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BB&T Corporation (NYSE:BBT)

Q2 2008 Conference Call

July 17, 2008 11:00 am ET

Executives

Tamera Gjesdal - Vice President of Investor Relations

John Allison - Chairman and Chief Executive Officer

Christopher Henson - Chief Financial Officer

Analysts

Betsy Graseck - Morgan Stanley

Adam Barkstrom - Sterne Agee

Matt O'Connor - UBS

Mike Mayo - Deutsche Bank

Nancy Bush - NAB Research

Steve Alexopoulos - JP Morgan

Greg Ketron - Citigroup

Jefferson Harralson - KBW

Kevin Fitzsimmons - Sandler O'Neill

Operator

Please standby we are about to begin. Greetings ladies and gentleman and welcome to the BB&T Corporation's Second Quarter Earnings 2008 Conference Call on Thursday July 17, 2008. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder today's conference is being recorded.

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

Tamera Gjesdal – Vice President of Investor Relations

Good morning, everyone, and thank you, Millicent 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 Chief Executive Officer, and Chris Henson, Chief Finance Officer, who will review financial results for the second quarter of 2008 as well as provide a look ahead. After John and Chris have made their remarks we will pause to have Millicent 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 31, 2007. Copies of this document may be obtained by contacting BB&T or the SEC.

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

John Allison - Chairman and Chief Executive Officer

Thank you, Tamera, and thank all of you for joining us this morning. I would like to discuss with you our financial results for the second quarter and year-to-date primarily focusing on asset quality, but also trying to give you a feel for our core business performance, and share with you a few thoughts about the future and we will have time for questions after Chris’s comments.

GAAP, net income for the second quarter of 2008 was $428 million, we did have the couple of non-recurring gains. We made a $47 million before tax $30 million after-tax gain on the sale of the rest of our Visa ownership which was a private sale. We also had a $36 million gain before tax, 22 million after-tax gain on the extinguishment of debt to the Federal Home Loan Bank. Our management team did a great job of picking up right point and the yield curve when the market may have over wrapped reacted to some of the federal reserve comments and we were able to get a not only $36 million gain, but we also reduced our financing cost about $4 million this year. So, we have not got a one time gain and a reduced financing cost.

We took both of those gains out and competing our operating earnings. Our operating earnings for the quarter were $377 million. GAAP EPS was $0.78 down 6% from last year. Our operating diluted EPS in the second quarter was $0.69 that was one penny above the consensus estimate of $0.68.

Cash basis EPS was $0.71, looking at our returns on a cash basis our return on assets was 122 and our return on equity was 21.44 which is pretty healthy returns in this type of markets.

Looking at the year-to-date results GAAP net income was $856 million down 2.6%. Operating earnings year-to-date [$778] million, GAAP diluted EPS $1.56 down 2.5%. Operating EPS $1.42 and cash basis EPS $1.48. Returns for the year were similar cash basis ROA of 127 and cash basis ROE of 22.12 for the six months.

Take a look at the factors driving the earnings; the really good news is we continue to have a fairly significant improvement in our margin. A margin improved from 354 in the first quarter to 365 in the second quarter up a 11 basis points and was above the margin of 355 in the second quarter of 2007. We have got a very positive trends to control margins we think that will continue. And Chris is going to give you some additional insight into that area.

Non-interest income, we were reasonably pleased with, in light of the market we are in, looking at our annualized growth rate from first or second quarter and trying to get what I call same store growth rate taking out non-recurring items, fair value accounting, purchase acquisitions, mortgage servicing rights, the annualized increase in non-interest income versus second was 25.8% that is the seasonal factor we tend to have a stronger second than first, but still good trend. Second to second non-interest income was up above 1%, I quote it a little better and as we had a fairly big fall in our other non-interest income. And year-to-date non-interest income is up 2.9%.

Again looking at the specific business lines excluding non-recurring items and purchases, insurance revenues second-to-second were down 3.9% up 22.5% annualized and finish flat for the year that’s actually very good performance in that premiums and commissions in the insurance business are falling anywhere from 15% in the commercial market area and that we could have flat revenue this year reflects a pretty major positive movement in market share from our insurance operations.

Service charges on the positive accounts were also very encouraging at 13.9% second-to-second, 47% linked quarters and 11.6% year-to-date. We were able to attract 35,000 net new transaction accounts in the second quarter and 70,000 year-to-date. We think we are actually having a positive market share move in that regard.

Non-deposit fees and commissions which are primarily our debit card and bank card fees continue to do well second-to-second up 8.6% annualized linked 34.6% year-to-date 9.9%.

Investment banking, and brokerage was down 1% second-to-second and up about 2% year-to-date, it has been very flat in terms of investment banking, and brokerage which is actually very good in this kind of a market.

Trust and advisory revenues down 5% second-to-second down 2.5% year-to-date really reflecting the stock market evaluations.

Mortgage banking income and this also excludes mortgage service right and fair value accounting second-to-second was down 4.3%. But that’s a little bit misleading in the sense that our residential mortgage origination business is doing extremely well.

Residential originations were $4.7 billion in the second quarter of ’08 compared to 3 billion in the second quarter of 2007 up 57%. And our revenue from residential mortgage originations was up 25%. We are clearly seeing a flight to quality with the eliminations of a number of our irrational competitors like Countrywide. We weren’t in any of the business like pick-a-payment business that have gone away. So we are really benefiting from changes in the residential mortgage market.

Protonically all our originations now are going into the secondary market with portfolio and very little of our residential production. We did have down revenues in our commercial mortgage business as you would probably expect with the demise of the CMBS market, commercial mortgage revenues for the quarter were down 48%. We do have outlets through Freddie and Fannie to do apartments in other entities and we are pretty optimistic, we are going to have the pickup in commercial mortgage revenues in the second half of the year, because there is a plenty of opportunity there, and we can find the allies. And we also have a number of insurance companies we work with. The commercial mortgage has been down.

Other income second-to-second was down $19 million and year-to-date its down $61 million, year-to-date the loss of miscellaneous items looking second-to-second the primary factors call us in the reduction where low income housing partnerships where we got tax advantages and they were down $13 million in our venture capital BB&T Capital Partners was down $15 million as we pretty much expect in this type of markets. That partly offset by about $10 million in increased revenue of revenues for a business we are doing for our clients.

Other income is probably at low point, we don’t -- certainly don’t expected to give any lower than it has been going forward.

Looking at net revenue growth, some pretty good numbers inline of this kind of environment annualized first to second and again without non-recurring items and fair value accounting purchases in mortgage service. And I was trying to look at the same store number, annualized first-to-second was up 23.4% second-to-second up 5.9% and year-to-date 5.7%. So very healthy trend in this kind of economy.

Non-interest expenses we feel pretty good about. Again looking at operating excluding purchase and fair value accounting annualized first to second were up 18.3% while that was seasonal commissions and other things that are related to increased revenue. Second-to-second only up 2.7% and year-to-date only up 2.6%. So we feel pretty good about expense control and Chris is going to give you some more insight into that area.

Lets now look at loan growth, which we also thought was pretty healthy for this type of environment. Looking at annualized first to second on a GAAP basis total loan growth was 9.3%. Taking out purchases and our decision to sell some leverage leases, which obviously, we don’t want in this kind of tax environment. We had very healthy growth particularly in our commercial lending business where on annualized basis commercial loans grew 16.3% direct retail is down 1.4% sales funding is up 10.5%, revolving credit 6.5%, mortgage 7.1%, but if you take out the warehouse, mortgage was actually down 2% as I mentioned earlier. Almost all of our mortgage productions going into the secondary market.

Specialized lending up 10.8 and up 13.7 if you take out the loans held for sale in process in total 10.6%. Within second-to-second we had similar trends which you will see the momentum that’s happening. One a GAAP basis total loan growth was 9.1%, taking out purchases and leverage leases second-to-second commercial is 12.9, direct retails is 0.7% essentially flat, sales finance 6.3%, revolving credit 14.9, mortgage 8.9 and 5.3, if you take out the warehouse, specialized lending 3.8 and 6.1, if you take out the warehouse and total 9%.

Year-to-date the numbers were similar except the total adjusted growth rate is 8.4%. So, what you saw is a pretty healthy growth and momentum in the second quarter reflecting a strong growth primarily in our commercial and industrial loan business. As there is, I don’t know if you call it a flight to quality, but a lot of companies are looking for a strong sources of financing. We are seeing more rationality in the marketplace in terms of pricing, in terms that has kept us from willing to extend credits in some cases. So, we are having the opportunity to penetrate relationships that we might not have been able to penetrate in the past. And some of our competitors are fairly focused giving us some more opportunities.

We also had some growth in our non-residential commercial real estate. In general lower risk credits, that could have gone to CMBS market in the past and we will get some opportunities there. We are actually I think reducing our risk, i.e., leveraging down our risk in this kind of environment, because we are getting some high quality opportunities.

Direct retail business is very slow mostly because consumers don’t have any equity in their homes or resources to borrow it so its kind of very slow business. Sales finance, particularly given the market we are doing very well in. We are probably getting, we are certainly gaining market share in the automobile finance business as the manufacturers finance arms are struggling. And we are having some growth in both our boat and RV business, because of exits from the market and we are able to give some very high quality, both boat and RV financing in this market place.

So, if you look across all of our portfolio, we are seeing some what I call flight to quality and we’re seeing more rational pricing and more rational terms in I would say all of our lending business segments.

Looking at deposit growth, non-interest bearing deposits taking out purchase, acquisitions second over second were down 2.5%, annualized linked up 13%, year-to-date down 2.9%. I think the decline reflect a lack of liquidity in our client base, they simply haven’t got the cash and that’s reflecting slower growth there.

Total deposit growth, again taking out purchase acquisitions second-over-second is 5.3%. Annualized linked essentially flat 0.5% and year-to-date 4.5%. We made a conscious decision to bring down our CD rates and keeping inline with money market rates, some of the CD rates hung in the marketplace and some of our competitors who are struggling a little bit to get their CD rates higher. We try to get our rates inline with the market. We don’t think we’ve lost any clients. We think that basically, it was rate choppers that we can get back at any point in time. And it certainly help improve our margins. So, I think it’s a very good strategy in light of what’s happening in the market place. And it was a pretty conscious strategy.

In terms of asset quality, which is really what everybody is interested in and the main thing we want to focus on. Our non-performers did increase from 989 million at the end of the first quarter to 1.301 billion at the end of second quarter and as a percentage of assets from 0.73 to 0.95 practically all the increase was related to residential real estate one way or the other.

Our charge-offs for the quarter were $170 million, from a $125 million. And as a percentage in the first quarter we had 0.5 forward charge-offs, in the second quarter 0.72 and excluding specialized lending 0.32 in the first quarter 0.53 in the second. Year-to-date our charge-offs have been 0.63 and 0.43 excluding specialized lending, which if you think about this economic environment that’s a very good numbers, a long way from what we have had in recent years, but very good numbers.

The provision for credit losses in the quarter was $330 million, charge-offs 170 so we added 160 million to the provision. And year-to-date, we’ve provided $553 million charge-off, $295 million and therefore increase the provision by $258 million. The increase in the provision and provision expense is obviously running through operating results and if you took out the cost of that rising provisions our operating results would be pretty impressive. So, we’ve been able to eat a big increase in provision expense.

Looking at the ratio of the allowance to loan losses to non-accruals in the first quarter was 144 and it was 124 in the second quarter. In the third excluding the loans held for sale portfolio has increased from 105 at the end of the second quarter of last year to 119 in the first quarter of this year and is now 133. So, we increased the reserve by 14 basis points during the quarter.

Let’s take a look at the specific components of the loan portfolio that we’ve been focusing particularly our residential and real estate lending businesses those of you who have the earnings press release, if you look at the last page, page 2 the credit supplement, I will make a few comments about these portfolios. Portfolio that we are most concerned about and when we are following the closes is our residential acquisition development and construction loan portfolio, which is on the top of page 2. You can see there that our total portfolio is 8.6 billion that’s actually down from 8.768 billion at the end of the first quarter. So, it is declining some, even though we are having to fund some developments we have in process. It does represent 9% of our loan portfolio. You can also see that we have a very small condo portfolio. We are very glad about that.

Non-accruals, the increase in that portfolio from 275 at the end of the first quarter to 412 at the end of the second quarter and charge-offs increased to 0.74% that’s gross charge-offs. We do have a loan loss reserve that’s specifically allocated to that portfolio. That loan loss reserve is 5.5% of the loans and that’s up from 4% at the end of the first quarter. So, we have 4.12 in non-accruals and we have reserve of 5.5%, against that portfolio, which has been increased.

If you look at where our residential construction and development lending is, the biggest concentration is in North Carolina where we’ve had some rise in non performers, but it is still doing well that portfolio has deteriorated some, but it still looks good. Our challenge is primarily in Atlanta, in Metro DC, which is reflected in the Virginia and some of the Maryland numbers and in Florida.

Fortunately we have a relatively small portfolio in Florida, where we are having the biggest non-accrual numbers perhaps loss have been in Atlanta. There was some confusion about our other commercial real estate, so we have tried to give you some more information in that regard. The next item in the bottom of that page looks at other commercial real estate loans, these are basically non-residential related loans.

They have three primary components there, commercial construction $2.2 billion, commercial land development $2.6 billion and then income producing property is $5.7 billion, for a total of $10.6 billion, about 11% of our loan portfolio.

This portfolio as you can see is very diversifying as was the our residential portfolio is small, [inaudible] are very good. Non-accruals are 0.78 and charge-offs 0.05. We are having some increase in non-accruals in this portfolio, but nothing dramatic. So, far its doing very well and we are watching it very closely because traditionally commercial and real estate follows the residential real estate, but so far that portfolio is performing very well as you can see from the numbers.

Big concentration in commercial real estate in North Carolina, where we are continuing to have excellent performers. The only two markets that we are heading and promising so far for that we can see the non-accruals were up to 2.2. In the East Tennessee, where the non-accruals are fairly high, but we have got a very small portfolio and we just get a couple of cases that make those numbers go there. So far our commercial properties excluding residential are doing well.

Going back one page in your supplement, back to credit supplement page 1, it looks at both our residential and our home equity portfolios. We have a large residential mortgage portfolio, which something we have had a far long-time. You can see the break up there prime mortgage is $12 billion in Q2 and Alt-A, construction 1.7 and we have a small subprime portfolio of 608 million, but that all coming from Glenmark our consumer finance subsidiary which are very traditional business serving our low income borrowers, it’s a very long-time business for us.

You will note that this portfolio the traditional prime Alt-A construction firms almost all first mortgages. You will also note very good loan to values [Alt-A] portfolio has a 67% loan to value. So we are well secured in that regard. Still good loss ratios, we are having more problem in the constructions permanent portfolio which are both non-accruals and charge-offs and basically what happened there a lot of people were building houses expecting to sell their old house now they can't sell for their old house and they can't get the equity for the construction loan and that’s what we have been working on.

You will note that even though the subprime portfolio is very small, the loss ratios aren’t very bad at 1.46%. Looking at our residential mortgage loans our primary concentration is North Carolina and Virginia. The biggest problems we are having are in Florida and Atlanta we can see there from their numbers kind of similar to that other issues.

The total mortgage portfolio is 17,672 billion compared to 17,804 billion at the end of the first quarter. As I mentioned it was actually been slightly shrinking that portfolio because our marginal production has been going into secondary markets. Non-accruals were 147, gross charge-off 0.23, which is still a very good number. Traditionally in that portfolio we want to run about 3 to 5 basis points, it was up a lot, but we still have excellent quality in that mortgage portfolio.

Looking at our home equity portfolio we have classified that in the two categories; one our home equity loans, the other home equity lines. Home equity loans are basically fixed payment loans made secured by somebody at home. We have a pretty good size of portfolio to $9.5 billion, small size at 49,000 half credit scores 725 very accurate credit scores. Its about the home equity loan portfolio, its about 10% of our total loans, 77% is first mortgages and the average loan to value is 67%. We have 0.51 non-accruals and 0.50 charge-off. We only extended this portfolio to our own client base as our home equity lines, we did in market loans to people and almost all of them have checking accounts, savings accounts, other kind of deposit relationships with us.

Our home equity lines we have $5 billion portfolio small size $34,000, credit scores 759 is very high scores, 5% of our total loan portfolio, 23% of that portfolio is first and the average loan to value 67.6%.

Non-accruals of small 0.27, but charge-off to 0.86 and the reason for that when we are having a problem with the home equity line in this environment we are binding the first so and particularly if its current in places like Florida we are just being charging-off the whole balance.

We conceded disposition of the portfolio again, its concentrated #1 in North Carolina, in Virginia, also we are still having our major problems in Florida, Atlanta, and Northern Virginia and in the Metro DC market area. You will note we have a very small portfolio in Florida looking at the whole portfolio non-accruals were 0.42 at the end of June that were 0.40 at the end of first quarter. So not much deterioration and charge-offs were 0.63 even it’s high number for us but not the high number by industry standards.

In addition to housing related credits, we had some questions about how their sales financed business, and how its regional acceptance or (inaudible). Sales finance losses were up some, but they remained at very manageable levels, through June net charge-offs were 0.71 compared to 0.39 last year. So obviously, a good bit higher, but off of a very low base and a lot better than the industries doing.

At this point we don't expect a material increase in sales finance losses for the rest of the year. Regional acceptance is our high risk automobile business, and it’s actually experiencing improved charge-offs and improved non-performers compared to the second half of 2007. Part of that seasonal factors, and other factors are government rebate checks certainly helped, but also because we tightened our standards pretty significantly back in 2006, which is impacting 2008.

Another interesting factor in the sales finance business, many of our loans are for nice larger cars like SUVs, and when we do have to repo them we are having bigger losses. Most of the recently accepted loans are on small cars. And when we have to repo smaller cars, we are not having as high of losses, because the small car market has held up. And recently we are also benefiting pretty materially from what has happened with the automobile manufacturing finance subsidiaries, because maybe unintentionally, they were buying very deep, and are not doing that anymore, we are actually now, actuality reducing the risk, and the reason is portfolio is still growing very rapidly, because there is less competition in that market segment.

A quick comment about the process for non-accruals and charge-offs, because some people have been asking us about that, for our retail portfolio, we basically follow the FDIC guidelines, which are based on the past two statistics, the attempt to market collateral, and the market at the time of non-accruals. And then taking any additional loss or gain at the time of sale.

In the case of second lien home equity, as I mentioned earlier, because of falling real estate values, we typically are now taking 100% charge-offs instead of buying in the first. On commercial real estate, including residential and construction lending, we watch the client relationships carefully, if we anticipate any problems, we put them on a watch list. At that time we sign a specific loan loss reserve.

What we expect to happen if things go in the wrong direction. If that continues to deteriorate, we mark them down to market. Then we take and put them on non-accrual, then if they do foreclose or take a beating and lose the foreclosure, we have an appraisal done, and take another markdown if necessary at that time. Traditionally we have not had significant losses, once we have got an asset into our own real estate portfolio. This year we are chasing a little bit of a moving targets, because the real estate values continue to decline. We don't expect any material losses from the ultimate liquidation of our other real estate portfolios. We actually mark them down to a discount of market. If we put in a property today, we will have two appraisals done and we because of the cost of selling it, we will typically mark it down to 75% of the current appraised value.

We just typically don't have big losses in that portfolio. We are a collateral lender, and we don't typically have large losses when we go through foreclosures like this. One of the issues I will just make a quick comment on, because people have been asking us about it, is our exposure to Freddie and Fannie. Like every other major financial institution in the US, a substantial portion of our investment portfolio is Freddie and Fannie mortgage backed securities, as you note these securities are collateralized by prime mortgages, and extremely low loss ratios, so we are really not practically speaking, very dependent on Freddie and Fannie dollars. We have $310 million in senior debt for Fannie and Freddie. We don't have any subordinated debt or any deferred stock, or any common stock of Freddie or Fannie. So far, whatever motion has been in the marketplace, it has not had any effect on our origination business. We don't have any pick-a-payment mortgages for CDOs, or SIVs, or any of those other type of popular capital investments. That concludes comments on asset quality. Let me talk a minute about dividends and capital. Those are very important issues in today's world.

Before we made a decision to increase our dividend, we went through a very analytical process, trying to stress test our capital ratios, what we viewed as worst case scenarios, obviously they are not the worst case possible, but we thought they were far worse than what we actually expect to happen. The worst case scenario, and we don't expect this to happen. Worst case scenario is that our loan loss is to rise at 1% in 2008 and we would raise our reserves to 2%. The economy would remain bad in 2009, and our loan losses would go to 1.5%, and we would raise our loan loss reserve to 3%. Even with these scenarios, and I think they are for us are very worst case scenarios, and do not expect them to happen, we would still be well capitalized by regulatory standards, and pay our dividend without raising any additional capital. Obviously we had to make a lot of assumptions about what happens in the economy, but under those assumptions, which we think is the worst case and we don't expect it to happen, we could still continue to pay our dividend and not raise capital.

BB&T is somewhat unique for a large publicly traded company, in that we are over 70% owned by individual shareholders who care a lot about dividends. You have heard about that. BB&T had paid a cash dividend every year since 1903. We have increased our dividend for 37 consecutive years. Continued compound annual growth rate of the dividend of 10.4%. We are very committed to our dividend.

A couple of quick comments on mergers and acquisitions, we are not pursuing any community bank acquisitions in this environment, even though there are a number of banks that would like to be acquired, basically because of the difficulty in performing due diligence on their real estate portfolios. We are continuing to look for opportunities to expand our insurance operations, we are pleased with the California purchase and hope to announce additional agency acquisitions in the future. Due to the falling premiums and initial volume, this is a difficult market for independent agencies, we have an extremely efficient insurance operation, and the best revenue production per employee in the industry. Let me share with you a few thoughts about the future, and then summarize my thoughts about our current performance. Reinforcing Tamera's opening comments, anything I say about the future could easily be wrong, it probably will be wrong, with this kind of environment.

Frankly, this is one of the more difficult environments I have been in the financial services industry, because of the endless number of surprises, including the increased variety of capital market products, and the international integration, have exponentially increased the complexity of our industry. For us the biggest issue is asset quality, and specifically what has happened to the residential real estate markets. Based on past experience, and our own economic forecasts, we believe that real estate markets still have a ways to decline. It probably will continue to through this fall, but we will be beginning to recover in the spring of 2009.

We also believe that after that, we will have some normalized appreciation in real estate, probably in-line with wage increases, usually what is ultimately termed real estate value in the 4 to 5% range. Because we think the major problem in real estate was overbuilding, which will be corrected to north of the inventory process, and the prices have gotten too high in some markets. The fundamental demand has not changed. The general consensus forecast as I am sure many of you have seen is for slow growth remaining this year, and now many more forecasted projected slow growth in a big chunk of 2009, which we think is a reasonable economic anticipation.

Last time I shared with you our guess, I said it was a guess, and I will say that again, our loan losses for 2008 would be in the 50 to60 basis points range. Real estate markets have deteriorated faster than we expected, and have deteriorated in some of our core markets where we hadn't had deterioration before. We now estimate, or guess probably is a better word, loan losses for 2008 will be in the 0.75 to 2.85 category. That includes our specializing lending, which raises losses by about 20 basis points. So your core businesses will still be in a pretty acceptable range, but a lot higher than we have been running in recent years.

Obviously in that kind of context, non-performing assets will continue to rise. This will require us to continue to provision for loan losses at an elevated level. On the other hand our core business I think is doing very well. We are experiencing healthy C&I loan growth. We are gaining market share in many of our business lines, norms loan pricing in terms have returned to more rational standards which opens opportunities to us, our competitors are internally focused, our fee income business is doing fairly well, even though insurance revenues are under stress, we are gaining market share in the insurance business pretty rapidly. There clearly is a fight to quality in a number of business lines as evidenced by our very rapid growth in our residential mortgage origination business. We are achieving regionally effective expense control.

The most encouraging trend is our improving net interest margin, which we expect to continue. No question, this is a very challenging environment. We are a large residential real estate lender. I don't underestimate the short-term challenges we face, because there are many. However I believe that this correction cycle will actually be good for BB&T in the long-term, there was a lot of irrational lending activity going on before the correction started. It has been a long time since we had a economic correction. We have to turn trade-offs that weren't making any sense. We were being hurt by the origination sale marketplace, which was very rational at the end of the cycle. And undisciplined competitors, I believe underwriting will be more rational going forward, which will benefit BB&T.

Also in contrast to many financial institutions, because we were not involved in most of the product lines that have disappeared, we do not have a loss of revenue going forward. Even though there are very challenging times for us, I am very optimistic about BB&T long-term. With that said, let me turn it over to Christopher Henson for some more in depth analysis in a number of areas.

Christopher Henson - Chief Financial Officer

Thanks John. Good morning, welcome to all of you joining the call this morning. As normal I would like to cover briefly with you 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 the year-to-date comparison, it had very healthy earning asset growth, up 7.6%, adjusted for purchases, produced 2.124 billion in net interest income, a 7.8 increase over five years adjusted to purchases, if you look at linked quarter, we had a strong earning asset growth of 9.2% adjusted for purchases. Produced net interest income of 1.090 billion. A very strong 41.8% annualized increase over the linked quarter adjusted for purchases. The common core basis earning assets were up 7.6%. Adjusted for purchases again, 1.090 billion in net interest income, a 9.9% increase over prior year, adjusted for purchased acquisitions.

As John said we are very pleased with our margin performance up 11 basis points on a linked quarter basis. 354 in first, and 365 in second, common quarter comparison we were up 10 basis points 355 in second quarter '07, to 365 Q2 of '08. On a year-to-date basis, we were up 1 basis point from 358 to 359. During Q2 we did continue to benefit from the significant decline in rates that occurred late last year and early this year. While also hedging against rising rates anticipated in 2009. Our positioning obviously continue to work pretty well as margin improvement accelerated during the second quarter. While we continue to experience healthy loan growth and an increase in non-accruals, we also began to experience improved new loan spreads, seen that across a number of businesses. Client deposit growth remains slow and our funding mix continue to shift towards the high cost alternatives as John talked about back in for CD pricing et cetera.

If you look at the rate and yields on a year-to-date basis, you can see total earning assets were down 84 basis points while total interest-bearing liability costs were down a 104, so our spread improved year-to-date 20 basis points. Linked quarter basis total earning assets were down 47 basis points, while total interest bearing liability costs were down 65 basis points, so it’s fair improvement of 18 basis points linked quarter.

You can also see linked quarter securities portfolio declined 17 basis points and loan yields declined primarily due to 88 basis points reduction in commercial loans and leases as you might recall that portfolio was 73% variable price. Total interest bearing liability costs again declined significantly as a result of large declines primarily in preference purchased and other borrowings line as well as long term debt loan due to repricing. We actually did improved some of our corporate debts that we have swapped to variable.

All deposits and funding categories once again declined during the quarter as it did in the prior quarter. Margin performance was obviously pretty strong in the quarter. We began to see improved loan pricing as I said the main driver was 11 basis points improvement in that interest margin during the quarter was a decrease in total interest bearing liability defaults resulting from three items. One, appropriately balance sheet positioning, the benefit from the falling interest rates that could control the deposit, the funding costs and also realizing and benefiting from a full quarter’s worth of rate reductions, most of which occurred prior to this quarter.

Our outcome model, which we said in the past is based on the blue chip consensus forecast. As soon as the Fed fund rates will remain flat at 2% level for the balance of 2008 and begin rising in 2009. As for our forecast, we expect the margin to continue to increase throughout the year to the low 370s by year end as our $27 billion CD portfolio begins to reprice to current market levels.

Turning attention to non-interest expenses, we were pleased with our overall expense control. During the second quarter, non interest expense growth rates adjusted for purchases and fair value accounting changes were very favorable on both the current quarter and year-to-date basis. While the linked quarter non interest expense growth rate appears high, it is offset by significantly higher linked quarter non interest income growth rate, both rates which are fairly typical when comparing second to first, as first quarter is generally our lowest revenue quarter with respect to non interest income and related expenses due to seasonality.

It is also important to note that we have achieved cost of operating leverage on a year-to-date and linked quarter basis and maintained a strong operating efficiencies as evidenced by the cash basis efficiency ratio of 51.2%. It's actually the lowest quarterly efficiency ratio we’ve seen in the last five quarters.

It’s also interesting to note a number of end of period FAEs in the second quarter when you pull out or exclude acquisitions, we were actually down 6 FAEs in the second quarter. Drilling down a little bit, if you look at the linked quarter comparison expenses, we had 18.3% increase adjusted for purchases or total non interest expense was up 43 million adjusted for purchases. It really came in two areas; personnel expense was up about 14 million, other operating was up 27.

Looking first to personnel, it was due to increases in the changing market in rabbit trust salaries annual increases which occur for us 1st of April and an increase in equity base comp due to change investing requirements we made for retirement employees. You might recall in the past years, we do show that expense all in the first quarter and with this change this will spread more evenly across the second and third quarter, so we get a negative comparison from that in the first currently. Also we had increase of insurance incentives and all those partially offset by a decrease in executive incentives.

And looking at other operating expenses, which is up 27 million, it's a number of items had increases in advertising and marketing expense, legal fees partially due to credit environment, professional services fees increased right down from foreclose properties negative process and expenses and then a small increase in employee travel.

Looking at common quarter basis, we are very pleased, we are up 2.7% increase over prior quarter in ’07 – the same quarter in ’07 adjusted for purchases, total non interest expense was up 26 million again in two areas drove that; personnel is actually down 11 million in common quarter and other operating was up 33. First looking at personnel that drove the decline, we had decreases in incentives and executive incentive, insurance incentive, banking network incentive and also Scott Springfield, our retail brokerage incentives. Also had decline in pension plan expense, market value on trust and also Aviva, our healthcare expense based on actual claim experience. It was offset by increases in salaries, again due to salary increases and equity based comp issue I just mentioned.

Looking at other operating expense, it was up 33 million, again driven by some of those same items, increase in retail and commercial bank card, bonus rewards expense, legal fees again as it relate to credit environment, increase write downs of foreclose, maintenance on data process and software and professional services. On a year to date basis, we were up 2.6%, adjusted for purchases or 49 million driven by 3 categories: personnel, occupancy and equipment, and other operating. Actually personnel was down year to date, down 20 million due to primarily about pension plan reduction and expense reduction in rabbi trust, insurance incentives, executive incentives, and also equity based comp due to the change investing.

Occupancy and equipment was up 10 million. The drivers there were IT equipment expense, de novo rent expense, and then normal rent expense excluding de novos as well as a small piece of communications expense for communications equipment. Other operating, up 59 million against the same items, retail and commercial, bonus rewards, or bank card bonus rewards expense, professional services, write downs on the foreclose property, fewer gains on selling real estate, legal fees, as well the credit environment and maintenance expense on foreclose property. But I have to say overall we feel really good when we put out purchase acquisitions on a year to date common being up in the 2.6, 2.7% kind of range.

Let me give you a quick update on our expense savings for bank acquisitions. We really have one that's Coastal Financial. As you recall we converted Coastal on August of 2007. We targeted savings of $27 million. To-date, we have saved 25.7 millions or 94% in the second quarter generated $7 million of those savings.

Moving to taxes, before I’m going to comment on the effective tax rate and what we expect going forward. We look at our effective tax rate on operating basis and see first quarter we were 31.57%. We declined in the second quarter at 27.64%. What was driving that was a $7 million credit we received additional interest for settlement of normal audits with the IRS, and then also low income housing tax credits that are flowing through from investments that were made in the latter half of ‘07. Looking forward, effective tax rate we expect to be in the 30.5 to 31.5% range for the third quarter and for the full year 2008.

Looking at capital, really no, what I call significant changes to the capital strategy during the quarter. Overall capital position remained strong. And as John said, we do not plan to raise any capital given the stress scenarios that he discussed. Looking at our capital ratios, equity to total assets within the period was stable with first quarter at 9.4%. Risk based capital ratios in the period, tier one was down from 9% first quarter down just slightly to 8.9% in the second quarter of 2008. Total risk based capital end of period was even with first quarter at 14.1% and leveraged capital end of period was down just lightly from 7.3% in the first quarter to 7.2 in the second quarter, well above our 7% target. So it's all of our risk based capital ratios continue to remain strong in a very tough environment.

Tangible equity was up slightly 5.7%, above our target of 5.5. We did not repurchase any shares during the first half of 2008 and do not plan to repurchase any in the near term, but as always constantly evaluate our position based on market and capital levels. As a reminder, we did increase our dividend one penny to $0.47, which is our third quarter dividend which represents a 2.2% increase over the prior year quarter.

So that concludes my comments and at this point I will turn it back over to Tamera for close instruction.

Tamera Gjesdal - Vice President of Investor Relations

Thank you, Chris. Before we move to the question and answer segment of this conference call today, I will ask that we use the same process as we have in the past to give fair access to all participants. Please limit your questions to one primary inquiry and one follow up. If you have further questions, please reenter to queue so that others may have an opportunity to participate. And now I will ask the operator Melison to come back on the line and explain how to submit your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instruction). Our first question will come from Betsy Graseck with Morgan Stanley.

Betsy Graseck

Good, thanks very much.

John Allison

Good morning Bet.

Betsy Graseck

Good morning. Couple of questions on the residential portfolio you were indicating I think during the call that you had some pretty good LTV levels on both the year first and second lines. Is it possible to indicate the type of values that you are looking? I just want to make sure that I understand what you are using for the denominator there and how it relates to your outlook for home values going forward?

John Allison

Are you talking about what we showed on the report for loan to values?

Betsy Graseck

Yeah, what are you using values at the time that the loans were made?

John Allison

In general, the values at the time of loan is made accepting our residential portfolios, the home equity, we do update those periodically using once a year, but most of these are values at the time of loan was made.

Betsy Graseck

Okay. So using your estimates for home values to decline somewhat going forward, you know, we just make those adjustments, but what we would think when you are forward. Is that fair?

John Allison

That would be fair. Although in - yes, but of course these would vary by markets obviously due to any kind of adjustments that you have to make.

Betsy Graseck

Right, absolutely. And then on the NEM, I guess I was just wondering you indicated that NEM would be going up until low 70s by the end of this year largely due to CD rollovers and could you help us understand how you would think that NEM would migrate if the Fed raised earlier or if the Fed is raising in ’09 as you indicated?

Robert Greene

Yeah, obviously we had 325, 350 basis points of fall, so we have $27 billion CD portfolio that has an average maturity of about seven months. So you are going to see a pretty good repricing, a pretty good chunk of it reprice in the third quarter. To the extent, the Fed will increase earlier in the year will have a greater impact. It increases later in the year, obviously have less of an impact. But from such a large fall from such a high level, it will take a substantial level of increase from this point to I think have a significant negative impact on the margin.

Betsy Graseck

But do you think that as you go into ’09, the margin then stabilizes even with the Fed rate increases?

Robert Greene

I do see some slight improvement and then more stabilization.

Betsy Graseck

Okay.

Christopher Henson

We are actually slowing our interest rate risk position to be fairly neutral. In fact we just in the recent model we would benefit slightly from rising rates because we feel like the downside rate risk is going (inaudible) so we would benefit slightly in terms of net interest income from rising rates.

Robert Greene

That’s right. We begin to put that upright protection on really towards the end of first quarter beginning at second.

Betsy Graseck

Okay, to protect yourself in '09?

Robert Greene

Right.

Christopher Henson

One tricky thing that back to your original question, about trying to adjust this rate to value, some of the loans could be three or four years old, and they weren't all appraised at the high point in the real estate cycle. Do you understand what I am saying?

Betsy Graseck

We did average obviously in the restructured loans that you are dealing with in the mortgage space or you having much progress with regard restructuring troubled that can then be refinanced by the FHA, such as taking off your balance sheets.

Christopher Henson

We are having some of that and we are having a fair amount of success working with borrowers under stressful conditions and we are trying to work with as many borrowers as we can obviously for their sake. The tricky thing is some people just don’t want to work with you because their house is under water and they just they don’t want to be cooperative, but we are able to move some to FHA. We are pretty big, we’ve all long been a pretty big FHA lender. So the movement the FHA is actually helping us in terms of the volume of our business and we are able to move some to FHA and this work out some things with some people to refinance for a longer term those kind of things.

Betsy Graseck

Okay. And the same restructured loans for how long before they would migrate back to performing if they were..?

Christopher Henson

If they are formally restructured they have to be back, they get to get back on a regular payment term before they would come out.

Betsy Graseck

Okay, so you reduce the interest rate, they stay in restructuring until…?

Christopher Henson

If we reduce the interest rate has to be consistent with the market, if we reduce the interest rate below the market, they start to be getting paid.

Betsy Graseck

Got it, okay. Okay and then just lastly on the construction book, did I hear do you right mentioned that you are carrying any non performance at 75% of the appraised value, is that what you have indicated during the call.

Christopher Henson

We have put them on other real estate. We take them to other real estate take, them from non accrual to other real estate. We have another set of appraisals done and we discount that appraisal by about 25% because of the cost of carry and the cost to selling. So I would say something appraised at a $1 million, we put it on all others real estate it would be back to $750,000.

Betsy Graseck

Got it. And have you been successful in selling any of those assets?

Christopher Henson

We are actually having a pretty good flow through. Yeah we are able to sale.

Betsy Graseck

And is it -- can you just give us a sense of what kind of marks you are seeing, are you getting any recoveries or…?

Christopher Henson

Traditionally on the other real estate, we’ve actually made a small profit, we are making small losses now because the real estate value, let's say if you marked it down 90 days ago even with a 25% markdown of appraised value, you are kind of chasing the moving target and you got your other carrying cost. So we are taking small losses on what we are selling. And we carry some of the things we make big gains on where the prices of some property is tricky in today’s world, in some cases and somethings we take some losses on.

Operator

And we will take our next question from Adam Barkstrom with Sterne Agee.

Adam Barkstrom

Hi, gentlemen. Good morning.

John Allison

Good morning.

Christopher Henson

Good morning.

Adam Barkstrom

I had a couple of questions for you. John, I was wondering if you talked about your capital adequacy and you talked about the stress test scenario that you guys come and ran through. I was wondering if you could just so we all have that clear if you can run that – walk through that again and then I was curious in that scenario if you guys I know you talked about regulatory capital ratios and being well capitalized in that scenario. I was also curious did you look at tangible equity assets?

John Allison

Yes.

Adam Barkstrom

And then I had followup? Thank you.

John Allison

Okay, what we did obviously we had to make assumptions about our underlying earnings. We’ve raised our loan losses in 2008 to 1%, which we don’t think higher than we think have. We think that's a worst case, worst loss, worst case that it would have any meaningful probability. We took reserve to 2% and we assume the 2009 was a bad year and the economy remain weak and the losses went up to 1.5% and we’ve raised our loan losses reserve to 3%, which again we think is a lot worse than it's very likely to happen to this. In that case, we know our regulatory capital guidelines but we basically met all of our other capital goals including keeping our tangible equity to asset ratio near and might gets it little bit under 5.5 goal but not materially under the 5.5 goal, and I assume we continue with our dividend and we still didn’t need to go raise capital. Now, obviously one of the underlying assumptions is how well your core businesses do and obviously that could move around, but what we thought was a worst case scenario, worse than we expect, we still didn’t have to raise capital.

Adam Barkstrom

Okay, okay. Fair enough. And then I was curious I just wanted to get your take on looking at the non-performing assets a bit of jump this quarter and certainly you have provided relative to charge-offs, but one ratio that seem to back down a little bit was the coverage of non-performing assets by the reserve. I was curious if you look at that ratio and kind of what your thoughts are going forward, are we kind of a minimum coverage ratio here, would you like to see that build going out or…?

John Allison

That's kind of a result of the whole process you go from establishing your what you think your charge off are going to be and what your reserve ought to be, it versus something that you actually manage to. We go from a pretty elaborate process of estimating the losses in our portfolio, obviously we haven't identified losses we take it. If we have an unknown loss, we set up a specific reserve and then for the rest of your portfolio, you look at your past loss experience and your expected loss experience and allocate reserves based on that. So you don’t really exactly manage against the reserve against non-performing assets or non-accruing loans, so it's more of residual and it has been going down I think just as a natural part of the reserving process.

Adam Barkstrom

Okay. And if I can just last one I promise. Hope and I think you talked about this last quarter, but I don’t recall what the number was, but looking at your home equity portfolio and second I guess second lean portfolio. What percentage of that of the home equity piece and I am assuming that the second mortgage is that a floating a credit pipeline structures or is that a fixed amortizing loan, I just want a clarification on that. And then what’s the percentage utilization? Thank you.

John Allison

Home equity loans would generally have -- would be loans which would have open amounts in them, may or may not be fully funded. The percentage utilization that I remember is about 50% and I don’t have a number and Chris I don’t know if you have a number.

Christopher Henson

I don’t.

John Allison

But to be honest with you, really there is some cases where people have low utilization and then they slowly fund up. We are refreshing all of these lines every year. We are refreshing the credit scores, so we don’t just leave them out. We look at the credit scores every year and if somebody is having a big change in the credit scores we will stop the availability under the line. Most of your problems honestly come from people that have already fully funded their lines. So it’s not like that you get a certain funding and people didn’t get any financial, I mean that happens a little but that’s not the typical case. The typical case is some buyers already fund the line and then used up all their other credit availability.

Robert Greene

The other point I will make is 35 to 40% of those equity lines are behind BB&T first.

Operator

And we will take our next question from Matt O'Connor with UBS.

Matt O'Connor

Hi John, Chris.

John Allison

Hi are you Matt?

Matt O'Connor

Can you give us a sense of what charge offs you’re assuming for the residential construction both in the back half of the year, it's very overall charge off guidance.

John Allison

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

Christopher Henson

No, I don’t know.

John Allison

You might have to call us back, we don’t have really the number right now.

Matt O'Connor

Okay, that’s not a problem. And then just step away in terms of the Visa gains, who are you selling the Visa positions to?

John Allison

It’s a private sale and we actually can't disclose the buyer, but it's obviously not the Visa buying.

Matt O'Connor

Okay, so it's still just to other members banks, there is no other market for it, right?

John Allison

Yeah, you can't sell it in the general market, you have to sell it ot another member bank.

Matt O'Connor

Okay, all right, that's it. Thank you.

John Allison

Yes sir.

Operator

And we will go next to Mike Mayo with Deutsche Bank.

Mike Mayo

Hi. I just had a general question on the worst case loan losses, just that's something I always like pulling investors and my whole investors, they often say maybe 200 basis points to be worst case or even base case sometimes and you kind of have a worst case of 100 or 150 basis points of loans losses. So if you could just remind us maybe why you take your loan portfolio is less risky than say the industry? And then a related question is last quarter you thought you have flat loan losses and as you mentioned the real state market got worse and it's an estimate and I appreciate you are giving the estimate, but what kind of components do you have that will in the new range of 75 to 85 basis points given what you see in the last three months?

John Allison

In terms of the second question, I know I have a high level of confidence it will be in that range, but obviously I might be wrong. I think we have gotten more cautious we miss last time in terms of the expectations of losses. For us to get to 200 basis points I think would take a really really severe economic correction. It's just the nature of our business, the fact we are largely collateralized lender, we do largely in-market stuff, we don’t do anything esoteric. In our history, we never had anything close to 200 basis points in losses. So it just really would take a huge economic correction which is not I just haven’t seen that kind of estimate from any kind of commerce. So we think obviously we could be wrong but we think that the one and the 150 is the worst case scenario that has any meaningful probability. That’s obviously not the worst case possible, but we just don’t see getting close to 2% losses in that portfolio based on long histories and long kind of performance numbers.

Mike Mayo

And the specialized lending increases, can you just elaborate on that and when you started seeing that, maybe the loss rates through the quarter?

John Allison

Specialized lending is actually down in terms of losses because of regional acceptance doing better, so our automobile business, in fact the losses are down and non performers were down in the specialized lending business. The reason I think the regional acceptance is the big driver, that’s the high risk automobile business, and the reason that is doing better I think is because of a little bit seasonality, the government rebate checks helped that market and they tightened their terms a good bit of couple of years ago and they are just starting to reflect in the portfolio now. So our expectations that regional acceptance will go up some from now because they are a seasonally benefits from taxes and those kind of things, but we don’t think they will go up any higher, in fact we think it will be a little better than they were last fall and they think based on all of their underwriting standards that they are actually underwriting in a lower risk rate today because some of the people that the GMAC or Ford Motor Credit would take in the past and are not taking now, they are less risky than our average portfolio and the way we make a profit of course is our rates are much higher in regional acceptance than the Ford Motor was doing for example.

Mike Mayo

Are you surprised that auto losses are holding in? I mean to the extent that private consumers showing weakness in terms of real estate when you expect this deliver effect to Auto?

John Allison

Well, we are getting in our traditional sales finance business and the traditional automobile business and what we are getting there is somewhat higher loss rates but when we repo them, we are getting more loss for a car. In the average market, the people got to have cars to get to work, they are going to live in an apartment and I think they tend to -- if I got a job they, they don’t keep making their car payment where you have what would really miss increase the car losses there if you have a significant increase in unemployment because that group is more vulnerable to unemployment and I guess we are seeing some more problems there and we are actually having a little over loss ratios after that we repo them in that market because they are mostly financed really small efficient cars because that’s what these people could buy and the last ratio when you repo high mileage low small car, lower than it used to be because of the resale value on those cars are holding up pretty -- are holding up very well versus the resale value on a SUV. So they are benefiting a little bit from the mix change than people buying small cars.

Operator

And our next question will come from Nancy Bush with NAB Research.

Nancy Bush

Hi, good afternoon John

John Allison

Good morning.

Nancy Bush

Could you just update us a little bit on conditions in Atlanta right now? Are you seeing any stabilization in that market, what sort of the inventory, has it increased or stayed about stable etc., etc?

John Allison

I was talking to Lord Anderson, our Atlanta Georgia regional President this morning literally and over the last couple of months, we have had I recall sight improvement in Atlanta. Now how much a couple of month, years, I don’t know. I would expect we will continue get some improvement for the rest of this summer and then in the fall will be a real issue, because a lot of the builder were wondering if they make it through the winter. Most house sales take place in the spring, summer is okay and fall is okay and winter is weak. And so I think that if we will get more problems that would probably come out of the winter. But we are seeing to be getting near the bottom in Atlanta. We are not having anywhere near the proportionate increases that we were having six month or nine months ago. We are having more increase in places like North Carolina where we had almost no problems six months or nine months ago. So Atlanta I think is getting near the bottom, but we will see when the fall gets here.

Nancy Bush

How about DC, same kind of evaluation on that?

John Allison

DC is kind of corky and the interior areas are doing okay, the further you are away from DC, your commute distances, that's where we are going to have our problems like the Eastern Panhandle and West Virginia places you wouldn’t think that they had DC commute areas, and I would say those areas are still drifting down a little bit although prices have stabilized in the areas, it is just that the turnovers has slowed.

Nancy Bush

Okay. Secondly John, just sort of a look ahead and you said this is certainly one of the more challenging environment that you have ever seen in your career and for those of that discover the industry for a long time. The observation is that the industry just keeps making the same mistakes in new ways. And I am just wondering what your thought process is about how you are going to keep you company from making the mistakes the next time around?

John Allison

I think what happens when you get to loan work in good times, a lot of loans work out that wouldn’t work out in tough times and it is hard to maintain that discipline through the cycle. What we try to do is to at least be in businesses that we understand and to not get in things we don’t understand or not getting into things that don’t make any sense. I think which is why we avoided things like pick a payment mortgages and really don’t have a truce of prime portfolio did the CDOs and those kind of things. And I think that we will try to continue to have that kind of discipline. I do think the market itself will help because if you are trying to make a profit and your competitors are doing lots of crazy stuff is you can’t just close the bank down and not do anything. And we certainly at the end of the cycle, there was a lot of stuff going on. I think the people that were doing that either won’t be in business anymore or won’t be doing those kinds of things anymore. So, I think the market itself will help us in that regard. I don’t know what the next 18 months is like. I am fairly optimistic that in 5 or 6 years after that because I think we will have gone through this correction process and will return to rationality. We have been doing a lot of internal talking. We look at the problems that we do have, almost all of them are things where we make exceptions to our own policies, if we had followed them the way we are supposed to follow them, we would certainly have had a few problems of the things that you can’t avoid. But we would have less home equity loans with the exception areas that you have got the problems in. But what we were doing was always more conservative in the market, we were just chasing the market that had gotten very too liberal in lending standards and particularly was under pricing the risk it was taking.

Nancy Bush

Thank you.

Operator

And we will move next to Steve Alexopoulos with JP Morgan.

Steve Alexopoulos

Hi, everyone. John, when you look forward are you getting incrementally more cautious on your consumer loan book given what we are seeing out there in the economy? The loan this quarter looks like prime mortgage and non performers were up fairly substantially from last quarter alone. Just want to see what you are thinking on the consumer side of the loan portfolio here?

John Allison

There has clearly been a drift in that the problems started in the high risk end, and we are having more problems with the people that have good credit scores, that you would never based on long time formulas have expected to have problems and I think a lot of consumers got overconfident and maybe overextended themselves. I don’t think though unless we have a really big economic correction, I don’t think that those A grade portfolios are going to be very stressed. I really don’t. In fact I think you are going to see in the consumer business, assume we don’t have a big recession, we are already surfacing the home equity problems, the stuff that shouldn’t have been done. And the rest of your home equity portfolios are performing very well. I would say in six months or maybe less, you are going to start seeing better loss ratios in those portfolios because you will have surfaced your problems. The vast majority of consumers are under financial stress, as long as unemployment remains at a reasonable level.

Steven Alexopoulos

And just a follow up, do you have the updated estimates of the LTVs in the residential A&D book?

John Allison

I would not have it. I don’t know if we have even got that all consolidated together or not so I don’t think…

Steven Alexopoulos

Okay that was my follow up. Okay thanks.

John Allison

Yes.

Operator

We will take our next question from Greg Ketron with Citigroup.

Greg Ketron

Good afternoon

John Allison

Good afternoon.

Greg Ketron

Just a couple of questions, one on the acquisition development and construction portfolio John. I think the expectation is pretty much that anybody has got an 80C book that is large should be experiencing a high level of losses, we’re seeing a lot of people report losses in Florida and North West in the 3, 4% range or higher. The fact that you have continued to have much lower than peer losses on that portfolio, I was just wondering if you can share any color on its beyond the mix issue, certainly North Carolina in itself, but beyond the mix issue what are the factors you think that are keeping your losses lower than what peers are experiencing?

John Allison

I think client selection, we deal the clients that have sort of been in the markets for long time, not doing in any out of market lending, I guarantee that the people having the biggest problems are the people that came in from maybe the Midwest and went to California. There are lots of local banks that have highest risk to the guys coming out of the market. The people who do various projects in our area were the people that came from out of the market and I think the other thing is we are a collateral lender. We get a lot of collateral in our deals. So I think all of those things are helping us. Our leadership teams have been around a long time, went through several real estate corrections particularly in the early 90s and try to have some memory about that may be not enough memory about that, so I think that’s why we are having better experience, we obviously expect our losses to go up, but we don’t expect them to go anywhere near in that kind of range.

Greg Ketron

Is your sense that may be from a loan to value perspective that you underwrote them with a lower loan to value than maybe what the peers were?

John Allison

Lower than a lot of people were doing and I am pretty positive about that, but we are sometimes in joint relationships that we are seeing this very often where a client does a deal with us and does a deal with somebody else and almost in every case our deal looks a lot better than their deal because we insisted on collateral and in better case in the end of a liquidation in some of our competitors were, obviously we have gotten a loan loss reserve of 5.5% of our whole portfolio. So we have certainly made plenty of mistakes, but I think we made less than most people.

Greg Ketron

And if can do one other question. In terms of flows like 30 to 89 days I know you don’t disclose during your financials that will be coming out when the call reports are filed, but is there any color that you can provide on those trends that you saw as the quarter progressed?

John Allison

We had an increase in 30 days past these across most of our portfolios. I can’t remember how significant it was but we are having a higher 30 day passed due number.

Greg Ketron

Is it significantly higher or is it just continue to trend upwards similar trajectory than compared what you are saying?

John Allison

I think it wouldn’t have radically jumped but it has been consistently trending up.

Greg Ketron

Okay. Great thank you.

John Allison

Yes sir.

Operator

Our next question comes from Jefferson Harralson with KBW.

Jefferson Harralson

I wanted to ask you guys about your pretax pre-provision very high this quarter with our credit costs increasing, do you expect a ramp up in your special office section, where it might be hard to defend this pretax pre-provision earnings level or this efficiency ratio?

John Allison

I think pretax pre-provision, I think we can maintain or sustain that kind of performance. I feel very -- that was in a way I am very glad that you asked that question. Because I think that's what we feel good about. What we feel bad about is the rapidly increase in our loan loss provision. But if you take out that rapid increase in loan loss provision, the rest of our business is doing fairly well for this kind of environment and based on everything we know unless the economy changes on us, we think we can sustain that kind of trend. If we have a risk, which is loan losses are bigger than we think those kinds of things, we think our core businesses is in pretty good shape independent of that.

Jefferson Harralson

Okay, thanks. Chris, you guys gave the other commercial real estate loan data for the first time this quarter.

Christopher Henson

Yes.

Jefferson Harralson

And the loss ratio out there and the nonaccruals are for the entire period of year-to-date June 30. Do you have the numbers handy of what they were in the second quarter or the first quarters so we can back into what those trends are for this quarter?

Chris Henson

That might be better offline. I don’t have handy, Jefferson.

Jefferson Harralson

I will contact you guys off, okay.

Chris Henson

Alright.

Jefferson Harralson

Thanks a lot.

Chris Henson

Thank you

Operator

Kevin Fitzsimmons with Sandler O'Neill. Please go ahead.

Kevin Fitzsimmons

Hi, it’s Kevin Fitzsimmons. I just wanted to ask you real quick about, we saw the increase in nonperformers and we saw the increase in 90 day past due and still accruing, can you give us a sense on what the earlier stage delinquencies are doing, the 30 to 89 day past dues in and directionally a magnitude of what you are seeing there?

John Allison

They are increasing, kind of the same kind of increasing pace that we have had. I would say we got the number somewhere, Chris do you remember off the top, we were looking at them yesterday but I cannot remember and I don’t know if I have gotten them here. That kind of trended up I would say if you look at the last couple of quarter, the 90 days past dues and the 30 days past dues have been kind of going up the same pace.

Kevin Fitzsimmons

Okay, great. And then lastly, the deposit service charges had a lot of strength linked quarter, you mentioned that it was seasonality was a big reason for it. Should we expect that to just be flat to up slight or we should expect that to ratchet it down going into next quarter?

John Allison

We have done a couple of things. We have attracted a lot of new accounts, our account growth numbers. A fair number of those accounts will end up paying some kind of service charge, like maybe an overdraft charge. And then we have changed some of the methods and changed some of the pricing for a variety of our products. So going forward, quarter to quarter basis, we should have pretty good comparisons last year and then we will have whatever normal levels you have in the third versus second and the fourth versus the second, but there is no reason that you should expect a big fall off in the third versus the second, in fact at anything I think the numbers will be headed up because we are in commercial kind of analysis that’s going to up because their earnings rate is lower. So if you are processing the same number of checks and you are getting less rate, you will pay -- you will get more balances or pay a higher service charge and the other thing is we call it the financial draft where you have a more overdraft as before, overdraft and a check in account. So I think we will have reasonably positive trend in the rest of the year in service charges.

Kevin Fitzsimmons

Okay, thank you.

John Allison

Yes sir.

Tamera Gjesdal

Thank you, Kevin. Although we have a number of callers with question remaining in the queue, due to time constraints, this will conclude today’s question and answer session. If you have further questions or need clarifications, please contact the BB&T Investor Relations department. We thank you for your participation today and have a great day.

Operator

Thank you everyone for your participation on today's conference and you may disconnect this time.

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Source: BB&T Corporation. Q2 2008 Earnings Call Transcript

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