring this portfolio down a little bit, maybe through bulk sales or auction? I’m just wondering like in terms of the growth of that portfolio going forward.

Kelly S. King

No, not specifically on ORE -- in fact, they do have some guidance that they will give around aggregate non-performing assets and classified assets and so it’s not like an absolute definitive ratio or percentage. But they don’t look at it as a singular category. They look at the aggregates.

Craig Siegenthaler - Credit Suisse

Got it, so it’s within the context of a non-performing asset, not on a standalone basis?

Kelly S. King

That’s right.

Craig Siegenthaler - Credit Suisse

And then I’m just wondering -- did you see the home price data this morning? We got new housing starts picking up again, beating the economic consensus estimates. I’m just wondering if BB&T really views that as a negative or positive, because it does -- you know, it’s positive for the economy but it also adds new supply out there.

Kelly S. King

I’m a little -- I didn’t see this specifically. Frankly, I’ve been in meetings but I’m not too surprised about that because what’s happening is, and I suspect that data probably talked about the new housing starts being in the low price end, so what’s happening is the market has really started improving in terms of inventory turnover in the low-end. Let’s call that below $300,000. And I’ve heard some feedback that some builders have started saying they just don’t have any inventory now because remember for about two years, they haven’t been doing anything and so I’m not terribly surprised if you see some beginning new starts in the low end.

Actually, our biggest challenge -- we being the aggregate economy -- in the housing sector today is in condos and higher priced homes, which are not moving and part of that is because the low end homes are moving because of -- a lot of it is because of the $8,000 tax stimulus, which is ironic because you may remember we argued as hard as we could argue that if they had put a larger tax credit based on a percentage value of the house, they could help move the whole portfolio. It’s really working on the low end and I suspect that’s what is driving those new starts.

Operator

We’ll go next to Chris Mutascio with Stifel Nicolaus.

Chris Mutascio - Stifel Nicolaus

Good morning. Thanks for taking my call. I have a quick question -- Kelly, I think you had mentioned that, if I heard you right, that about $98 million in OREO sales this quarter?

Kelly S. King

That’s right.

Chris Mutascio - Stifel Nicolaus

So if I -- just -- was the gross inflow of OREO then roughly about $340 million, if I just take --

Kelly S. King

That would be right.

Chris Mutascio - Stifel Nicolaus

Okay. Can you tell me -- and maybe this is more for Darryl -- what write-downs did you take on that 340 in the quarter and then what line item on page 14 is -- does that -- do the write-downs go through commercial loans or through mortgage loans on page 14 for gross charge-offs?

Daryl N. Bible

The average write-off, the asset [inaudible] OREO [we sell] is another 16% write-down, and that goes through the foreclosure expense, non-interest expense line item. It’s not through charge-offs.

Chris Mutascio - Stifel Nicolaus

You don’t take the first hit through the charge-off?

Daryl N. Bible

The hit through charge-off is when the value goes into OREO, so when we -- when the asset goes on a non-performing and then goes into OREO, we take certain write-downs and impairments. And then when it leaves OREO and goes off balance sheet and is sold, then it goes through our non-interest expense line item.

Chris Mutascio - Stifel Nicolaus

Right, so I’m just saying, the gross inflow of OREO in the first quarter, where would the write-down of that 340, what line item on page 14?

Kelly S. King

That would be embedded in your charge-offs.

Daryl N. Bible

That’s correct.

Chris Mutascio - Stifel Nicolaus

Right, but which -- I’m sorry, is the mortgage loan charge-off, is it the commercial loan lease charge-off?

Kelly S. King

Well, it depends on which type of property it is.

Chris Mutascio - Stifel Nicolaus

Okay. All right, I’m sorry, the --

Kelly S. King

-- break that out --

Chris Mutascio - Stifel Nicolaus

Right. All right, the 16%, I’m sorry, is that the average for the quarter or the average for all your write-downs of OREO?

Kelly S. King

That 16% has been the most recent average for the last quarter for all the aggregate of product coming out of OREO.

Operator

We’ll go next to Nancy Bush with NAB Research.

Nancy Bush - NAB Research

Good morning. Could you just talk about -- the dividend is very important to your shareholder base and it certainly I think was wrenching experience for you guys to cut it. Could you think about or talk about plans for re-growth of the dividend?

Kelly S. King

You know, I said, Nancy, when we cut it, it was the worst day in my 37 years, and it truly was. And so immediately upon that, I started two top personal priorities -- the first was to get the government out of our hair. Thank god we’ve done that. And the second is to restore our dividend as fast as possible. That’s my personal agenda.

Now, that having been said, as you well know, we have to be careful about how quickly we try to do that.

So as we look forward, we will have a strong penchant to restore our dividend and to its nature of being a relatively aggressive dividend because of the nature of our retail shareholders.

Now when and how much we do that will simply be a function of our visibility of the economy going forward, our earnings momentum, and overall capital positioning. So what we will be doing is as we get stability in earnings looking forward, we’ll be methodically moving it up and probably returning to our traditional -- you know, we’ve always had a range of 40% to 60% of earnings being returned to shareholders in dividends and I think that’s a good healthy percentage for us for our kind of shareholder, so we’ll be moving back to that kind of guidance.

Nancy Bush - NAB Research

Do you think that you will have to sort of see the end of the recession before you can start to build it, or is it just have to sort of be the light at the end of the tunnel?

Kelly S. King

I think -- no, I don’t think you have to see everything completely over because as you know, the way this thing -- well, we don’t all know but the way I think this thing will evolve is we are going to actually begin to see some clear light at the end of the tunnel and actually see the technical recession over and then some indicators like unemployment may still be hanging up there.

So I don’t think it has to be everything back to normal. What really we have to see, frankly, is a change in cash flows. So as you know, right now our underlying cash flow generation is huge. But when you take the charge-off, the costs associated with dealing with ORE, and the reserve build, obviously we’re throwing a lot of money in there.

As the portfolio indicators allow us to stop the build, that will be the first step, and then as charge-offs come down, we’ll start generating a lot more earnings and about the time that that happens will be about the time we will be able to consider a dividend increase.

I don’t want to do it too early, Nancy because frankly, I’ve been through this nightmare once. I don’t want to go through it again.

Operator

We’ll go next to Brian Foran with Goldman Sachs.

Brian Foran - Goldman Sachs

I guess the most common concern I hear from investors on BB&T is the fear that you are more exposed to residential construction than appreciated, and also that there are more write-downs to come on some of the non-performers. And I think the stock today kind of reflects that with this lot loan disclosure as well as the growth in OREO. So can you -- it was helpful to hear the write-downs on the $100 million of NPA sales, or the OREO sales you had this quarter but are there any other metrics you can give to help give people comfort that there are no more loans secured by lands that might be in other buckets, or that the OREO is marked correctly? You know, just any metrics you can give because I think that’s the main concern.

Kelly S. King

Yeah, I appreciate that and I think that is a concern and I -- I mean, I think it is a fair concern. Well first of all, the -- I don’t want to -- I hope we won’t blow the lot portfolio out of proportion. We wanted to fully disclose it for full transparency but again, it’s a $1.9 billion portfolio and it’s well-contained and we’ve taken a really aggressive posture on it in terms of dealing with it. We are actually in the process of a very aggressive renewal program with those portfolio loans. The vast majority of those clients are simply renewing the loans with a longer term amortization schedule, because they still plan to come here and retire. So I don’t think one should look at that as just a total disaster. It’s just one that had some tank to it and we wanted to be really aggressive in terms of dealing with it.

I actually -- if you look at the rest of the portfolios, remember what I said in terms of our aggregate past dues coming down for the last two quarters. If you look at the 16% average discount we’re taking on OREO disposition, that’s not a dramatic number and that’s been relatively stable for us, I would add. And so the -- in terms of the existing portfolio, other than this little spike in this lot portfolio, if you go through and really dig through the metrics, look at the past dues, look at the growth levels, what you will see is it’s been performing pretty much what we expected. Yes, there is an increase in non-performers but we’ve said all along that with our type of portfolio, of course if you got builder loans and so forth in this kind of economy, you are going to have a run-up of non-performers.

But the real key is in the ultimate loss and we still believe our ultimate losses will be superior to the industry because of the way we select clients, we structure the deals, the cross characters we have, the additional collateral, the fact that we don’t speculative lending, on and on and on. So we feel pretty confident that it will continue at a methodical type of change relative to the environment and that we are not worried about some massive big surprise in our real estate portfolio. Rather, it will be a portfolio that will perform as you would expect it to perform relative to unemployment and housing prices and housing inventories.

I don’t want to make it too positive or negative. What I am saying is we expect it to continue to deteriorate at a methodical pace for the next two or three quarters but we think it will be very manageable.

Brian Foran - Goldman Sachs

And then if I could follow-up, it seems like market share opportunities, or market share is the big opportunity, given the Wachovia integration, given the Georgia Bank failures, given what’s going on with CIT and what that could mean for your factoring business -- I mean, there’s a lot of very specific things that should benefit you. Are there some metrics you can give us to update us on the progress so far in any of those businesses or just any kind of tangible metrics to help size the total opportunity and the progress to date.

Kelly S. King

Well, we’ve tried to track some of the numbers in terms of specifically, for example, how much money have we attracted from Wachovia, and that kind of thing. To be honest with you, it gets to be very difficult because so much business moves in across our vast system that you just -- you can’t -- you just really can’t identify it.

We tried to track some anecdotals and we know we’ve attracted several billion dollars of business over the last 18 months from Wachovia. So you are right that the opportunity out there is just unbridled, and it’s all the ones you said -- it’s just extraordinary, and so what we are trying to be really sure that we focus on right now is while we have a strong hand held on the asset quality, we don’t want to miss this phenomenal opportunity because, as I tell my associates, you are never going to see a time in the rest of your career, I don’t care how young or old you are, where you are going to see a more opportunistic time because virtually all of our competitors are extraordinarily weakened and we are going to take advantage of that opportunity.

Operator

We’ll go next to Greg Ketron with Citigroup.

Greg Ketron - Citigroup

Good morning. Thanks for taking my question. I had one on the other commercial real estate loan portfolio and looking at some of the dynamics in there compared to last quarter, if you look at commercial construction, it looked like it dropped from $2.9 billion down to $1.3 billion. And then if you go over to the permanent income producing properties, it had a similar increase. And the first question would be are those properties that are coming to completion on commercial construction that are being taken over to the permanent financing bucket? And if so, when you look at the under-riding characteristics of the permanent financing, how does that compare when maybe you originated the construction?

Kelly S. King

Okay, so your assumption is right. That’s the transfer over from construction to permanent. And the way we do it is we under-write it for its permanent characteristics before we allow them to put the shovel in the ground. So whether they plan to sell it or not, frankly, in some cases they may have an outside take-out but whether they do or not, we under-write it to a permanent amortization schedule that we are prepared to hold it. And so for ones we had planned to hold or one that for some reason, if their permanent take-out goes away, it simply rolls right into a permanent amortization schedule that is already pre-determined based on pre-lease cash flow requirements.

Greg Ketron - Citigroup

Okay, and Kelly, on that are you seeing the cap rates hold in pretty well compared to when you originally under-wrote it or what the original expectations were? Are you seeing -- even if you are seeing some deterioration, is it still holding in to an acceptable --

Kelly S. King

Yeah, I think they are holding at the same general level. You know what happens with cap rates -- they move up and down depending on what’s happening in the marketplace, so they’ll get scared and they’ll pop up and then they’ll get [hungry for loans] and investments and then it will come down.

But I say over the period of time, there’s not been a material change in cap rates that’s caused any inability to move out into a permanent market. It’s rather based on the quality of the product.

Operator

We’ll go next to Paul Miller with FBR Capital Markets.

Paul Miller - FBR Capital Markets

I want to follow-up on Brian’s discussion on the CRE -- you know, he brought up a good point about your construction exposure and why some people feel that your losses will be higher coming out of the cycle then going into the cycle and I think that’s what worries some people about your stock.

On the CRE side, which is more of a late cycle losses relative to recessions, do you see that maybe that -- what would your argument be against that your CRE won’t peak later on down the road and that you’ve done -- that stuff that you’ve done is like not the big stuff, the smaller stuff and you have a very good handle on where the outlook for those losses will be?

Kelly S. King

Well, I base that on two things. One is I know what we’ve done, I know what our policies are and what our practices are and what the nature of what we booked is. And I also look at how it is performing. I mean, you’ve seen the metrics, I mean, there’s some deterioration but it’s dramatically better than all this trash you hear about in the marketplace.

And so again, remember, what this is in our portfolio is not the big -- you know, you saw the article in the Wall Street Journal with the four high-rise office buildings with no tenants. Well, we don’t do that kind of stuff. And so we have strip shopping centers, Walgreen stores and CVS. We do a lot of that kind of stuff that number one has, is completely cash flow under-written to a very strong anchor tenant. Number two, we typically also have a strong equity as a deal to start with, and thirdly we typically have it guaranteed by the owner.

So first of all, I don’t think those projects are going to be the kind of ones that you are going to read and hear about that are going to explode as this -- you know, this [inaudible] which [inaudible] is expiring next year and that’s all that big stuff that was packaged up, should have never been packaged up and sold and it’s coming to you and it’s dirty. Well, we don’t -- we’ve never participated in that market so I don’t expect our portfolio to perform even remotely like that. It’s just a different portfolio.

Paul Miller - FBR Capital Markets

And the other issue is, you know -- when do you think this [inaudible] peaks? I mean, we are still seeing deterioration in the job market. Hopefully that starts to really right itself but if the job market doesn’t -- if the unemployment rate or the job losses peak in say the third or fourth quarter, do you think that is when the charge-offs are going to peak? Or will those charge-offs peak a couple of quarters after that?

Kelly S. King

I think they will peak a couple of quarters after that. I think you get a little lag after that because some people hang on to the last minute and then they finally lose their job and then it goes through the process of becoming a non-performer in charge-offs and that kind of thing. And remember in some of these cases, the process because of state limitations, is very prolonged between when you first start having difficulty to when you ultimately grab the property and charge it off.

So I think it will be a little bit of a lag effect but it won’t be like two years down the road. I mean, I think by the mid next year or there abouts, we are going to begin to see I think non-performers and charge-offs begin to peak.

Operator

We’ll go next to Christopher Marinac with FIG Partners.

Christopher Marinac - FIG Partners

Thanks. Good morning. Kelly, you had made a statement back in the analyst day in February regarding doing transactions with the FDSC and related acquisitions that something to the lines of you wanted to be paid in advance for those and buy things at a discount. Is that still I guess your opinion today and has anything evolved as we’ve seen change the last four or five months?

Kelly S. King

No, that’s still absolutely my view, Chris, and candidly we have been trying to be helpful to the FDIC in terms of helping them understand how they need to package or structure an assistant still so that an institution like us would be willing to do the deal.

And what we explained to them, as I mentioned at the conferences, you know, we’re not going to go in there and [take a deal with a bunch of dirty] assets, period. And then if you say well okay, let the FDIC take the assets, well, that’s still problematic because if we just get all the deposits with no running assets, that’s problematic. So we’ve been working with them and I have some optimism that they reasonably soon going to come out with the structure that is going to be a fairly -- a fair structure. Not that the banks, not that you’ll be able to buy and immediately make a fortune on it but that you would be able to take over these institutions, if they are strategically important to you and it wouldn’t be dilutive.

Christopher Marinac - FIG Partners

So is the current loss share arrangements not -- you see as [inaudible] changes to what’s being done right now?

Kelly S. King

Well, the loss share arrangement is okay but there’s the problem -- if you do the loss share arrangement, you’ve still got to take the dirty assets and you still have huge capital implications and I personally don’t like to load up a bunch of dirty assets on our balance sheet and have sold more capital, even if there’s an ultimate loss share arrangement with the FDIC. That’s not to say we wouldn’t consider doing one but I would be real careful about the nature of the loss share arrangement and try to look for some consideration in terms of the capital allocation based on that asset being covered by a loss share with the FDIC. And so you could get that type of consideration with regard to capital allocation, then it would be a reasonable approach.

Operator

We’ll go next to Jordan [Heimowitz] with Philadelphia Financial.

Jordan Heimowitz - Philadelphia Financial

Hello?

Operator

Your line is open. Please go ahead. We’ll move on to Gary Tenner with Soleil Securities.

Gary Tenner - Soleil Securities

Good morning, guys. My question is -- all my questions have largely been answered, just one quick question for you, Darryl, on the linked quarter increase in personnel expenses, was there a particular driver behind that and how should we look at that going forward?

Daryl N. Bible

The biggest driver was our VIVA expenses were up quarter over quarter, and just higher health care costs.

Gary Tenner - Soleil Securities

Okay, great. Thank you.

Operator

We’ll go next to Todd Hagerman with Collin Stewart.

Todd Hagerman - Collin Stewart

Good morning, everybody. Kelly, I just wanted to circle back to your prepared remarks on the charge-off expectations -- you mentioned a couple of times that charge-offs at this stage of the year, if you will, much worse than what you had budgeted or prepared for internally. And if I think about the granularity of the portfolio and the fact that you guys did two targeted reviews this quarter in some of the more troubled pieces of the portfolio, what is it necessarily or specifically that is surprising you guys in terms of the charge-off rates, you know, implying that the second half of the year is going to be respectively worse than what we saw in the first half in terms of charge-off?

Kelly S. King

Well, frankly, Todd, from the first of the year until now, there’s only two things that have changed. One is that we did see more deterioration in that one particular lot portfolio than we anticipated at the beginning of the year and so as we did a deep dive into that, we frankly chose to be pretty aggressive in terms of shoring it up from a non-performing and a charge-off and allowance point of view.

And then the other thing, and the other thing frankly is just me trying to be more conservative in terms of giving you some guidance in terms of the future, and I’m doing that frankly out of just caution because we are just in a really, really difficult environment to forecast how things are going to go. I mean, frankly, I do not have great visibility in terms of when this market is going to turn.

I do have a lot of confidence in the fact that we are nearing the bottom and that as we head into ‘010, we will begin a slow recovery. So just out of an abundance of caution, I am trying to be a bit more cautious in terms of what we put out there in terms of any guidance or expectations with regard to what our charge-offs may be. It’s not that there’s been a dramatic change in terms of the rest of our portfolio because frankly there has not been.

Todd Hagerman - Collin Stewart

Okay, and I guess what I’m looking for is again, given the fact that you did this targeted review, if there was something new or incremental that you were necessarily expecting in the second half of the year, you know, post this review outside of just kind of the, you know, a weakening economy?

Kelly S. King

Well, I think two things -- one is you should expect that as the economy continues to linger in recession, more real estate clients will have challenges. You know, we’ve said all along that when you are dealing with real estate clients, whether they are builders or developers, the longer the recession lasts, the more likely they will run out of cash and they will become a “problem”. It does not necessarily say that you will lose money -- it just says they are out of cash and somehow we have to get in there and be more active in working the project with them.

And so I think that one factor is just the longer it goes one, the more of those you would expect to become classified assets and/or non-performing assets.

So as you move through the cycle, you know, in terms of allowance, for example, the allowance is materially driven by the level of classified assets and so you end up having to build your allowance based on classifieds even if you don’t end up losing any money on it. And then in terms of your charge-off expectations, part of that is us being somewhat more aggressive with regard to taking stronger up-front hits in terms of charge-offs as these clients move into the classified status.

Operator

We’ll go next to Jefferson Harralson with Keefe, Bruyette & Woods.

Jefferson Harralson - Keefe, Bruyette & Woods

I have a question on again the mark of MPAs and such -- what do you think is the average mark on a relatively new MPA is? The first time you mark an MPA -- let’s call it a commercial real estate MPA, what do you think the average first mark is on a new problem loan?

Kelly S. King

Well, so the first mark being when it moves out of our performing asset category into OREO?

Jefferson Harralson - Keefe, Bruyette & Woods

Yes.

Kelly S. King

We get a range there of like 15% to 30% I think we said, Darryl? It tends to average somewhere around 20?

Daryl N. Bible

I think it’s a little higher, it’s 27.

Kelly S. King

Twenty-seven, okay.

Jefferson Harralson - Keefe, Bruyette & Woods

And do you think that the 16% I guess average mark on OREO to sale is kind of a good number to think about going forward or should we see that decline or get better as time passes?

Kelly S. King

I think most likely it’s reasonable to think about that as kind of a normalized rate going forward. There will be two things that will work against it, one good, one bad. I mean, what will work for it will be as we begin to see some increased appetite for these properties, and that is happening, by the way, by the day -- there’s lots of money on the sidelines that wants to buy these properties. So as you have more demand for the properties, that will tend to put more upward price pressure which will put more downward pressure on the exit costs.

And then on the other hand, on some of your properties that you hold a longer time, if there’s not any increase in demand, that would argue that those might take a deeper discount. So when you kind of put all that together intuitively, I kind of feel like something in the 16% range would be kind of a reasonable number to forward at.

Jefferson Harralson - Keefe, Bruyette & Woods

All right, and then lastly on balance sheet growth, do you expect you guys would have the opportunity to take away a lot of market share if you wanted to and you’ve done a lot of it in the past few quarters but is the loan demand just not there to grow the balance sheet? Or are you being cautious? And what do you expect this balance sheet -- where do you expect this balance sheet to be a year or two from now? Do you think it should be smaller because of the environment and the economy or larger because of the great market share takeaway opportunity that you have?

Kelly S. King

Well I think it will definitely be larger because it will take away market opportunities. Now what the market itself does is a little bit harder to judge because right now, I would say the second quarter, I think we and probably everybody else you talk to is probably going to have experienced some real softness in their commercial book in the second quarter. Their retail book is probably like ours, been soft for some period of time.

But these things are very psychologically driven. If the market begins to sense that we are going to recover from this economy at the end of this year, into next year, if they begin to get some sense that Obama and company are going to be more reasonable in terms of some of the kind of fiscal policies they put into effect, all of those things would tend to restore confidence and you would see people buying computers and building plants again.

So I think it’s hard to judge what the market itself is going to do. I personally think it might be sluggish for the next couple of quarters and then you are going to probably see some pretty decent growth in the market itself because at some point, you kind of have to replace trucks and buy computers.

In terms of our opportunity independent of the market, that’s a wonderful opportunity to first move market share and our expectation is to grow independent of the market as we do that.

Operator

We’ll go next to Jamie Peters with Morningstar.

Jamie Peters - Morningstar

I was just curious, now that you are out of the TARP funds and we talked about the dividend earlier, would you consider issuing a share buy-back repurchase program before [raising] the dividend?

Kelly S. King

I think, Jamie, that kind of will depend on the economics at the time. As you know, it would kind of depend on our stock price relative to our dividend, which we’d have to raise the dividend. It would kind of depend on your capital ratios and/or future opportunities that might require capital.

So you really can’t forecast that but we will have a bias towards, everything else being reasonably equal, we will have a bias towards raising the dividend before we would do stock buy-backs.

Jamie Peters - Morningstar

And if you think about your OREO as kind of an investment portfolio, how much of that $1.2 billion seems to be something that you’d be willing to hold on to, hoping maybe prices would bounce back? And maybe how much of it is simply just garbage that you are just ready to get rid of at any price?

Kelly S. King

Well, I don’t consider any of it to be garbage but certainly there are -- there’s a gradation in terms of the whole $1.2 billion portfolio. Certainly some of it is of a nature that we would not expect it to respond in price with a direct correlation to improvement in market conditions. That portion we will be moving to move it on out just as quickly as possible at kind of whatever price it takes.

On the other hand, most of it is price sensitive to market conditions and we do not feel today that it is smart to go out and deep discount that portfolio and throw it out on the street because it’s not shareholder friendly. I mean, you know, it’s a business. We’ve got it set aside with high powered people running it and you can run that kind of portfolio over a couple of years if you have the capital, which we do, and it becomes a very shareholder accretive business to hold, as long as you don’t panic and we’re not going to panic.

Operator

We’ll go next to Nancy Bush with NAB Research.

Nancy Bush - NAB Research

Kelly, just one follow-up and this is certainly a question I think that you probably thought about -- I mean, I come from Atlanta and I know that Atlanta has been in a non-stop growth mode for most of my life and much of that growth has been generated by residential real estate. And this is true of the Southeast generally -- it’s true of Georgia, it’s true of the Carolinas, it’s certainly true of Florida, et cetera. I mean, what do you see for residential real estate in the Southeast going forward in terms of growth and if indeed it’s not going to be what it has been in the past, which I don’t think it’s going to be, what do you see filling in the holes in the economy?

Kelly S. King

Well, that’s a really good tough question, Nancy. I’ll tell you what I think -- I think we are going to see a relative downsizing of house sizes. I think over the last 25 or 30 years, the whole economy moved into houses that were too large, not necessarily -- I mean, larger than necessary, too expensive, and I think a macro trend will be to smaller houses, more efficient, practical, multi-family. That will reduce the aggregate cost relative to people’s income streams, which will allow them to save more and I think that’s the long-term secular trend we are going to see.

As that occurs in the short-run, I suspect what you are going to see is a number of the existing housing inventory that is on the higher end products is going to end up being discounted and bought by investors and turned into rental property, for the same reason.

And then what will take its place, I may be a contrarian on this, Nancy, but I don’t see and I don’t think this should be something to take its place in the context of what would it take to reconstitute the booming economy of the 90s? I don’t think that was a sustainable long-term economic engine and I don’t think we ought to try to go back to that.

If we go back to where we were in the 70s when I first started and if we kind of look forward and want to talk about normalized being 5%, 6%, 7% kind of growth rates, then I think you can return to that and absorb some of these structural changes like houses and even companies having less leveraged balance sheets and not really have to find something to replace it.

Does that make sense?

Nancy Bush - NAB Research

Yeah, I think so, but I mean if residential real estate is not the growth engine of the Southeast, then are you going to be able to add manufacturing capacity there or is there something to replace it?

Kelly S. King

Well, again, [I don’t think you have to replace it in total], but I understand your point. You know what I do think, I think we are going to see a resurgence of manufacturing in the Southeast. We are already seeing in a number of areas industries that are finding out that they can compete globally as they really do embrace more automation. And so you will see more manufacturing because I believe one of the kind of broader macro trends that you are going to see over the next maybe long-term, is there’s going to be less willingness to go and do a lot of international outsourcing, primarily because of the geopolitical risk.

I will tell you from my point of view, I am much less likely today to look towards international outsourcing than I was 10 years. The geopolitical hot risk places around this globe are enormous. I personally think unfortunately for our kids and our grandkids, it’s going to be that way for the rest of our lives and maybe longer.

And so I think you see all sorts of investments being changed by virtue of that global kind of systemic change.

So manufacturing is one. I think you clearly see a continuation of growth in bio-tech. And for example, in the triad, where I’m sitting, as you know, this area has been heavily dependent on textiles, furniture, agriculture. There’s a huge surge of investment in biotechnology in this very area. Lots of new jobs being created and not just biotechnology, other forms of technology -- Dell Computers, Apple Computer.

So I think the Southeast switches from being so driven from residential housing into a more balanced drive coming out of pure business investments.

Operator

We’ll go next to Al Savastano with Fox-Pitt Kelton.

Al Savastano - Fox-Pitt Kelton

Good afternoon. Two questions here for you -- first, quickly, was there any bulk sales of MPAs or MPLs this quarter? And then second, you kind of mentioned the three OREO buckets but could you kind of quantify or give us a little idea of what’s in each? Thanks.

Kelly S. King

Al, was the first part of the question is does the OREO have hotels in it?

Al Savastano - Fox-Pitt Kelton

No, did you do any kind of bulk sales of --

Kelly S. King

Oh, bulk sales, I’m sorry. No, not really. We did a little small bulk sale, I can’t remember if it was the end of the first quarter, the first or the second but it was very small and -- you know, like $15 million or something. We wanted to just kind of dabble and see kind of what the discounts would be and we didn’t like what we saw, so we were really not interested in bulk sales.

The fact is, the people who are going to buy the bulk sales are private equity venture capitalists and they are going expect a 25%-plus compound return and my sense is if it’s a reasonable property, which most of ours are, if that kind of return is out there, which implicitly it is for our shareholders, if it’s available for somebody else, I would rather give that return to our shareholders.

Al Savastano - Fox-Pitt Kelton

And then the composition of OREO and the three buckets?

Kelly S. King

So it was 52% I think land lots, those kind of properties, and then it was 30-some percent --

Daryl N. Bible

It’s 35% one to four family and then the remaining piece is really split up. It’s very marginal between commercial and multi-family.

Al Savastano - Fox-Pitt Kelton

I’m sorry, I had the question wrong -- in terms of the three buckets, what you think has no value, what you think you can hold on into the short-term, and what you think you can hold on for a couple of years?

Kelly S. King

Well, we haven’t delineated that in terms of a report but I would tell you intuitively, I think in terms of the trash bucket, if you will, you know, there could be as much as 15% to 20% of our portfolio that we would put in that category. And then really the rest of it, we wouldn’t have three buckets. They would really be -- the rest of the buckets would be properties that we would consider holding on to and moving out and we think that moving out will be over a 12 to as much as a 36-month period of time.

Operator

We’ll go next to David West with Davenport & Company.

David West - Davenport & Company

Good afternoon. I wonder if you could give us a quick update on exposure to auto dealers and your floor plan lending?

Kelly S. King

I asked that same question a couple of days ago, David. I don’t have exact numbers but I can tell you what Pete Davenport said -- we don’t really have any material issues in terms of our relationships with our auto dealers. First of all, we don’t do that much wholesale and when we do, it’s very, very conservatively under-written and monitored. When we have any other credits to them, it would be like a credit on the building. That would be very, very conservatively under-written and with owner guarantees, and so what’s really happening is for our portfolio, any of the ones that we have that are not being renewed, if you will, we see that they are typically being bought out by other, you know, lasting dealers and so our people don’t have any material concern about any real deterioration in that portfolio.

David West - Davenport & Company

And then an unrelated follow-up -- could you comment a little bit on your expectations in the mortgage area? In the first half, you’ve obviously done well, refinancing and so forth. Are you seeing carry-through to those trends in the third quarter?

Kelly S. King

No, it’s slowing. We saw applications slow in the second, which will carry over into the third and it literally changes week by week depending on what happens to the tenure and the mortgage rates. But we don’t think we will be at the $8 billion level in the third and fourth. You know, I suspect it will be in the 50% to 60% range of that kind of number per quarter. Now that could change, if rates flop, we could get another huge round of refinancing and we could have another [inaudible] another quarter, but I don’t think that’s likely. I think you may see $5 million, $6 million quarters versus $8 million quarters.

Operator

And there are no further questions at this time. I would like to turn the conference back to our speakers for any additional or closing remarks.

Tamera Gjesdal

Thank you for all your questions. We certainly appreciate your time and participation in this morning’s conference call. If you need any further clarification, please don’t hesitate to call the BB&T investor relations department. Have a great day.

Operator

Thank you, everyone. That does conclude today’s conference. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: BB&T Q2 2009 Earnings Call Transcript
This Transcript
All Transcripts