Truist Financial Corp (TFC) 2002 Q2 法說會逐字稿

Welcome today to the BB&T second quarter earnings release conference call.

At this time everyone is in a listen-only mode.

Later, there will be an opportunity for your questions and at that time I will give you instructions

If anyone during this conference should need assistance, press 0, then star.

As a reminder, your call is being recorded.

And now, I would like to introduce to you Mr. Tom Nicholson.

Go ahead, sir.

Thank you.

Good morning everyone.

We thank you for joining us today.

This call is being broadcast on the internet from our website at BB&T.com so whether you're joining us through the website or as a dial-in participant we appreciate your being a part of the call today .

BB&T is very pleased to once again announce record quarterly earnings.

We have John Allison, our Chairman and Chief Executive Officer, and Scott Reed, our Chief Financial Officer, to review the financial results for the first quarter of 2002 and to look ahead.

After John and Scott have made their remarks, we'll pause and ask Royanne to come back on the line and explain how those who have dialed into the call can participate in the question-and-answer session.

Before we begin, let me make a brief comment about forward-looking statements.

BB&T does not make predictions and 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 the factors that could cause the actual results to be different are contained in the Company's SEC filings including but not limited to the report on Form 10-K for the year ended December 31, 2001.

Copies of this document may be obtained by contacting the Company or the SEC.

Now, it's my pleasure to introduce our Chairman and Chief Executive Officer, John Allison.

Good morning. Thank you Tom

And thank all of you for joining us.

Let me outline the areas that I'd like to discuss.

We'll talk about our financial results for the first quarter and year-to-date and bring you up to date on our merger and acquisition activity and future expectations in that area.

And then we'll share with you our thoughts on future earnings and then Scott will cover in some more depth both our margin non-interest expense trends, capital share --share buy-backs and our tax position.

And then as Tom mentioned, we'll have time for questions .

We are very pleased with both the second quarter and the year-to-date results, particularly given the overall economic environment.

I want to talk about the quarterly year-to-date numbers.

What we will be doing is, excluding merger related expenses, interesting enough however, our merger related costs were very small, in fact only $1.1 million in the quarter.

In fact, we've had two quarters that are extremely clean.

That's a request that a number of analysts have had, so we've had two very clean quarters.

The only reason for talking about it including merger related expenses, is because we did have merger related expenses last year and our growth rates would look too high if we didn't do an apples to apples comparison.

Our net income for the quarter was $329 million, an increase of 23%.

Diluted EPS was 68 cents, up 17.2% compared to the second quarter of last year, that was right on top of the consensus estimate.

It was 2 cents better than the first quarter, when we made 66 cents or 12.2% annualized growth rate quarter-to- quarter, and was a 13.3% increase over our originally reported second quarter EPS last year, 60 cents.

On a cash basis we made [inaudible] increase over the same quarter last year.

To 12% annualized increase over the first quarter, when we made 67 cents, and that's a 7.8% increase over the originally reported cash basis EPS of 64 cents that we made in the second quarter of last year.

Our returns are very strong, ROA 175, ROE 1844, and a cash ROA 181 and a cash ROE 23.94%.

The year-to-date numbers look very similar.

Very similar kind of results, and again, excluding merger-related costs and the good news there were few of them this year, very clean six months, net income was $638 million, up 20.7%.

Diluted EPS, $1.34, up 16.5% compared to last year, or 13.6% above the originally reported EPS of $1.18 last year.

On a cash basis, we made $1.35, which was an increase of 9.8% compared to last year, or 8% above the originally reported cash basis EPS for the first six months of 2001 of $1.25.

ROAs and ROEs look very similar to the quarter, ROA 175, ROE 1889.

On a cash basis ROA $1.80, cash ROE of $23.70, so very healthy returns.

If you look at the factors that are driving our earnings, one very positive trend has been in our margin, which improved to 427 in the second quarter, and Scott will give you some input and some more information on the margin, that's been a very positive trend over the last year.

Our interest income growth has been another positive factor.

Annualized, and this is taking out purchase accounting, annualized first to second, we grew 16.3%.

Second quarter of last year to second quarter this year, we grew 8.9%.

And year-to-date, again, without purchase accounting, our non-interest growth has been 11.8%.

If you look at the components of that growth rate, it's been a mixed bag, we've got reasonable growth in service charges, second quarter-second quarter, without purchase accounting again.

Services charge up 7.4%.

Very strong positive trend has been our investment banking revenues, which are actually up 29.8%.

Again, that's without purchase accounting.

We've had very positive trends in our fixed income capital markets area and we have a very strong fixed income business.

And also, in our ranch based investment sales activity, we have been surprisingly strong, particularly selling annuities.

We're seeing a lot of customers move out of CDs into annuities because insurance companies are paying very high rates relative to CD rates.

On the negative side, our trusts revenues are down 9.6%, simply reflecting the decline in the stock market which drives a lot of your trust revenues.

I guess the only good news, our trust business is small compared to a lot of other organizations.

Very strong growth in the insurance business.

That continues to be a very bright spot for us, with internal growth rate in insurance commissions of 14%.

Nice momentum there.

Mortgage banking, total revenues down 18.3%.

Interesting mixture. Our mortgage origination business remains very strong.

In fact, for the first half of the year, we originated $5.1 billion, compared to $4.5 billion last year .

So origination business is strong.

However, the servicing business is getting killed because of refinancing.

In the quarter, we had mortgage servicing right writedowns of $15.8 million.

We had about $10 million in the first quarter.

We took about $19.7 million in security gains, primarily designed to offset the $15.8 million in mortgage servicing right writedowns.

We did take a few other security gains, which we normally do as we restructure our portfolio. But they were trivial.

We told you in the past the way we hedge our mortgage servicing rights is through our bond portfolio, which is a good bit larger than most banks.

Actually it's been a very effective -- it's interesting, despite taking security gains and valuations in our security portfolio, the gains actually jumped from $160 million at the end of the first quarter to $291 million at the second quarter.

So the mortgage servicing rights and security gains really act as good hedges against each other.

Those of you that came to our analyst meeting in February, you may remember when we did our financial plan for this year, we actually expected to be recapturing mortgage servicing rights because we thought long-term rates would be rising and put in our plan $40 million of recapture.

Interestingly enough, so far we've been able to offset the fact we haven't made the plan in terms of mortgage servicing rights by excellent expense control and also healthy growth rates in other non-interest income areas like our investment banking area.

Looking at net revenue growth, annualized first to second, we were up 6.5%.

Second to second, up 6.2%.

And year-to-date, up 7.4%.

Our fee income ratio continues to improve.

Last year in the first half of the year was 33%.

This year, 35.3%.

Non-interest expenses is a great story.

Second to second only up 1.4%.

Year-to-date, 2.7%.

Scott will talk about that. But that's been one way we've been able to achieve our financial goals.

If you look at the comparison of revenue growth to expense growth, it's very positive.

Year to year, revenue growth 7.4%.

While expense growth is only 2.7%, if you exclude purchase accounting, in both the revenue and expense side.

Loan growth, without purchase accounting, [inaudible] but mortgage loans were down 30.6%.

So total loans were down 2%.

Second to second, commercial 4.3%, consumer 3.5, mortgage down 14.8%, total basically flat.

And year-to-date, 2001 to 2002, commercialized grew 4.9, consumer 2.7, mortgage down 9.4, and total up 1.3%.

If you look through the trends, what is happening is the good news is we're starting to get some pretty strong growth rates in our consumer lending business.

We're having substantially increased utilization of home equity loans.

I think what we're seeing is less mortgage refinance, there's still some refinance but less refinance was driving our mortgage activity, now at new home sales, and because people were refinancing less, they are using their other retail credit lines.

In fact, if you look at about the last six weeks, our consumer loan annualized growth rate has been more in the 12% range.

So definite, positive move in terms of consumer loan growth.

On the other side, the commercial loan demand remains very slow and for us unusually slow.

We're finding our commercial customers simply aren't interested in making investments.

They're antsy right now with what's going on in the economy .

Mortgage business is strong in terms of originations, but what is happening to us and why our mortgage outstandings are dropping so fast, the warehouse is going down, as we said under the market, but when we are buying a lot of community banks, [inaudible] portfolio -- lot of home mortgage loans and we rest finance those loans, we move them into the secondary markets.

We don't like the interest rate risk, particularly in today's world interest rate risk in portfolio in those mortgages.

So we're moving those mortgages out of our own portfolio into the secondary market.

Deposit growth is very pleasing in terms of our non-interest bearing deposit growth.

You take out purchase accounting in our official check program, second-to-second non-interest bearing deposit has grown 7.9%, the annualized first to second growth rate was 11.4%.

It's been a long time since you've seen that kind of non-interest bearing deposit growth.

And year-over-year, 9.4%.

If you look at total deposits, the growth rates are slower.

Again taking out purchase accounting, second-to-second we're up 1.8%, annualized link we're up 6.6%, year-over-year up 2.4%.

What we're seeing is a lot of companies going to a higher level of liquidity.

Partly probably to offset commercial account service charges and partly just because of concern about what is happening from a business perspective.

And that's driving up non-interest bearing deposit growth.

On the other hand, CD deposit growth has not been healthy, and for us a couple factors are driving that.

One, again, when we buy community banks and thrifts, sometimes they've been more aggressive and paying higher rates for CDs for people they don't have relationships with, and we think single service CDs without a checking account or car loan or home equity loan is just not a profitable market segment, so we let some of that go.

That's going to some of the community banks who are willing to pay very high rates.

The other factor though, and this is fairly material, is, we are moving a fair number of our customers from CDs to annuities because annuity rates are very attractive relative to CD rates.

One of the most encouraging trends is asset quality.

Not only does our asset quality remain strong, it appears that both peers in the industry, all the asset quality numbers in the second quarter moved in the right direction, which is extremely encouraging.

Non-performers, for example, actually declined from first quarter to second quarter, from $422 million to $400 million.

At the end of the second quarter, non-performers were .52, that was up from the second quarter of last year, .43 but actually down from the first quarter.

They dropped from .56 to the .52 level.

Chargeoff in the second quarter [inaudible] 46, which was actually better than chargeoffs in the first quarter.

Higher than last year, where where we had .43, but in the first quarter we had .48 chargeoffs -- so chargeoffs moved down.

Year-to-date, our chargeoffs have been .47, compared to .35 last year.

If you take out our specialty finance businesses in the second quarter, our chargeoffs were only .38, and in this market we think that's excellent , quality numbers.

If you look at our provisioning, we provided $58.5 million, charged off $58.1 million.

So basically the provision of chargeoffs were equal and the same thing for the year-to-date, we provided $115 million and charged off $114.2 million.

So again, basically flat.

But we've had very little loan growth so our provisioning is, you know, at a fairly normal level.

The reserve at the end of the second quarter was 140. It was down one basis point from the first quarter, 141.

It was up a good bit from last year when we were 130. Our long-term target we still think is, is 130.

We won't get there this year.

But when we start seeing improving trends in non-performers, we will be able to write down the reserves slightly if the trends continue.

If you kind of stand back and look at asset quality, we feel very good about the fact that the negative trends have at least been reverted.

We were having big increases in both chargeoffs and non-performers and those turned around.

Now, we don't think that this means every quarter they'll move down from here.

We could have them non-performers bounce bounce up in the third or fourth quarter but we think we're near the peak, so that we're not -- the trend for rapid increases in non-performers and chargeoffs we think is behind us, assuming the economy doesn't deteriorate on us.

We think our chargeoffs in the third and fourth quarter will be at a similar level, as we have had in the second.

We'll see some bouncing around on that.

They could bounce up a little bit but we don't think they'll move up materially and then by early next year we think they'll be headed back down.

We're not involved in any of the more famous credits.

We're not in Enron, we not in Worldcom, we're just not basically in that marketplace.

So we don't have any credit problems coming out of that kind of activity.

It's always interesting to look at our long-term trends, and fortunately they remain excellent.

We use our merger of equals, which was 7 and a quarter years ago now it's kind of the milestone event, and over that 7and a quarter year period on an originally reported basis, the compound growth rate in diluted EPS has been 14.2%, and on a cash basis EPS as originally reported has been 13.8%.

So we continue to have some very healthy long-term trends.

Changing direction on you, I want to talk about our merger and acquisition activity.

In the quarter, we completed our second successful conversion of the year.

We converted Community First, a $600 million bank in the Atlanta area , that went extremely well.

We're planning do our area conversion to the $3 billion Kentucky bank this weekend and everything seems to be on target for that.

Mid-America, our other $2 billion Kentucky, in this case Louisville , acquisition we expect to convert their systems in September and and that all looks on go.

Last time we shared with you that we now expect to save about $5 million in costs more than we expected at the time we announced those two acquisitions.

We originally projected about $20 million to $27 million in cost savings .

We're now estimating about $32 million in cost savings.

So both of those mergers really look a little better than we expected, and we've been able to maintain reasonable revenue momentum in both area and mid-American.

I feel like the acquisitions are going well.

In the quarter, we announced an agreement to acquire Regional Financial, which owns First South, a $1.6 billion thrift, headquartered in Tallahassee, Florida.

It's an interesting company and it's what I call a new thrift.

It was designed and built for all practical purposes in the last 8 or 10 years.

They do what we do, in the thrift aspect of our business, obviously, the commercial aspect they don't have, but they originate home mortgages, sell most of them into the secondary market.

Portfolio arms, and have a very strong residential construction lending business that's particularly profitable.

We think it'll be extremely easy to convert to a commercial bank and retail bank because we've already got the products and services, and technology and skill set, to graft on top of their distribution system.

They're in great markets, have very fast growth rate and excellent momentum, and it's not a big acquisition but it will be a very good one for us.

One thing that you will have noted is the low level merger-related charges in the second quarter.

Only $1.1 million.

Many of the merger-related charges in the second quarter had been appropriately accrued in prior quarters such as in the case of the F&M conversion in the first quarter, so actual expenditures in the second quarter were charged against those accruals.

The only conversion we did in the second quarter was Community First, which was a very small institution.

For the remainder of 2002, we do anticipate our merger related charges to be approximately $20 million after taxes.

With around -- around $13 million in third quarter and approximately $7 million after taxes in the fourth quarter.

For the total of 2002, merger-related charges will be about, we think, about $31 million after taxes, which is slightly below our original estimate of $33 million.

Looking to the future, we have the same amount of efforts, same call effort, but I'm not sure what that will result in, in terms of merger announcements in the next six months.

What is happening I think, in the merger and acquisition business is, one, we're very cautious right now with all that's going on in the economy, potential salaries are very cautious.

We've had some issues with some community banks and thrifts.

Stock prices have really moved up, particularly ones that people think might sell, and in several cases we've run our financial models and companies where we can have 30 and even one case 50% cost savings, and we can't pay the current market price.

So basically, in our model, some of those companies are grossly overvalued and we're not going change our models.

We've used the same discipline in mergers and acquisitions for 15 years and have no intention to change that.

So I think that there may be less activity in the next few months.

I found the past sometimes we get surprised, maybe something will happen we don't expect, but I feel the whole environment is not very conducive to do mergers and acquisitions, and we're going to stick with our policies and our process because it's worked for us for a long, long time.

I still think the long-term trends are the same, and we'll continue to do the kind of community banks and thrift acquisitions as we have over the long-term, but the level of activity may vary.

We're very pleased with the numbers, particularly in the insurance area where we've really got a great formula, and also in buying niche asset managers to help strengthen our asset management business.

We just acquired our second wholesale insurance broker.

We're now by far the largest independent wholesale insurance broker in the U.S., which is a great adjunct and great synergy with our retail insurance operation.

So we are pleased with the activity in the insurance business.

One thing I would also share with you, we're near the end of our regional visit process, where Kelly King and I go visit all our regions, and part of that process we get a very comprehensive report from our community bank presidents on the performance of those regions.

And what I find encouraging is the improved performance we're having in the new regions that have recently joined BB&T through the merger process, and there are a lot of those.

In fact, over half our regions we call new regions.

Our core regions have been part of BB&T for five years or more and they've always had very high performance numbers.

Interestingly enough, some of our core regions, while doing well, aren't doing as well as they were because, particularly in the North and South Carolina area, the economy has been hard hit by the decline on the textile industry and our newer regions are doing better.

Across the spectrum, what we see is the argument that Kelly presented at our annual presentation to analysts in February is that, through the introduction of our sales system and our community bank strategy and our expanded product line, we can drive revenue growth after we get everybody fully philosophically integrated and trained at a much higher rate than the companies we acquire, and that's consistently happening.

We're seeing the companies that have joined us two years ago really moving up the performance spectrum, so that's very encouraging in terms of the future of performance.

Let me share with you a few thoughts about future earnings expectations.

I'll share with you our thoughts for the remainder of 2002.

I would just reinforce all the caveats that Tom expressed.

Particularly in the days where anything we say about the future obviously could be wrong.

It's a very difficult environment to project the future.

Clearly, our biggest concern is the overall state of the economy, and because we're primarily small business, retail, lower middle market, we tend to be a proxy for the economy.

We are seeing some evidence of improvement in the economy.

Including improved asset quality, and stronger retail loan growth.

However, commercial loan demand remains weak, and it's difficult to estimate the effect of continuing bad news in the press on -- I don't know how to totally -- how to evaluate that factor.

With that as background, the consensus estimate for 2002 is we'll earn $2.77 per share, with 71 cents in the third quarter and 73 in the fourth quarter.

Assuming that we continue with an economic recovery, and interest rates begin to rise in the full quarter, we expect to be able to meet the consensus earnings estimate for the rest of the year.

Frankly, the third quarter is a little bigger challenge because there's a 3 cents increase, and the fourth is a little easier.

But we think we can make the consensus estimates of the year.

Our expectation is that interest rates will begin rising in October, and will increase by approximately 75 basis points by year end.

However, and I think this is good news, we still have a reasonable probability of reaching the consensus earnings estimate, even if interest rates stay flat, unless -- this is an important unless -- unless flat interest rates reflect that we're suddenly back in a recession in the economy, in which case both loan growth will be slower and loan problems will be higher than we expected.

Under our most likely economic forecast, we again do still believe we can achieve the consensus estimate for 2002.

In summary, we're very pleased with both the second quarter and first six months results, especially given the economic environment.

Even though loan growth is less than we hoped and expected, asset qualities moving in the right direction, non-interest income growth is reasonable, and we've done an excellent job controlling our costs.

We're optimistic about the remainder of 2002 and 2003.

Provided the economy continues to move in the right direction.

With that, let me turn the presentation over to Scott.

Thank you, John.

And let me add good morning to everybody.

As John mentioned, I'd like to home in just a little bit on net interest income and our net interest margin.

I'll talk about -- give you a little color on non-interest expenses, and then kind-of wind up with some general comments about taxes and capital and share repurchase.

Looking at our net interest income on a tax equivalent basis, in the second quarter we produced $727 million, of net interest income, it was up 12.2% over the corresponding quarter last year.

Interestingly, the components remained about the same as John has already mentioned, our margin improved 11 basis points, second-to-second quarter.

And our earning asset growth was slower, at about 9.3%.

So the two working together produced the 12.2% year- over-year growth.

If you take out purchase accounting, that interest income in common quarters only increased 4.7%, and again the margin was up substantially, but we only had about a billion dollars or 1.5% growth in earning assets.

If you eliminate purchase accounting.

Looking at the link quarters, 24.6% annualized increase, about $42 million bump-up, second- versus-first.

But if you eliminate purchase accounting, only 1.2% annualized growth.

We had a one basis point improvement in the margin, and we actually had, removing purchase accounting,

we actually had a decline in earning assets of about $400 million.

Or 2.2%.

In addition to just generally slow loan growth, that was offset by a major decline in the mortgage loan warehouse, which dropped $700 million, comparing first to second quarter.

Year-to-date, we've produced $1.4 billion in net interest income, up 10.1%.

That compares to 7.3% increase in earning assets, and again an 11 basis point margin improvement for the full six months of this year versus the first six months of last year.

After eliminating purchase acquisitions, the growth in net income year-to-date is only 5.1%, but that compares to earning asset growth of 2.4, and again making up the difference with improved margin.

Turning specifically to the margin, John's already alluded to a very pleasing picture for BB&T, one that we did predict earlier on these conference calls and other conversations we've had.

Second quarter of last year, we had a 416 margin, improving to 419 in the third quarter, 420 in the last quarter of 2001 to 426 and then 427.

So again, very pleasing.

Obviously, all hinges on spread enhancement.

To give you a little insight into what's going on with our spreads, if you look at common quarters, total earning assets have decreased in yield 142 basis points, 160 on the loan side and 89 basis points decline in securities and other earning assets.

But while earning assets are down 142 basis points, interest bearing liabilities have fallen 170 basis points, with interest bearing deposits down 196 and short-term borrow funds down 305 basis points.

Link quarters, very similar numbers in terms of the direction, but much less in magnitude, obviously.

Earning assets are down 16 basis points, interest bearing liabilities down 18.

So we get a little bit of a spread enhancement, and therefore pick up of one basis point and margin.

We have seen significant growth in DDA, as John alluded to.

Plus, the average cost of CDs just continues to fall quarter to quarter.

We're seeing a lot of movement of accounts out of CDs into fixed annuities, as John mentioned, but also into our transaction accounts, our investment deposit account and our money rate savings accounts.

Looking at year-to-date, information, full six months of this year versus last year, 156 basis point decline in earning assets, 186 on the interest bearing liabilities side.

We have been forecasting if the economy continues to recover and if we see rates turn up and start to increase on the fourth quarter of this year and on into 2003, we are slightly positioned for an increase in interest rates, and so we should see the margin even grow stronger later this year and on into next year, again, if we see a rise in rates.

I do think the margin will remain strong, even if rates are flat.

Throughout this year. And on into the first or second quarter of next year.

Turning to non-interest expenses, continue to see very strong expense controls and we have alluded to in the past and continue to want to mention to you that we are realizing our cost savings on acquisitions, we're either meeting or exceeding our projections, which is helping obviously with expense control and small growth rates in non-interest expenses.

If you look at the second quarter to second quarter, we were up 12.9%, but if you eliminate purchase accounting, we're only up 1.4%. Personnel expense up less than 1%.

Comparing those two quarters, I would mention that our -- we shared with you our profit plan at our February annual conference.

We are running about 500 FTEs below plan.

That's head count.

And been able to operate the bank at -- with significantly less people, and, therefore, again, personnel expense is non-growing , it's less than 1% growth.

On the flip side of that, I would also mention the only significant increase we've seen in common quarters is the amortization of mortgage servicing rights, which are up almost 100%, $9.5 million was charged earnings, second quarter of last year, $18 1/2 million charged to earnings second quarter of this year.

The same components really justify what is going on in the link quarter and year-to-date.

Just quickly give you those numbers.

Link quarter growth in non-interest expense is 31.3% annualized but only 7.2% eliminating purchases.

Personnel expenses actually down on an annualized rate basis, 3.1% in link quarters.

Year-to-date numbers, 11 1/2% over prior year, only 2.7 when you throw out purchase acquisitions.

Let me talk just a moment about taxes.

We continue to work feverishly to search out ways to reduce our federal and state tax burdens.

I've mentioned many times an ongoing state tax minimumization program we've had in place a number of years.

Plus the use of various investment companies and other states, REITs and offshore captives to hold down our effective tax rate.

It's been very consistent the last five quarters between 28 and 29%.

I would continue to forecast that maybe we're kind of just pessimistic about it, but we do think it will increase over time as we add marginal revenues and we fully tax treat those .

The remainder of this year third and fourth quarters, I would look at something between 29 and 30% as an effective tax rate.

Our -- in terms of capital, we have obviously maintained very strong capital ratios, our equity to asset ratio at the end of the second quarter was very strong, 9.3%.

Very much in line with March 31 number.

Our risk base capital ratios to year one remains very strong and very consistent quarter end to quarter end for the last five quarters at almost 10%.

And our total capital ratio we ended the period at 12.8%.

Our leverage capital ratio that we want to manage between 7 and 8%.

Again, it is being maintained in that range.

We did balloon a little bit at the end of the first quarter because of not being able to do any share repurchases to 7.7%.

And that fell by the end of the second quarter to 7.3.

But still way above our minimum of 7%.

We did repurchase 7 million shares of our common stock in the second quarter, a cost of $266 million.

That translates into about $38 per share.

We will continue to do periodic repurchases as we previously announced throughout the year, basically trying to control our leverage capital ratio and manage it back down towards the 7% level.

That could accumulate to the high teens to even 20 million shares to be repurchased during the year.

One last reminder: we just announced the increase in our cash dividends for the 31st consecutive year.

An increase of 11 1/2% from a quarterly rate of 26 cents per share to a board-approved 29 cents a share, that will be paid on August 1st of this year.

So we're -- continue to be proud of that and glad we're able to share our success with our shareholders.

Tom and John, that's the end of my formal comments.

And we can turn to questions.

Thank you, Scott.

Before we move to the question and answer segment, I'd like to request that we structure this call or this portion of the call in a way that gives the best access to all the participants.

I'll ask, as you submit your questions, please limit it to one primary inquiry and one follow-up.

Then if have have additional questions, come back into the queue, but give others a chance to participate as well.

Royanne, our operator, would you come back on the line and explain how to submit the questions, please?

Yes, sir.

Ladies and gentlemen, at this time if you do have a question, press one on your touch tone phone.

Will you hear a tone indicating you've been placed in queue, and may remove yourself by pressing the pound key.

If you're on a speaker phone, remember to pick up your handset before pressing the numbers.

And again, ladies and gentlemen, please limit your questions to one and press 1 if do you have a question.

The first question comes from the line of Jason Goldberg with Lehman Brothers, go ahead.

Good morning, gentlemen.

Good morning.

John, the beginning of the year profit plan was 282 and I think last quarter you cited [inaudible] consensus of 279, now it's kind-of drifting down to 277.

If you could maybe just provide us more color on what gives you confidence in that number, particularly with regards to the third quarter in light of Scott's comment, that tax [inaudible] should trend higher.

Jason, we just redid our pre-plan.

And we looked at every trend that we see in our business.

Now, the reason we probably won't -- knowing -- expect to make our original financial plan is that the economy from our perspective in terms of loan growth had been considerably slower and huge mathematical factor is that mortgage servicing rights, in which we thought we would get $40 million in recovery, may {inaudible} $25 million in writedowns, that's a $65 million swing.

So when we run our models today and they -- on the information we have today that shows it actually -- I mean in candor it shows us beating the 277 but in light of what's going on in the economy, I'd hate to lead anybody above 277.

And most of the beating of the improvement takes place in the fourth quarter, and the factor that helps us some in the fourth quarter would be rising interest rates.

If rates stay flat, we still think we can make the 277, if they were to rise, frankly we would probably beat the 277.

But my comfort in any interest rate projection with what is happening in the economy and happening in the newspapers is low right now.

So we're not showing, you know -- we're not showing a lot of difference in the bottom line between what we are sharing with you after the first quarter than we are now.

But we're probably less comfortable with projecting anything above the consensus estimate right now, just because of the unknowns in interest rates.

That is helpful.

And then one follow-up, you kind of mentioned you expect to see in the recent and near term a slowdown in the acquisition activity.

Did that play into anything on the past that is clearly added to the earnings growth potential of the company?

Well, it could -- in the longer term, if we quit doing it, it would impact us.

Ironically, in some ways it's a good lull because we've had so much the last couple years, I think we probably, over the next 18 months will benefit from being able to focus on all the acquisitions we've already done.

Your marginal energy can only do one thing or the other. If you're doing more acquisitions, you've got all the benefits and all the challenges that go with that.

If I thought we couldn't do acquisitions over the next three to five years, that would be -- we'd have to think about how we would get better earnings growth from other activities.

But I don't think that's going to happen.

I really think, my own intuition is we're talking probably about a six-month period, where we're less likely although acquisitions are sometimes -- they just happen out of blue, but where we think we're less likely to do deals.

So I don't think it has a negative impact in the immediate future.

Because we've got plenty of integration from past deals to focus on anyway.

Sounds good.

Thank you.

Yes, sir.

Thank you.

Next in queue, to the line of Jefferson Harrelson with KBW. Go ahead sir.

Thank you.

I was wanting to ask similar to Jason on your 277 estimate, is there any MSR writeup in your expectation to meet 277 in a flat-rate environment?

If we -- we can still make the 277 if we don't write up MSRs.

We would beat the 277 if we had the chance to write up MSRs.

So basically, what we see is we can -- and again, all this depends on the economy not going bad on us, but we still can make the 277 if rates stay flat and we don't get to write up MSRs.

We'll beat it.

If rates start moving up and get to write up MSRs, based on our most recent pre-plan.

Thank you.

Loan service -- what is the valuation of your servicing rate right now?

Valuation of our servicing rate.

As a percentage of loan service.

Scott, do you have that number?

I don't have it as a percentage.

The mortgage servicing rights are $396 million, and we service probably close to $31 billion.

If that's the number you're looking for.

that is.

And again, we also, just as an add-on, we have about $91 million now sitting in the reserve through the impairment charges we've made over the last five quarters, so that's about $91 million that if rates rise, longer term rates, that at some point in the future based on accounting and convention, we'll have to recapture and run back through earnings just as we took the charges through earnings.

Okay.

Thank you, guys.

Thank you.

Next, the line of Ed Nagarian with with Merrill Lynch, go ahead please.

Good morning.

Good morning.

One quick question on the mortgage side. The $16 million of amortization this quarter, just remind me, that comes out of the expense line or is that netted against the mortgage revenue line?

Revenue.

Isn't it, Scott?

The mortgage servicing writedown goes against revenue, I believe.

Yes, the impairment goes against mortgage banking non-interest income.

Okay, so it's not sitting as part of what is potentially adding to expenses this quarter?

No, what adds to expense, don't ask me the logic of all this, but the ongoing amortizations that you do every month and every quarter, which as I mentioned has about doubled if you look at second quarter of last year to this year, and was $18 1/2 million, that goes against expense.

Okay.

That's an amortization in our categories [inaudible] operating expense.

But that's an expense, that 18 million.

The special charges you take on impairment creating this reserve go against non-interest income.

Okay and one more quick question.

Could you give the core excluding purchase acquisition growth rates, both linked quarter and year-over-year for non-CD deposits?

I think you sort of gave total deposits, including CDs and then you also gave non-interest bearing.

But could you give sort of a non-, non-CD deposit core growth rate? Do you have that?

I've got core -- what we call core deposits without purchase. Second to second was .4% basically flat.

Annualized link is 3.4%.

And year over year is 1.4%.

Yes, those are the right numbers.

Okay, thank you.

Next in queue, the line of Roger Lister with Morgan Stanley.

Go ahead.

Looking out into the coming quarters, as you so look at rising interest rates and you kind of do your scenarios about what's going to happen to the margin and net interest income, how do you think about the tradeoff that as, if the war gets better and interest rates rise you may be able to do more lending, but at the same time you may lose some of these very attractive DDA accounts, when people start to pull back on liquidity.

What sort of a tradeoff between losing some of the good deposits and picking up on the loan side?

How do you think about that? Going forward.

I think overall we're better off because I think -- hard to know in any one 90-day period and depends on the speed of rates, but when we run our total models slightly rising rate market from the low levels we are now, would be positive for us.

Because it would reflect increased loan demand, improving margins.

It would also reflect lower levels of loan chargeoffs or else you wouldn't be having that kind of economy.

The negative would be probably what happens to you, one reason your DDA growth is slower, going the other way, would be that commercial analysis charges drive DDA growth to some degree because people use their balances to offset those charges, and the charges reflect volumes of activity, so you'd have some pickup in volume of activity because business would be better.

But on the other hand, people would be getting more credit for their balances that offsets that activity.

So you might have some slowdown in your commercial service charge revenue growth, but it wouldn't be enough to offset the benefits you would get from the loan growth etc.

If I could add to that, John, in our models as we look out into next year, which certainly again we are modeling a rising rate scenario, we have projected about equal growth in DDA, back more in the 6 and 7% growth rate range versus what we're now experiencing. And a pretty much balanced growth on interest bearing deposits, again 6 to 7% style range.

And have grown loans at an accelerated pace from where they are today, but still only about 7%.

So I think that model's a little bit of what you're asking about and we still maintain a margin throughout all that of about -- 425 to 430, exactly where are today.

We think all that being in balance and running through our models works very well for us, and produces very nice income growth.

So, if I could summarize, you said you can get stronger growth in about the same spread, out of sort of the combined events?

Right.

Exactly.

Thank you.

Thank and next in queue, the line of Katherine Murray with J.P. Morgan.

Yes, good morning.

Good morning.

I think there were some technical difficulties at the first part of the call.

Could you please repeat the loan growth numbers, excluding the acquisitions, and also I don't know if you provided any net interest income, but I'd ask for those numbers also, please, thank you.

The loan growth numbers annualized first to second, and this is without purchase accounting, commercial was 2.9%, consumer 9%.

Mortgage was actually down 30.6%, and then the total was down 2%.

And then second-to-second, commercial was up 4.3, consumer 3.5, mortgage down 14.8, and the total flat, and then year-to-date commercial was up 4.9, consumer up 2.7, mortgage down 9.4 and the total up 1.3.

What we're seeing, Katherine, is clearly and positive trend in consumer lending, we're starting to have some pretty heavy utilization of home equity lines, etc. because mortgage refinance is slowing.

In fact, the last six weeks, our annualized growth rate in consumer lending has been in the 12% area.

Commercial lending has remained slow, businesses extremely cautious.

Mortgage, we're doing great in originations with a much higher percentage now, new homes instead of refinance, which is good from an economic perspective.

However, our warehouse has fallen as Scott described, and the other thing is when we acquire community banks and thrifts, a lot of them have portfolio-d home mortgages that we don't like to hold because of the interest rate risk.

We refinance them, we sell the end of the secondary market and that knocks our portfolio down.

Okay, great, and net interest income, would you have those same figures please.

Yes, I'll give those to you Katherine..

As I mentioned, if you look at common quarters, eliminating purchase acquisitions, 4.7% growth in tax equivalent net interest income, and that compares to about 1 1/2% growth on earning assets without purchases.

Link quarters, 1.2% annualized increase, but that compares to a decline in earning assets of 2.2% annualized link quarters.

All of that decline is produced by a very major move in our mortgage warehouse that is down $700 million.

First quarter into the second. Without that, we would have certainly had more in line with the common quarter growth.

And in year-to-date, 5.1% growth in net interest income, compared to 2.4% growth and earning assets.

Thank you very much.

Next in queue, the line of Chris Marenet with SunTrust Robinson.

Hi, John and Scott.

Hi, Chris.

I want to ask you a question regarding real estate and both the health in your markets as well as what you're expecting in terms of losses coming out the next six to 12 months.

Are there any signs you may be having some losses there or anything that percolates as a problem?

It's interesting, Chris.

I'll divide our real estate into two categories.

Residential remains what I'd call strong.

We're not seeing material problems in the residential market.

Commercial real estate, we have had some individual projects that are in a problem status, but more what we're seeing is a lack of activity and a very significant amount of people going to the long-term market to refinance bank type con -- or financing for commercial real estate projects.

But right now if you looked at our non-performers and compared non-performers to our exposure in real estate, they still remain very low relative to other segments, and are not deteriorating significantly.

Doesn't mean they won't start, but we haven't had problems in real estate so far and are not -- we've got individual project here and there but we're not seeing any kind of systemic problem.

Obviously, low rates help tremendously in the real estate market.

And the other thing, I think, because of past history and past problems, the industry didn't -- it had more discipline than it had last time, and interestingly enough, REITs are suddenly getting a lot of cash, and you guys may know more about that.

We're seeing -- if we're having a problem, we're having people cash out and selling stuff to REITs.

And, and that's reducing our loan demand.

So today, there's no evidence of it going in the wrong direction.

Okay, very well.

Any signs of concern on the consumer side, particularly just drilling down on home equity lending?

That's been a growth area for you in a lot of other banks, but any flips on the credit piece going forward?

Well, so far, our loss ratios in our consumer lending portfolio remain extremely good.

And I guess you can -- if you think the economy is getting ready to tank again, then you got to get worried about the consumer side.

If you think we're headed toward some kind of modest recovery, then maybe we're not going to have big problems on the consumer side.

We -- the consumer benefited enormously from being able to refinance their home mortgages at low rates, and while unemployment has picked up a little bit, it's not that bad.

So again, I think it -- if your forecast is we start having a modest kind of improvement in the economy, I feel pretty good.

If have you another -- recession or suddenly the economy goes back in the wrong direction, obviously that could work for the consumer side and they'd probably pass the point where refinance is going to help them as much.

But our chargeoff past due numbers on the consumer side are not showing any material deterioration.

Even our sub-prime operation, which operate with high loss ratios, obviously, aren't showing any kind of material deterioration -- they deteriorated initially when the economy got slower but they've actually been kind of improving or at least been stable the last 180 days, so we're not seeing a lot rise in problems there.

John, our loss number on the direct retail side of consumer, which would include the home equities year-to-date losses are 28 basis points.

So again, been fairly low, and well contained.

Very well guys, thanks a lot.

Yes, sir, thank you.

Thank you, and next in queue, to the line of David Stump with AG Edwards.

Go ahead.

Good morning. Some of your strongest fee income growth in the insurance area, even after you excluded the effect of purchase accounting.

Can you talk about that business a lit Bill and what is driving that growth?

Is it the synergies between the various insurance businesses that you're bringing together under your umbrella?

Is it synergies with the bank?

Is it just a fundamentals of the insurance agency business themselves or guess maybe all of the above?

That's a good question, David. And in a certain sense, I would say all of the above.

One clear factor is the business is better.

The insurance companies underpriced -- in fact, insurance rates declined for 10 years.

They were making a bunch of money on investments, and that party is over, and they're raising their prices commercially.

Retail side, consumer insurance is so regulated, you're not seeing big price increases, although that may be coming on the consumer side.

But the commercial side you're seeing major price increases, and we get a percentage of the commission, so that just falls through the bottom line. No more cost to us.

It's also maybe a disproportionately favorable to us because we have some pretty good leverage with the insurance company because of the size of our operation, and we're mostly competing with the other small -- small agencies given our history and so a lot of these small agencies, not only is the price going up commercially, but they can't get anybody to provide the insurance.

So we're moving market share partly because we, through our leverage with the companies, can get the product when other people can't.

We're getting more and more synergy out of the bank.

[Inaudible] It takes a long time, particularly in the small business, lower end of the commercial middle market.

We're getting higher and higher sales ratio in our own client base.

We've developed a call center to help us do that.

And so we're getting momentum there.

We're benefiting a little bit from the wholesale -- being in the wholesale business because we can put our own retail volume we used to have to put through other wholesalers through ourselves, which we make profit on.

So our wholesale business is growing partly because we're redirecting our retail volume through our own wholesale operation.

I happen to be pretty optimistic about the agency end of the insurance business for the next five or six years, and that's hard to know because we've really had a 10-year period where that was a business where revenue, if you weren't selling new clients, your revenue was falling.

And that -- we've had a cyclical change in that business.

And for the companies, it's a little harder to ascertain because they're going to lose the profits they were making on the investment side, and they've got to make it up with raising their -- the revenue relative to loss ratios.

But on the agency side, it's all just gravy, so it's all moving in the right direction for us.

One follow-up, how big -- how should we think about the size of this business relative to the bank over time?

How much bigger can this business get for you?

Is there a point at which you'll be going national in this business, getting outside of the footprint, or is there something still primarily a footprint focus?

We're getting better and better in the business, and our vision continues to expand.

We set a goal about I think about three years ago to take it to $250 million in revenue.

We're going to beat that goal.

In five years.

And we're -- we'll probably be closing on $200 million this year.

We'll have a $200 million momentum going by the fourth quarter of the year.

We like our retail distribution connected to our footprint.

But we're in a number of states where insurance agencies have not been consolidated, an obvious opportunity for us is Kentucky, where the agency business has not been consolidated in Kentucky.

We've been the consolidator in North Carolina, South Carolina and Virginia.

We hope to be the consolidator in Kentucky.

There's a tremendous opportunities in Florida, where the AC system has not been consolidated.

So there's a lot less to do on the retail side out of -- in our footprint because we've opened a lot of new markets on the banking side. This wholesale opportunity is a great one.

There are some other subsidiaries of other agencies and insurance companies that might be opportunities for us to grow in the wholesale business, which is a national business.

So our vision gets bigger as we continue to be very successful, and have made this a really good business for us.

Thank you.

Yes, sir.

Next in queue, we'll go to the line of Gary Townsend with Friedman Billings, go ahead.

This is actually Amy Isner, good morning, how are you?

I'm trying to get a sense of what your commercial deposit account growth is, if you're acquiring new commercial customers?

Scott, have you got a number on that?

Commercial deposits.

Commercial deposit growth in the account number side.

Really don't have anything close to that information at hand.

I'll be glad to call you back, Amy, we'll try to get you something.

Okay, great, thank you.

Next in queue, we'll go to the line of Chris Wills with T. Roe Price.

Good morning.

I was hoping to get just a little insight into the primary drivers of the link-quarter increase in other non-interest expense of about $23.2 million.

You mentioned the amortization of the MSRs of about $18 1/2 million I think in quarter two, versus about $10 million I think you'd said in maybe quarter one.

That I thinks in that line item?

Is that correct?

And is the new rate there of about $164 million, is that the formula we are going to be looking at on a run rate basis?

Scott, you can answer that.

Yeah, I think, if I did hear all of the question, but your question was, you were looking at the link-quarter growth and non-interest expenses?

Correct.

And other non-interest specifically.

Other non-interest.

Uh-huh, it's about 23 million higher than Q1.

Pretty big jump on a quarterly basis over the last five quarters.

If you take out purchase accounting, it's up about 15 million.

It's still a huge growth rate.

Let me give you some numbers.

One of the primary items there is the amortization of mortgage servicing rights, which increased $2 million, actually $2.1 million, first to second quarter.

So again, it keeps ebbing up each quarter.

We also had advertising, public relations up were up about $1.3 million, professional services up $2.7 million.

We had some gains on the sale of fixed assets in the first quarter that were not repeated in the second quarter.

So that was a pretty large flip.

But as you know, we are required to account for those gains or losses in non-interest expenses.

A lot of all of this is I think less of a trend and more of timing, just of when we get bills, when we pay for services, when we're doing advertising and public relations than any kind of a real movement upward in terms of trends.

I think if you were to look going forward, the number without purchase accounting is $160 million, right at it, in the second quarter.

And I think that's high.

I think something more between $150 and $155 would be more of a run rate.

At least for the next couple quarters.

And then we have to grow from there, obviously, as the bank grows.

Sure, that's great. And, just a quick follow-up, on personnel expense, run rate going forward?

Color there, same thing, $320 million level on a quarterly basis?

Yeah, and, again, if you take out purchase accounting it's $302, but looking at the $320 level, I think it's $319, whatever, all I know is we continue to run the bank with -- running well behind plan on FTEs.

We are giving 2% salary increases, which is about half of what we have typically given in the late 90s and early 2000, 2001. But this year, we're giving them, only 2% increases.

A lot of that personnel expense quite honestly fluctuates with what we're doing on the revenue side because of the many incentive programs.

For investment bankers, brokers, for mortgage lenders, for our insurance agencies.

So as revenues really kick up, we will see that personnel line increase.

My guess is that aside from any other purchase accounting we will do, probably 2% to 3% quarter-to-quarter kind of annualized increase would make a lot of sense.

I don't think it's going to get beyond that, and that would be mostly just because of, again, promotions and occasionally incentives being paid for good performance on the revenue side.

Very helpful.

Thank you very much.

You're welcome.

And next in queue, to the line of David West with Davenport and Company.

Go ahead.

Good morning.

Hi, David.

John,I've got a two-part question following up on your comment, in your discussion of M&A it sounded like you were a little bit more optimistic on the non-bank front and one area that you talked about back in February at the analysts meeting was to develop more of a "professional asset management organization."

So I guess, (a) I was interested in your comments on what you thought your M&A prospects were in the asset management area, and then, second part, what type of acquisitions do you feel like you need to do, to I guess this is aimed at developing more proprietary products?

So I guess that's the two-part question.

Good question, David.

What we have believed is that as we've grown our bank, our trust and our asset management business hasn't grown proportionately because most community banks and thrifts we acquire either aren't in the trust business, aren't in the asset management business, or they have very small operations, so if you look at our trust asset management businesses relative to the size of BB&T, they're much smaller than you would expect.

On the other hand, we had very fast growth rates until recently in our trust operations and our asset management activity.

We feel like there's an opportunity to consolidate what I would call niche asset managers.

Very similar, we believe, to what happened in the insurance agency business.

We begin consolidating agencies that everybody thought was the wrong time because the market was headed down.

We knew it was headed down. And that made the people in the business more interested in selling.

We thought the market would turn around in two or three years.

It took about 10 years for it to turn around.

But it's certainly turned around now.

We think that the asset management business is not going to be as much fun the next few years as it was the last few years, and that that is a motivation for people in that business to think about other opportunities.

We're basically targeting companies that manage from $750 million to $2 billion in assets, usually they're a local company.

They usually have a handful of people that really make it work, very analogous to the insurance agencies.

Most have a specialty field. They do some thing extremely well.

A lot of them, frankly, have a very heavy focus on bonds, which is working out very well for them.

And a lot of them care a lot about the social issues, how, maybe their son is in the business, how they will be treated, how can they be part of the team going forward and can we send referrals to them?

We think we can do that, just like we did with our agency business.

So we're looking for what you might call the niche players, the guys that -- in Washington, D.C. or Winston-Salem, North Carolina or Atlanta, Georgia, that have a niche in $750 billion, whatever, billion-five in assets that they manage.

We've done two of those acquisitions so far and they've worked out very well, feel really good about what we've done.

We're working on a number of them.

We've got five or six we're talking to because it's a individuals business, they'll have to make that decision so it's unpredictable, a lot of non-economic reasons.

But we're seeing a good bit of interest expressed, and -- from those type of individuals, and I would expect us to have a pretty healthy pace, although they're going to be some quarters we do some and some we don't.

But I would expect us to have a pretty healthy pace, and we'll keep learning as we did in the agency business, from doing that,

But if I had to guess over the next year, we'll do 3 to 5 of those type acquisitions.

Thank you very much.

Yes, sir.

Thank you. do have any further questions, take this opportunity to press one on your touch tone phone. And we'll go now to the line of Robert Patton with UBS Warburg.

Go ahead, please.

Hey, John, Scott. Just a quick question.

I just -- have you guys gone forward and looked at your assumptions on rates for next year?

And also, I'm just sort of doing the math, if you had put $40 million in recapture in this year's plan, and can still hit the numbers, being optimistic.

If you go into '03 with a pretty good cushion, with that reserve being pushed in '03, is that accurate sort of way to look at it?

Yes, we'd have a very large reserve going into '03 if we don't get to recapture any this year.

We're working on our pre-plan for '03 now, Bob.

I can get pretty optimistic if the economy does well.

But we haven't really finalized our numbers. But we, I feel pretty good about it.

Again, it's all based on the caveat that we start having some kind of economic recovery and we get some momentum in the economy.

It would be a very nice environment because we'd have some rise in interest rates that wouldn't be too dramatic.

We'd have strong loan demand which would help us considerably and and we'd have lower loan losses.

So you can be optimistic if you think the economy is headed for some kind of -- not a barn burner recovery but some kind of modest, nice, healthy kind of recovery.

And we would recapture in the mortgage business, although we'd probably have less originations because it would reflect rising rates, but for next year we would make a whole lot more profit in the mortgage business because the mortgage servicing right recapture would way offset whatever we would lose in terms of profits from the origination business.

Okay, thanks.

And just a quick follow-up, are there any areas in the commercial consumer sectors that you're concerned about?

What is on the top of the list now?

In terms of loan segment.

Our problems -- fortunately getting better, still more focused in manufacturing than any single segment.

Textile industry is still struggling, although it's getting better.

But if you look at our credit problems, they would be more manufacturing. Otherwise, they're kind of across the spectrum where you have more individual companies and individual situations.

Somebody developed a bad real estate project or somebody's not running their retail business very well. They're not really focused in any particular segment.

And the consumer side is doing surprisingly well. Again, it could get worse, if the economy heads down.

We could have a higher unemployment rate.

But as Scott mentioned, the numbers our lost ratios very good on the consumer side.

And past dues are good on consumer.

We're just not seeing deterioration at this point.

Thank you, guys.

Good quarter.

Bob, if I could go back to your first question, you also asked about what we were assuming in the modeling for next year in terms of rate increases.

And we modeled a 75 basis point improvement this year, basically all in the fourth quarter, and then layered on top of that which I think again maybe just the best guess, pretty modest increase from 2003 of another 175 basis point movement upward. And all rates across the board some from where we are today, we've got about 250 basis points built in from now through December of '03.

And I think that's pretty much in line with generally what economists have been saying and is -- you know, decide for yourself whether you think that's overly aggressive or not.

I think it's pretty middle of the road. But I think that was part of your first question.

Yeah, I appreciate that, Scott, and that's conservative, and you're in line.

Thanks.

Thank you, next in queue, we'll go to the line of Lee Rosenbub with Putnam Investments.

Go ahead.

Hi, how are you doing? Just a quick question. It was $396 for the mortgage servicing rate and did I hear correctly the servicing portfolio was $31 billion?

Yeah, John do you have any closer number, that's about what it is.

What I remember, Scott, but I'm not sitting here looking at a servicing portfolio number.

I can guarantee it's between 30 and 31, so it's not far off from those numbers.

Okay, and do you know the weighted average service fee is on that portfolio?

The weighted average servicing fee?

No, I don't have that.

I'll be glad to call you back.

Okay, I'll follow up with you after..

Okay, just give us a call.

Thanks.

Next in queue, we have the line of Jeff Davis with Midwest Research. Go ahead.

Your line is open.

Good morning.

Not to beat a dead horse and John, I know you're an eternal optimist, but let me take a little bit different tack on the rate side is -- we saw Fed funds futures yesterday, not hard, but break through 175 and bonds are up pretty good today. What -- and Scott, you've done a phenomenal job, particularly that trade in the summer of 2000 on the Schwabs [ph], the bond portfolio. Do you have to change how the balance sheet is managed so if the Feds got to come back and trim rates a little bit further this fall?

Well, if rates were to actually fall from here, it would certainly be a challenge for us, and we would have to move to a different strategy.

We did just take a pretty major hedge, but it's basically against rates not going up.

I think if rates don't go up, we'll be fine.

We won't be as good as if they go up a little bit, but if they actually go down from here, I don't know that -- I hadn't -- a quarter would make much difference. If they go down much more than that, I think it's going to reflect a tough economy.

It's hard for me to believe there's much incentive for the Fed to lower rates and it's certainly not the consensus forecast.

You know, lowering rates -- what we would be worried about more is lack of loan demand and credit problems than we would our margins.

But if they come back and trim and I'm talking about the short end, because the long end is still coming in today, if the short end, if there's trimming on the short end, though, margin ought to reasonably -- and I concur with you that the credit would obviously, from a macro [inaudible], be an issue, but does the margin reasonably hold in the current vicinity of 420 to 425?

Yes.

Yes.

If you're talking about a quarter point, it wouldn't make much difference.

Now, if you're talking about a major decline, obviously there will be so much compression with every kind of deposit product that we have that are already at extremely low rates, then you get hurt, obviously, a lot more.

But if you're only talking about 25, even 50 basis points, we're certainly going to stay in the 420-plus range I think in terms of margin.

[Inaudible} our projections.

And I didn't mean to be a whacko from left field, but there was -- there has clearly been a change in the bond market here in the last few weeks.

So -.

No doubt about it, that's definitely true..

Thank you.

Thank you.

Next in queue, we go to the line of Mark Fitzgibbon with Sandler O'Neil.

Good morning.

I was wondering, John, is the growth in the consumer loan book coming equally from across the franchise or is it in your newer regions?

We're probably getting -- definitely getting more momentum in the newer regions and part of that is us getting them trained up to make consumer loans.

So we're getting -- decent growth in our core markets, and we're doing better in our new markets in the retail side.

And part of that is just get -- not necessarily the market doing it, but we're getting much better performance.

Okay, and just a follow-up, I'm wondering if loan demand and deals don't materialize the way that you hope they will, is it likely that you'd be more aggressive with the buy back program later this year?

Yes.

Yes.

We try to manage, as Scott mentioned, our capital [inaudible] toward that 7% capital ratio, so if we didn't need the capital and all models show us creating a huge amount of excess capital, then we would be more aggressive in buybacks.

I would say we have a very modest loan growth plan in our projections, obviously, that could be worse than we're planning. But we're not overly optimistic about loan growth either.

Well, it sounds like that's a possibility, John, because you don't sound too optimistic about your ability to do deals later this year.

And with the exception of consumer loan growth, there hasn't been an awful lot on the commercial side.

So it sounds like that may be a likely scenario, the 20 million shares is a low number.

Could be.

Could be.

It could be.

And next near hefty shot buybacks also.

The wonderful privilege we have now is that we can monitor it every month, every quarter, and you know, just manage our way down to the 7% level.

We don't have the constraints that you had under the old pooling rules that made it difficult to buyback and now we can do it when we need to.

Thank you.

Yes, sir.

Thank you and next in queue, we'll go to Roger Lister with Morgan Stanley, go ahead.

Sorry to keep you guys on the phone all this time.

One question in terms of credit quality. The foreclosed real estate line continues to increase, though I did notice the foreclosure property line dropped.

What's in that line, and are you having any success in getting things off the books even if you're adding new ones?

Yes, sir. What is happening is it goes into non-accrual and then we foreclose on it.

So our total non-performers are following, and we're working them through the cycle, we're taking them from non-accrual into foreclosure.

And once we foreclose, we own it and then we sell it.

It takes a while to sell it.

I would say we're doing pretty well frankly on sales of real estate.

Overall, real estate values have held up surprisingly well.

Somebody was asking the question earlier, that would be a real challenge if we started having some real softness in the real estate markets.

But we haven't seen that.

Lot of times we take losses when we foreclose but by the time we own the property, our historical experience is we actually have slight gains on our foreclosed real estate and we would expect that again this year.

We try to write them down to below market value and sell them for small gains and we've done that consistently for a number of years.

And that trend continues. So we're moving it -- of course, the amount of new stuff that's going in is going up, and you'll also -- we pick up some of that from -- when we do purchase acquisitions.

You don't restate history on the non-performers, so you get some of that happening as it comes in to purchase acquisitions.

Is most of this residential or is that commercial? If it's commercial, is it coming from properties that were used as collateral versus actual commercial real estate deals?

Most of it would be residential or small commercials.

It might be -- we might -- a business -- a retail business might go out of business and he might own his store location and we'd foreclose on that. We don't have -- we have very few sizable real estate projects in foreclosure.

We have a few subdivisions. I don't know of anything big in -- you know, we might have something that's two or three million dollars, but we don't have any really big pieces of property in our foreclosed property.

John, you're exactly right.

The last time I remember looking at the top 10 list in other real estate, I don't think it was much more than That's the largest, and it dropped real quick buy-down to a about a million and a half. few hundred thousand dollars.

I would also add that we currently -- and we typically have under contract about 20 to 25% of what is sitting in other real estate balances. We have about 20 to 25% under contract, so it's moving through the pipeline fairly fast.

The problem now that John just alluded to is we're adding to it a little faster than we're selling it.

John's also very right, year-to-date, this is through May -- I don't have a June number -- but year-to-date through May, we took $2.4 million in gains, versus what we brought into other real estate for.

So we took the loan loss, wrote it down through a reasonable amount, and brought it in, and $2.4 million over five months is not a very material number, but it is a slight gain that we're able to produce at that point.

So this suggests you can continue to use commercial real estate on regular -- when you're making commercial loans, commercial real estate this time around is still providing that liquidity collateral that enables small business and medium size business to keep borrowing?

Yes, sir.

In fact, that's probably the best thing that has held the economy is the real estate market has held up and we secure the huge percentage of our loans with real estate rather than for real estate property or just a small business.

And you're right, the collateral buys have held up very well.

They've probably appreciated in most markets.

Yeah, it seems to be, you know, the huge difference from last time, that everybody was afraid of last time, projecting what happened last time to this time around, it's been totally different.

I mean, large corporations totally different world from this sort of small, medium business so that's good news you're moving through even with some gains.

I would guess based on what we -- what is happening right now, if you look at the foreclosure real estate, if you just liquidated what we got there, we'll probably make a $5 to $10 million profit based on what is happening today.

So in contrast to in the late 80s and early 90s, anytime you foreclose on stuff, you were chasing prices down. Now the prices, if anything, are moving up and certainly are stable.

But certainly is promising if the rest of the economy starts to get going.

Yes, sir.

Thank you.

Next in queue, the line of Scott Seefirst with Prudential Securities, your line is open.

Good morning, guys.

Just hoping I could ask you to repeat really quickly, the number you gave toward the beginning, it was just the non-interest income link-quarter annualized growth, I think it was something like 16%.

And then if you could go into the components that number as well.

Okay, annualized, this is first to second, was [inaudible].3%.

Second to second was 8.9.

And that was without purchase.

And then if you look at the components and this is second-to-second, without purchase, service charges were up 7.4%, investment banking 29.8%, and insurance commissions internal growth rate was 14%, trust was down 9.6%, and mortgage banking was down 18.3%, which was primarily the mortgage servicing write-off because mortgage originations are actually up from $4.5 billion in -- was the first half number, compared to $5.1 billion in the first half of this year.

So the mortgage banking is because of the mortgage servicing right writedowns.

Thank you very much.

Appreciate the detail.

Yes, sir

And the final question for today's conference is coming from the line of Gary Townsend with Friedman Billings.

Go ahead.

Good morning, Gary.

Good morning, how are you all?

Great.

Quick question with respect to state taxes and just how hard you work those, in at least one state that I know of there have been attempts to change the deductability or the exceptions that are given for mortgage rates and other types of investment companies in the states.

Do you know of any initiatives such as those, in the states where you operate?

And how might those affect you?

Gary, I don't know of anything that specific around mortgage loans and the funding costs surrounding that. I will say the states are getting very aggressive.

All of DORs, department of revenue by state, are getting very aggressive.

They all need money.

Some of them have state budgets that are negative and have shortfalls in their state budgets. I think they've gotten the orders from both their general assemblies and from their governors to go out and get some more money, so they are being very aggressive.

We've been through audit after audit and seem to be able to get through those in pretty darn good order year after year.

But I would just say generally, you know, we try to do what's right and follow code, yet try to minimize that line item like any other.

And yes, they're getting aggressive, and -- but I don't know of anything as specific as you're commenting on in our region.

Thank you, then.

Sure.

Thank you.

There's no one else in queue.

Go ahead, Mr. Nicholson.

Thank your Royanne, and thank all of you for your questions and for participating in today's teleconference.

If you need additional clarification on any of the information that was presented during this call, please call BB&T's Investor Relations department.

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