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BB & T Corp (NYSE:BBT)

Q1 2008 Earnings Call

April 17, 2008 11:00 am ET

Executives

John Allison - Chairman and CEO

Chris Henson - CFO

Tamera Gjesdal - SVP IR

Analysts

Steven Alexopoulos - JPMorgan

Matthew O'Connor - UBS

Mike Mayo - Deutsche Bank

Nancy Bush - NAB Research

Todd Hagerman - Credit Suisse

Christopher Marinac - FIG Partners

Chris Mutascio - Stifel Nicolaus

Jefferson Harralson - KBW

Greg Ketron - Citigroup

David Hilder - Bear Stearns

David Pringle - Fells Point Research

Operator

Welcome to the BB&T Corp’s first quarter 2008 Earnings Call. (Operator Instructions).

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

Tamera Gjesdal

Good morning, everyone, and thank you, Diego. And thanks to all of our listeners for joining us today. This call is being broadcast on the internet from our website at BBT.com/investor. Whether you're joining us this morning by webcast or by dialing in directly, we are very pleased to have you with us.

As is our normal practice, we have with us today John Allison our Chairman and CEO, and Chris Henson, Chief Finance Officer, who will review financial results for the first quarter of 2008 as well as provide a look ahead. After John and Chris have made their remarks we will pause to have Diego come back on the line and explain how those who have dialed into the call may participate in the question and answer session.

Before we begin, let me make a few preliminary comments. BB&T does not make predictions or forecasts, however there may be statements made during the course of this call that express management's intentions, 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 31st, 2007. Copies of this document may be obtained by contacting the company or the SEC.

And now it is my pleasure to introduce our Chairman and CEO, John Allison.

John Allison

Thank you, Tamera. Good morning and thank all of you for joining us. Areas that I'd like to discuss, the financial results for the first quarter primarily focusing on credit quality, which of course is the big issue. A few quick comments about mergers and acquisitions and then share with you a few thoughts about the current environment and the future. Chris will give you some updates on a number of areas and we will have some time for questions.

Looking at GAAP, net income for the first quarter, we made $428 million, an increase of 1.7%. Operating earnings for the quarter were $401 million, down 5.6%. GAAP diluted EPS for the quarter was $0.78, up 1.3%. Operating diluted EPS was $0.73, down 6.4%. The $0.73 was consistent with the consensus estimate.

There was a lot of noise in the quarter; we did include $43 million in security gains as part of operating earnings. The reason we did that is that, we had an unusual opportunity we call it the slope of the yield curve and the very high quality of our investment portfolio, we were able to take the gains and increase net interest income this year by over $11 million without increasing risk or materially extending the maturity of the portfolio. This odd set of opportunities is very favorable, for one reflecting the very high quality of our bond portfolio.

If you take out the security gains, and exclude them from operating earnings, operating earnings were $0.68 this year. On the other hand, we added $98 million of loan loss reserve above charge-offs, which is obviously an abnormal factor to do. If we take out both security gains and the addition to the loan loss reserve, then operating earnings would have been $0.78.

If you look at the factors driving earnings, there was also some very good news from our perspective and that was the continued improvement in our margin, which increased from 346 to 354, eight basis points, the second quarter in a row. Our decision to be liability sensitive as a hedge to risk in real estate market has turned ought to be very wise and Chris will be given you some more insight into the margin.

On non-interest income growth, we are fairly pleased with, in light of the kind of environment we are in, looking annualized fourth-to-first, excluding non-recurring items, purchases and net mortgage service right impairment, our non-interest income growth was 5%, first-to-first was 9.3%.

Again, excluding non-recurring items and purchases and I am going to focus on first-to-first because we have a lot of seasonal anomalies. This happens at many of our businesses over a long period of time.

I will focus on first-to-first comparison. Insurance commissions were up 4.9%, which is extremely impressive in this environment, since premiums may fall in 10% to 15%. We are obviously moving share pretty rapidly in the insurance business.

Service charges were at 9.3%. We had a 36,000 net new transaction accounts, a very strong performance. Our non-deposit fees and commission, which is basically are debit card and bank card fees, were up 11.3%, investment banking 4.9%. Trust was essentially flat. Mortgage banking income excluding mortgage servicing rights was at 38.6%. We did have a number of accounting changes. We had corporate fair value accounting, which added $31 million, but we also had an impact of SFAS 159, which increased our personnel expense by $16 million.

We had a very strong production quarter, and mortgage loans. Last year first quarter, we produced about $2.5 billion. Originations in the first quarter of 2008 were $4.4 billion, up 78% in a tough market. We are significantly moving market share due to an elimination of a number of our competitors in clearly fight to quality. There was a lot of volatility in the market, which made it difficult for us to capture, in terms of revenue the whole increase in production volumes. But we think we will be able to do that going forward.

We had a strong first quarter in the mortgage business, which is obviously dependent on market conditions, and are thus very optimistic. We can even show better results going forward in terms of bottom line and profitability on the mortgage banking. This is a kind of a fundamental shift in the business, and the elimination of irrational competitors is very good for us.

We had a few strange results in other income, which was down 76%, compared to the first quarter, and a few positive. Client derivatives activities were up $10 million. We had a series of negatives, with trading losses at a strength of over $6 million. We had SFAS 157 adjustment of $9 million. Our [IOLTA] trust was down $12 million. [Boli] was down $15 million, and we had partnership losses of $8 million. Last year in the first quarter we had a sale of insurance subsidiary in which we made $19 million, so that was down $19 million in comparison.

Our other non-interest income at $15 million is far below our normal run-rate. Now the numbers bounce all around, but our normal run rate is about $40 million, and while this number will vary from quarter-to-quarter, we had much lower number than we typically will have in other non-interest income. I wanted to mention looking forward that will impact earnings.

We are in the process of considering doing the sale of leaseback on a number of our physical facilities. We haven’t finalized the agreement and that would obviously depends on the pricing been something that is favorable to us. If we are able to execute the sale of leaseback it will increase EPS about $0.01 this year because of the timing but the annual run rate going forward will be about $0.04 a year and we hope that transaction will get done in the next of quarters.

Good news in net revenue growth. If you look at annualized fourth-to-first and try to take out all the noise by getting to the same store sales numbers and taking out non-recurring items, purchases, mortgage servicing rights, as well as excluding other income and security gains you can arrive at a real same-sales number. Annualized fourth-to-first we were up about 5.2% in a tough environment, annualized first-to-first up 7%. Our fee income ratio was 40.2% kind of a little bit above our short-term goal, our long-term goals get to 45%. Had a story on expenses, and last fourth to first up 5.6% first to first 4.4% again taking out purchases. Chris will give you some insight into the expense numbers.

Loan growth was also a good story overall, looking at average loan growth, annualized fourth to first using GAAP we were at the total of 8.5%. If you look at fourth to first without purchases and leveraged sales and looking at the different components portfolios, we had very strong commercial loan growth at 15.4%. Direct retails essentially flat, sales finance was essentially flat. Strong and revolving credit, basically credit card growth at 14%, mortgage was up 6.1% but lot of that was the warehouse as we had very little growth on purpose in our portfolio of mortgages and specialized lending was essentially flat for a total growth of 8.9%.

If we look first-to-first, again using GAAP, total loan growth was 9.2%. Taking out purchases and leveraged sales, commercial loan growth was 9.4%, direct retail 1.8%, sales finance 5.2%, revolving credit 15.4%, mortgage 10.3%, specialized lending 7.1%, total growth is 7.9%.

So we actually had stronger real growth fourth-to-first than we've been having. If you look at first-to-first and most of the increase in momentum was in our commercial lending business and in our revolving credit business. We had very strong C&I loan growth, the disruption of the camper market has given us some lending opportunities. A number of our major competitors are less competitive and less irrational on the pricing and risk-taking elements of the commercial market. There is clearly a flight to quality. And we are known as a reliable lender.

We are also experiencing higher utilization in our commitments probably reflecting the economy. We have got practically no growth in our residential and construction development business on purpose and we had slower CRE growth but very strong C&I growth.

Our direct retail is essentially flat, and what we are seeing is fairly strong production volumes. In a sense we are pretty much in A-grade lender, we are having a fair amount of home equity loans to refinance people who go and refinance their first mortgages.

The finance business, automobile industry is very slow, particularly domestic, companies which we are largely related with. We are clearly gaining share with a number of the other finance entities, but we are in a slow growth environment .

Focusing on our own client base, credit card business is strong. Mortgage production was excellent but we are not portfolioing much of our mortgage business. Our specialized lending businesses are slow, reflecting the economy. But overall, we are pleased with our loan growth.

Looking at deposit growth, non-interest-bearing deposits first-to -first were down 3.3%, annualized link are down 11.2%, planned deposits without purchased accounting again, first-to-first up 3%, basically flat on an annualized link basis. And total deposits up 3.6% first-to-first and annualized linked, again without purchases up 6.2%.

We have consciously slowed our deposit acquisition program to improve our margins. There seems to be a continued level of irrationality from community banks on deposits or income rate, which are inconsistent with capital market rates.

Also, in terms of noninterest-bearing deposits, the real estate market has the impact. It is not just our builder class, but we have lot of title insurance and returns etc that are related to real estate. We also had a quirky thing. One of our largest transaction clients had almost a billion dollars of deposits. He got acquired and that is one of those black birds that happens to you. We still have the capacity to accelerate deposit growth in any time we want to, but we really want the market to get more rational before we focus on doing that.

The big issue of course is asset quality and I want to focus on that. We did have a fairly significant increase in non-performers. They increased from $696 million to $989 million, and as a percentage of assets from 0.52% to 0.73%, almost all the increase was in the residential real estate related activity.

The reason for the increase our economy, in our area is these experiencing recession. I think we were little slow to get into it, it may be while we have a little drag in the increase and the other thing is we are an A grade lender and the first problem in the real estate markets were in our risk credits and we are seeing problems in people that a year ago were certainly had been classified as A-grade credit. We're trying to deal very effectively with the problems. You'll note that our 90-day past dues only went up from 0.24 to 0.27, so we're getting them on a non-accrual status very aggressively.

Our charge-off results were up, but still pretty good. Charge-offs for quarter were $0.48, they went up to $0.54 in the first quarter. If you take out specialized lending, charge-offs for the fourth quarter were $0.28, charge-off in the first quarter $0.32, so we're still getting very good results from a charge-off perspective.

We did provision $223 million, we charged-off $125 million, so we added $98 million, almost $100 million to our reserve above charge-offs. Coverage of charges-offs remained at about 2.2 years of coverage. Coverage in non-accrual runs was $1.44. If you look at the reserve to loans, excluding loans held for sale increased pretty significantly from $1.06 at the end of the first quarter last year, $1.10 at the end of the fourth quarter, and then $1.19 at the end of the first quarter of 2008.

Let me talk a little bit about our residential construction and real estate-related portfolios and our mortgage related portfolios, so that's the focal point from credit quality perspective. You actually have the press release, so I'll refer you to the very last page, credit supplement page two, that looks at our commercial real estate portfolio, and specifically our residential acquisition development and construction portfolio.

Note, the portfolio is about $8.8 billion, about 9.3% of loans, it's a very diversified portfolio with small wins at every client relationship of only $1.1 million. You'll also note that we have very small condo portfolio, which is where a lot of the biggest problems have been. We did have rising non-accruals and charge offs in all of those portfolios. Our total non-accruals for the whole portfolio were 2.75%, loss is 0.27%. We do have a reserve of approximately 4% on that portfolio, already on our loan loss reserve compared to 2.75 of non-accrual. So our reserve is more than non-accruals in that portfolio already.

The other commercial real estate portfolio such as office buildings, hotels, warehouses, apartments, rental houses, and shopping centers, continue to do very well. We are not having any material problems in that portfolio today, which obviously we could. You see that non-performers are only 0.47, charge offs only 0.02 and for the total commercial real estate portfolio, non-performers were 1.53 and charge offs 0.14.

For residential acquisition development construction loan portfolio, our concentration of problems remains Atlanta, Florida, recently Metro DC and largely what we call the peripheral areas, Metro DC parts and Northern Virginia into the panhandle of West Virginia as opposed downtown Metro DC. We are starting to have more problems. The Carolinas continue to do very well, as you can see from these numbers very low non-performers and very low charge offs in the Carolinas.

Looking at page 4, those of you have the press release will take time to talk about our residential mortgage portfolio and our home equity portfolio. We are a large residential mortgage lender and we are an A grade lender. Our prime portfolio is $12 billion, has very high scores as you can see 17, its almost all first mortgage loans

Non-accruals are 0.74 and loan losses are 0.08, still very good numbers. The average loan to value in that portfolio is 74%. Out of eight portfolio, again, very high credit scores, all first mortgages. We are having some rise in non-performers there at 1.25. Losses are 0.24. Our average loan to value in that portfolio is 67%.

Construction permanent portfolio, that's really for individuals that typically buy a lot, get a builder to build on their lot for them, we're having a higher level of non-accruals, as you can see there, up to 2.27. Charge-off still remain low at 12 basis points. What's happened in that portfolio, people started to build a new house expecting to sell their old house, now they can't sell their old house, and that's where we're having problems.

That portfolio has an average loan to value of 76%. And the general point I wanted to make and one reason you see non-accruals go up much more than charge-offs is that we're a very secured lender, and even when we end up foreclosing on a piece of property, we typically don't lose much money. It even goes into our very small subprime portfolio where we have an average loan to value of 75% in our subprime portfolio. And our losses are less than 1% in the subprime business, which is a very small business for us and it's a traditional kind of business.

The problems for residential mortgages look a lot like the construction, Florida being the primary area we're having problems, but also in Atlanta and in parts of Metro DC. Those are the typical markets where we're having issues. The loss ratios in that portfolio for the first quarter were 0.14. Traditionally, that portfolio had about a 5 basis point loss ratio. So it's up a lot from traditionally. But this year we think losses would be anywhere from 15 to 20 basis points. That's up a lot from the 5 basis points, but still a very high quality portfolio. We just really don't see large losses there.

Looking at home equity loans and lines, you'll see that we were primarily a home equity lender in terms of loans. That's our main business, and 77% of those are first mortgages, high credit score, 724, small loans, average size 47,000. Losses have gone up a little bit to 0.40. The non-accruals are low at 0.47.

In terms of home equity lines, we're not a big home equity line lender relative to our size. We try to lend to our clients since almost all of our home equity lines would be to our clients. In fact, about 40% of our home equity lines were behind BB&T first mortgages. We received a very high credit score, 757. We are having more losses there. Not many non-accruals thus giving a high level of losses of 0.68.

And what's happened, and this is particularly true in Florida, if you have a default on a home equity line, you're not going to buy in the mortgage because of what has happened to real estate values. And so, we're not having that much higher default rate. We're just having a higher loss rate when we have defaults. But we're an A grade home equity lender and dealing mostly with our client base.

We also see the gross charge-offs on the portfolio are 0.49, that the concentration tends to be in Florida and Atlanta and in Metro DC, same markets we've talked about. Our projection is that this is fairly close to a run rate for our home equity portfolios that we think will be something like 0.50, maybe 0.55 this year in home equity lending losses.

Our biggest challenge is in the residential construction and development lending business. We are a large residential construction development lender. It has been a core business for us for over 30 years. We have successfully weathered multiple downturns in real estate in the past. We only make loans in our markets where we understand the market, the builders we know. We very closely service those relationships.

We began tightening our standards in the summer of 2005. Our strategy, much I wish had happened before the market started tightening, is to understand the markets. We think immigration of population and affordability are very important. We know our clients, the character of the net worth experience, control unsold units, diversify our risk.

Now we're putting a great deal of focus on intense servicing, making sure we don't over advance. We are trying to work with our clients to help them stay in business and get through the challenging times. We're only basically funding feasible clients that had been in the business for long time, many of which have a lot of net worth from the big profits they made over the long positive real estate cycle.

Obviously, there are times when bars can't be held, and we try to deal with those problems very aggressively and take our losses early. It's important to note that we are a secured lender. We anticipate more deterioration in non-performing assets and increase in charge-offs as we tend not to have large losses on foreclosures.

We're moving real estate fairly effectively right now. Part of that may be the season, maybe the spring. Traditionally, by the time we get an asset into other real estate, we traditionally don't have losses. In fact, net-net, we often have gains in our other real estate portfolio.

Let me make a few comments on some of our other loan portfolios. We continue to have strong credit card growth. All the credit card portfolio is growing with our client base. We're getting strong growth in markets where we did mergers three, four years ago.

While losses have increased somewhat, we are not experiencing significant problems in this portfolio. Losses have increased in our sales finance portfolio to the 75 basis point level, reflecting both the economy and used car prices are up till recently. We do actually anticipate lower loss ratios going forward as, as price have firmed somewhat for used vehicles.

Recent exceptions are our sub prime automobile business, we continue to experience high to normal loss rate but interestingly while the charge-offs and non-performers improved in comparison to the fourth quarter. While we expect a high to normal loss rate for the year, we anticipate the losses will actually continue to decline over the course of the year. The tightening of standards by GMAC and others is actually allowing us to upgrade our risk at very attractive returns in that business.

Our commercial industrial lending business is strong both from a growth and quality perspective. We are actually reducing our risk, as lower risk rate companies are exiting counter markets and low risk clients are seeking other financial institutions with lending capacity like BB&T.

We had a interesting phenomenon going on, we are trying to help non-profit institutions in our market deal with the auction rate market situation. We have over $4 billion and loan and letter of request from high quality hospitals, universities etcetera and other public entities in our area. This is a volatile situation and we are not sure how much will funded but we are in a position to meet the needs of our community and make a profit doing it.

We certainly expect both loan losses and non-performing assets increases, however, over the long-term both our non-performing assets and our loan losses have consistently been better than the industry and we expect to continue.

The best aspect of our asset qualities that we either totally avoid it or had very small exposures in the type of risks that have so significantly negatively impacted many of our large financial institution competitors. We do not do negative amortization mortgages. We have a tiny traditional subprime portfolio. We do not do CDOs or SIVs or a long list of other instruments.

One of the guiding principles in our lending business is to only make loans which we believe are objectively in borrower’s best interest. While this concept will not eliminate losses, it is significantly reduces the probability of losses in the long-term.

Our focus on quality is also reflected in our bond portfolio, in recent years we actually experienced a lower yield in our bond portfolio than most of our competitors. We were criticized for that. It reflected lower risk. However, in the short-term the high quality of the portfolio has allowed us to take gains and increase earnings at the same time this quarter.

Leading asset quality and refocusing on our overall results, we are recently encouraged with the first quarter particularly in light of the economic environment. We experienced solid loan growth, solid non-interest income growth, accessible expense control and a very positive improvement in net interest margin. All healthy achievements in this market.

Changing directions, just a couple of quick comments, on mergers and acquisitions. We are for all practical purposes out of the community bank acquisition business, a combination of our stock price and our inability to due diligence on community bank real estate portfolio has made us very unlikely at least in the immediate future to do community bank acquisitions.

We are continuing to aggressively look for insurance agency acquisitions; you see several listed in our press release. We also look at a few other non-bank acquisitions, but most of our activity will be in the insurance arena. We have the fastest internal growth rate and the best productivity of the ten largest brokers in the US. It's a very difficult market for independent agencies, which makes it a good time for us to do acquisitions and leverage our operating advantage. So hopefully you'll continue to see targeted insurance and acquisitions.

With great trepidation, I will share with you a few thoughts about the future. I did first want to remind you that we do not make forward earnings projections and anything I say about the future may be wrong and probably will be wrong in kind of environment we are in today. We use a blue chip consensus economic forecast for planning purposes. Two-thirds of the blue chips forecasters say we are already in a recession. It sure feels like one in a lot of ways. However, the consensus is that the economy will begin recovering in the second half of 2008 and be in a recovery in 2009.

Real estate markets are obviously very important to us. We expect real estate markets to remain slow and for prices to continue to fall, may be another 5% to 10%, but it will vary a lot by market. We do think real estate will bottom this fall and be recovering in spring of 2009. Real estate price cycles typically run three years and this spring of 2009 it will be three years.

I also strongly believe that real estate values, particularly residential real estate values will be higher in three years than they are today. The fundamental demand for residential real estate has not changed.

As indicated earlier, we expect rising levels of both non-performers and charge-offs. We will probably have more challenges relative to non-performers and charge-offs as we are a secured lender. Last time we told you that our guess and we emphasized it was a guess that the charge offs would be in the 0.50 to 0.60 basis point range. Our new guess and it is also a guess that the charge-offs will probably be in the 0.55 to 0.65 range, still very acceptable level, given the kind of environment we are in.

While credit quality is a dominant concern, it should be noted that the rest of our business is doing fairly well. There is a clear flight to quality in the mortgage business, which will significantly impact in a positive way this business for us. We are seeing more rationality in loan pricing and risked underwriting, which is improving our lending spreads. And general loan competition is more rational and capital markets competition has diminished dramatically. While a positive pricing from community banks remains irrational, we're seeing large banks become more rational in deposit competition.

As Chris will highlight, we have and will continue to benefit from our liability sensitive position, even though we are now moving to hedging against rising rates in 2009. Two other important general considerations, we believe our model for doing business has been conformed, where quality could differentiate client focus competitor. In addition, we are primarily in origination of the [whole] business. We were being negatively impacted in 2005, 2006 and early 2007 from the origination of sale competitors, more rationality in this market is good for us.

In addition, since we were not in these businesses, we're not losing the revenue from not being in the businesses going forward, and I think that's important, so our model has been conformed. In addition to demographic and economics of our core markets are strong, we have immigration of population in most of our markets and above average population growth. More people moving into markets helps a lot with real estate. Population growth cures the real estate market over the long-term.

We also have very large market shares in our markets and we have the largest market share of any of the 15 largest banks in US relative to the market, which is a foundation for efficiency. The markets where we don't have rapid population growth, we tend to have very large market shares.

I'm certainly concerned about the residential real estate markets in the general economy, and we recognize these factors will be negatively impacting our business in short-term. However, I remain confident about our long-term performance, because the fundamental principles with which we run our business have been reconfirmed in this process in a very positive way.

With that said, let me turn it over to Chris for some more comments. Chris?

Chris Henson

Thanks John. Good morning and I would also like to welcome each of you to the call. As is normal, I would like to speak to you briefly about net interest income, net interest margin, non-interest expenses, taxes and capital.

First, looking at net interest income based on operating earnings. If you look at year-to-date comparison. You can see the average earning assets were up 7.6% adjusted for purchases, which produced year-to-date basis of $1.34 billion and net interest income of 5.7% increase over the prior year adjusted for purchases. If you look at linked quarter comparison, first quarter of 04/07, you can see earning asset growth was up 5.1% adjusted for purchases. Again a $1.34 billion in net interest income, a very healthy 10% annualized increase over linked quarter adjusted for purchases in net interest income.

And as John commented, the margin based on operating earnings we are very pleased with, was up 8 basis points from 3.40, six in the fourth to 3.54 in the first quarter of '08. On a year-to-date basis we were down seven basis points 3.61 first quarter of '07 to 3.54 first quarter of '08.

Just a few comments about the margin, during the first quarter we did maintain a liability sense of position which John pointed out, served as more of a hedge against the current real estate markets. The positioning worked really well, as margin improvement accelerated commensurate with the significant decrease in short-term interest rates that we experienced during the quarter.

We continue to experience healthy balance sheet growth, as pointed out, the increase in non-accruals and unfavorable change in asset mix. We continue to book declining percentage of higher yielding assets like commercial real estate loans and direct retail loans, while booking increasing percentage of lower yielding assets like C&I and mortgage. Although the margins in C&I loans and mortgage loans are improving as risk premiums increase.

The client deposit growth once again slowed and resulted in a funding mix shift toward higher cost alternatives. If you look at year-to-date comparison on yields and rates, you can see total earning assets were actually down 61 basis points, while total interest bearing liabilities were down 69 basis points creating positive spread of 8 basis points.

On a linked quarter comparison, you can see total earning assets were down 42 basis points, while interest bearing liabilities were down 60, creating 18 basis point improvement in this spread. And you see the securities portfolio actually performed very well, with the yields up 3 basis points in what I think is a very difficult environment and I think speaks to the quality John was mentioning earlier.

While yields declined primarily in the loan portfolio due to a 94 basis point reduction in commercial loans and leases, that portfolio is 73% variable. So you would expect the short term rates falling.

Total interest bearing liability cost declined significantly as a result of big declines in other interest bearing deposits in Fed funds and other borrowings due to the repricing that was taking place. And once again, just like the last quarter, all of deposit and funding categories declined during the quarter.

The main driver of the 8 basis point improvement in net margin during the first quarter was clearly the decrease in our interest bearing liability costs, which resulted really from two items. One, really effective control of our deposit and funding costs, and then secondly, maintaining the liability sense of position during the falling interest rate environment. We resolved that quite well during in the first quarter.

As we look forward, benefits should continue to accrue from the current positioning throughout the year. Our outcome model, which is based on the Blue Chip consensus forecast, assumes a 25 basis point reduction in fed funds rate in April and also a 25 basis point reduction in August.

And so, the forecast is that we expect margin to increase slightly in the second quarter and continue to increase throughout the year to the low 370s by yearend. Finally, we are beginning to hedge against rising rates in 2009 as we begin to move forward. So, very pleased overall with the margin and expect positive movement for the balance of year.

Non-interest expenses, we were pleased with our expense growth, especially on a year-to-date basis after adjusted for purchase acquisitions, up 4.4%, and given that first quarter is traditionally our lowest quarter with respect to non-interest income generation, specifically the seasonality seen in insurance services, service charges in non-deposit fees and commissions. But given that, we maintained a relatively strong operating efficiency as evidenced by the cash basis efficiency ratio of 52.4%.

Also, interesting to note, the movement in FTEs, I want to give you a little detail on that. If you look at our FTEs in the first quarter of 2008 when compared first quarter 2007, you would see that they increased only by 53 excluding acquisitions. They were actually up 850, but 797 of those were acquisition-related. So, the net increase, excluding acquisitions, up only 53.

On a linked-quarter comparison, excluding acquisition, FTEs increased by 273. About 100 of those were added in payment services, electronic delivery, insurance services as revenue producer and/or revenue initiatives in the case of electronic delivery. About 50 were added in special assets, another 25 in our leadership development program, and the balance of approximately 100 were simply to replace existing vacancies throughout the company. So, overall, I felt really good about our FTE control as well, and we'll stay focused on that because, really, that drives many other expenses.

Non-interest expense growth rates drilled down a bit year-to-date. Again, 4.4% increase over prior year adjusted for purchases equates to $1 increase in total non-interest expense of $40 million after purchases, again, 4.4%. The drivers there, personnel expense was up $8 million, occupancy and equipment up $5 million, and then other operating was up $27 million to round up at $40.

Taking personnel first, the drivers there were the largest,  and really the primary driver was due to the decrease in the capitalized salary expense and mortgage due to the adoption of FAS 157 and 159, a new accounting standard adopted January 1, that John talked about. So we had expense this year that would have historically been deferred to recognize in this period comparing back to '07, when it would not have been there. So, that certainly drove personnel.

king personnel first, the drivers there were the largest being -- and really the primary driver was due to the decrease in the capitalized salary expense and mortgage due to the adoption of FAS 157 and 159, a new accounting standard that John talked about mortgage adopted January 1. So we had expense this year that would have historically been deferred to recognize in this period comparing back to '07, when it would not have been there. So, that certainly drove personnel.

In occupancy and equipment, it was increased rent evenly split between new de novo offices as well as rent in other non-de novo. It's a small number of $5 million. Other operating expense was up $27 million, and the drivers there were about six items pretty evenly distributed; increase in professional services, increase in bankcard and bonus rewards expense, small increase in advertising, increase due to fewer gains on the sale of real estate, increase in write-downs on foreclosed property, and then a small increase in charge-offs. So that's the reasons behind the common quarter change.

Linked quarter expenses were up 5.6% annualized over the linked quarters adjusted for purchases. So that total non-interest expense in dollars was up $13 million or again 5.6%. The drivers there were, personnel expense was the primary driver, up $27 million, while occupancy and equipment was really down, as well as rent, as it was in past discussion, and other operating expense was down $10 million.

The real driver was personnel expense and we've drilled down into that. What you see is about half of it was due to social security increase and social security in unemployment taxes and increase in [thrift] expense due to fourth quarter employees reaching their contribution. And you typically see that shift in social security and unemployment taxes both differs as well.

We also had $8.7 million. Again, it was less capitalized, salary expenses being differed. So we realized more expense in the quarter as a result to mortgage adopted FAS 157/159 new accounting standard. And we had a small increase in executive incentive accrual, which was related to a credit accrual that was taken in the fourth quarter. So we're getting the negative swing of that in the first. And then small increase in salaries due to annual increases that were in effect April 1 of 2007. So that rounds out really the drivers for personnel, $27 million that really drove the overall increase of $13 million in the non-interest expense line.

I want to briefly update you on the progress with respect to our recent acquisitions. We only have one remaining, and that's Coastal Financial. You might recall I targeted savings there was $27 million. We actually converted Coastal August of 2007, and versus that target of $27 million, we have saved $18.7 million to-date and $7 million of that came in the first quarter.

Looking at taxes, I just want to comment on effective tax rate and what you might expect going forward. Effective tax rate actually went from 30.83% in the fourth quarter to 31.57% in the first and you might recall, I commented during the last call that we did have a $3 million a year in credit true-up up in the fourth quarter, but overall tax is fairly stable. Going forward we expect the effective tax rate to be in the range of 31.5% to 32.5% for the second quarter and also for the full year 2008.

Speaking to capital, just a moment, really no changes to overall capital spreads here to report. Capital position overall continues to remain very strong. Equity to total assets at the end of the period stood at 9.4%. Our risk-based capitals in the period to un-risk based capital was at 9%. Risk-based total capital is very strong at 14.1. So obviously our risk based capitals remain strong in difficult environment.

Leverage capital to end of period actually increased from 7.2% in the fourth quarter to the 7.3% the first quarter of 2008, well above our 7% target. Our tangible equity was at 5.6% slightly above our target of 5.55. Overall capital continues to be one of the strengths of BB&T.

As for share repurchases we did not repurchase any shares in the first quarter and looking forward we do not plan to repurchase shares in the near-term but with these costs we reevaluate our position based on the market capital levels et cetera.

As a reminder our dividend in the second quarters $0.46, represents the increase to 9.5% over the prior year quarter and kind of looking forward, given our strong capital position and current projections, we do anticipate increasing our dividend in 2008, but the level of increase will depend on the market conditions of that time.

So, that concludes my comments. Overall, I would say we are pleased with the quarter. At this point, I will turn it back over to Tamera for further instruction.

Tamera Gjesdal

Thank you, Chris. Before I move to the question and answer segment of this conference call, I will ask that we please use the same process as we done in the past to give fair to all conference call participants. Please limit your question to one primary and then one follow-up. If you have further questions, please reenter the queue so that others may have an opportunity to participate.

And now, I will ask Diego to come back on the line and explain how to submit your question.

Question-and-Answer Session

Operator

(Operator's Instruction)

Our first question comes from Steven Alexopoulos with J.P. Morgan. Please state your question.

Steven Alexopoulos - JPMorgan

Chris looking at the seasonal decline in the insurance commissions, it was a lot less than we have seen in another first quarters. Are there any one-timers in the revenue line?

Chris Henson

No, I don’t think. Not that I can think of. I think just reflective of what John spoke of, we really are moving market share, but don’t have any large one time kind of items.

John Allison

We have expanded our product line. We are in some arenas that we weren’t in before and that is probably why you are seeing some growth.

Chris Henson

Well that’s true.

Steven Alexopoulos - JPMorgan

And maybe just one follow-up on non-performers, if we look at the $1 billion in non-performing assets, is that essentially written down to market value now, or is that book value?

John Allison

It would vary. When you go through the non-performing process, when it gets to other real estate, we try to get it down to the market value. The risk is while it's in the process. You write it down, but you don't want to do it multiple times when you're going through a valuation process. When you put it in non-accrual, you get reserves. We think the reserves weigh more than cover the losses in the non-accruals. But you haven't always written every non-accrual down to market value because we you have to go through a valuation process. That's how you get ready to a foreclose on a piece of property or put it on non-accrual.

But you've got to go through the foreclosure process and the valuation process. By that time you end up owning it, you would have written it down, but initially you may not totally know exactly what the write-down ought to be. So you write down half of what thought and it ends up being more than the lots because you're just kind of in a evaluation process.

Steven Alexopoulos - JPMorgan

Got you. Thanks, guys.

Operator

Thank you. (Operator Instructions). Our next question comes from Matthew O'Connor with UBS. Please state your question.

Matthew O'Connor - UBS

From a broader perspective, do you think there will be a lot of situations whether it's the trust banks that are looking to sell? How does BB&T get into that?

John Allison

Based on the calls we get I think that there are a lot of banks for sale right now with no buyers. They are distressed to the point where they could get assistance. How many would actually distressed to point when the FDIC steps in and provides assistance, I really don’t know. I do think there are some markets like Florida, where there is some real challenges in the community banking market. So it's really a little bit hard for me to judge.

We traditionally have been very cautious on buying companies that were in financial trouble because we are basically a quality oriented business. We don’t really like to fix up things that are broken too badly. We would look at companies that may be have some specific challenges and have good long-term client base, but we would be very cautious about getting aggressive about [assisted] transactions.

Matthew O'Connor - UBS

Okay. That’s helpful. And then just my follow-up question you gave kind of your guess on the charge-offs going forward. Any guess on non-performers in 2Q in the back half of the year?

Chris Henson

I am really trying. We have our estimates, but they are so volatile that I really don't know. Our models show a slowing growth rate in non-performers and if the economy improves by the end of the year, you actually start seeing some improvement. But that is very dependent on what the economy does.

Matthew O'Connor - UBS

Okay thank you.

Chris Henson

Yes sir.

Operator

Thank you. Our next question comes from Mike Mayo from Deutsche Bank. Please state your question.

Mike Mayo - Deutsche Bank

There is lower growth rate for NPAs from up 50%, that's a big range there. Can you just give a little more color? So far the Carolinas have been safe, has that helped you out? And also with regard to home price depreciation, I guess some people will say based on affordability, home prices could have another 20% to fall. So just a little more color on the outlook for NPAs?

John Allison

Well, I'm cautious about actually giving you formal estimates. But I can tell you what we are seeing, as our numbers reflect so far. The Carolinas have held up very well. We are still actually having some appreciation in some markets like Charlotte and Raleigh, which is interesting. The coastal part of the Carolinas has slowed considerably. We are seeing continued declines in house prices in places like Florida and in the Atlanta market because of really high inventories and not that many buyers.

Our guess, and it is a guess, is that on average we have probably taken a 10% additional decline from where we are now, which will have been in some markets 25, 30% from the peak. In other markets it won't be that big a decline. But you are not getting material declines in markets that didn’t have such rapid appreciation. If you look back, the declines are in markets that were growing very rapidly, and it's ironic in some cases, they are down 30%, but more than they were three years ago.

So the real vulnerable person is the buyer in the interim, and particularly the speculators that got stuck with houses they thought they could sell. I am guessing, but I think that we probably got another 10% to go on average.

Mike Mayo - Deutsche Bank

And a follow-up, how much do you think these housing related problems, we'll call the commercial real estate housing related indirectly, how much do you think that is spreading now or is likely to spread through other asset categories?

John Allison

Well it's certainly, I think the impact in the automobiles business is pretty dramatic. Because I think the fact that people have less comfort in the equity in their homes, unless since the security makes them less willing to do bigger purchases. It's impacting the furniture business pretty significantly. Obviously people buy furniture when they buy new homes and that's a deferrable purchase and so you have furniture retailers struggling.

So I think the bigger picture in deferrable categories are where you are seeing the biggest problems, whether you could have that get through in to shopping centers, I don't know. I am in the process and every spring I get to visit all 33 of our community banks and I am having the opportunity to talk to lots of our small business, middle sized business clients. And the story if you are in the residential construction development business is that you aren't have any fund. If you are in the commercial end of the market, most everybody says things are fine, although they may not be fine going forward. I am not getting anybody on the commercial side that's not pretty optimistic. That isn't still doing pretty well from an economic perspective. So far it's reflected on our numbers, but also the sentiment it hadn't hit the commercial market material.

One thing is that in the early 90's a lot of the downturn was commercial, not residential, because you had so much excess buildings. And this time around, you probably have some excess buildings, but it's nothing like the early 90s, whereas if you had so much excess lot development in retrospect in the residential side, I think that's why you are having a much more serious correction on the residential versus commercial.

Mike Mayo - Deutsche Bank

All right. Thank you.

John Allison

Yes, sir.

Operator

Thank you. Our next question comes from Nancy Bush with NAB Research. Please state your question.

Nancy Bush - NAB Research

There certainly has been more than the usual share of volatility in your market and financial institutions over the past few months. I am wondering if you are beginning to see any market share come your way as lender are more stable players in that market.

John Allison

We really are, Nancy, particularly in the C&I lending business, both the trouble and the account for markets. And I guess, yes, people want to be secure. They have either multiple sources or they have strong sources. I would say the attitude of our sales teams is the best I've ever seen. Anyhow, it's still a challenging environment, but you've got to be very careful you don't get adverse selection in this kind of environment. But we're having, particularly in the C&I lending biz, commercial and industrial lending biz, we're really having a great deal of success.

Nancy Bush - NAB Research

Are you seeing larger credits come or larger companies come your way than normally would have been the case and are you able to accommodate that kind of business?

John Allison

Yes. We're seeing, I'd call them large middle market companies, maybe the lower end of the large market. We're having disproportionate amount of success in that market right now.

Nancy Bush - NAB Research

Okay, great. Thank you very much.

Operator

Our next question comes from Todd Hagerman with Credit Suisse. Please state your question.

Todd Hagerman - Credit Suisse

Just a couple of questions. First, just in terms of the, John, you mentioned the reserves, the 4% allocation on the homebuilder, residential construction portfolio, could you just kind of give us an update in terms of your principal assumptions there for that reserve? And then, secondly, whether or not there is any unallocated piece that's associated with that?

John Allison

Yes. I don't now the numbers in terms of the unallocated. There is a pretty substantial unallocated piece, but I don't k know the number. When we go through the reserve requirement, the first thing they go to and look at every single Watchlist credit, and they specific reserves against those Watchlist credit. And that's where you've really had the biggest increase in reserves. You worry about a specific loan.

And then, secondly, they go back and look at loss ratios in different economic environments and for your general portfolio, based on risk rates. And we're right now on the process; we've been doing this for months. In this month you're seeing reserves pop I'm sure as everybody, you're changing your risk. We're having relationships that we rate from 1 to 10; 1 is wonderful, 10 is bad. And we're having relationships that I think objectively a year ago were risk rate 3 suddenly becomes 7s and 8s. And that might not be in a non-performing status, but you're going to increase your reverses on that relationship pretty materially even though the credit is still performing, paying loan, et cetera. So we're going and that is a very meticulous process.

Now, it's a lot of science, but it's also part of art, because you may not always know, somehow it can go, have that kind of radical decline in the risk rate status. We very carefully follow what we think the gap, but we know the gap rules are on establishing reserve. I think we have a very good reserve relative to what we know today.

Todd Hagerman - Credit Suisse

And just as a follow-up to that, is there any material portion of that portfolio if that is not on currently, at least, a Watch credit, if you will, it doesn't have, at least, some portion of reserve set aside?

John Allison

Of that entire portfolio, sure, you have residential builders and developers who have huge amounts of cash. Remember, they had a 15-year run. Some of them got very conservative and there are a lot of people buying now. So, yeah, their portfolio -- the old line guy, the guy real cautious two years ago, sold above when the market -- kept some of the projects, but kept a lot of liquidity. We've got clients in that base that is buying, they are buying at discount. So you would have a wide range of borrowers. Now, you have reserves against everybody, but somebody like that you're not going to have a material reserve against because they are low-risk clients. But, in general, the grades are drifting down pretty radically.

Todd Hagerman - Credit Suisse

Okay. Thanks very much.

John Allison

Sure.

Operator

Our next question comes from Christopher Marinac with FIG Partners. Please state your question.

Christopher Marinac - FIG Partners

You had mentioned you thought there's a three-year process to go through the cycle, now we're two years through. Do you think that we are two-thirds of the way through recognizing the losses? Do we get a fall to those in next year?

John Allison

That's a great question. I think we're two-thirds away recognizing the non-performers and maybe two-thirds or probably more like a half recognizing the losses because we really didn't turn into losses until the fall, if you look at prices peak two years ago in the spring of 2006, but because we've been on such a long run, it was really last 2007 before we started really turning into losses. This is just a wild guess. I'm guessing we're probably halfway through the loss process as an industry.

Christopher Marinac - FIG Partners

Okay. And then my follow-up question just has to do with North Carolina. I know you mentioned about prices going up. Does the change in unemployment there seems to have happened in Raleigh and Charlotte the last year, does that portend to maybe some softness in the coming quarters?

Chris Henson

You could. We're not seeing in Raleigh. I guess, Charlotte, you got to worry about what happens in the big drivers there, Banc of America and Wachovia and what happens with there staffing levels might be big enough to impact that comp because there's lot of those stuffs in Charlotte. So you could see some slowing in both Raleigh and Charlotte, although certainly Raleigh we're not seeing it so far. But neither one of those had the kind of appreciation you had in lots of other places. They could have more problems than they have been having.

Christopher Marinac - FIG Partners

Great, thank you very much John.

John Allison

Yes, sir.

Operator

Thank you. Our next question comes from Chris Mutascio with Stifel Nicolaus. Please state your question.

Chris Mutascio - Stifel Nicolaus

John, in your opening remarks you talked a little bit about selling securities and you got some gains and you were able to enhance net interest income, I thought it was about $11 million for the year. I had to step-off, so, though maybe you would address this later, may be Chris’s comments. How do you know about selling securities at a gain which implies you had a yield above the market and still increased to NRI, if you don’t -- otherwise sell those securities. I don’t get that.

John Allison

It was because of the weird abrasions we had in the market. First yield curve has been almost bizarre, dropping down of for two years and going right really fast up for three and four years, right?

Secondly, we had governments and could trade off into agencies and this government agency spread has got to be crazy.

Chris Mutascio - Stifel Nicolaus

Okay.

John Allison

That’s why we account it as an operating profit. I have never seen anytime that you can take bond gains in the internal round and improve your income without changing your real [asset] or duration. We extended the duration about a year and we went from government treasuries to agencies and we are able to, both get the $40 million and get $11 million increase in income. And it just was the fact that we had treasuries and we were right on the yield curve. We had a very short duration for our bond portfolio. In some degree, we paid the price for that and got some criticism over the years because we were short in the high quality. We say we don’t take our risk in our lending business, we are any risk in the bond portfolio and because of that our bond portfolio has been very nice to us and this is one of the drivers in terms of our rising margin, because we got a low risk portfolio, that's right we would always be in terms of the yield curve.

Chris Mutascio - Stifel Nicolaus

Okay, thanks for the color. I appreciate it.

John Allison

Yes, sir.

Operator

Thank you. Our next question comes from the Jefferson Harralson with KBW. Please state your question.

Jefferson Harralson - KBW

Thank you. I want to ask you guys about timing of losses in this AD&C book. If you look at the disclosure you have in Georgia, and Florida you've got very high accruals in both states. You've taken pretty significant losses in Georgia, but almost none in Florida, I wanted to ask you about how you, I guess what the timeline looks like when you take a construction loss.

John Allison

Well, again, you go through the cycle, you put it on non-performing because you feel like they're not going to pay you, then you have to valuate the property and then you end up foreclosing on the property and then you liquidate it.

We try to as we go to that valuation process to write it down and then when you get it off, when we actually foreclose on it, we write it down to what we feel comfortable we can sell and we've traditionally been very close in that regard.

Since a lot of this stuff has deteriorated relatively recently, we're still in the process of evaluating that, I would point out again, we are a very focused, secured lender, our typical loan to value ratios were 75%. So even if a piece of property falls in value 25%, we are not going to have a material loss on that property.

So sometime those things get out of line obviously, but we are collateral lenders in the real estate lending business and we are kind of a nuts and bolts lender with lots of small builders, which means you go out and expect the stuff and you're staying on top of it, so you don't tend to have big losses in that kind of real estate, even if property value falls and if they fall 50%, you got a loss, they're probably falling 20%, 25%.You are not going to have a whopping loss in there.

So yes, we have some more losses to go through. We have included that in what we think our loss ratio will be for this year. I have mentioned earlier we think our loss ratio for the year will be 55 to 65 basis points and that includes the expected losses on the inventory of non-accruals and process.

Now obviously if house prices fall more than we expect or kind of get worse it would be a different number but we feel reasonably comfortable with that projection based on the knowledge we have now, which is obviously such a good challenge.

Jefferson Harralson - KBW

Alright now a follow up for Chris on the Visa gain. Is that Visa gain and other income and what’s the pre-tax Visa gain?

Chris Henson

The pre-tax was about 34 on the gain and we got to reverse about 39 in legal charges that we took last quarter. Those charges would be in other operating expense and the gain would be other operating income.

Jefferson Harralson - KBW

All right. So other operating expense was benefited by 39?

Chris Henson

Well of course we took that out of operating.

Jefferson Harralson - KBW

Okay. And the Visa gain is separate completely from the securities gain.

Chris Henson

Right.

John Allison

And we took both of then out operating. So it is not in operating.

Chris Henson

Yes we took the 39 and the 34 out of operating.

Jefferson Harralson - KBW

All right thanks a lot.

Operator

Our next question comes from Greg Ketron with Citigroup. Please state your question.

Greg Ketron - Citigroup

My question is regarding the margin outlook that you provided Chris. You had a margin increase in the low 370s by the end of this year. And just looking at the quarter, it looks like you passed through over 90% of the Fed easing into the interest-bearing deposit base. And couple of questions there, one is, do you think you can continue that rates. Should we see further Fed easing and maybe some color around the expansion and margin, and where that would be coming from?

Chris Henson

Sure. I think first can you pick up benefits from additional Fed easing, I think the answer is yes. What fed easing has already occurred, we are going to clearly get benefit from it whether we get 90%, remains to be seen, and certainly depends on competition etcetera. But we are going to get a large part of it. And I think we'll get a greater part of additional easing obviously.

So that will carry on through the year, and then the real pickup later on in the year, more like third, fourth quarter, our CD book has about a six to seven month average maturity. So the repricing begins to occur in the CD book in the third, fourth quarter. So that's really what's going to drive, sort of the back half of the year if you will. There are some other small items, but that's the primary one.

Greg Ketron - Citigroup

Okay. And following question to that, deposit pricing that you pass through from a competitive standpoint, where do you stand competitively across most of your markets on deposit rates? Does that change from where you were positioned before or is it still pretty constant?

Chris Henson

Still pretty constant. We might be, as I pointed out, we may object the decision to try to take advantage of the liability sensitivity that we had. But, we still have had CD growth. And I recall as competitive, but it just looks like the right objective thing to do, given some of the markets. We've seen little bit of [loosening] back up from one competitor, but it has not been a widespread kind of issue and we feel pretty good where we are. The future will determine obviously what we do there in terms of pricing. But I think we are in a pretty good place at the moment.

Greg Ketron - Citigroup

Okay. Thank you. I appreciate it.

Chris Henson

Sure.

Operator

Our next question comes from David Hilder with Bear Stearns. Please speak your question.

David Hilder - Bear Stearns

The answer to this may be obvious, but I just want to ask about the geographic breakdown of non-accruals in the residential ADC portfolio, and also in the first mortgage portfolio. Certainly the numbers, as you've said, for Georgia, Florida and the DC area, are very different than some of the other geographies, especially North Carolina? Is that truly because of overbuilding in those markets or did you, as a lender do something different in those markets as well?

John Allison

I think it's the markets. I don't think we had any different standards. I would say, if you look at Florida, and what I call the peripheral areas of Metro DC, it was the such rapid appreciation in prices that simply made the houses unaffordable. And in Florida you had many more speculators than I think anybody realized.

Atlanta is a little different phenomenon, because Atlanta has actually has great economics, as well as inbound population, etcetera. I think what happened in Atlanta was more the number of lots. We are having more trouble in Atlanta around lots than we are around houses that the market got ahead of itself and it's really bifurcated in that, if you kind of inside that -- I guess it's the second beltline, I can't remember the number of it…

Chris Henson

285.

John Allison

You are okay. But if you are outside of it, you got problems, because of the gasoline prices have really slowed. Markets that were growing very fast have also just hit a wall because of the gasoline prices. So I don't think it was our standards in those markets. I think it reflects the markets.

David Hilder - Bear Stearns

And in the first mortgage portfolio, no real difference in terms of owner/occupied versus second home or investor loans?

John Allison

We tried not to do any investor loan there. If we got one, it's called somebody was lying to us, which happens fairly often, not a lot, but it happens fairly often in general. We did inherit a portfolio from one of the companies we acquired in Florida. That was higher risk than we normally do and that portfolio has had disproportionate problems in it. So that's been a distortion there.

And probably just because of the nature of the Florida market, it had a few more expensive houses, and that's where you really take it. If you end up foreclosing, you take the biggest [bee] if you have a more expensive house today. But I think that would be the only deal. I think Florida is a very tough market today.

David Hilder - Bear Stearns

Okay. Thank you very much.

John Allison

Yes sir.

Operator

Our next question comes from David Pringle with Fells Point Research. Please, state your question.

David Pringle - Fells Point Research

I want to make sure that I understand this home equity portfolio. The home equity loans on page 9, the ones close to the end, the $9.832 billion.

John Allison

The home equity portfolio you have got two categories, let me make sure I am getting on right page that you are talking about The $9.8 billion are really as you call them home equity loans, we called them direct retail loans, due to the small loan size.

David Pringle - Fells Point Research

Yeah.

John Allison

You see that almost 77% are first mortgages.

David Pringle - Fells Point Research

Right.

John Allison

A lot of that is somebody who has already paid off their mortgage on his house, he wanted to add a room. It's not worth upfront costs since they needed to go get a regular mortgage and we just them made it a first mortgage.

David Pringle - Fells Point Research

But those are closed end home sales.

John Allison

Yeah. Closed at the end and pay X amount a month. It just looks like a regular home loan, but smaller.

David Pringle - Fells Point Research

Is there a way that somebody can put a first in front of you on one of those without you knowing it?

John Allison

No.

David Pringle - Fells Point Research

Okay. And then, you mentioned the home equity lines are open end and 22% or 23% of those are first. You had mentioned that 40% of your home equity loans are behind the BB&T first?

John Allison

Yes.

David Pringle - Fells Point Research

So, can you add the 22.8% plus the 40% to come out with a 60% of the home equity lines or either first or behind yours?

John Allison

Yeah. You could add those two together.

David Pringle - Fells Point Research

Okay.

John Allison

And in theory, we never did. The combined loan to values were not supposed to be more than 80%. So the first plus the home equity weren't supposed to be together obviously, but it always happened. That was our normal policy and the vast majority of that 62% was added up and would not have had a loan to value when made of more than 80%.

David Pringle - Fells Point Research

Okay. You mentioned furniture and US Bank Corp. mentioned doorbells. Do you have an idea of how much of your C&I book is sort of maybe partially or more than partially directly related to housing?

John Allison

I don't know off the top of my head because you'd have to check account laws as related to the housing. The more vulnerable end would be the furniture manufacturers. The law is going international. We don't have big exposures there any more just because it's going international. And furniture retailers, and we would have some retailer exposure, but I mean it'd be less than 1% of our portfolio.

We could have a bad reap in High Point. You have the largest furniture market in the country and a lot of people. You have furniture dealers here that sell nationally because of both prices and taxes. We can have a bad loan related to that, but the whole business if you added in furniture will still be a small portion of our home business.

David Pringle - Fells Point Research

And the one-to-four construction is about half of your construction book. How is the other half?

John Allison

You're talking about the commercial. The non-residential commercial business is doing very well right now. The non-residential commercial business, if the economy goes down, it's going to impact that, but that looks like office buildings, it looks like hotels, warehouses, apartments, rental houses, shopping centers, and we're having very few problems in that portfolio to-date.

Operator

Our next question comes from Mike Mayo with Deutsche Bank.

Mike Mayo - Deutsche Bank

Hi, John, a follow-up.

John Allison

Hi, Mike.

Mike Mayo - Deutsche Bank

I have a really simple question. You have $4.7 billion of home equity lines. How much of your home equity line have been committed but not funded?

John Allison

It's a good question and I don't know, meaning how much more could we fund out of those loans.

Mike Mayo - Deutsche Bank

Yeah. Let's say, I went to you and I got approval for $20,000, and I have only drawn down $10,000. Where is my other $10,000 show up?

John Allison

Chris, do you have that? I don't have that.

Chris Henson

I'm looking, but I don't think so.

John Allison

We can certainly get it for you. And maybe, you call Chris. I just don't know.

Mike Mayo - Deutsche Bank

And if you had to guess, I man relative to the $4.7 billion, would it be 10%, 50%, the same size, more?

John Allison

This is a guess. I think we run about 65% utilization.

Chris Henson

I was going to say 70%.

John Allison

Yeah, maybe 70%. So now there's probably another 30% that could be funded. I will say this though the people that tend to be less than fully funded, tend to be you lowest risk clients.

Mike Mayo - Deutsche Bank

Okay. Do you think that's the case of the industry, kind of two-thirds utilized?

John Allison

I would guess, Mike, but I don't know. I've never really talked to anybody about this. So, I'm not sure.

Mike Mayo - Deutsche Bank

And how much flexibility do you have to kind of say, forget it, like I got approval for $20,000, at least, say, hey, I'm a bad borrower down in the southern part of Florida, Mike, can you take that away from me?

John Allison

Yes, if we have some objective reason to do it. There are rules. And we could reappraise your house and do this kind of thing if we had some reason to do that. A lot of times you stop advancing for some reason, you've got some genuine reason.

Mike Mayo - Deutsche Bank

Okay, here is an unrelated question. I feel like you guys have been kind of "on again, off again" with regard to mergers of equal. And if I've timed it right, I think you're kind of off.

John Allison

Yes.

Mike Mayo - Deutsche Bank

But it just seems kind of strange after all these years when there seems like there's more potential combination that you kind of put yourself out of that market.

John Allison

Well, I won't say we are out, but we actually went through a process last spring, mostly looking at what we thought were our objective opportunities. We got through that process. Couple of the banks seemed like legitimate partners on surface, we were concerned about the economics, and then in the cases, it seemed to work economically. There were cultural issues that seemed difficult to resolve.

In theory, we would be interested in doing a merger vehicles, but frankly, we wanted to be sure that we aren't taking inordinate risk in that regard, because I mean the merger vehicle is, you're doubling your assets, and the other thing is to be sure we have a colorful fit, where we like the philosophy that we run our business on and feel good about it, and we want to be sure we have a cultural fit. So I wouldn't be shocked on the other side of all this, a year or two from now, if we might not have an opportunity to do that. It's pretty tough to go in and figure out what somebody else's problems are and then to figure out what your problems are and you both feel good about. That is possible. This is a difficult environment.

Mike Mayo - Deutsche Bank

All right, thank you.

John Allison

Yes, sir.

Operator

Ladies and gentlemen, we have now run out of time for questions. I will turn the conference back over to Tamera Gjesdal for closing comments.

Tamera Gjesdal

Thank you all for your questions today, we appreciate your participation in this teleconference. If you need further clarification on any of the information presented during this call, please don't hesitate to call the BB&T's Investor Relations department. Thanks again, and have a good day.

Operator

Ladies and gentlemen, this concludes today's teleconference. All parties may disconnect at this time. Thank you all for your participation.

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Source: BB & T Corp.Q1 2008 Earnings Call Transcript
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