Truist Financial Corp (TFC) 2003 Q1 法說會逐字稿

Good morning.

My name is Melissa and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the BB&T conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period.

Instructions will be given at that time.

I would now like to Mr. Tom Nicholson, Director of Investor Relations.

Mr. Nicholson, you may begin your conference.

Thank you, Melissa .

Good morning, everyone.

We thank you all for joining us today.

Once again, this call is being broadcast on the internet from our website at www.bbandt.com.

As you've already seen, BB&T has announced another solid quarter, and we're pleased to have John Allison, our Chairman and CEO, and Scott Reed, our Chief Financial Officer, to review the financial results for the first quarter of 2003 and to look ahead.

After John and Scott have made their remarks, we'll pause and ask Melissa to come back on the line and explain how those who've dialed into the call may 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 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 the forward-looking statements.

Additional information concerning factors that could cause actual results to be different is contained in the company's SEC filings, which include, but are not limited to, the company's report on form 10-K for the year ended December 31st, 2002.

Copies of the document may be obtained by contacting either the company or the SEC.

Now, it's my pleasure to introduce to you our Chairman and CEO, John Allison.

Thank you, Tom, and good morning and thank all of you for joining us.

Areas that I'd like to discuss is to give you an overview of our first quarter results and try to update you on mergers, and specifically, the First Virginia acquisition, and share with you a few thoughts on future earnings expectations.

And then, as Tom mentioned, as Scott covers a number of areas, we'll have some time for some questions.

Looking at the first quarter results, we were reasonably pleased with results, particularly given the general state of the economy and the fact that we had some very bad weather in our primary service area.

We did have about $3m in merger-related charges in the quarter, which is consistent with what we've told you.

On a GAAP basis, we made $327.7m, up 5.8%.

Our operating earnings were $330.8m, up 7%.

GAAP EPS was 69 cents, up 4.5%, and operating diluted EPS for the first quarter was 70 cents, up 6.1%.

The 70 cents was one cent less than the consensus estimate.

On a cash basis, our EPS was 71 cents, an increase of 6 percent compared to the same quarter last year.

Returns remained very good.

ROA was 1.69 and ROE was 17.94, and on a cash basis, ROA was 1.76 and ROE was 24.26, which are very strong returns in the world we're in today.

If you look at some of the factors driving earnings, we did have a decrease in the margin from 422 in the second quarter to 413 in the first.

And last year in the first quarter it was 426 .

And Scott's gonna talk about what happened with the margin and where we're going in the margin looking forward.

We were pleased overall with non-interest income growth.

It was down a little bit from the fourth quarter, but if you look at first to first -- which, we do have a lot of seasonality in our business -- non-interest income was up 24.4%, and even if you take out purchase acquisitions, it was up 14.3%.

We had some very strong areas; mortgage banking was up 79.6%, with internal growth at 22.8.

Insurance was up 31.6%, internal growth of 14 and a half.

Non-deposit service charges up 27.5%, with internal growth of 19.3%.

We did take a $36.9m write-down in mortgage service and writes , which we offset with bond gains, and they're about equal to each other, which is exactly what we've doing in the past.

Trust revenues were actually down first to first, but were up substantially compared to the fourth quarter.

We had an accrual adjustment in the fourth quarter that reduced trust revenues.

But overall, we were pretty pleased with non-interest income growth.

Our net revenue growth, first to first, was 12.6%, and if you take out purchase acquisitions, 4.6%.

Our fee/income ratio continued to improve, up from 34.1 percent last first quarter to 38.3% this first quarter.

Non-interest expenses -- we had some good news there.

First to first, they were up 16%, but if you take out purchases, we're only up 5.2.

We were actually down 7.6 percent on an annualized basis, fourth to first, and Scott's gonna talk about what we've doing from an expense percent.

Loan growth remained slow.

If you look at fourth to first, take out purchase acquisitions, commercial loans grew 1.9%, consumer, 1.2.

Mortgages were actually down, and that's primarily our warehouse of mortgages in process, so the total loan portfolio was essentially flat.

Now, what's happening in our consumer business, we're having phenomenal originations, but we're refinancing a lot of our home equity lines in our mortgage operation.

Commercial loan demand is simply fairly weak.

If you look first to first, commercial grew 2.6; consumer, 7%; mortgage 1.2; and total, 3.4%.

Deposit growth was more encouraging.

Non-interest bearing deposits, first to first, grew 18.3%.

If you take out purchases, it grew 10.4%, which is very healthy.

Interest-bearing transaction deposits -- very strong growth -- 22.5%.

Even without purchases, it was up 13%.

Total deposits -- again, first to first, up 12.9, and without purchases, 3.8.

And fourth to first, annualized total deposits grew 5.6%.

We're real pleased with our transaction deposit growth.

It's been extremely healthy.

And we still are not being aggressive in the high-priced CD market because we do have some single-service households from acquisitions, and some of those people shop price.

That's OK because we know we can get them back anytime we want them in terms of CD deposits.

So, we're pleased with the deposit growth.

Asset quality, of course, is an important issue.

We did continue to have some increase in non-performers; basically a little less than we told you to expect.

We did a little better than we expected, but our non-performers went up from .56 to .60, from $450m to $474m.

Charge-offs -- we were, frankly, pretty pleased.

Charge-offs were .47.

Last year, first quarter we were .48, and the fourth quarter was .51.

I think one of the nice, encouraging numbers is if you take out specialized lending, our sub-prime businesses, charge-offs in the first quarter were only .35 compared to .40 in the fourth quarter.

In terms of the provision, we provided $63m.

We basically charged off $63m, so provision basically equaled charge-off, which seemed appropriate, since we didn't have any growth.

The reserve declined slightly from 135 at year end to 133, and excluding loan sale for sale, it went from 142 to 139.

That was basically caused because of a reclassification of about $9m in allowance related to unfunded commitments.

This reflected the n 45 and the fact that in the past our unfunded commitment amount was so de minimis we hadn't had a special reserve for it.

If you adjust for that, the reserve would have basically stayed flat at 135.

One of the pieces of good news is our 90-day past-dues actually fell from .21 to .17.

If you look at any challenges we're having, we're not really experiencing any specific concentration of new problems, although manufacturing, and particularly textiles, remains weak.

The only market where we've had material deterioration would be in Atlanta, probably reflecting the slowing economy there, and surfacing some problems related to past mergers.

We're not having any large problems, or certainly no large new problems.

Most of our problems are in the small business area in the lower middle market that's continuing to suffer with the economy.

We do expect some more increase in non-performers in the second quarter.

Right now we're at 60 basis points compared to assets.

We think it might go to the low to maybe mid-60s assets.

We're expecting non-performers to level in the third quarter, and then hopefully decline in the fourth.

We think charge-offs are gonna be relatively flat.

We don't see a big increase in charge-offs at this point in time.

Clearly, the economy has been slower than we expected, although it hasn't -- you know, it hasn't been terrible, but it's clearly been slower than we expected.

We still remain very pleased with our long-term trends.

This is the eighth year since we did our MOE, and over that eight-year period, the compounded annual growth rate in originally reported EPS has been 13.2%, so it's still a pretty good long-term trend.

With that said about the financial numbers, let's talk a little bit about our merger activity.

We did acquire and converted Equitable to a $477m thrift in Wheaton, Maryland.

That acquisition and conversion went extremely well.

We've had really good results there.

It's a small company, but it's an excellent fit in a great market.

We did fail to get regulatory approval on FloridaFirst, which we will be reconsidering in December.

And basically, the OTS changed how they interpreted their own rules in terms of the period of time when they would allow mutual thrifts to convert to the stock companies and then be acquired, and we kind of got caught in that change in their interpretation of the rules.

First Virginia, of course, is the larger consideration.

And I'd have to say I'm extremely encouraged about First Virginia.

The acquisition is going far better than I would have anticipated at this point in time, primarily because of the management support and leadership in the First Virginia organization.

Kelly King, President of our Holding company -- and I'm in the process of visiting all of the First Virginia branches and all their home office functions.

Our goal is to shake almost everybody's hand, which is about 5,000 employees.

The process has been extremely encouraging.

First Virginia has got a lot of long-term employees.

They're committed to the organization, particularly in their branching network, which hold customer relationships.

The morale is extremely good.

The fit in terms of the geography of the distribution system is extremely good, and the fit in terms of the culture is extremely good.

We are in the final process of analyzing the cost savings, and we expect to be able to achieve our goal.

We think we're doing well on the cost-saving side.

I am particularly encouraged on the revenue side.

We had a unique experience.

For the first time, we are acquiring a company that actually prices higher than we do.

Always in the past, we've acquired community banks and thrifts that had lower loan rates, higher deposit rates, lower service charges, et cetera, and you always go through the challenge of keeping clients when you change the pricing over a period of time.

Consistently, we've seen that First Virginia charges higher service charges than we do.

It's very aggressive in terms of the pricing for their loans.

It's a great opportunity maybe for us to find some increasing revenues out of this process, and I don't think we're vulnerable to losing clients because if we're doing anything, we'll be cutting price from a First Virginia perspective.

So, I think that the revenue side is gonna be better than we originally thought.

First Virginia has been extremely conservative on the loan side in terms of their willingness to take lending risk.

And we believe just applying what are clearly conservative standards, but less conservative than First Virginia, we'll have substantial loan growth long-term out of this franchise.

We expect to close the acquisition either right at the end of the second quarter, or, more likely, in the third quarter.

The fiscal conversion is targeted for October.

That is all in process.

The merger-related charges are still expected to be consistent with our original analysis that was shared with you, which was a net of about $35m -- net of about a $31m dollar gain from the branch sale.

Overall, I'd say First Virginia is doing extremely well, beyond my own expectations, and I believe in the long-term, this will probably be one of the best acquisitions we've ever done.

In terms of other activity, as we told you, we're not pursuing any other bank or fifth acquisitions until we're clear.

First Virginia is headed in the right direction in terms of the integration, with a conversion targeted for October.

We are continuing to look for insurance agencies and other small bank deals, as we've done in the past.

The insurance business is going extremely well, as are the acquisitions in that arena.

OK.

Now, let me make a few comments on future earnings expectations.

And I just have to reinforce all the caveats that Tom shared.

We don't make projections, and frankly, if Alan Greenspan doesn't know where the economy's going, I'm not sure at all how we're supposed to know.

In any event, the economy in our market area is slow in the first quarter.

General economic weaknesses and certainly fear around the world, or bad weather, which impacts activity pretty significantly in as bad a weather as we've had.

We are noticing some pick-up in the last couple of weeks.

Not a boom, but things are getting better in terms of our activity; a combination, I think, of victory in the Mid-East, and maybe just some better weather.

Obviously, our results are very dependent on the economic environment.

If we have a very bad economy, it's gonna have some impact on our business.

However, on the other hand, if the economy shows some growth -- which we do expect -- and particularly, if short-term interest rates, at least, remain flat, and maybe there's some slight increase in long-term rates, we feel pretty good about the rest of the year.

At this point, we think that the most likely scenario -- if we have a, you know, a recovering economy -- is that we'll be able to make the current consensus earnings estimate.

The current consensus is $2.89.

We shared our profit plan with you, which is not a forecast, but at our analysts' meeting in Greensboro, and that indicated that with First Virginia we'd make 2.91.

We still think that earnings are in that range, again, assuming an improving economy.

We don't try to provide quarterly guidance.

In today's rural and volatile environment, we didn't try to provide guidance for this quarter; it was just too volatile.

But we feel comfortable -- based on what we know today, and assuming we get some kind of economic recovery -- with the current annual estimate.

For information purposes, one issue we are looking at -- or at least considering -- restructuring some of our long-term debt.

We may be at a good time to do this.

Our primary reason for considering restructuring is that First Virginia has a very high level of liquidity, which, when combined with our liquidity, creates some margin if rates were to fall.

While we will incur a pre-payment penalty, the restructuring would enhance future earnings pretty significantly.

Some of you may remember; we restructured our bond portfolio several years ago at exactly the right time, and significantly enhanced future earnings.

We've not finally decided what to do or what magnitude to do, but we wanted to let you know that we would at least be considering doing that, and we would certainly appreciate your feedback as we approach that process.

We are obviously disappointed in our stock price reaction to the First Virginia announcement.

We will do our best to prove the First Virginia merger is an excellent long-term investment for our shareholders, and I'm convinced it will be.

I would note one important downside protection for our shareholders is our dividend.

The current dividend yield is 3.61%, compared to a five-year treasury yield of 2.89 percent, which hopefully provides some nice protection for our stock price in the long-term.

Let's all hope the economy begins to grow more rapidly as the Iraq situation is resolved.

In summary, while the first quarter was slow in a number of regards, we were pleased with the bottom-line results, particularly given the economic environment.

First Virginia is going very well, and we see no reason we can't achieve the goals for the First Virginia merger previously communicated to market .

And, in fact, long-term, I suspect, we'll exceed them.

With a little help from the economy, and we do need some help from the economy.

We still have a very reasonable chance of achieving the current consensus estimates for earnings for BB&T for the year.

With those comments, let me now turn the discussion over to Scott.

Thank you John, very much and good morning to everybody.

I'll jump right in and give a little bit more information on our net interest income production for the quarter and also what took place around our margin.

And then we'll talk about operating expenses, capital derivatives and a couple other miscellaneous items.

First, our net interest income on a tax equivalent basis for the first quarter of the year was $722m, up 5.4% over the first quarter of 2002.

However, if you take out purchase acquisitions and their positive impact on our numbers, we actually had a decline of 1.4% in net interest income quarter to quarter.

Average earning assets growth, if you compare these same two quarters, was 9% growth.

But again, adjusting for purchase acquisitions only .4% growth in earnings assets.

So, again, as John has already commented, slow growth and the balance sheet has certainly slowed down growth in net interest income.

Our loans and leases grew quarter-to-quarter 3.4%, but investment securities were down 6.3%.

Looking at the linked quarters, we actually had a decline of 11.3% in net interest income.

Eliminating purchase acquisitions, that was 11.7% decrease.

Average earning assets on an annualized basis were only up 2.3%, 1.3% adjusted for purchase deals.

Again, very little loan growth.

Actually, there was no loan growth as loans and leases were down one tenth of one percent on an annualized basis linked quarters.

And security growth made up for some of that as our security portfolio increased by about 7% on an annualized basis.

Looking at the margins, John's already mentioned that our margin for the first quarter was 4.13%, down 13 basis points from the first quarter of 2002 when it was 4.26 percent, and down nine basis points on a linked basis to the fourth quarter when it was 4.22%.

First year over year and the 13 basis points decline.

Four basis points of that was due to our share buy back that occurred in the last three quarters of 2002 and a very small share buy back of only 1.6m shares or $53m.

But some buy back in the first quarter of this year.

Also the continued security sales that we have been executing on mostly as an offset to the mortgage servicing write impairments that we've experienced, have reduced net interest income and dropped our margin by five basis points first quarter to first quarter of this year.

So nine basis points of the 13 dropped was due to share buy back and security sales.

In addition, our spreads have closed.

Total earning assets, the yields have dropped 77 basis points while total interest bearing liabilities have dropped only 72 basis points.

So about five basis points difference over the course of the year, and that is basically what has occurred with our margin.

Looking at linked quarters, again, down nine basis points.

One basis points is due to share buy back.

Two basis points due to security sales, leaving a net of six basis points reduction due to spreads.

As all of you might recall, the last rate reduction by the Fed was 50 basis points reduction in the middle of November, actually November 6 of 2002, and so we had a very quick reduction in our earning asset yields and liabilities have been catching up with it.

The full impact of that occurred in the first quarter of this year.

Earning assets are down 25 basis points in yield while the rates on interest bearing liabilities have only fallen 19 basis points.

So, again, six basis points differential.

In terms of the future, in our model we see a pretty flat net interest margin in the second quarter versus the first quarter of this year.

We do see some pick up potentially in the third and fourth based on some investment strategies.

Obviously it would even be better if we wound up taking some losses on long term debt restructuring that John alluded to.

We are basically neutral in terms of our asset liability management gap position.

Slightly biased towards rising rates but, again, fairly neutral.

Turning to non-interest expenses, we continued very strong expense control realizing cost savings on acquisitions as banks are converted to the BB&T system.

John's already mentioned our efficiency ratios which are pretty flat compared to the first quarter of last year and also the fourth quarter.

Year to date, we're up 16% in non-interest expenses for the first quarter versus first quarter of '02.

Up only 5.2% if you eliminate purchased acquisitions.

Let me just comment on that a little bit.

Occupancy and equipment expense is down about 2%.

No major items there, just a small decline.

Personnel expense is up 5.8% first to first quarter.

Most of that is in incentives, mortgage loans incentives that go along with the tremendous production that we're having.

We're up almost $7m.

Other incentives around the bank up about $9m including the production of insurance commissions.

Social security taxes up about $2.8m and our pension plan is up about $2m in quarterly costs first to first.

Other operating expenses are up about 8.5% first to first quarter.

Some major items there, foreclosed property expense is up about $3.7m.

Amortization of intangibles is up 2.4%.

Major item is gain on the sale of fixed assets decreased from the first quarter of '02 to the first quarter of '03, $5.6m.

General insurance expense, obviously the markets firmed up a great deal and all of our insurances are costing us more to the tune of about $2m increase quarter over quarter.

Loan and lease expenses increased about $3.5m and then lastly, charge offs in differences of all kinds increased $2.2m.

Those are just some of the major items.

As you can see its fairly well spread with the big one being the shift in the gain on sale of fixed assets and then also the amortization of intangibles and foreclosed property expense.

Looking at linked quarters, we actually have seen a decrease as John mentioned, 6.5%.

Eliminating purchase accounting it's actually down 7.6 on a quarterly basis.

Very little growth at all in personnel expense.

It's only up 1.6% linked quarters.

Occupancy expense is essentially flat and we've had a large down turn in all other expenses.

Few of those major items you might recall in the first quarter, fourth quarter, excuse me, of 2002.

We had about a $5m donation of a building here in Winston Salem that we gave to the Winston Salem Foundation for the use within the city.

So that was a fairly large decline.

Professional services expenses are down almost $7m.

Just year-end billings and everything tend to balloon the fourth quarter in terms of those kinds of expenses.

Advertising, public relations, other marketing expenses are down about $1.5m first quarter versus fourth.

And then lastly, charge offs in differences, again, a lot of clean up goes on in the fourth quarter.

Down about $2.5m.

Turning to taxes for a moment.

We are right on our projection in terms of our effective tax rate.

It did, excuse me, jump up from around 27% on operating earnings in the fourth quarter of '02 to 30.32%.

And we had forecasted for most of the year we would be between 30 and 31% effective tax rate.

That's what we did in the first quarter and I think that's what we'll be - where we will be in each of the remaining quarters of the year.

Somewhere between 30 and 31%.

We continue to, excuse me, work diligently to search for and find strategies to reduce our federal and state tax burdens using reaps, investment companies and offshore captives wherever we can.

A lot of those are described in our 10K and their impact on our tax situation.

Turning to capital for just a moment, we actually saw an improvement in our capital position at the end of March of 2003.

Equity to assets at the end of period rose from 9.2 at year-end to 9.5%.

We still have very strong tier one capital at 9.4% and total risk based capital at 13.6 percent.

Our leverage capital ratio that had dropped just slightly below 7% at year-end, returned to 7.2% ratio and we have anticipated that and have predicted that for you.

I have mentioned the share repurchase, which was not very great in the first quarter.

Again, only 1.6m shares, $53m.

We do plan on continuing periodic repurchases throughout the year managing our leverage ratio to approximately 7% as we have said in the past.

The number of shares that we buy back will depend on any other loss taking that we might chose to do.

John's already reminded you about our 11.5% quarter, first quarter over first quarter last year dividend increase and our very strong dividend yield of 3.6%.

I did want to take a moment to comment on derivatives since they had escalated again this quarter.

We moved up about $1.5b in notional amount of derivatives to $13.2b.

Almost the entire rise was linked to mortgage loan activities and came in the form of additional interest rate lock commitments and the derivatives surrounding that as well as forward commitments for our pipeline of mortgages.

Those two items along increased $1.1b and were the majority of the increase quarter to quarter.

I would mention also that as we went through the last part of 2002 we were adding swaps, fair value hedges as well as cash flow hedges to protect ourselves from prolonged down rates or decline in rates.

And we're very glad we have those on the books that we show in our press release we have a fairly nice gain.

I think it's about $179m unrealized in our derivatives portfolio.

But we did add swaps during the last half of last year to protect us.

And, again, that's most of the increase if you go back to Mach 31, 2002 versus the end of this first quarter.

So those are all my comments.

Tom, I think we're probably ready for questions and answers at this point.

Thank you Scott.

Before we move to the question and answer segment, let me make the same request of you that I typically have in these calls in the past.

In order to make sure that everyone has an opportunity to ask the questions they'd like, please limit yourself to one primary question and one follow up.

And if you have additional questions to ask, reenter the queue and come back after others have had a turn.

Let me ask the operator, Melissa , at this point to come back on the line and explain how to enter the Q&A queue.

Ladies and gentlemen, at this time if you would like to ask a question please press star then the number one on your telephone keypad.

If you would like to withdraw your question, press star then the number two.

If you are using a speakerphone, please pick up your handset before asking your question.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Jeff Davis with FTN Securities.

Good morning.

Hi Jeff.

John I can't remember if it was from the second quarter or the third quarter, but at the time there was a discussion regarding the balance sheet being a little bit asset sensitive and benefiting from rising rates.

And I asked you about what would happen - I think at the time the 10-year had just broken through four for the first time at that point.

And I said, you know, what are your thoughts.

What happens if the Fed cuts?

What happens to the margin?

And your comment was - at least as best as I recall was, well, it would hurt but I would be more concerned about credit.

Since then we've seen the Fed follow through cutting the short end and the long end has come down further though maybe it was the servicers buying bullets to hedge their portfolios.

Why has credit continued to hold so well given the economy looks reasonably soft?

Well, that's a good question.

I guess, Jeff, the economy is soft but it's not terrible.

In our case, of course, we are a big real estate lender, particularly residential construction.

And that particular market has done reasonably well.

It's not - there's a fair amount of activity but it's turning over pretty quick.

So it's not that there's a huge growth in residential lending, construction lending.

What I think has hurt us is the way we're - and this is what I was probably trying to say then, is that we're having a lot less loan growth than we would have experienced.

And I think that that hurts our margins and that loans are obviously more profitable than any other asset category that we have.

And so I think that the drag that we're seeing is not so much that we've had a big deterioration credit cards.

We really haven't.

But because we're not making the marginal loans that happen when people start growing their businesses.

And I think that's both the opportunity and the challenge going forward if we get some growth in the economy you could have a fairly quick pick and loan demand as people get more optimistic.

If you don't then loan demand's going to be less than we'd like to see it and I don't think our drag is necessarily that we're out of bounce, but just in the slower growth environment you make less loans and loans are your most profitable asset.

OK.

But from the 30,000 returning back to the discussion six months or so ago, at this point you're still not seeing anything that would indicate credit quality is really going to move against you or the industry for that matter?

No.

There's nothing, you know, as I've said we think we're going to have a small up drift but we think charge offs are going to be pretty flat.

And we just - we're not seeing a, you know, large number of new bad loans coming on the list or anything like that.

We're having a little longer time working through some of our problems as potential buyers of problem assets are a little more cautious and those kinds of things.

But, you know, in our watch list we add a few things and we take a few things off and it's kind of been flat.

So we're not really seeing any of the kind of signs that you see when you really think things are getting bad.

One interesting indicator, it's not a biggie, but our 90 days past dues still accruing actually fell some.

So there's not real negative signs that there's some, you know, major change in the negative direction happening out there.

OK.

Very good.

Thank you.

Yes sir.

Your next question comes from Christopher Marinac with SunTrust.

Yes.

Hi John, Scott.

Wanted to ask you about the insurance business and particularly any contingency fees that may have come in on the quarter or what you may expect in the near term?

John, I'm going to let you answer that.

You've got the numbers, I'm sure.

Yes.

Well, obviously our insurance business did very well and I think John quoted that year over year we were up 14.5% taking out and eliminating purchase accounting and obviously even stronger with purchase accounting.

Was up 28.5%.

We had some contingency revenues come in but we spread those, Chris, throughout the year.

So there's not any big balloon of those in the first quarter as might have been the case two or three years ago for us.

We basically are accruing those throughout the year and anticipating them.

There's some slight adjustment.

This business is extremely good one.

We're getting very good internal growth, as I just quoted you.

We're penetrating our client base to a much greater degree than ever before.

And, of course, prices are firming up so much.

I think it's going to be a business we're going to continue to see 20 to 30% growth with acquisitions and mid-teen growth, certainly double digit growth at the very least internally.

Great.

And separately, as my follow up, Scott, you're mentioning the fair value and cash flow hedges earlier in your commentary.

Did any of those impact the NII in the quarter?

No.

In terms of net interest income?

Correct.

Well, they all are producing cash flow, yes, into, let me get a sheet here that I have.

Yeah.

They're all producing net interest income for us.

And speaking with I have that.

We had, again, notional amount of about 13.2 and, I'll looking at my sheet here.

I can't find the net interest income.

But they are certainly offsetting any fall in yields on the assets that they're hedging, Chris, in producing net revenue.

Let me find that.

I'll try to answer that as we go along through the conference call.

That'll be great.

Thanks so much, Scott.

Sure.

Your next question comes from Jefferson Harralson with KBW.

Good morning.

Good morning.

Question regarding the security sales of this quarter.

What was the amount of sales and how much net revenue do these sales give out in future quarters?

Now again, we generated about $35m worth of gains for the quarter.

I believe that is correct.

Yeah. $34.2m.

Best I recall, we sold about $1.5b in securities to generate that.

We had already impacted 2003 with our 2002 security sales by about $90-$91m less in pretax net interest income.

These sales will probably impact us another, I don't have a specific number, I'd say, Jefferson, about $5 to $10 more million.

So probably we're standing at close to $100m negative impact from selling those securities, taking the gains, and then reinvesting at lower rates.

And you mentioned you had some investment strategies that were going to help you out later in the year.

What are you talking about there?

Well, we are just looking at some additional investments pertaining to some mortgages that we usually might sell them to the market, some corporate bonds that we might purchase, doing some more [Inaudible] .

Just a little bit here and there on the balance sheet to kind of make up for the lack of loan growth.

OK.

Thanks, Scott.

Yes..

Your next question comes from Casey Ambrecht with Millennium Partners.

John, thanks very much for taking these questions.

Sure.

Can you give us some color on what type of securities you're adding down here?

I guess, the most I can tell, it's pretty dangerous to be at a yield for ten years at 104%.

So I want to get your thoughts, and kind of the outlook for the securities growth for the remainder of the year?

We have been very cautious in growing our security portfolio for that reason.

The interesting fact is, however, in a rising rate market, not so much because of our interest rate posture, but because of the fact that we get more loan growth, we're going to do very, very well.

So we have been buying some securities, as Scott just mentioned.

We are planning to buy some securities, basically to give us some downside edge in case rates were to fall further.

We're in a posture that we're trying to maintain our interest rate risk position.

But we're not doing a big deal to change the extension of our portfolio.

But we, you know, we try to [Inaudible] interest rate whereas not to, you know, gamble on what the market might or might not do.

So that's really what we're doing.

OK.

So we expect 2% for each quarter?

I don't understand what you?

2% in quarter growth securities.

In securities portfolio?

Yeah, let me get that.

You're talking about second to first?

Yeah.

We're looking at our model has, itself, about a $0.5b on a $16.5b base.

So what would that be?

That'd be about 3%.

And one last question for you.

Can you, what's your tangible book value today, and kind of what's performance handled book value after the First Virginia, John?

Our book value, are you talking about per share?

Yes, tangible book value?

Book value per share is 16.05.

I don't know where I have tangible.

First Virginia, our, the tangible book value is going to drop about 52 basis points, I believe.

And our tangible book value is, I'm looking at actually 2004 projections.

The tangible book value would be about $14.13 that is down because of First Virginia about .52 cents.

So about half a dollar.

So our tangible in 2004 was projected to be 14.65, roughly.

And I do not have a current tangible.

But it must be right down in the $14.5 to 14.75 dollar range.

Okay, great.

Thanks, very much.

Your next question comes Jason Goldberg with Lehman Brothers.

Thank you.

Good morning.

Good morning.

You mentioned the potential for our long term debt restructure.

So obviously, you've given it some thought.

Maybe you can kind of give us more [Inaudible] of the magnitude that you think that would have, and just what effect you think it would have on a buyback, and how you weigh the two?

Jason, I don't know if we have the exact answer.

Because we've fooled around with a lot of different numbers.

There's a, I guess it depends on how confident we feel like that we can obtain the downside protection which we believe that the restructuring would give us and the upside benefit.

Which is a combination.

And also just looking at the liquidity coming out of First Virginia which is an extremely liquidable organization.

But we could restructure several billion dollars in long term debt.

Which would have a pretty major impact on future earnings, positive earnings.

We do have some prepayment penalties we'd have to absorb.

And if we, real constraint in terms of shear buyback would be, we don't want to drive leverage down to a ratio of under 7%.

So there's a fair, I don't really have an exact number for you today because we're still fooling around with the numbers.

But there's a fairly large range.

If we really see the numbers looking good on the restructuring, we'll do more.

And if we don't, we'll do less.

Probably the best thing to do, you know, over time, if you guys will give us some feedback about the concept, we would appreciate that.

But we think it looks a lot like our bond restructuring that we were very successful with several years ago.

And we think that now might be the right time to do it.

And every time we look at our numbers, it helps us either way.

It helps us if rates fall and it helps us if rates go up, in terms of future earnings projections because of the mathematics of where we were in the market right now.

But we could do several billion dollars of restructuring of debt.

Which would reduce the number of shares we could buy, in terms of stock.

That's helpful.

And then separately, when's First Virginia expected to report to you on earnings?

Today after the market closes.

Super.

Thank you.

Yes, sir.

Your next question comes from Gary Townsend with Friedman Billings Ramsey.

Good morning, gentleman.

How are you?

Good morning, Gary.

Fine Gary.

Could you discuss what you're buying, in terms of securities in this interest rate environment.

And I guess, I'm impressed that your investment yield remains as robust as it is.

And perhaps you could speak to some of the outlook in that regard?

OK, Gary.

A couple things.

We had a lot less mortgage backs than most people had.

Which is one reason our portfolio is not liquidating quite as, even though we were, we had a shorter duration than a lot of people appeared to have.

A lot of banks went very heavy with mortgage backs.

And their actual duration turned out to be a lot faster than anybody expected because of prepays.

We had a much lower wait on mortgage backs.

In terms of what we're looking at now, it's basically three categories.

One is we will buy some, probably three to five year treasuries.

That won't be a big number.

But that's kind of more normal activity.

We are going to portfolio some of our mortgage originations.

Again, not a huge number.

But we've got some pretty nice yields relative to date in mortgage originations.

And then we're also going to buy a few corporates that fit from a risk perspective and that have a little higher returns.

And as Scott mentioned, we're increasing our boley (ph) .

None of those are huge numbers.

As Scott said, the average size of investment portfolio is going to increase about $500m.

So it's not a big bet.

But the purpose of it is to reduce our downside risk in case rates do fall.

And that's really what we're planning on doing.

OK.

OK.

Thanks very much.

Yes, sir.

Your next question comes from Rodrigo Quintanilla with Merrill Lynch.

Earlier this year, you had included a sizeable recapture of the relation reserve of the MSR assets in their profit outlook.

Given the ride downs that you had in the quarter of the value of this asset, what is your current outlook in respect to the potential recapture?

That's a great question.

We are, obviously, we expected to recapture and we had a loss.

And it really depends, obviously, on interest rates.

It doesn't take much of a positive move in long term rates for us to get our recapture.

We do think we can still be very close to the profit plan that we shared with you even if we don't get a material recapture.

And the reason for that, part of the offset is our mortgage production has been dramatically better than we expected.

So we're hoping to get some recapture.

But we're not saying that we can't meet the profit plan expectations because we don't get recapture in and of itself.

Because we feel like most of the shortfall, at least a big chunk of the shortfall will be offset by mortgage production activity if rates stay that low.

So, you know, the bigger challenge, frankly, that we're struggling with is getting more commercial loan demand up to the pace we plan when we shared our profit plan to you.

But that's, it's a good question, we debated ourselves.

But we still think even if we don't get a material recapture, we can get close to the plan, provided the economy starts moving and we do get some commercial loan demand.

Thank you.

Yes, sir.

Again, if you would like to ask a question, please press star then the number one on your telephone keypad.

Melissa, apparently, we don't have other questions.

So, let me say to all of you who are listening today, that we thank you for the questions that have been asked.

We thank all of you for participating in this call.

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

Have a good day.

Thank you.

Take care.

Thank you for participating in today's BB&T conference call.

You may now disconnect.