Truist Financial Corp (TFC) 2005 Q3 法說會逐字稿

I would like to welcome everyone to the BB&T third quarter 2005 conference call. [OPERATOR INSTRUCTIONS] As a reminder, ladies and gentlemen, this conference call is being recorded today, Friday, October 14, 2005.

Anyone who objects to this recording may disconnect at this time.

Thank you.

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

Mr. Nicholson, you may begin your conference.

Thank you and thanks to all of our listeners for joining us today.

This call is being broadcast on the Internet from our website at bbandt.com/investor.

So whether you're joining us this morning by webcast or by dialing in directly we're very pleased to have you with us.

As is our normal practice we have with us today John Allison, our Chairman and Chief Executive Officer; and Chris Henson, Chief Financial Officer.

They'll review the financial results for the third quarter of 2005 and also provide a look ahead.

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

Before we begin, let me make a couple of preliminary comments.

BB&T does not make predictions or forecasts.

However, there may be statements made during the course of this call that express management's intentions, beliefs, or expectations.

BB&T's actual results may differ materially from those contemplated by these forward-looking statements.

Additional information concerning factors that could cause actual results to be materially different is contained in the Company's SEC filings which include but are not limited to the Company's report on Form 10-K for the year ended December 31, 2004.

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

Also, both in our earnings release and during today's call BB&T makes reference to operating earnings.

This is a non-GAAP performance measure.

It's presented in addition to GAAP information because BB&T believes it aids in the comparison of results for various periods.

Information providing reconcilements of this non-GAAP information to GAAP measurements can be found both in the financial tables attached to the quarterly earnings release and on the Corporation's website, bbandt.com.

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

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

I would like to discuss with you our financial results for the third quarter and the first nine months, talk about our merger and acquisition activity, then share with you a few thoughts on future earnings expectations and future performance.

Chris is going to take several areas in further depth, then we'll have time for questions.

Obviously we were very pleased with the quarterly results.

Our GAAP net income for the third quarter was 442 million, which was a record.

Operating earnings were essentially the same at $441 million.

GAAP net income was up 7.1%, operating 7.3%.

GAAP diluted EPS was $0.80, up 8.1%, as was operating EPS.

The $0.80 was $0.03 greater than the consensus estimate.

It was up $0.05 over operating earnings for the quarter, which were $0.75 or a 26.4% annualized increase.

Our cash basis EPS was $0.84, up 9.1% compared to last year, up 25.1% on an annualized basis compared to the second quarter.

The ROAs and ROEs we were very pleased with, an ROA of 1.64, ROE of 15.65 on a cash basis, which we think is a better measure because of our purchase acquisitions.

Our cash ROA was 1.81, our cash ROE was 28.56.

For the nine months GAAP net income 1.224 billion, up 7.2%, operating earnings 1.248 billion up 8.9%.

GAAP EPS up 8.3%.

Operating EPS on a diluted basis up 9.7%.

Cash EPS, $2.38, an increase of 9.7%.

Many of you know our target is 10% so we're right at that target in terms of cash EPS growth.

The returns for the nine months look similar than the third quarter but the third quarter was actually better.

The nine-month ROA was 1.61, ROE 15.10, cash ROA 1.78 and cash ROE 27.81, obviously very healthy returns.

Looking at the factors driving earnings clearly our biggest challenge has been our margin which is declining primarily because of the flat yield curve and margins dropped from 3.92 in the second quarter to 3.88 in the third quarter, or 4 basis points.

Chris is going to give you a good bit of insight into the margin issue because I think that's the one there's been a lot of focus on.

Very encouraged with our noninterest income growth.

Annualized second to third and taking out purchase acquisitions, noninterest income grew 12.2%.

Third to third grew 8.5%.

Looking at our results in our noninterest income sources of revenue, taking out purchase acquisitions again, insurance is our number one source of revenue in the noninterest income area.

The insurance revenues actually declined second to third 4.1%, which is primarily a seasonal factor, you can look at our history there.

Third to third was up 2.1%, and year to date 1.5%.

Interestingly enough, the industry is down between 5 and 10% depending on the numbers you look at, so we are clearly moving market share, and while the third to third is only up 2.1%, it's better than the year to date.

So we're actually getting relative momentum.

The hurricane had some indirect impact on our insurance business.

As you know we're a broker, we're not a company, so we don't have the actual risk of loss but we did have a large market share in the area affected by the hurricane through our agency business.

In the short term that's probably somewhat negative for us and we'll get less contingencies because of the loss experienced.

On the other hand, the hurricane losses will probably stabilize pricing in the market and actually will probably be slightly positive for us because it will clearly firm rates that had been falling and will probably increase our insurance revenues next year by -- in a positive way.

Third charges at our second largest source of noninterest income, pretty positive story, annualized link service charges are up 5.4%.

We didn't have a price increase in the third quarter so all of that is related to volumes, transaction volume increases.

Third service charges were up 4.1% and year to date 2.6%.

Those increases are a combination of volume and price.

One big thing happening is we are having a very great success in attracting new clients.

We are adding about 10,000 net new clients per month.

We were losing clients related to our merger activities.

We tried to kind of reposition ourselves to have more profitable clients in the large addition of new clients is driving part of those service charges revenue.

So we've got some really great momentum now adding new clients to our operation.

Our nondeposit fees, excellent growth rates, second to third annualized 24.5%, third to third 17.3%, year to date 14.6%, primarily driven by bank card and debit card, a lot of growth in the debit card area.

You can see not only is it strong growth but it's getting more momentum.

The third is better than the year to date comparisons are.

So real positive trends there.

Investment banking and brokerage our capital markets activity was down from the second quarter which was unusually good.

However, third to third it was up 10.6% and year to date up 6.3%.

Our capital markets people still are encouraged.

They've got a big pipeline but the dilemma with that, you never know that it's going to close but they're pretty optimistic they're going to do a fair amount of volume and we'll have a good four quarter, we'll obviously see.

Scott & Stringfellow, our retail brokerage operation is showing some pretty healthy growth rates right now.

Mortgage business very strong quarter, strong results.

We did have a net recapture of about 11 million due to rising rates.

We've got about 50 million more potentially that can be recaptured.

Interestingly enough for those that tend to take mortgage recapture out, year to date our net recapture is actually less than 2004.

Last year we recaptured 21.1 million, this year 12.8 million year to date.

Also last year we took about a $6.6 million security gain to offset the net recapture, and there were no security gains or losses in the third quarter of this year.

Mortgage production is strong.

Originations were 3.1 billion in the third quarter of 2005 compared to 2.1 billion last year -- very healthy production.

Servicing growing very nice pace, up to 40.7 billion compared to 37.6 billion.

We are a portfolio and ARMs in some of our jumbos -- our long-term strategy has been to have about 20% of our loan portfolio in mortgages, and we've done that for a long period of time.

And we're kind of moving back towards that strategy.

We're basically replacing part of our bond portfolio with adjustable rate mortgages.

We are doing some interest-only's, about 20% of our volume is interest-only's.

However, the interest-only's have excellent credit scores, better than our other productions.

We don't do any negative amortization ARMs whatsoever.

I feel like the credit risk in our mortgage portfolio is extremely, extremely low.

Our trust business third to third up 26.6%, most of that -- a lot of that is Sterling capital, taking out purchase acquisition third to third was up 6.2%.

So some very nice performance numbers in our noninterest-type businesses.

Looking at net revenue growth, taking out purchase acquisitions, really had a nice trend.

Second to third annualized up 10.7%, and that compares to third to third of 6.3% and year to date of 3.6%.

So nice momentum in terms of net revenue growth.

Our fee income ratio went up from 37.8% last year in the third quarter to 39.2%, nice trend.

Chris is going to give you some more detail on noninterest expenses, but just a couple of comments.

If you take out purchase acquisition non-interest expenses actually fell from second to third 1%, and third to third we're up 7.5% but year to date only up 1.8%, which is an excellent number.

And our cash basis efficiency ratio in the third quarter was 49.7%.

The overall performance of our lending business is very good.

Specifically focusing on loan growth, some really nice trends.

Looking at annualized second to third and the actual in the purchase -- and without purchase are the same for the annualized quarter we had no purchase adjustments, but very healthy commercial loan growth, 10.5%, very strong sales finance, 15.6.

Direct retail 8.1%, revolving credit 10.7, mortgage 24.8, total 13.1.

If you compare that annualized growth rate it is stronger than the year to year comparisons or the year to date comparisons.

For example, commercial loans second to third grew 10.5, but third to third, comparing last year, was up 8.5%.

Sales finance, much stronger growth rate.

Total loans grew 9.5% third to third compared to 13.1 annualized second to third.

Year to date total loans grew 7.8% compared to the 9.5 and the 13.1, so obviously we're getting some real nice momentum in our lending business.

If you look at direct retail it's the one area where we're seeing slower growth, and that's not surprising because it's primarily driven by home equity lending and rising interest rates and less opportunity for people to do home equity lines.

Big positive secular move for us is the dramatically improving growth rates in our sales finance business.

As we talked about last time we think this is a secular trend.

Our big competitors have been Ford Motor and GMAC, and they've got serious problems and have become far less effective as competitors in the sales finance business.

We tend to have the largest market share in the bank-based sales finance in most of our market areas, and we are the best.

In fact, we're ranked the best in the country in terms of banks in providing service to dealers in sales finance.

It's not a big part of our business but it's a nice positive trend.

Nice healthy trends in our commercial and small business lending, double-digit growth.

It's been a long time since we've seen that kind of growth.

If you look at our loan portfolio, we're about 50/50 commercial versus retail.

That's a conscious strategy that we've had for a long time, and it looks like the commercial growth rates are moving to much stronger rates.

We have some pretty healthy momentum frankly, moving into the fourth quarter in our lending businesses in terms of volumes.

Deposit growth also was very encouraging.

Again, this is without purchase acquisition, which really doesn't impact the third to third and linked quarter comparisons.

Noninterest-bearing deposits third to third up 10.7%.

Annualized linked 11.7.

Year to date 10.7.

Great growth rates.

Total deposits, third to third 10.5%, annualized linked 18.1%, year to date 6.8%.

Obviously some strong deposit growth numbers.

Part of the growth rate in total deposits is a mix shift moving out of things like fed funds into commercial-type CDs, but we're also having strong retail deposit growth.

We've refocused on retail deposits, we consciously ran off some single-service households that had high rate CDs out of our mergers, and refocused on more profitable clients and are getting faster growth rates on the retail deposit side.

We've combined that with a lot of more marketing effort, and with free checking that's bringing in client accounts and all driving faster deposit growth rate.

You will note peripherally related that our bond portfolio did shrink.

Some of you commented about the fact that we were growing our bond portfolio and financing it with short term financing.

That was not true.

We had -- we said that we had purchased some of our bonds earlier.

We thought it was a great time in the rate market earlier in the year.

We had a huge amount of liquidity in our bond portfolio, because we have much shorter duration than most banks do.

We're letting that liquidity run off and we've allowed the bond portfolio to shrink.

To the degree that we're replacing those bonds, which are fixed rate loans, longer term interest (technical difficulty), we've replaced them with variable rate ARM products in our mortgage portfolio, a pretty strong combination.

Well, excellent combination of loan growth and deposit growth, particularly noninterest bearing deposit growth and we've had that for two quarters running, probably the best two quarters in terms of combination loan to noninterest bearing deposit growth that I ever remember.

Asset quality remains excellent.

Our nonperformers continued to fall.

Third quarter 2004 nonperformers were 390 million.

They dropped to 309 at the end of the second quarter and 304 at the end of the third, and percentage-wise have dropped from 0.40 to 0.29 to 0.28.

Excellent trends.

Our charge-offs were up a little bit compared to the second quarter but still great numbers.

Charge-offs were 0.30 compared to 0.25 in the second quarter but compared to 0.34 in the third quarter last year, and we do have some seasonal trends that tend to happen in our charge-offs, so the quarter to last year is probably the better comparison.

Including specialized lending charge-offs were 0.19.

Year to date charge-offs have been 0.28 compared to 0.35 last year.

Specialized -- when you take out specialized lending charge-offs are 0.17 compared to 0.23 last year, which are great numbers.

If you look at our statistics, whether it be past dues or nonperformers, et cetera, we really don't see any evidence of deteriorating asset quality and anything going negative.

Obviously that can’t -- could change but right now there's no evidence in any of our numbers that asset quality is getting ready to get worse.

It can't get much better obviously.

It's at such a great level.

But we don't -- right now we don't see any evidence of it getting worse.

We do usually take a few higher losses in the fourth quarter as we really clean up our portfolios, but fourth to fourth comparisons should be positive.

In terms of provisioning for credit losses, we provided 57.5 million, charged off 54.4 million, so we provided slightly more than we charged off, 3.1 million.

Same things true year to date.

We've provided 148 million, charged off 146 million.

We provided about $2 million more than we charged off.

Our reserve compared to loans did decline some from 113 at the end of the second quarter to 111.

Frankly, that's really driven by the GAAP rules.

We're -- we don't have the discretion we used to perceive we had in terms of setting reserves.

We use more of a formulistic kind of approach, and all the numbers show reduced credit risk which is why the reserves are coming down, and that's really evidenced by the ratio of loan and lease losses to non accrual loans which continues to improve.

In fact, the third quarter of 2004 it was 2.71.

By the second quarter, it had gone up 3.51, and it improved one more time to 3.54.

So if you look at the allowance compared to nonaccrual loans it continues to go up and get stronger.

So we're very pleased with asset quality.

We'd also like to reflect on our long-term trends.

The big event in our history happened about 10 years ago when BB&T and Southern National did a merger of equals and we kind of use that as a long-term performance evaluation tool.

Interestingly enough over that little more than ten-year period our cash budgets earnings per share growth rate on an originally reported basis on a compounded annual growth rate has been 11.4% -- very healthy -- healthy long-term trend.

So we're very pleased with both the quarterly results.

In fact, the last two quarters have been very strong and the long term trend looks mighty good.

Changing direction a little bit I want to talk about mergers and acquisitions.

And my purpose here is primarily because there's been a lot of comments in the press about our merger and acquisition activity.

The thing I wanted to communicate to analysts and investors, there's really no news.

There's nothing here different than we've been saying for a long, long time but I am going to reiterate it.

On the nonbank side we've had limited activity but not by choice.

More by what's been going on in the marketplace.

We continue to look for insurance agency acquisitions.

There have been less acquisitions due to the regulatory commotion and the hurricane, which impacted our business, but we're still looking and expect to acquire some more high quality insurance agencies.

We continue to look for consumer and commercial finance operations and asset management.

So we're still focused on the kind of acquisitions we've been doing in the nonbank arena.

On the bank side, of course our history is that BB&T's primarily been built through the merger and acquisitions process.

Interestingly enough going back all the way to the 1930s, in particular since the 1980s we've been very successful in doing a lot of community bank and thrift acquisitions.

We did consciously decide about a year and a half ago to slow our acquisition process, in fact, to stop it, because we had some indigestion.

Turned out to be a wise move.

It allowed us to get refocused on our internal operations and now we have excellent momentums in our new markets.

At the time we made our announcement we said we expected to go back in the acquisition business in early 2006.

We reinforced that again last quarter, and that's what we do expect to do.

We are out now calling on potential community banks and thrifts to acquire.

In terms of our acquisition strategy it will be in context exactly the same that we've done in the past.

We're not -- we're looking for in market acquisitions.

We don't expect to open any new markets in size, from 500 million to $15 billion in assets.

And that's kind of been our long-term cap of about 15% of our size.

We're looking across our whole footprint.

In theory, Florida would be the best place to look.

In practice what we've seen is most of the Florida community banks are selling for such high prices that they don't work from an economic perspective in terms of acquisitions, and Florida, frankly, is a very easy market to de novo branches in.

So while in theory we're interested in Florida.

In practice, I don't see how many acquisitions work in that state.

But there are some opportunities in other states.

We are a very disciplined acquirer.

We use a very clearly defined set of financial criteria that we've used for a long period of time, and I would note in the period when we were doing a lot of mergers and acquisitions our compounded annual growth rate of EPS was 11.4% and our stock outperformed both the S&P 500 and the S&P financials.

So we're not going to do anything crazy, we're not going to do anything that doesn't make pure economic sense.

We've -- one other issue that comes up sometimes is, we don't do large acquisitions.

The only kind of large acquisition we would ever consider that I can think of would be a merger of equals.

Of course, BB&T was created by a merger of equals.

It was very successful.

Mergers of equals are very difficult.

You have to have a great cultural fit and a great economic fit, but we in theory we'd consider a merger of equals.

That's not news.

That's something we've said for a long period of time.

One other comment, on the other side of the acquisition business BB&T remains very committed to being independent.

In fact, in the last two years we've added four key members to our executive management team they are all in their mid-40s, they have been with BB&T a long period of time, we have an outstanding management development program, and these are great people and they're clearly qualified to be the future leaders of our organization.

So we're planning to be here.

Really, the whole merger and acquisition strategy and our commitment to remain independent aren't news but there's been a lot of news about it so we just wanted to be sure to reinforce what we've been saying for a long time.

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

First, I'll just reiterate what Tom said and say that anything we say about the future may be wrong, and anything we say about the future may be wrong.

There's also a couple real big unknowns out there.

In doing economic forecasts, we use the consensus of the blue chip economists, but that doesn't mean that their forecast will be right.

There's a lot of things going on in the economy that it's hard to fathom what the impacts will be, what about higher gas prices, higher interest rates, a hurricane, et cetera.

So our economic forecast is optimistic but it obviously could be wrong.

The other issue is, what happens with an inverted yield curve.

If we have an inverted yield curve it won't be good for our business.

We don't particularly try to hedge against that because we think the probability is remote.

And inverted yield curves, despite some comments by Mr. Greenspan, always, at least in the past have indicated recessions and we don't see that but obviously an inverted yield curve would impact our business.

In addition, when I talk about core performance of the business I'm talking about the economic operations of the business.

We seem to be subject to an endless ream of accounting changes, so I don't predict the accounting changes and what effect they may have on us, but what I'm talking about really is talking about the economic earnings.

In that context, frankly, though, we are very encouraged about both the results for the last couple of quarters, the nine months, and the trends as indicators of the future.

We're coming into the four quarter with a lot of momentum.

We have a really extraordinary combination of strong loan growth pretty much across the board, outstanding transaction, and total deposit growth, and excellent asset quality.

So really big factors going in the right direction.

We certainly have some challenges.

Insurance revenue growth has been a challenge, although we're clearly moving market share, service charges has been somewhat of a challenge.

And the big issue has been the net interest margin.

However, and Chris is going to reinforce this, all of ALCO forecasts always show that our earnings improve with rising rates.

We are still fundamentally structured for rising rates.

Something that I'd like to emphasize kind of independent, or, I guess, what I'd call some of the causation for the numbers, I think underlying these numbers are several pretty major fundamental factors that are impacting our business.

First, our core markets are doing a lot better than they were doing.

We went through a very tough period of time in a number of our markets.

The number of basic industries, furniture, textiles, tobacco, that really got hammered in the last correction that had traditionally done pretty well in poor economic environments, some of them will never be back.

And while we have healthy market shares in the metro areas we also tend to have dominant shares in mid-size towns.

The Hickory, North Carolina, and the Wilsons, and Lumberton's, and [Whitewalls] that have populations of 25 and 30,000 people and a lot of those markets got hurt pretty hard in the last economic correction.

What we're seeing is a pretty fundamental improvement in business in a lot of those markets.

We're seeing an in migration of industry, service businesses.

We've got a great labor force that works harder, works for less pay, it is nonunionized, and jobs are moving into our market area from other parts of the U.S.

We also continue to have retirees moving into the mountains and the beaches of the Carolinas and Virginia, which is a great quality of life.

People even moving back from Florida because of the lack of seasons.

We've got a fast-growing Hispanic population across most of our footprint.

So our core markets are doing economically better and that's really good for our business.

Even more significant than that we're seeing a major improvement in our new markets.

Over half of BB&T is new to BB&T in the last five years.

A few of those markets have been doing very well all along.

In general, however, they weren't doing as well as our core markets because they hadn't learned the set of products and technologies and strategies that we have in sales systems at BB&T.

The great news is they're all getting better.

Every one of them is showing significant improvement.

I mentioned earlier that we're now adding net new clients at a pace of 10,000 per month.

A lot of those are coming out of our new markets.

We're certainly getting some in our core markets but very healthy client growth in our new markets.

We have substantially reduced turnover in our new markets and our turnover remains significantly better than the industry.

There's some -- I saw a report the other day that small banks were saying they were hiring a lot of our people.

They may be hiring some of our people but our turnover is a lot less than it used to be.

We have one of the best management development programs and we're rated in the top 6% of S&P 300 companies in terms of the quality of our employee education so naturally we have a lot of good people but we're having a reduced turnover in those new markets.

So our new markets are doing better, in fact, a little side example is two of the most improved markets, and one of the highest performing markets in BB&T are now in West Virginia.

They're moving a lot of coal out of West Virginia.

A smaller factor but not a trivial one I mentioned earlier is we're having a secular turn in our sales finance business with the demise of GMAC and Ford and we're number one market share and the best in most of those markets in our footprint.

So there's some nice structural reasons why our performance is improving.

Interestingly enough, when it's all over I think First Virginia is going to be one of our best acquisitions ever.

Took us a couple years to get it integrated but we've got great momentum in our Virginia markets related to First Virginia and, of course, the sales finance business a lot of that came out of First Virginia.

So it's going to be one of our best deals ever.

Obviously, I might be wrong, however, I am very encouraged about our current trends.

I think the stock market has over-reacted to the flattening of the yield curve.

We're looking forward to a good fourth quarter and a healthy 2006.

With that, let me turn it over to Chris for some more in-depth analysis of several areas.

Thanks, John.

Good morning, everybody, and I’d also like to welcome each of you to our conference call.

The positive momentum from the second quarter has obviously continued through this quarter, evidenced by our strong balance sheet growth and excellent overall credit quality performance that John alluded to.

In fact, one item on that point, we currently have no nonperforming assets over $5 million.

No nonperforming loans over 5 million, which I think for a bank our size is an interesting number.

Noninterest income growth remains solid, and we continue to realize improvement in overall efficiency, and as a result, as John said, we really look forward to an outstanding 2005.

Like to speak to you briefly about net interest income margin, noninterest expenses, taxes, and capital.

First, I’d like to briefly look at net interest income.

If you look at common quarter third quarter '04 to '05, you see that net interest income was 920 million, up 4.9% over the prior year quarter, driven by a very strong earning asset growth of 9.8% after adjusting for purchases.

Net interest income for year to date was 2.687 billion up 3.7% increase over prior year adjusted for purchases, it’s driven by earning asset growth of 7.5% adjusted for purchase accounting.

The real story, though, continues to be linked quarter.

It was up -- net interest income linked quarter was up 9.8% annualized over linked quarter driven by a very strong earning asset growth of 11.6% adjusted for purchases.

And really the main point here is that balance sheet continues to gain momentum evidenced by the double-digit earning asset growth.

So some good momentum there.

Looking at net interest margin, you can see it did fall slightly, but we were relatively pleased given the environment and the curve.

Looking at linked quarter, fell 4 basis points, 392 in second quarter '05 to 388 third quarter '05.

Common quarter fell 19 basis points, 4.07 in third '04, to 3.88 in the third quarter '05, and for the year fell 14 basis points on a year-to-date basis from 4.06 to 3.92.

The margin compression driven in part by the flat yield curve and also a competitive deposit market, as you can see in the yields and rates.

If you look at -- drill down a little bit in yields and rates in common quarter, you can see loans and leases were up 81 basis points, securities and other earning assets up 18, which is a sign of the flat yield curve with total earning assets up only 65 basis points while total interest-bearing liabilities were up 100.

And the majority of the compression we're seeing is in the short-term borrowings which increased 177 in the CD category, which was up 110.

And all that really drove the spread down 35 basis points.

Looking at linked quarter, total earning assets were up 20 while total interest-bearing liabilities were up 30 basis points.

And it's really the same story.

Short-term borrowed funds up 38, CD category up 30 basis points, driving the linked quarter spread down 10 basis points.

Looking forward for the margin, our forecast for the balance of the year continues to call for the margin to be relatively stable.

ALCO model projects rates rising slightly during the fourth quarter and shows net interest income rising in that context.

Assuming rising rate environment and further tightening of the yield curve, margin could drift down slightly.

However, in a rising rate environment with a more normalized curve, we could realize some real upside in our margin, really resulting from what I kind of look at as four drivers.

First one we've mentioned in the past, it's repricing of the variable rate loan portfolio.

The majority of our loan portfolio, in fact, about 60% of the portfolio is variable rate priced.

Of that portfolio, about half of it reprices within 30 days, and about two-thirds reprices within a year of a rate increase, with the great majority occurring 90 days after a rate increase, and that's probably the most impactful item, especially -- obviously as assets catch up with deposit rates.

Second item as rates rise, liability rates are not projected to increase on a one for one basis with asset rates, and obviously that would improve our spread.

That is more of a short-term phenomena, because we couldn't continue that long term but do think that will have some positive impact during the fourth quarter.

Another item as loan growth accelerates, we are experiencing an asset mix change out of securities into loans, which is a healthy thing to occur for our spread.

And then finally, we are realizing incrementally more benefit from the pay-fixed, received-variable swaps that we have on the books as rates rise.

So overall I feel pretty optimistic about the margin on a go forward basis.

Turning our attention to noninterest expenses for a moment, we experienced very solid expense control during the third quarter as evidenced by the noninterest expenses declining on a linked quarter basis adjusted for purchases.

While driving both net interest income and noninterest income to higher levels, we’re able to achieve a little operating leverage which was helpful.

And as a result we saw cash basis efficiency improve both linked quarter and year to date basis.

I wanted to update you on the cost savings revenue enhancement initiatives.

You might recall that our goal for the year was to achieve 60 million in savings and revenue enhancements, and through September 30, we have achieved 60 million.

We really have no plans to set a new target for the year but just will obviously continue to aggressively generate as many savings as possible through year end but the process is going very, very well in those areas.

I've been very pleased with the process of how it's impacting really the whole enterprise.

If you look at expense growth rates, first, year to date, you can see that noninterest expenses were up 1.8% other the prior year quarter adjusted for purchases.

Common quarter up 7.5% over prior year adjusted for purchases, and that was primarily driven by production related expenses such as incentives, advertising expense related to our new advertising program, and loan and deposit expenses as a result of higher revenue levels, so very understandable.

Look at taxes.

Really, there's no strategical changes here, and we anticipate effective tax rate to -- excuse me, effective tax rate did decline slightly from 33.76 in the second quarter of '05 to 33.03 in the third quarter.

But we do expect effective tax rate to continue to drift back up in the 34% range for the balance of the year.

Looking briefly at capital, obviously continue to maintain very strong capital positions, as evidenced by the equity of total assets at the end of the third quarter of 10.5%.

Tier 1 capital third quarter was 9.5, while total capital settled in at 14.8%.

You might recall second quarter leverage capital did slip below our stated goal of 7% at the end of the second quarter.

We told you at that time that we'd be back to 7% by the end of the third quarter, and as a result we issued $500 million in trust preferred securities during the quarter and leveraged capital is an amount, 7.31%.

Looking at share repurchases, to date we've repurchased 5.5 million shares at a cost of 213 million.

Average cost of $38.79 a share.

And we remain committed to our original objective of repurchasing 12 million shares during '05, obviously depending on market price conditions and consistent with maintaining the leverage ratio at 7%.

Finally, just like to remind you that our fourth quarter dividend was $0.38, which represents an 8.6% increase over the prior year quarter.

With that, that concludes my comments.

Chris, thank you.

Before we move to the question and answer segment of the conference call, I'll ask that we do as we've done the past several quarters to try to give fair access to all the participants.

Please limit your questions to one primary inquiry and one follow-up, and then if you have additional questions, re-enter the queue.

Come back in.

But give others a chance to ask questions as well.

Would you explain how to submit the questions, please?

Of course. [OPERATOR INSTRUCTIONS] Your first question comes from Gary Townsend with Friedman, Billings, and Ramsey.

Question with respect to share repurchases.

As I -- I'm just -- there were none in the third quarter?

That's right.

Arguably you had a very attractive share price.

Can you explain just what will motivate you to repurchase shares moving forward?

That's a good question.

It was really just an issue of timing, and as I said a minute ago, we remain committed to the 12 million shares that we had stated earlier in the year to be able to repurchase in '05.

So you'd be at a rate of a little bit better than double your rates the first two quarters?

Yes, as I say we've committed to that 12 million shares for '05.

Thank you.

Your next question comes from Chris Mutascio with CSFB.

Chris, I had a quick question for you.

On the CD book, it looks like CDs now represent about 43% of total deposits, I think it's up from about 40% a year ago.

What is -- do you know the average maturity of the CD book?

Offhand, I don't know that.

I would assume it's short term given the fact that consumers don't want to go long.

Yes, I mean, I would guess, you know, somewhere in the three to six-month range, but I really don't know.

John, do you have any thought on that?

I don't know.

You have two books here.

The percentage change is mostly a change out of things like payment deposits and fed funds.

Retail CDs would actually probably be, if anything, flat compared to a year ago, but the duration, my guess is probably six months.

We do do some longer term CDs, but mostly we do three, six, nine-month kind of CDs.

If they're shorter term, does it concern you that if the fed keeps going that these are going to have to reprice two quarters from now or do you protect yourself by swapping that out somehow?

You have to look at the overall interest rate variability and all the assets and all the abilities.

Any time you pick out one part, and people tend to do this, they miss the forest for the trees.

Right now all of our projections show, and again, this is assuming the yield curve doesn't invert, but if you maintain normal spreads in the yield curve we do better in rising rates.

Our real risk is falling rates.

Yes, we've got a problem with CDs, but we've got positives on the asset side and we’ve got derivatives.

So if you look at the whole balance sheet we do better in rising rate markets.

Thank you very much.

Yes, sir.

Chris, I would say on the wholesale side those are 90 days or less.

It's just the retail side I'm not clear on.

Thank you.

Your next question comes from Jon Balkind with Fox-Pitt Kelton.

Nice quarter.

I just had a quick question on the insurance business.

Obviously you guys will probably benefit on the margin in '06.

My question is on the hurricane area exposure, which you highlighted earlier.

There's been obviously a fair amount of confusion about coverage issues in the Gulf, and I'm just wondering if your managers in those locations are concerned about any related liability that you all may have based on the coverages that you placed on behalf of your clients.

That's a question we don't think we've done -- we have any liability.

In today's world, somebody can sue you, though.

We are not the insurance companies.

We are the broker.

In many cases the insurance policy is going to pay the maximum anyway.

You get into these crazy arguments where people are trying to interpret what is obviously flood damage and call it wind damage and those kind of things, but to our knowledge, we have made no mistakes, and we don't have any real liability, which doesn't mean that somebody can't sue us, and it doesn't mean that in some court we wouldn't lose something, but we don't think we've done anything that we should have any problems with.

In fact, we think we've done a great job in trying to objectively analyze the coverages that we had, et cetera.

Great.

Thanks, John.

Yes, sir.

Your next question comes from John McDonald with Banc of America Securities.

Your growth in the noninterest bearing deposits seems to be doing better than the industry.

John, could you give a little more color on how you are getting that growth, what your strategy is there and how you're managing to grow the deposits at a time when consumers seem to be switching more into CDs?

That's a great question.

Our non-interest bearing deposit growth is a lot driven by the commercial side.

It is driven I think a lot by an effort and energy on our part, a lot of it in new markets.

Some of our acquisitions weren't as strong in the commercial middle market in terms of having the cash management treasury services that we have, and we've got far superior treasury services than some of the community banks we acquired, and we're getting pretty healthy growth there.

And the others -- on the consumer side where we are getting some noninterest bearing deposit growth, it is -- we have for a long time tried to stay out of free checking.

We finally said "uncle" because when our bigger competitors went to free checking and we are getting some pretty healthy growth rate in number of accounts on the retail side.

All of the free checking is noninterest bearing, but the dollars are primarily driven by the commercial side.

And I think it's -- we're getting it across the board but a lot of it is our new markets.

Great, thanks.

Yes, sir.

Your next question comes from David West with Davenport & Company.

On the C&I loan side I wonder if you'd characterize if there's any particular geography where you're seeing any great strength, either on a state-level basis or even more -- on a more micro view than that if you don't mind?

That's a good question.

We're getting generally healthy commercial loan growth across most of our footprint.

We're growing a little faster in places like Florida where we have a very small base.

We're growing very rapidly in our new markets in general.

The coastal areas are experiencing fairly strong real-estate loan growth.

But it's not -- it's not isolated to any one particular area except in a broad context year to year comparisons across our whole new market footprints where we're getting the more rapid growth.

And I would think in some of those markets we're actually probably moving market share.

In some cases we had been flat for awhile and we're just finally developing momentum in those new markets.

Then I guess an unrelated follow-up, on the insurance agency pricing, we've -- given there's some seen clarification on profit base contingents now, are you starting to see maybe a little more certainty in the pricing in that acquisition area, or is there still a fair amount of uncertainty?

We feel comfortable -- we feel like that the contingency issues have really been settled and that agencies have the legal right and have had it for years and years to charge a contingency commission and it's a very legitimate business practice, and, of course, nobody's ever gone to court about it because they'd lose.

None of these people pursuing these regulators have gone to court because they'd lose over the contingency.

In any event we think it has firmed, and we're back looking at agency.

There's been enough commotion, though, in the whole area that it's just -- it's been a tough environment until recently, and, of course, in the hurricane, which actually impacted our business, our people are very busy dealing with claims around that, those have had an effect, but we would “fully value” contingency revenues so we think for our agency business it is going to be there.

Thanks very much.

And in terms of an acquisition.

Yes, sir, thanks.

Your next question comes from Betsy Graseck with Morgan Stanley.

I just wanted to drill down on the new customer number that you were talking about, 10,000.

Just wanted to confirm, is that gross or net?

That's net. 10,000 a month -- right at 10,000 a month average.

Could you just give us a little bit of color on the type of customer that you're talking about?

Is this commercial, retail, across the board?

The 10,000 number I'm using is all retail.

Okay.

And as you mentioned it was in, primarily in your new markets.

We're having better growth rates in our new markets than in our old.

Which is -- it's a big turn around in a lot of our new markets.

And the -- if you could just give us some color on ramp rate and on how you are anticipating that number to trend here over the next couple of quarters given what you've seen over the past couple of quarters.

It is continuing to grow.

We've got -- we've been -- the momentum has been increasing.

Now, that doesn't -- there are seasonal factors and those kinds of things.

Right.

But I don't know that it -- we're not going to have the dramatic turnaround that we've had before but I think we're going to continue to see marginal increase.

It's driven by a combination of factors.

A big factor is simply us having gone through the exercise of getting all of our staff trained up in the new markets to the level we need them trained up, and that's been a big undertaking.

It's never “completed” but we've come a long ways.

We've gotten a much better sales effort going on.

The number of calls per day by the selling staff has improved significantly.

Secondly, we are putting more marketing dollars.

Chris mentioned we've increased our marketing budget.

We've traditionally done very little marketing.

We are -- particularly in new markets we are putting a lot more dollars in advertising.

We have introduced free checking, which we were the last people to do.

We're having a great cross-sell ratio.

The reason we changed the strategy, what our statistics showed is that when we got a client in the bank we were literally by far the best of any of our competitors in cross-selling, but we had a much slower pace of getting new people in the bank, primarily probably because of the lack of advertising and the lack of the free checking.

And we -- a fairly high percentage of the people that come in for free checking we are able to up-sell into other products, and because we have the sales force that's really, based on the statistic cross-sell, the best in the industry, we said, well, gosh, we need to do a better job of getting them in the bank.

If that includes a potential loss leader, that was the right thing to do.

I think it's been a home run for us.

So you would expect that that 10,000 number is going to be increasing over time?

I do.

I don't know that it will go up in any kind of exponential pace but I think it will continue to increase.

John I'd even add that most of that change really has occurred over the last year.

An additional benefit or help is the de novo strategy.

That's a good point.

Okay.

Thanks.

Your next question comes from Tony Davis with Ryan Beck.

Good quarter, guys.

Thanks.

Good morning.

And again, John, given this apparent acceleration in loan and customer growth that you're seeing in new markets, has there been any change in your expectation here regarding the time period that will be required to close what I remember to be is something like $1.5 million differential in revenues between the new and core branches?

Tony, if anything, it is -- we're -- fortunately our core markets are doing good, too, so they're growing some, but we really think of this as a five-year process from -- in the first year or two you get almost no -- you're lucky if you're even, and then the next three years it kind of improves, and it improves pretty exponentially.

If you look at the -- kind of the average you'd have to say we're maybe three years in the process, so we've got another one or two years to go I believe in improvement in these new markets, and then we'll hopefully continue to get improvement, but where we get them up to the performance levels of our core markets.

They are moving faster, and Chris has made a great point, we have put, in addition to the advertising and training, we have -- we are opening more branches in those markets, and that's driving part of the growth rates, too.

So I -- I think, if anything, we'll be ahead of our five-year kind of curve spectrum.

I do, too.

Okay.

You mentioned last quarter that now that loans are growing again in your markets for most people, that the degree of competitive pricing may ease a bit.

Has that happened at all?

Well, pricing is very intense.

I do think there's a little less craziness on the commercial side, and ironically a little more on the retail side, retail lending growth rates so that direct retail had slowed some, so you're seeing more pretty irrational pricing of home equity loans, et cetera, but the commercial, I would say -- I wouldn't say it's great, but we're seeing less irrational pricing on the commercial side, and less on the small business side.

I think a lot of community banks are under some margin pressure, and they've been the real people out of line on pricing on small businesses, and I think it's hurting them, and we're seeing some more rational pricing on the small business side, which is big.

We are -- as you know we're a huge small business lender.

Thank you.

Yes, sir.

Your next question comes from Gary Tenner with SunTrust Robinson and Humphrey.

If you could just comment on credit standards both on the commercial real estate and the mortgage side, especially along the coastal markets with the CRE product, if you'd pulled back in any certain markets, or if there's any markets you're especially concerned about?

That's a good question.

We did -- and I guess this was like 90 days ago, maybe a little longer than that -- we did a very comprehensive analysis of our commercial real estate, residential real estate portfolios, and there were a few tweaks that came out of that analysis, but we have been -- we've had the same policies good times, bad times.

We've been a big commercial real estate lender through four or five cycles in commercial estate.

We don't get greedy in the good times and we don't get super conservative in the bad times.

And we came to the conclusion that we were in good shape.

We do have policy limits for certain -- all kinds of classes of commercial loans, how much hotels we'll do, how many commercial land development, those kind of things, and we adhere rigorously to those policy limits, and that represent what -- we really focus a lot on granularity in our commercial real estate lending portfolio.

We don't do the great big deals and we tend not to get overly concentrated markets and we try to discipline ourselves in that way.

So if there was a huge downturn in commercial real estate obviously that would hurt us but we really didn't find anything and don't see anything that we were concerned about and we just simply haven't ever moved to the risk standards that some people have.

We haven't done the -- some of the condo projects.

We just don't do -- other people do.

We don't take some of the risks that other people do, and never have in those markets.

So we feel overall very comfortable.

In terms of residential real estate which ends up in our mortgage portfolio, our traditional loss ratios are incredibly small, and it would take something really wild for us to have high loss ratios in our residential mortgage portfolio, the stuff we call mortgage loans on our books, because we've generally got 20% equity, and we have higher quality borrowers, and it's a conscious strategy because we keep all the servicing.

And the way you kill your servicing business is make a bunch of marginal loans.

And even if you don't have charge-offs, you spend all your time trying to collect them.

So since we keep our servicing we only put good loans into the servicing business because you don't want people who are going to be a lot of past dues because it kills you from a servicing perspective, even if you ultimately collect the credit.

So I don't think in our mortgage business the risk would be very low.

I guess as a follow-up, in terms of any specific geographies that you're especially worried about, whether in your older markets or in some of your new expansion markets.

Well, the places you objectively have to worry about is the ones that have very high appreciation.

Parts of Florida, obviously, the coastal parts of the Carolinas and Virginia have had very rapid appreciation, and northern Virginia.

We are seeing a pretty significant slowing in appreciation in a lot of those markets.

I think the press talking about it.

I know, we're not seeing values fall, and I'm going to be surprised unless rates really go high you're going to see values fall but I do think you can see a much slower appreciation in the markets that have had such fast appreciation rates.

And that would include northern Virginia, including the coastal -- the whole southeast coast, all the way through Florida has had very rapid appreciation.

Most of the other metro areas have had healthy appreciation.

The Charlotte's and Atlanta's, but not crazy, and I think they are, generically speaking, a little less vulnerable to slowdown in real estate values.

Thanks.

Yes, sir.

John, to reinforce that point on the residential that you made on that study that included home equity loans in retail, construction, commercial, what have you, mortgage, it was only about 6 basis points worth of net losses relating to single family throughout all portfolios.

Right.

Your next question comes from David Hilder with Bear Stearns.

Just a question on your outlook for the auto finance business.

Do you think that you will continue to see this level of loan growth or for how long might you see it?

That's a good question.

I was a little surprised myself that we're looking at 15% annualized growth rate.

Now, it was a great month in there for the whole industry, and I think that's an issue.

But I think we can have a reasonably healthy growth rate in our sales finance businesses.

In that number you see there are two businesses.

There's the traditional sales finance, which is basically an A-grade lender, and there's also regional acceptance, which is our subprime sales finance business, and it's experiencing very healthy growth rates, too.

So I don't know if we'll have the same kind of pace we had, the 15%, but I think we're looking at a much healthier pace than we've had for the last -- for years in that business, because GMAC and Ford were the dominant competitors, and they got some big-time problems, and what they did was crazy, and they kind of -- it came around to haunt them, and I think that's a big change.

Do you see any competitors coming back into the business doing, on economic pricing anything like what Ford and GM did?

The worst problem we have is credit unions who don't know what they're doing.

They're all going to have problems doing it, and so that tends to self-discipline, but I think people are -- you probably saw where Wachovia made a big purchase, but that's not a new competitor to us.

You see what I'm saying?

The competitor was already there, they just made an acquisition.

Bank of America is buying some of the paper coming out of GMAC and Ford but it is not an easy entry business.

It's not -- it's an easy business to get in and lose a lot of money, because what happens if you don't know what you're doing, the dealer is going to send you the bad deals.

So I won't say anybody won't come into the business but it's a tough business to have the expertise in, and it's a very economies of scale business.

So there will always be crazy competitors out there, but so far we haven't seen anything where some new competitor showed up that's really messing up the market.

Again, you've got the peripheral thing that some of the credit unions who don't know what they're doing, but that will self-correct because they're going to have problems.

Thanks very much, John.

Yes, sir.

Your next question comes from Christopher Marinac with FIG Partners.

I wanted to follow-up on a comment in the press release about the recapture net of hedging gains.

I was wondering if, John, if you or Chris could just give us more color on your experience on hedging this quarter and was there any particular volatility late in the month?

No, Chris, we actually -- I thought we did a very good job.

We were in a position near the end of the month where if rates went up or went down, we were going to have a gain in this category.

You can't do that every month.

So--.

Yes, our hedge coverage was 85 to 90%, and at the end of the month that was at, or end of the quarter, it was at 85, start of this quarter 85%.

So there really wasn't a lot of variability.

Yes, and obviously with rates going up, that's -- we're -- that should be good for this quarter.

We've got a total of about $50 million worth of recapture that, if rates keep going up we'll at some point get to recapture.

After that you still get the benefit of much lower amortization costs on your servicing portfolio.

You have two effects from rising rates.

One is recapture of the write-downs.

The other effect is that you don't have to amortize your servicing rights as fast because you're actually getting slower pay-offs.

So our servicing business becomes more profitable with rising rates on two scales.

Now, the negative, of course, is usually that impacts the volume, the productions volumes coming out of your origination business.

We are adding producers in our origination business.

This market has made it tough for a lot of the small independent brokers and in contrast to some people we've actually been trying to increase our production capabilities in our mortgage origination business.

Been adding staff.

Great.

And then your comment earlier John about the pay-fixed received variable swaps also enters into that positive impact to this quarter?

Yes, and we got a really nice phenomena going forward.

Swaps, there's some coming off, some coming on, but we got a number of pay-fixed swaps that have been underwater that are going to go over water if the prime rate keeps -- are going to become positive if the prime rate keeps rising so that really does help us.

Great.

Thanks very much.

Your next question comes from David Stumpf with A.G. Edwards.

I hate to bring up the M&A.

You got off almost the entire call, John, with no questions on M&A but I'm going to ask it anyway.

You were great to give us the criteria in terms of geography and size.

Curious whether you'd review with us, John, in a little bit of detail maybe, what your financial criteria might be in terms of internal rate of return, expectations from a bank acquisition or merger, and/or sort of a dilution tolerance?

That's a good question, Dave.

We've used the criteria for a long period of time.

We -- the number -- the beginning point is having an internal rate of return of 15% or better, which we think is above our cost of capital which is something in the 10, 11% range today.

We then look at the effect on cash basis earnings per share and we have to -- it has to be accretive to cash basis earnings per share.

Typically it's accretive in year two.

We will sometimes go to year three.

We look at the effect on cash basis ROA and cash basis ROE, it needs to be accretive.

Typically again in year two we will sometimes go to year three.

The area we've been willing to be more -- to allow more dilution has been book value per share.

People argue this.

We think that earnings per share is far more important than book value per share.

So we will allow -- we have a general rule of five years dilution in book value per share.

In our nonbank deals sometimes they go as long as eight or nine years, insurance agencies go eight or nine years on book value, they ironically are usually accretive the first year on cash basis EPS and generally have higher internal rates of return but you don't have any tangible assets.

Right.

Typically, though, interestingly enough, they are accretive on stated book value, but when I'm talking about book they're generally dilutive on tangible book.

Right.

So we will, we have, we say we go five, but we do in some of our nonbank deals in particular we go nine or ten years on tangible book.

Okay.

That's great.

Thanks very much.

Yes, sir.

At this time there are no further questions.

Mr. Nicholson, do you have any closing comments?

Yes, thank you.

I'd like to thank all of you who have participated in the Q&A segment and, in fact, all who have participated in our call today.

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

Thanks, and have a good day.

Thank you.

Thank you.

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

You may now disconnect.