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BB&T Corporation (NYSE:BBT)

Q3 2009 Earnings Call

October 19, 2009 11:00 am ET

Executives

Tamara Gjesdal – Senior Vice President Investor Relations

Kelly King – President, Chief Executive Officer

Daryl Bible – Chief Financial Officer, Senior Executive Vice President

Analysts

Mathew O’Connor – Deutsche Bank

Todd Hagerman – Collins Stewart

Craig Seigenthaler – Credit Suisse

Greg Ketron – Citigroup

Nancy Bush – NAB Research

Christopher Mutascio – Stifel Nicholaus

Brian Foran – Goldman Sachs

Betsy Graseck – Morgan Stanley

Jeff Davis – FTN Capital Markets

Christopher Marinac – FIG Partners

Paul Miller – FBR Capital Markets

Jason Goldberg – Barclays Capital

Adam Barkstrom – Sterne Agee & Leach

[Ed Nagarian – ISI Group]

Jamie Peters – Morningstar

Jefferson Harralson – Keefe, Bruyette & Woods

Heather Wolfe – UBS

Vivek Juneja – J.P. Morgan

Operator

Welcome to the BB&T Corporation third quarter earnings 2009 conference call on Monday, October 19, 2009. (Operator Instructions) It is now my pleasure to introduce your host, Ms. Tamara Gjesdal, Senior Vice President Investor Relations for BB&T Corporation.

Tamara Gjesdal

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

We have with us today Kelly King, our President and Chief Executive Officer and Daryl Bible, our Chief Financial Officer who will review the financial results for the third quarter of 2009 as well as provide a look ahead. As we have in the past, we will have a question and answer session after Kelly and Daryl have made their remarks.

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 result may differ materially from those contemplated by these forward looking statements.

Additional information concerning factors that could 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 King

Good morning everybody. Appreciate you joining our call. We’re going to cover a number of items today. I’ll start with focus on the performance of the third quarter and the first nine months. Then we’ll talk about some unusual items, some drivers of our performance and spend a few minutes on the Colonial integration and the strategic importance of that acquisition. Then Darryl is going to give you some more color on the margin and balance sheet composition including the Colonial impact, expenses and efficiency and taxes and capital, and then we’ll have plenty of time for questions.

So overall we feel pretty good about the quarter given the environment that we’re in. Our net income available to common shareholders was $152 million. Diluted EPS for the third quarter was $0.23 which was a penny ahead of the $0.22 consensus. I would point out that it is three pennies ahead of the second quarter, so nice progress there. We’ll give you more color in terms of the drag on earnings for this quarter as we get through the discussion.

I did want to point out that our earnings power remains very strong. Earnings power is defined as pre-tax, pre-provision and if you look at the third quarter, it was $881 million compared to $916 million in the second, but remember we have some seasonal down draft in the third, so it’s really more important to look at the year to date where you see we have $2.7 billion in year to date ’09 versus $2.6 billion for year to date ’08, so it’s up about 3% which may not sound like a lot but I think that’s very good in a really tough environment with slow growth, recessionary kind of conditions, intense focus on and the drain related to credit caused.

And remember, that even though in this calculation we’ve taken out the pre-provision impact, there’s also substantial credit related costs embedded in the earnings including ’08 costs and the drag of non-accruals. So we feel pretty good about that underlying strength of the economic engine if you will of the company.

We did have some unusual noise in the quarter that basically washes out. We had a $25 million pre-tax contingent liability on a non-recurring item. That’s about $0.025. We did have $18 million in merger charges related to Colonial, so the two of those gets you to about $0.04 to $0.05. That would be accounted to our advantage relative to accounting what you might think about as core earnings.

On the other hand, we did have about a $12 million tax advantage because of some non-taxable gains related to terminating some leverage lease transactions, and also about $31 million in securities gains which is about $0.05. So our view is that the $0.23 is a pretty solid number and kind of washes itself out. Net income year to date was $544 million or diluted EPA of $0.88.

Let’s talk about some of the key drivers. Obviously credit quality is the primary focus for us all. Today I’ll just make an editorial comment as we begin to look through these numbers. You’re going to need to really focus on the impact of Colonial in some of our credit metrics because as you know, we’re required to report on a GAAP basis but in some cases it makes more sense to look at the numbers excluding the impact of the $8 billion or so in Colonial loans, because as you recall those are covered loans with a loan share agreement with the FDIC which makes them substantially risk free. And so when you’re going through these numbers in detail, you just want to be aware of that.

So our non-performers increased in the quarter from $3.3 billion to $4.1 billion ending at 2.48%. Now just to show an illustration of what I was just describing, if you look at non-performers excluding covered assets, that number would come down to $3.19 billion versus $4.1 billion, but the ratio goes up to 2.52%.

So it’s a little tricky because you numerate and denominate, it changes around on you. Not dramatic changes, but just want to be sure you’re able to focus in on that.

Net charge offs were $446 million, down a little bit from the $451 million in the second quarter. The charge offs percentage was 1.71% versus 1.81% for the second quarter. And then if you look at the excluding covered loans, the charge offs is 1.79% for the third versus 1.81% for the second, so a little down tick in charge offs.

So if you look at year to date charge offs excluding covered loans, is $173 million and certainly is reasonable given the kind of environment we’re in. Our provision for credit losses is $709 million versus the charge offs of $446 million so we had a $263 million allowance build in the quarter which again is a significant number. Year to date I would point out that we have an $801 million allowance build which is substantial.

So overall, the credit story is basically more of the same, kind of what we’ve been saying to you in the first and the second quarter. We are pleased to see some signs of stabilization in consumer and prime rate mortgages. I’ll show you some numbers on that.

We’re having additional deterioration in our housing related portfolios, particularly ADC, builder/developer portfolios are deteriorating about as we expected, but a steady deterioration. Primary areas are still pretty much where we had it in Florida, Atlanta, Metro DC, although Metro DC is stabilizing somewhat. And we’re beginning to see a few more problems in the coastal areas of North and South Carolina.

I would point out that we are seeing some signs of stabilization in the early stage delinquencies. We’ve seen a leveling off in the rate of change in non-performing loans and non-performing asset formation.

For example, non-performing loans increased 22%, 21% and 23% respectively for the first, second and third quarter, so you can see a pretty steady rate of increase. It’s certainly not increasing.

Same thing in terms of non-performing assets; you see an actual decline in terms of the percentage increase where the first quarter was 35% increase, second quarter was 21% increase and the third quarter was 18%. So a nice trend; obviously going up, but going up at a slower pace which we think is important.

I’d also point out for you to evaluate our delinquency numbers in which case our 30 to 89 days for the third quarter was 1.71% versus June which was 1.70% and March which was 1.83%, so a declining to stable level of delinquencies. 90 day plus, .33% for the September, .33% for June, .38% for March, and so you can see at least we can say that there’s a stabilization there with regard to delinquencies and obviously what’s happening is, the previous identified problems are working their way through the non-accrual and into the OREO bucket.

So just a little bit of color on the various sub-categories; if you look at single family residential ADC, that’s where most of our stress has been and it remains. We do I would point out monitor all credits in the portfolio $2 million or above; that’s about two-thirds of the portfolio on a very intense regular basis.

The balance on that portfolio is now $6.3 billion, down $2 billion in one year, down $500 million since the second quarter so we’re really moving that portfolio through. Charge offs are up from $4.35 million in the second, $6.35 million in the third. That’s part of the resolution process.

Non-accruals did increase from $9.3 million to $12.1 million from second to third. In response to that, we did build our allowance for that particular portfolio up to 13% from 10.7% in the second.

So that’s still the primary focal area. We believe it’s being managed very intensely and is under control, but we do expect to see further deterioration in that portfolio.

Looking at other CRE, it’s holding up reasonably well in the environment that we’re in but there certainly are increases there. Non-accruals are up from 1.82% to 2.35%. Charge offs are up from 4.7% to 1%. I’ll remind you though, this is a very granular portfolio and average note size is $543,000. We have a $25 million project limit, so we just don’t have the large projects.

I know there’s a lot of conversation today about the CVS portfolio and the trillions of dollars that are coming due and what’s that going to do to the marketplace. I would just point out to you that for our company; certainly we don’t have the high rise 50 story office buildings, the huge mega hotels, the big power centers.

By policy and discipline, we’ve just not done those. I’m not saying that ours isn’t experiencing deterioration, but it’s unlikely to see the kind of significant deterioration that you might expect to come out of some of these CVS securities, as they mature.

We certainly don’t have third quarter numbers of course, but I would point out to you that we went back and looked at our performance and other CRE at the second quarter and our numbers while increased, have significantly been better than the industry at around 50% or less of what our industry peers are representing in this area.

In C&I, it’s performing I think reasonably well. I will comment again in a moment. It’s very soft demand out there, but non-performing loans are up to 2.05% versus 4.0% in the second. Charge off are at .94% versus .60% in the second.

Again, deterioration, but certainly not the kind of deterioration that we saw in the ’91 period or even the ’01 period in the C&I space, and so we’re not particularly alarmed about that at this time.

I did want to make a particular point about the Lot loan portfolio. Remember we talked a lot about that at the second quarter because we had some concerns ourselves on that approximately $2 billion portfolio, so we had a lot of intense focus on it right at quarter end. We took a very aggressive migration analysis approach with regard to that portfolio and indeed, if you recall last quarter, our charge offs spiked up because we really put a lot of those accounts on non-accrual and took some pretty high charge offs at 15.5% level because we wanted to be overly conservative at that time.

Since then we’ve had more time to steady the portfolio, get more current appraisals, see how the loss mitigation process is working and indeed proves that we were overly conservative in the second so we actually it was necessary to reverse $12 million of charges that we did in the second to be realistic. We just overdid it.

So if you look at the second quarter Lot loan charges including the reversal, we only have 2.5% in the third, but a fair way of looking at it, if you exclude the reversal the charge offs in the second quarter would have been 13.8% and 5.2% for the third.

So certainly a portfolio that’s seeing some distress but nearly as bad as it appeared in the second quarter and I would say that our loss mitigation process working with those clients is going extraordinarily well. The vast majority of those clients that we are entertaining re-working those credits for those clients, the vast majority are taking the proposals we’ve made and we expect a very positive outcome of that for the clients and for the company.

Home equity loans and line just not a material concern for us now. It’s very stable. Non-accruals are up slightly but just not a major issue. Bank cards not a major issue for us. Modest sized portfolio, $1.9 billion. Past dues unchanged at 2.88% which is substantially below the industry average, and actually down 36 basis points from January.

Mortgage continues to be a bright spot for us at $6.9 billion in production for the third and it was down from $8.5 billion in the second. I think we all knew that with rates going back up some. Application volume was down 27% from the second. Remember the second was just a phenomenal blow out quarter, so we’re very pleased at $6.9 billion for the third.

We did have 64% re-fi, but the good news is, 36% purchase, so you’re beginning to see the lower end of the housing market move as evidenced by the sales figures you see and also the purchased mortgages that we are producing.

Non-accruals were 4.31% versus 3.82% so an uptick there. Charge offs were 2% versus 1.95%, again an uptick, but very low numbers relative to industry averages.

Sales finance is performing very well and some commentary. In auto portfolios, ours is performing very well. Charge offs declined. Delinquencies are stable. There’s a small normal increase in our regional acceptance portfolio due to seasonal factors, but there are really no material changes in our sales finance portfolio.

I would point out that we’re getting actually improved net charge offs. One of the reasons is because the values of trucks and cars has come back up substantially in the last six months, particularly the last quarter as an awful lot of new product is not available in the market place because of the original manufacturers difficulties, and so used property is being a bit up in the these auctions, and that’s really helping us in terms of disposition of underlying collateral.

OREO of course deserves a lot of attention. It increased 10% to $1.3 billion. We had some increases in Georgia, had a property increase in Maryland. I’ll remind you that our portfolio is basically made up of lot and land at about 52%. One to four verticals at about 35%.

Pretty good news, ORE sales were $132 million, up 28% compared to second. We already have $82 million in new sales contracts in for the fourth. So OREO is moving. That’s an important take away from this. If you look at sales for example in the first, we had $43 million, in the second we had $98 million and in the third we had $132 million, so OREO is moving, obviously not as fast as we would like it, but it’s certainly moving.

I also want to point this out because I think there’s a lot of misunderstanding about looking at OREO. Our OREO looks relatively high compared to come of our peers and that’s been noted. But I don’t think that’s the thorough and complete story.

We think what you should look at is total under-performing assets which includes 90 days and still accruing non-performing assets, TDR’s and OREO. And so ours on that combination is 4.84%. We don’t have the third quarter numbers of course, but for comparison, last quarter we were 3.73% and our peers were 5.47%.

So the truth is, we have relatively high OREO, much lower 90 days still accruing, much lower TDR’s. We think that’s a good story because we’ve been flushing our problems right on through the cycle and flushing them right into OREO where we have control of them and we just start the disposition process.

We don’t think it makes any sense to let stuff hang around 90 days still accruing and loading up on TDR’s when you have no practical way of really ultimately resolving the issue, at least when you’re under that restructured contract. So we think we’re being very conservative. There’s been some concern about that, and we’ll be glad to entertain questions about that. But we feel very comfortable about where our OREO portfolio is.

If you want to think in terms of guidance, the charge offs looking forward, we have said last quarter that we thought for the year we’d end up in the $180 million to $185 million range. We’re not changing that. We still think that’s the right range for this year.

We’re cautious because the economy is mixed today. Certainly some of our data shows stabilization in credit quality metrics. Some show deterioration. So it’s just too early to call any kind of an end to this cycle, but certainly there’s no reason for us to raise our guidance in this area.

We’re very pleased that our margin is at 3.68%, up 12 basis points. A significant portion of that relates to the Colonial acquisition. Daryl will give you some real detail on that because we think that’s a good story for you to focus on.

I’ll call your attention to core revenue of net interest growth. Remember the most important thing to look at a company from a long term point of view is how much revenue you’re generating. So our net interest income second to third was reported 34%. Our reported numbers are all high now because of the Colonial impact and in some cases some insurance impact.

Those are real transactions. They did take a lot of work. I’ll remind you of that. But if you want to flush those out, taking our purchases and selected items, second to third we’re still up 6.6%. a good number to look at I think is year to date where on a reported basis, we’re up 11.6%, without items 6.9%, which I still think is very strong given our recessionary environment.

If you look at non-interest income growth second to third, it was down without items, 29%, but remember we have a huge seasonal swing there. If you look at third to third, we would be up 11.1%. if you look at year to date we’re up 13.9%. Still experiencing very strong mortgage increase of $67 million over last year’s third to third.

Other deposit fees and commissions are up 11% million. We’ve been getting good results in higher commercial fees and operating lease portfolio growth so I feel pretty good about our non-interest income growth.

Insurance is still very strong relative to industry. It is beginning to, still suffering though some because of the prolonged soft market in the insurance space. We think that may be on the verge of changing but certainly right now it’s still a soft market.

So if you look at net revenue growth, third to third we’re up without items 7.5% which is very strong and year to date 9.7% which we feel very good about. If you look at the fee income ratio, third to third is up from 41.4% to 41.8% and on a year to date basis is up materially from 40.9% to 43.4%. Obviously mortgage is helping on that but our non-interest income businesses are helping as well.

So if you look at loan growth, this is a real challenge for us and I think the industry. For example, our annualized second to third our commercial growth was 2.9%. Now again, I think that’s going to look very, very good compared to the industry but still down direct retail which has been down for the last several quarters is down 7.5%. So total loan growth second to third is down 4.2%.

Now third to third is up 1.6% because we did have decent growth in the first quarter and the first part of the second quarter, and year to date is up 3.9%. But the more important issue here is what’s going on right now, and we are definitely experiencing a slow down in the commercial loan area.

I personally think based on my own discussions with a lot of business people that the business community is kind of sitting on their hands kinds of waiting. They’re apprehensive about what’s coming out of Washington around health care, tax increases, trying to get some sense of clarity around the economic direction, and so the demand for loans is an issue.

I know sometimes when people look at the loan growth numbers they assume it’s because the banks are not willing to make loans, that’s just categorically not true. We need to make all the good loans we can possibly find.

I will say we’re being very diligent in terms of the quality of underwriting as you would expect in this kind of environment, but primarily there’s a reduction in demand for credit. Our real estate portfolio is specifically reducing by our own intense focus and desire to diversity.

But we are seeing some flight to quality and obviously understanding the fact that aggregate numbers are declining, we believe that where we want to grow, we are growing which is C&I and an interesting thing is happening and that is, we’re booking a lot of C&I commitments through LC’s because of the nature of the decline we’re dealing with which is a higher clientele relative to what we’ve had in past years.

And so if you impute a number of C&I growth including the LC commitments which is fair, third to third our growth would be 8.9% versus 2% on a stated basis. So we believe we are actually growing market share in the C&I area and feel very, very good about that space.

A quick look at deposits, it’s just a great story. Non interest bearing deposits year to date are up 13.5% which is very strong. Client deposits are up 13.8%. Even when you take out purchases, it’s up 8.1% and so the deposit market is very strong. We’re seeing again there a substantial flight to quality. We’re getting lots of really good deposits interestingly from municipalities and state institutions from around the country because we’re viewed as a safe haven.

We’re continuing to grow net new transaction accounts. We increased 17,400 during third quarter, a little below our goal, but I would point out that that kind of growth in a recessionary environment is still very strong growth.

A comment for you about the Colonial integration, we’re very pleased about this merger as we said when we announced it. The three reasons are strategically compelling, there’s almost no asset risk and it’s immediately accretive. You don’t get too many times in your career to do them like that so we feel very good about it.

Strategically it has improved here in Florida from 16 to number five which is very, very important from a long term point of view. I know there’s still concern about the Florida market but again, I’ll remind you that there are 18 million people there and it’s still warm in January. We are very bullish on the long term for Florida when we get through this correction.

We picked up a really strong number four position in Alabama. It’s a really good market. I’ve been traveling down there recently. The opportunity for us specifically in Alabama because of all the turmoil in banking down there has left a pretty wide open market for a company like us. We’re very, very excited about that. Anytime you can make an acquisition that meaningfully bolsters up your balance sheet in another wise flat to down recessionary environment, that’s also a really good strategic advantage.

And we also picked up a nice toe hold in Texas in the Dallas/Fort Worth area and a small operation in Austin. There’s been some question about our attitude to that. We view this as a permanent strategic move and we do not expect to materially expand in Texas right away. We’ve still got work to do over here in our existing footprint, but certainly that is a really fine operation. We’re very excited about working with folks in that market.

Texas is a big state, 25 million people and it’s a very important part of our long term strategic direction, but again we won’t be pushing it materially in the short run. We will do it over a longer period of time, but we will be keeping and nurturing that operation and growing it in the Dallas/Fort Worth area.

I’ll give you just a sense of achievements that we’ve made in only about a two month period of time. Our leadership teams are in place in all of our Florida new regions, Alabama regions, virtually totally in place in Texas. We’ve implement BB&T’s credit review process for all new loan originations. We’ve already converted their payroll, securities and fixed assets systems. The rest of the conversions will be completed by the second quarter of ’10.

We did a thorough evaluation of the mortgage warehouse business. You’ll recall there was a lot of conversation about that and it was part of what Colonial had which was very bad which we did not inherit. We did not have anything to do with.

We did however take a rational look at the essence of the warehouse business done properly and determined that it is a good business for us. We’re already doing some and with their platform, we think we can grow that in our footprint and take advantage of the good relationships they had. A classic example of I’m not throwing the baby out with the dirty bath water.

They also had a very unique homeowner’s association line of business which is one we’ve been thinking of trying to develop for the last five years. They have it very well developed. We’re going to keep that and expand it, so that’s a real plus.

We already have our signs temporarily changed on all the Colonial branches even though we’re not fully converted to systems. We’ve developed a manual system of taking deposits across institutions and so the BB&T signs are up all across Alabama and further in Florida.

We did announce recently we reached an agreement with the sale of the Nevada branches which we had telegraphed early on was our intention. We’re very pleased about that transaction. We’ll be closing that in January.

And finally I would just say to you that the response from the communities, the employees, the depositors in that market has been phenomenal. I spent a good bit of time down there and we are very, very well received as evidenced by the fact that our client deposits have been stable and we believe we’re poised to begin to grow that very, very shortly.

Finally before I turn it over to Daryl, I just want to remind you that in the midst of all of the turmoil that we’re all going through and the negativity around recessions and all that’s going on, and I don’t want to minimize that, it’s certainly critically important. It’s got a number one focus.

On the other hand it is important to remember that even in the midst of a difficult economy, the real good long term surviving companies will protect and build on their value promise to their clients because ultimately at the end of the day, if you have a good value relationship with your clients, you’ll be able to generate revenue. And that still is the most important driver of long term success.

Our value promise is based on the notion that values are matched on the quality relative to price. We know based on study and experience that quality is a function of reliable, empathetic response to competent service and so what we’ve done is studied in the marketplace how we do and we can say affirmatively that we have the best value proposition in the market.

To that point, we just recently received the most recent study performed by Merritt’s Corporation, an outside very well established global research firm that does statistically independent studies of our scores and those of our major competitors. We looked at some key metrics comparing ourselves to SunTrust, Wachovia, and Bank of America and I’m very pleased to say that when you look at for example the question about likelihood to remain with us, we look at the top two boxes.

So in other words, how many of your clients gave you a nine or a ten out of a zero to ten point scale, and 84.6% of our clients gave us a nine or a ten. Our competitors ranged from a high of 71% to a low of 53%. In the commercial area, same question, we ranked 84.3% in the top two boxes. Our competitors ranged from 77% down to 70%.

If you look at the question which is very pivotal of all banks satisfaction, in the top two boxes we did 62.2%. Our competitors ranged from 57% down to 42%. In commercial that same question we did 56.9% giving us a nine or a ten. Our competitors ranged from 49$ down to 28%.

So you can see that we have a statistically valid material value distinction based on client feedback relative to our competition. And that I believe is the most important question to be answered for investors and others looking at our company from a long term point of view.

Let me turn it over now to Daryl to give you some color on some important areas then we’ll have some time for questions.

Daryl Bible

Good morning everyone and thank you for joining us today. I will be discussing the following topics; balance sheet activity, margin, expenses, efficiency, capital and finally, taxes.

Let me first discuss margin and the balance sheet activity. Linked quarter margin was up 12 basis points to 3.68%. Linked quarter margin increase is primarily attributable to the acquisition of Colonial which added about 10 basis points. This is composed of three basis points related to paying off Colonial’s higher cost deposit and Federal home loan bank advances, three basis points from the yield on covered securities and four basis points on covered loans.

Excluding the impact of Colonial, margin would have increased two basis points which is exactly what we expected for our legacy balance sheet. This was driven by wider spreads on loans and deposits.

Retail loan credit spreads widened by 14 basis points and mortgage loan credit spreads widened six basis points offset by reduced carry on transactions that we entered to become more asset sensitive. On funding spreads, while interest, checking and managed rate deposits widened, while CD’s narrowed a bit.

While we are pleased with our margin results, if you adjust for the deteriorating asset quality including OREO compared to last quarter [manifest] margin would have been two basis points better on a linked quarter basis and 12 basis points on a common quarter basis.

On a common quarter basis, margin improved two basis points largely due to improved liability costs and the initial impact from Colonial. We believe that margin for the fourth quarter will be in the low 370’s improving our outlook for the full year 2009 to the mid 360’s. Looking into 2010 we expect margin to hover in the low 370’s.

The primary driver for margin for the next few quarters will be the effect of the Colonial acquisition, rates paid on deposits and the level of growth, the amount of carry associated with non-performing assets and changes in the shape of the yield curve.

We have taken a number of actions related to the balance sheet post Colonial which we outlined in the press release. With respect to securities, we’ve sold $2.4 billion of agency securities acquired from Colonial. We retained $1.2 billion of non agency mortgage backed securities and municipal securities. Almost all of these retained securities are covered by the FDIC loss share agreement.

With regard to deposits, the long term debt, we executed on the following strategies as planned. We paid off $1.6 billion of higher cost broker deposits, $815 million of mortgage warehouse business related escrow deposits were paid down mostly due to [Tailor Bean] run off. We prepaid $2.8 billion of Colonial’s home loan bank advances and we used approximately $4.1 billion cash proceeds from the FDIC to pay down liabilities.

The acquisition resulted in $690 million of goodwill and $176 million of core deposit intangibles. The goodwill resulted primarily from the mark up on Federal home loan bank advances, the deposit interest rate mark and the valuation of covered assets and the FDIC receivable.

And finally in connection with the Colonial acquisition, we successfully issued $1 billion of equity capital of 38.5 million shares on August 21, which further strengthened BB&T’s already very healthy capital ratios.

Going forward, given soft loan demand and our desire not to reinvest securities at low interest rates, our balance sheet will remain relatively stable to down slight for the next quarter or two.

Now let’s look at non interest expenses. Looking on a common quarter basis, non interest expense increased 31.3%. Excluding merger related costs and adjusting for the impact of purchased acquisitions and significant items, non interest expense increased $179 million or 15.5%.

This increase was driven by a $96 million increase in the maintenance costs, valuation adjustments and sales of foreclosed properties. A $35 million increase in FDIC expenses, $18 million related to our [RAVI] trust, legal fees of $7 million primarily due to our credit environment and an increase of approximately $6 million from mortgage related incentives. We also incurred an increase of $17 million for pension costs.

As we told you earlier, the FDIC expenses, pension and related credit costs would be head winds for us in non interest expense this year. If you exclude these items as well as purchase accounting and significant items, non interest expense increased 2.7% on a common quarter basis.

Looking on a linked quarter basis, non interest expense increase 46.7% annualized. Excluding merger charges and adjusting for the impact of purchase accounting adjustments, acquisitions or significant items, non interest expense increased $64 million or 20% annualized. The increase was primarily driven by $58 million increase in maintenance costs, valuation adjustments and sales of foreclosed property and $4 million increase in advertising.

Turning to the impact from Colonial, we reported our expectations and projections following the acquisition announcement. Those were based on rough but conservative estimates in the short amount of time we had to model the transaction. As the integration proceeds, we will continue to update you on our estimates.

First, we remain confident that our estimated cost savings of $170 million range as expected will be at the full run rate by the fourth quarter of next year. We have a very strong history of achieving our cost savings targets and acquisitions and will do so in this deal also.

We are reducing our estimate of merger related charges to $205 million from our initial estimate of $245 million. This reduction reflects the ability to repudiate contracts and branches in the FDIC assisted deal with no additional cost of cancellation.

The timing for one time costs will be revealed by quarters with the bulk of the cost in the second quarter of 2010 in connection with our systems conversion. Overall we are aggressively managing our controllable non interest expenses and will continue to pursue opportunities for expense management.

Turning to efficiency, we continue to see some deterioration related to costs with the current credit environment and for the initial impact of including Colonial into our company. Efficiency rose to 52% for the third quarter compared to 49.8% in the second quarter. We continue to remain intensely focused on containing controllable expenses even in the face of higher costs associated with our problem loans.

Due to heightened credit and regulatory costs as well as those higher relative efficiency ratio, offset as cost savings from the Colonial transaction realized over time, the efficiency ration will probably get a little worse before we see improvement later next year.

Looking at our full time equivalent of employees, positions decreased by 325 excluding acquisitions in the third quarter. Including Colonial, we expect to see significant reduction in FTE’s mainly in the support functions over the next three to four quarters.

Operating leverage for the third quarter was negative primarily due to elevated expenses during the quarter. As we mentioned last quarter, high expenses related to credit quality issues, slower loan growth and decreasing mortgage banking income had negatively affected operating leverage.

With respect to taxes, as Kelly discussed earlier, we entered into a settlement late last year with the IRS related to our leverage leases. As a result we had non taxable gains on terminations of certain leverage leases resulting in a tax benefit of $12 million. In addition to this benefit, we had tax exempt income of $80 million and tax credits of $21 million. These levels are consistent with prior quarters.

These factors together with lower pre tax income produced a net tax benefit for the quarter. Assuming no more leverage lease terminations, we expect the tax rate will be approximately 11% for the fourth quarter.

Finally, taking a look at capital; despite the economic challenges, our regulatory capital ratios remain very strong. The leverage capital ratio was 8.5%, Tier One capital was 11.1% and total capital was 15.6%. Our Tier One common to risk rate at asset ratio was 8.4%, among the strongest of our peer group. Additionally, our tangible common equity ratio remains strong at 6.1%.

Our capital ratios continue to place us in the top tier or other large financial institutions and we remain one of the strongest capitalized financial institutions in the industry.

In summary, even though we continue to face credit related challenges and heightened costs, our underlying performance remains relatively strong. With our acquisition of Colonial, we have increased our earnings power potential. We have strengthened our capital base and coupled with the FDIC loss share agreement, we have produced a lower risk balance sheet.

And now, let me turn it back over to Tamara to explain the Q&A process.

Tamara Gjesdal

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 with fair access to all participants. Due to heavy participation today, our conference call provider will limit your questions to one primary and one follow up. If you have further questions, please re-enter the queue so that others may have an opportunity to participate.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mathew O’Connor – Deutsche Bank.

Mathew O’Connor – Deutsche Bank

Can you give a little more color the sale of some of the OREO’s that you did this quarter in terms of what you got versus what it was being carried at, and then I assume that feeds into some of the OREO expenses that we saw this quarter.

Kelly King

We’ve been basically selling, primarily focusing on the verticals during the most recent quarter, and I think as we reported the sales price, if you look at it from all the way through from the original loan all the way to the final exit value, there’s a reduction of 37%. What we do is, when we put it into OREO, we take a reduction. That’s usually about 27%.

And then we write it down if necessary based on further appraisals during the time we had it and that for the last quarter averaged about 10% and then we actually sold it for about 5% less on average than what we had it at. So that math doesn’t exactly add up because you’re talking about the 10% is off the 73% and the 5% is off, so you know you have to go through that.

But when you go through all the math, the final disposition price to us is about 37% of the original loan balance.

Mathew O’Connor – Deutsche Bank

I know it’s impossible to know what the sales activity will look like this quarter, but if you think about the OREO costs going forward, is this a decent run rate to start off or should we be adjusting it up or down?

Kelly King

That’s a good question and a hard one to answer, but I intuitively think we are at a level where we’ll kind of be at for the next two or three quarters. I don’t see it materially changing one way or the other because what happens to you, is you kind of, at a work release kind of projects, you kind of get the project in, you have some early costs, you have to cut the grass or you’ve got to get all the upfront things done.

Sometimes there are repairs that have to be made if it’s a house or if it’s a project. So you get a lot of that kind of upfront expense. But then when you kind of get it up to resell state, you’re just kind of holding it, then you just kind of got the taxes, so then whether or not you have any write downs. But I think we are kind of at a level that we’ll probably be able to sustain for the next two or three quarters.

Operator

Your next question comes from Todd Hagerman – Collins Stewart.

Todd Hagerman – Collins Stewart

Just a couple of questions in terms of the purchase accounting for the quarter, Kelly could you talk a little bit about the final marks in terms of the Colonial book and then given that it looks like with the SOP-03 accounting affect with the assets coming on board, can you talk a little bit just in terms of the optics for MPA’s going forward as those assets deteriorate, what we can expect as we think about kind of repopulation effect.

Kelly King

Let me just give a general answer and Daryl will give you some more color on that. Basically in business terms, the way to think about that book of business is that through the whole cycle, we have about a 5% exposure. Now it gets real tricky in the accounting because you have FDCI receivable, you have marks on the portfolio and then as you begin to collect those loans, you basically asset it on a regular basis and adjust the numbers at least quarterly.

So you are constantly adjusting the receivable and the mark based on your actual collection reality. So you’ll see some changes in our numbers as we go through the next several years, but the net earnings impact on this we believe will be very positive.

What you’ll have to do though is when you look at like our non-performers from a GAAP point of view, we’ll have to report their non-performers. I say they because we’re actually in our own company creating that book as a non legacy part of the bank and we’ve got it warehoused and circled off and we’ll be managing that with a separate work group. Let me ask Daryl to give you a little bit more detail on that.

Daryl Bible

As it goes forward, as the OREO balances as we work through the assets on Colonial, the OREO balances will build up and that will go into non-performing assets. All the other assets really won’t be considered non-performing because we have the lot share agreement with the FDIC so we’re going to be paid the principal back plus the accrued interest on the loans.

So it’s only the residential mortgages will go into OREO increase which should be a smaller percentage because Colonial mainly had commercial mortgages on their balance sheet.

Todd Hagerman – Collins Stewart

Can you give us the order of magnitude there, just give us some context there on the resi mortgage?

Darryl Bible

If you look at our report we showed what the number was initially. I think it was about $151 million is what we had to begin with. I really don’t have a read on how quickly that’s going to build. I know Clark and his team are managing just like they were our own existing assets, so typically we would take those loans in, write them down like Kelly talked about and dispose of them.

Depending on what state they’re in it’s going to take some time to actually get final product sold and take possession of it and get it finally sold out. It’s hard to give a figure what that is but know that when it is in OREO, at least those assets that are in OREO, we have the FDIC lot share agreement allows us to put back the expenses that it costs to manage those OREO assets.

So even though you’re going to see increases of OREO assets from Colonial, our expense base shouldn’t go up because of that, that much.

Operator

Your next question comes from Craig Seigenthaler – Credit Suisse.

Craig Seigenthaler – Credit Suisse

I had a question on the non-performing loan valuation. It looks like the charge off coverage on the change in MPL balance is down a lot sequentially. And it also looks like a lot of the MPL growth came from CNI loans which have historically had much higher severity. So I’m wondering if you could either provide the inflow of problem loan level this quarter versus last quarter and also maybe a little more granularity on the problem loan valuation this quarter.

Daryl Bible

As far as the inflows we definitely saw a larger increase in inflows on the commercial side. I think that’s a mix of some loans on income producing CRE as well as CNI. We did have one large significant credit that’s in that number that we believe will come out in the fourth quarter. It will kind of move those numbers dramatically.

If you take that one significant credit, it was close to about $90 million out, and you make that adjustment then you wouldn’t see as much of a run off in that category. It’s still an increase but not as much and we believe that we don’t really have any loss exposure with that asset.

Craig Seigenthaler – Credit Suisse

So on that shared national credit, it was a $90 million notional loan and I guess you took a charge off at a percentage of that which you think could actually come back in the quarter. Is that correct?

Daryl Bible

It went into our non-accruals. We don’t believe we have a loss. There was no loss taken. So even though it went in there, there’s restructuring going on with that credit that we believe we’re going to be fully secured on it.

Operator

Your next question comes from Greg Ketron – Citigroup.

Greg Ketron – Citigroup

I had a follow up question on the OREO situation. One is the type of property that you’re seeing flow in, maybe new to OREO account, how much of it might be the lot loans, how much might be the four family commercial type property. Any breakdown you might be able to provide.

Daryl Bible

For the most part, there’s really a mixture of both flowing in. The vast majority is definitely residential mortgage related so it would be vertical construction as well as land and lots. As far as the other CRE goes, it’s a lot smaller percentage. As Kelly said earlier, the sales are mainly, about 70% to 80% of sales this quarter were verticals construction.

That is actually an increase in more sales on the land piece than we had last quarter. It is the harder piece to move but it is moving a little bit faster than it has in prior quarters.

Operator

Your next question comes from Nancy Bush – NAB Research.

Nancy Bush – NAB Research

A couple of questions, points of clarification, Kelly you talked about on the lot portfolio, lot loan portfolio that you were working with borrowers etc. Could you just add some color to that? I guess I’m a little bit clueless as to how you do a loan modification in a lot loan portfolio.

Kelly King

What happened was remember, virtually all of these were where people from different parts of the country ultimately plan to retire in our market and so they would buy a lot and get a three to five year bullet loan from us expecting that in that period of time they would retire, sell their home, move here and build. It’s been happening that way for my whole career.

What happened here is two things; one is they had challenges with regard to the lot value, and more importantly they were concerned about their 401-K’s dropping, their ability to sell their house. They could no execute on their plan to retire at this time.

So we talked to enough people. We kind of know that’s what’s going on and so what we did was we proactively reached out to those clients in anticipation of maturities and offered them a restructuring plan that allowed them to amortize it over I think we did 15 or 20 years because it wasn’t realistic for them to come down and build a house now when they couldn’t sell their other house.

So we just proactively offered them a proposal that made sense. It still allowed them to accomplish their long term purpose and that has been extremely well received and the vast majority of those clients have been very appreciative, have accepted those restructuring terms and it’s performing as agreed.

Nancy Bush – NAB Research

Does that then dictate that the loan go on non-performing until some kind of performance target is reached or can that just be a simple work out.

Kelly King

It’s fairly complex. It depends on a number of factors. One is the appraised value of the property, whether it was past due or not, what’s the beacon score of the client. There’s some scenarios under which that would have to become a TDR. In many cases they would have to become a TDR. But you have to look at it loan by loan.

Daryl Bible

The only think I would add to that is out of all the loans that have renewed this past quarter, only 6% really had issues that would either go non-accrual and have to get impaired. The other 94% we were able to put on a new schedule and they basically as agreed upon.

Nancy Bush – NAB Research

Early in your comments, you made a comment about $0.0.45 to $0.05 special things that should be looked at and one of them was some special loss or something like that or some special charge. Could you expand on that?

Kelly King

Nancy you’ve been in the business for a long time and I’ve got a lot of respect for you. I think you’ll be able to understand my answer. This is one of those unusual situations where I really wouldn’t be wise for me to give you the exact detail, but it’s a fairly aggressive reserving for us against something that we think will be resolved in the not too distant future and it’s absolutely a non-recurring type of situation.

Operator

Your next question comes from Christopher Mutascio – Stifel Nicholaus.

Christopher Mutascio – Stifel Nicholaus

You net charge off guidance for the year of $1.8 million to $1.85 million, is that for legacy BB&T’s average loan book or does that also include the addition of CNB’s average loan book?

Kelly King

That’s the legacy of BB&T.

Christopher Mutascio – Stifel Nicholaus

Daryl just to follow up on the purchase accounting, you went through some details on the percent, the changes in the basis point of the margin for a purchase accounting adjustment. Was there any benefit on the net interest income dollar this quarter?

Daryl Bible

There was. When we look at the impact for Colonial for the third quarter when I take into account the net interest income as well as our fee income expenses, I added about $0.02 to the quarter in the third quarter and I think if you look at it conservatively, it’s probably $0.03 to $0.04 in the fourth quarter.

Margin was probably on a purchase accounting basis only and it’s difficult to describe what’s purchase accounting versus not because we wrote down the assets and you’re receiving a wad of cash off of a base that generates more earnings. It’s probably worth about two basis points just on pure purchase accounting.

But obviously by aggressively managing the liabilities and having a smaller book balance off of a bigger asset base that generates cash, you can see that you have higher potential yields on those other assets but I don’t put that in purchase accounting.

Operator

Your next question comes from Brian Foran – Goldman Sachs.

Brian Foran – Goldman Sachs

Can you talk about the commercial construction book from two aspects; first it looks like non-performers were up fairly significantly this quarter, so the outlook for ultimate level of strength. And then secondly when the balances being down several hundred million this quarter, coupled with several hundred million growth in the permanent mortgage income producing book, so how much of the commercial construction is kind of moving off balance sheet and how much of it is being turned out in your permanent mortgage book?

Kelly King

Some of the construction portfolio is simply that structure maturing and on our own books becoming permanent. So we start as a construction loan to construction finish and then it moves into permanent. Some of it does move out into the external market, but we underwrite all of our construction credits so that we are prepared to hold them if that’s what the client prefers.

In terms of the increase in the commercial CRE, it’s kind of a cross the board what you’re still seeing in the commercial CRE, is some deterioration, some small office buildings, a little of deterioration in some small strip shopping centers. Nothing big. It’s very granular. This portfolio has an average of about $543,000 in size so you just don’t have any one big answer I can give you there. It’s just a little deterioration across the board in those smaller credits.

Operator

Your next question comes from Betsy Graseck – Morgan Stanley.

Betsy Graseck – Morgan Stanley

I wanted to turn the conversation a little bit towards some of the goals that you have for CNB and the CNB branches. Could you just outline for us what your key goals are over the course of the next one to three years, what you’re measuring, what kind of time frame you’re going to be looking to hit certain goals and how you’re going to disclose that to us?

Kelly King

The most important in any merger, but particularly in a merger like this is to stabilize the market, stabilize the clients so that you don’t have any client loss. This is particularly important in this case because of all the negativity around Colonial and just the nature of an FDIC assisted transaction.

So step number one is to stabilize the deposit base. You don’t have to worry so much about the loan side. They’re not going to run off. So you stabilize the deposit base first. We’ve done that much quicker than I had even hoped to be honest with you. It’s gone just extraordinarily well. The communities in Florida and Alabama, even Texas have received us extraordinarily well.

The employees are on a real culture high and the clients know BB&T because our reputation is very, very positive. So the deposit market is stable.

The next step is to move that retail platform to a sales mentality. That has already started. We started late last week our first sales program through the Colonial branches. Early returns are very positive as the employees are excited finally to be able to sell. Remember that the last two years, particularly the last year, they were just on hold. They couldn’t sell anything. They were just really held back.

And then the third step is to basically restructure their lending machine. They were totally focused on real estate lending and in many cases the kind of real estate loans we don’t want to make. So we said up front and I would reinforce it, the real challenge in this merger is to build out for them a lending machine. Fortunately that’s BB&T’s strongest suit, so we will be doing that.

In terms of time frame, the deposit part is stable. The sales culture in terms of retail side will be I think up to full speed within a year or so and then it will take a couple of years or so to get the loan machine going where we want it to go.

Betsy Graseck – Morgan Stanley

Then a separate question on the reserves; with gross stabilizing at roughly 20% Q on Q, how do you look at the reserve levels going forward?

Kelly King

That’s a really good one and to be honest with you, I think we’re going to thoughtful about dramatic raises in the reserves going forward. Obviously it’s a function of what happens to your non-performing assets but heretofore, there’s been a real focus on building based on the absolute levels and trying to keep the allowance at appropriate levels relative to non-performers.

My view is that as you near the end part of the cycle which is where I think we are, then you begin to think about your allowance somewhat differently in that you’ve already flushed out a lot of your problems and the probabilities of future problems goes down as you near the end of the game.

So for example you saw us this time allow for the first time our allowance to non-performers drop below one. Historically in good times, you certainly wanted to be well above one. As you enter the early part of the cycle, that’s a pretty good indicator.

But as you move through the cycle it’s not realistic to expect that number to be above one at all. In fact, it’s not unrealistic for it to be meaningful below one because again you’ve already flushed through some of your worst credits and you know a lot about your migration, experience, you know a lot about your ability to collect.

So you just don’t have to have quite as many dollars in allowance for every dollar of a problem loan. So I think what will happen Betsy for us, and probably for the industry is you’ll probably see the allowance continue to go up but at a slower pace probably for the next two or three quarters.

Daryl Bible

One thing I’d like to add to that is we saw that our unallocated reserve increase. It was $65 million and now it’s $100 million.

Kelly King

Which kind of proves the point that as you get toward the end of the cycle you just don’t even have as many direct ones to allow for.

Operator

Your next question comes from Jeff Davis – FTN Capital Markets.

Jeff Davis – FTN Capital Markets

Kelly you partially just answered my question but just sort of a follow up then in terms of credit losses for the industry and BBT, and maybe looking back last week things were somewhat of a mixed message from the release earnings. Are we decidedly at a peak in credit losses?

Kelly King

I wouldn’t be prepared today to call it a peak like a peak, peak. What I would say is, and this is intuition, but also based on just looking at our metrics. I think we are nearing the peak. If I had to stake myself out, I would say you’re certainly going to see over the next two or three quarters, I suspect you’ll see non-performance of the industry and for us continue to increase probably at a declining rate of increase.

And then frankly, as you see the economy begin to stabilize and grow, you’ll begin to see non-performing asset sales increase because the market place is going to figure out when you’re at the peak, that’s when you want to start buying. So you’ll see demand for these products go up materially I think over the next six to 12 months.

So you’ll get helped on both sides. You won’t be putting as many in and you have more going out the bottom. So I wouldn’t call it a peak today, but I think it’s not nearly as far away as it has been.

Jeff Davis – FTN Capital Markets

Not to put words in your mouth, and maybe it’s obvious but if the economy muddles along 1% to 2% GDP next year, is the rate of improvement in charge offs just a gradual lift from here? Is it gradual improvement or have we flushed as an industry so many bad credits that the back half of 2010 even without the economy, credit costs start to drop notably.

Kelly King

Well you framed the question well. It really does depend on what happens to the economy. Back in January when we were talking all together, we were kind of projecting charge offs and so forth and we gave a little lower number than we’re at now.

But we said, if the economy is bad enough and we start seeing unemployment close to 10% that begins to change things. That occurred. If the mood in the economy stays such that unemployment gets above 10% and hangs there then you’ll see a stagnant level of high non-performers for a material time.

I don’t think that’s going to happen, but that would be the result of that. So right now the pace at which we peak and the pace at which we decline is a function of consumer and corporate confidence. And to be honest with you, I think that’s largely right now based on what’s coming out of Washington.

When you were coming out of the first quarter I think the mood was clearly improving and people were beginning to think we were getting ready to get through this thing and move on. And then all the rhetoric coming out of Washington about health care and taxes and all that has just put people on the sidelines.

I get a lot of anecdotal feedback because I sit on the Federal Reserve Board in Richmond and I always say my comments and my personal ones are not the ones of the Federal Reserve Board. But based on all the feedback that I see, the underlying metrics are turning. But whether it continues to turn will be a function of confidence and we’re going to need some positive leadership out of Washington to restore confidence so people will be willing to go ahead and invest and buy.

Operator

Your next question comes from Christopher Marinac – FIG Partners.

Christopher Marinac – FIG Partners

I just wanted to clarify on the goodwill that you added from Colonia this quarter, will that be reassessed each quarter and perhaps actually be declining in the negative goodwill days of BB&T in the past?

Daryl Bible

We actually go through an assessment every quarter to see if there’s any impairment. We do that for all of our acquisitions that we have. But the goodwill number in and of itself of 690 will not change. The CDI will get amortized. We’re going to amortize that on an accelerated basis over 10 years, with the bulk of the expense running through the early part of that 10 year time period.

Christopher Marinac – FIG Partners

On the $4.1 billion of cash that you mentioned, was that increased from what you originally disclosed or does that include some of the cash that Colonial themselves had?

Daryl Bible

What we did is, it was really the net difference between the assets and the liabilities that was acquired from Colonial. That was the wire that the government sent to us. And we used those funds really just to pay down our net borrowed position in the company. So that’s one of the big reasons why the balance sheet is a little smaller than maybe people were expecting, is that we were able to just pay off our national market borrowings by the net wire that the government sent to us.

Operator

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

Paul Miller – FBR Capital Markets

My question has to do with credit quality. I know you’re sick of talking about it but on your loans 30 to 90 days past due, especially in your commercial loans and leases, we’ve seen a pretty good improvement from $600 million down to $365 million over the last couple of quarters, but the numbers on the non core loans continue to go up pretty fast. Can you talk a little bit about the process of the early stage delinquencies and when it moves into MPA’s?

Kelly King

What happens is, if you think about the nature of these clients, when they first start out of course they’re flush with cash and flush with extra collateral, and then as the economy stagnates, they begin to use up liquidity. They begin to get a little past due. And as you work your way on through it, they get more past due and then ultimately they are out of cash and they become a non-accrual, and then you go through the process of resolving the situation voluntarily or in the court process.

So a lot of times it takes a long time to move them through the cycle. But that’s why I think what you’re seeing now shouldn’t be too surprising because the clients that are going to have problems, the less capitalized, the projects that are the more difficult ones, they’re will identified. They’re already in the game so to speak, so they are the ones that are pushing now. They’re already at the end of 90 days. Now they’re pushed into non-performer, then to non-accrual, then they get pushed into OREO.

That’s kind of the bucket that it’s moving through. I think that’s why you’re seeing your 30 day and 90 stabilize, is because we’ve already got in the hopper the ones that were most likely to become challenges to start with.

Daryl Bible

The other thing I would add to that is that large credit that $90 million one was basically paying as agreed throughout this whole process and he went right into NPL. So that was just a jump. He went right through the past due.

Kelly King

And they’re still paying by the way.

Paul Miller – FBR Capital Markets

The big question is, is the cure rate probably very low for these loans going 30, 80, 90 days past due. Even though defaults are down, the cure rates probably are not that great.

Kelly King

I think right. I think once these clients get to 90, that’s particularly why I was talking about some of the other industries, competitors, once these real estate guys get up to 90 days plus, think about the nature of their business. All they’ve got is house and lots. They don’t have anywhere to do.

So it’s going to become, unless the market turns around real fast and they start selling lots and houses, it’s going to become a non-performing assets and ultimately OREO.

Now you do need to factor in when you’re thinking about your aggregate, look at the industry and to some degree us, there are some positive signs out there in terms of particularly the lower end houses. Lower end housing prices have stabilized in more markets. Lower end volume sales is increasing.

You’re beginning to see, I was just told last week from many of our Presidents some of the lowest tract builders are beginning to go into some of these markets and take down lots again which is a very positive sign. So this thing could almost turn on a dime for a lot of these clients because if he’s sitting there with a bunch of houses and a bunch of lots and all of a sudden a track builder comes along and want to buy 100 lots, he’s got enough cash to cover for quite awhile. So it’s a challenge to know exactly how that might work out.

Operator

Your next question comes from Jason Goldberg – Barclays Capital.

Jason Goldberg – Barclays Capital

I think you mentioned we should look at the combination of restructured loans what you call MPA’s and 90 days past due. I don’t think you include restructured loans in your MPA’s on page 14. Could you just tell us if you do or don’t and if you don’t or even if you do what that number is.

Daryl Bible

I think we also included in the PDR numbers which are actually in the 

Jason Goldberg – Barclays Capital

I guess for the third quarter you don’t have that?

Daryl Bible

I think we normally publish that in the Q. I think last quarter we were $120 million or so and we think it’s going to go up a bit but nothing too significant from that.

Jason Goldberg – Barclays Capital

You mentioned stabilization in delinquencies. To what extent, or maybe you can quantify the impact of loan modifications or foreclosure moratoriums are impacting those numbers.

Kelly King

You’re seeing some impact on that in the consumer portfolio. Remember I talked specifically about the lot portfolio. That’s been material but only on that $1.8 billion portfolio.

The restructuring and modifications also has an impact in the mortgage area, but I don’t think that would be what I’d call material to the aggregate stabilization of the consumer metrics.

Jason Goldberg – Barclays Capital

I think I had in my notes that there would be some sort of bargain purchase price gain on the Colonial transaction. Could you just explain why there wasn’t just given the purchase price?

Daryl Bible

We went through that. We had really three line items that created the goodwill and when we were initially evaluating the company, the bulk of the goodwill is associated with the deposit premium that we paid as well as the interest rate mark on deposits, and then the mark on the advances.

We decided to pay off the advances because we thought that was beneficial to our earnings and to our liquidity position to do that early rather than keep them and amortize it over time.

Operator

Your next question comes from [Ed Nagarian – ISI Group]

[Ed Nagarian – ISI Group]

Just wanted to focus on the other commercial real estate piece outside of land and home development, the 40 basis point loss in the second quarter going up to 1% loss in the third quarter. Could you give us a little detail on what’s driving that increase and other CRE losses what types of properties?

Kelly King

There’s not any one particular category. It’s kind of a broad base. Remember this is an average portfolio, the size of $543,000. You get a lot of small things to just kind of creep up on you.

Daryl Bible

The three industries that are under more stress in that area are retail, office and hotel/motel. Those are probably the three major segments where if you had to pick which industries we’re seeing higher increase in MPA’s and charge offs, it would be those industries.

[Ed Nagarian – ISI Group]

Do you expect that to get materially worse before it stabilizes?

Kelly King

The issue there is back to the question of unemployment and how high it goes and how long it hangs because we don’t have the super high rise hotels and super high rise office buildings. We have the Quality Inns and the Hampton Inns and that kind of thing. So to the extent that the consumption patterns today based on the consumer public’s conservative view towards traveling and entertainment stays where it is, then you would see some continued deterioration of that.

If as the economy is expected to change we see a topping out of unemployment and then things start steadily improving, you would see some contingent increase but nothing dramatic and then beginning to improve corresponding to the improvement in the unemployment rate.

[Ed Nagarian – ISI Group]

Just in terms of a broader question on reserves, you’re still building reserves at about the same pace in the third quarter here that you built them in the first and second quarter. For most of the big banks that reported last week we saw noticeable decline in the pace of their reserve builds. I’m just wondering do you expect to keep building reserves that are around this pace for several more quarters or should we expect a drop off in the pace of reserve build? How should we think about that?

Kelly King

You have to kind of take it a quarter at a time and remember again, GAAP reporting today, there’s a very scientific methodology in terms of how you calculate the reserves that you have to follow particularly. But that having been said, I think you will see an absolute increase in reserves for us but at a decreasing rate as we go through the next two or three quarters.

[Ed Nagarian – ISI Group]

A decrease in dollar rate?

Kelly King

Probably. I’m more clear about a percentage.

[Ed Nagarian – ISI Group]

The $35 million extra FDIC charge, could you remind me what that was and that is not going to recur in future quarters or what is that?

Daryl Bible

That’s year over year. If you recall last year we had actually credits with our FDIC expense. So you’re really just seeing a change in that line item between us not having to pay an expense last year due to the credits to us paying the full rate of the FDIC. Plus it is up over last year a little bit.

Operator

Your next question comes from Jamie Peters – Morningstar.

Jamie Peters – Morningstar

[inaudible] bullish on long term on quarter. Was that net migration out of the state for first time in 40 years and unemployment hovering around 11% are you expecting a significant lag on a recovery of that market? And could you talk about your short term, medium term outlook for that state?

Kelly King

My understanding is in the last two or three months, it is now reversed back to positive in migration. Remember the out migration was a function of the general economy but also the storms and memories are short. The storms subside and people start moving back in. So I may be wrong, but I was told recently about some people in Florida that it is turned to migration.

The values down there have been so deep discounted that for baby boomers that want to end up living in a place that’s warmer, it’s inconceivable to me that Florida will not come back fairly strong. Now I personally think it will be, let’s take Tampa for example, I think it will be kind of spotty.

For example, you’re already, we mentioned on an earlier call what the people in Florida tell me is that that market actually deteriorates and then improves from the south to the north. So you have already relatively more improvement in the Gulf Coast for example than you do in the north because it hits the north later. So you’ve got that phenomenon.

Then you’ve got the phenomenon of the nature of the market. For example, Miami has more high rise condos and most of the biggest problems are still in those condo projects. I think I would project that ’10 would be kind of a year of finding a solid bottom in Florida and then in ’11 you’ll begin to see some steady improvement.

I don’t think Florida is going to be some kind of whip around turn around in 18 months. I don’t mean to imply that. I just think over the next few years its going to be a solid steady improvement and for the long term it’s going to continue to be one of the most important states in the country.

Operator

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

Jefferson Harralson – Keefe, Bruyette & Woods

I was going to follow up on Jason’s question just to make sure I understood what you were saying there. It sounded like you were saying that you pre-paid some debt at Colonial which kind of traded near term in addition to goodwill in exchange for higher EPS over some period of time. Am I understanding that correctly?

Daryl Bible

I think the way to think about it is the goodwill that we have basically gives us the ability to accrete earnings more so over the next five years or so. So it’s a hit to our tangible equity capital but it’s a positive to the run rate of the earnings.

Jefferson Harralson – Keefe, Bruyette & Woods

Can you quantify that and/or in combination of that how accretive you think that Colonial was even though you only had it for half a quarter this quarter?

Daryl Bible

I would say right conservatively, when we did the deal we said around $0.15. I think we’re able to go from $0.15 to $0.20 right now and as we get more clarity in the acquisition, we can maybe update guidance a little bit further.

Operator

Your next question comes from Heather Wolfe – UBS.

Heather Wolfe – UBS

Two quick questions on the Colonial balance sheet; the loan volumes that you consolidated. First can you tell us what the carrying balance was at closing and also can you talk a little bit about how much of that you expect to run off over the next couple of years and how quickly you might be able to get some of these credits that weren’t underwritten to your standards off your books.

Kelly King

One thing I’ll tell you before answering your question, we will publish an unaudited beginning balance sheet from Colonial before October 30, so you’ll be able to see that. But the loans before the mark are about $13 billion. They were about $300 million lower than what we thought when we were bidding on the transaction, but remember we were bidding on a June balance sheet.

After we take the fair value market, it’s about $8.3 billion is what the amount is. And the way we model these assets is that these assets would probably pay down fairly aggressively, probably 50% to 60% over three years or so and the rest remaining being a longer tail.

Operator

Your next question comes from Vivek Juneja – J.P. Morgan.

Vivek Juneja – J.P. Morgan

The reserve commitment, that was up pretty sharply. Is that separate from the contingent liability reserve?

Daryl Bible

If you’re on the press release, there was about a $70 million adjustment that went through purchase accounting. On the lines, unused lines from Colonial, that mark didn’t go through earnings, it just went through purchase accounting, is why you saw that big increase in that unused line.

Vivek Juneja – J.P. Morgan

On lot loans, you talked about MPL’s were up 25%. You talked about doing a lot of restructuring of these lot loans and the ones that are not working out going to TBR’s. Can you talk about what drove such a large increase in MPL’s?

Kelly King

Are you talking specifically about the lot portfolio?

Vivek Juneja – J.P. Morgan

Yes.

Kelly King

That’s just a process of working through the restructuring process as well as the non-restructured. Not all clients were candidates for restructuring based on our assessment of collateral and Beacon scores and that kind of thing. So it’s just a combination of what flushed out of the restructuring process and what didn’t, and put a restructuring process that then became non-performers.

Tamara Gjesdal

Although we have a number of callers with questions remaining in the queue, due to time constraints this will conclude today’s question and answer session. If you have further questions or need further clarification, please don’t hesitate to contact the BB&T investor relations department.

Thanks and have a great day.

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Source: BB&T Corporation Q3 2009 Earnings Call Transcript
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