Truist Financial Corp (TFC) 2005 Q4 法說會逐字稿

Good morning my name is Crystal and I will be your conference facilitator today.

At this time I would like to welcome everyone to the BB&T fourth quarter 2005 earnings 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.

As a reminder, ladies and gentlemen, this conference is being recorded, today, January 19, 2006.

Anyone who objects to this recording may now disconnect.

Thank you.

I would like to turn the conference over to Mr. Nicholson, Director of Investor Relations.

Mr. Nicholson, you may begin your conference.

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

Most of you realize that today's earnings announcement is a few days later than has been typical of BB&T in the past.

Beginning today and for the remainder of 2006, BB&T has adopted a standardized earnings report date which will be the third Thursday of the quarter.

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

Whether you are joining us this morning by webcast or by dialing in directly, we are very pleased to have you join 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 will be reviewing the financial results for the fourth quarter of 2005 and also providing a look ahead.

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

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

BB&T does not make predictions or forecasts; however, there may be some statements made during the course of this call that express management's intentions, beliefs or expectations.

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

Additional information concerning the factors that could cause 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 31, 2004.

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

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

Thank you, Tom.

And good morning to all of you.

Thank you for joining us.

This morning, I would like to discuss with you our financial results for the fourth quarter 2005 and the full year; update you on our merger and acquisition activity; share with you a few thoughts about our 2006 strategic focal areas; and a few thoughts about our financial expectations for the year.

And, of course, after that we will have some comments from Chris and then time for questions.

Looking at the fourth quarter, GAAP net income was $429.6 million, up 3%.

Operating earnings were 220 -- excuse me, $426 million, up 2.4%.

GAAP diluted EPS and operating diluted EPS both in the fourth quarter were $0.78, up 4%.

The results were $0.02 less than the consensus estimate and down $0.02 from the third quarter.

Our cash basis EPS was $0.82, an increase of 3.8% compared to last year but down $0.02 from the third quarter.

The quarter, obviously, was not as strong as we expected.

We were, however, pleased with the returns; the return on assets was 1.57.

Return on equity was 15.18.

The cash ROA was 1.73 and the cash ROE was 27.88.

Very healthy returns.

The year results, frankly, were a good bit better.

GAAP earnings were $1,653.8 million, up 6.1% and operating earnings $1,674 million, up 7.2%.

GAAP EPS was $3.00, up 7.1%, and operating EPS $3.04, up 8.2%.

Cash EPS was 3.20, up 8.1%.

Returns were strong for the year.

ROA of 1.60, ROE of 15.12 and cash ROA of 1.77 and cash ROE of 27.82.

So the year we feel very good about, although the quarter was a little less than we had hoped.

Our target is for earnings growth of about 10% a share so the 8.1% is a little lower than our long-term target on an annual basis, but still a very healthy number.

If you look at what drove our performance, unquestionably our biggest challenge is our margin.

The margin declined from 3.88 in the third quarter to 3.82 in the fourth quarter, down from 3.97 in the fourth quarter of 2004.

Chris is going to give you some detail and some insights into what happened to the margin and what our expectations are because that is our biggest challenge.

Non-interest income growth was, frankly, quite positive.

Annualized third to fourth growth excluding purchase accounting was 7%, fourth-to-fourth 8.1%, year-to-date 4.5%.

Interestingly enough, if you take out both purchases and the change in the mortgage servicing rights impairment, annualized third-to-fourth non-interest income growth was 16.7%, very healthy.

Fourth-to-fourth 9.4%, and then for the year 5.3%.

So we did gain some momentum in our non-interest income businesses in the fourth quarter.

To kind of give you some additional insight.

Our biggest driver of non-interest income, of course, is our insurance business which had a strong fourth quarter.

Third-to-fourth annualized insurance revenues were up 25.1%.

This is excluding taking out purchase acquisitions.

Fourth-to-fourth up 9.9%, year-to-date 3.7%.

The industry growth rate through the end of September for the first nine months of 2005 was actually a negative 5%.

So our growth rate of 3.7 and then year-to-date -- I mean fourth-to-fourth of 9.9, a very healthy growth rate, obviously reflecting moving market share in the insurance business.

The catastrophic losses in the third and fourth quarter have tightened the market some.

We really stopped the decline in insurance pricing so you see the fourth-to-fourth comparison is better than the year-to-date comparison.

We are somewhat encouraged by the fact we are moving market share and the market is getting a little healthier in the insurance brokerage business.

Service charges is our second largest source of non-interest income, that has been a challenge for us.

Third-to-fourth, service charge is annualized up 1.6%.

Fourth-to-fourth up 6%, and year-to-date 3.4%.

Two big negatives, pricing competition leading to more free checking and more free everything related to service charges, and current [INAUDIBLE] account analysis revenues are not rising as fast because of the higher earnings rate as short-term rates rise.

We are continuing to experience some growth rate and overdraft charges primarily driven by a large number of net new accounts.

In fact, for the year we added approximately 90,000 net new accounts.

We did have some slowing in the acquisition to accounts in the fourth quarter, which is primarily seasonal, but very healthy year in terms of new accounts.

Non-deposit fees continue to be very strong, and that is primarily our bankcard and debit card fees; a lot more use of bank cards and debit cards for what in many cases used to be cash transactions.

Third-to-fourth, non-deposit fees annualized up 12%.

Fourth-to-fourth, 18%.

Year-to-date, 15.5%.

Very healthy growth rate.

Investment banking and brokerage overall was a little bit disappointing, frankly.

Third-to-fourth, down 2%, fourth-to-fourth basically flat, year-to-date up 4.5%.

Kind of mixed results.

Our Scott & Stringfellow brokerage operation continued to do pretty well, but we are very large in the fixed income trading business in BB&T Capital Markets area and it has been difficult to make much profit in fixed income trading because of flatness of the yield curve.

So that business has been basically flat.

Mortgage is an interesting study in that if you take out the fluctuation in mortgage servicing rights and related derivatives, mortgage has actually done fairly well this year.

Third-to-fourth mortgage revenues excluding the fluctuation in mortgage servicing rights were actually up 55.5% annualized.

Fourth-to-fourth up 22.7%, and year-to-date 7.9%; however, if you include mortgage servicing rights, basically mortgage revenues were flat fourth-to-fourth and down 5.7% for the year.

In the fourth quarter, we had a $3.3 million net writedown.

Not a big number but that was compared to a $4 million net write-up in 2004.

And year-to-date in 2005 we had a net valuation increase of 9.5 million, but that was compared to $25.2 million in 2004.

Mortgage servicing originations were actually, interestingly enough, a little stronger in the fourth of 2005 than 2004.

We did $2,450 million in 2005 compared to $2,370 million in 2004.

The flattening yield curve, obviously, impacts mortgage servicing right valuations.

Our portfolioing of ARMs does continue but we continue to have outstanding experience in terms of credit quality in our portfolioed mortgages and very low loss rates.

Looking at total net revenue growth, a little better picture than we have been having.

Annualized third-to-fourth, up 3.1%; fourth-to-fourth, 6.9%; year-to-date, 4.4%.

Again taking out the fluctuation of mortgage servicing rights, annualized third-to-fourth was 6.8%, fourth-to-fourth 7.5% compared to year-to-date 4.7%.

So a little better momentum in the fourth quarter, primary driven by the insurance business.

Our fee income ratio in the fourth quarter went over 40%, which has been a long-time goal for us.

Non-interest expense is not a positive story for the quarter although it's a pretty good story for the year.

Fourth-to-fourth non-interest expenses were up 12.4%, year-to-date 4.4%.

The year-to-date number looks pretty good but the fourth quarter number doesn't look good, and Chris is going to give you some insight on what issues we had in the non-interest expense area.

Certainly a portion of it relates to a pretty major investment for future revenues that we expect to achieve next year.

Average loan growth, a good story, very encouraged about loan growth.

Annualized third-to-fourth, commercial was up 9.2%, sales finance 1.8, direct retail 5%, revolving credit 8%, mortgage 14.8 for a total of 8.8%, again, taking out purchase acquisitions.

Very similar kind of numbers fourth-to-fourth commercial 9.2, sales finance 6%, direct retail 7.3, revolving credit 5.5, mortgage 18.5.

The total fourth-to-fourth, 10.1%, healthy growth rate.

If you look at the year-to-date numbers, commercial was 7.9, sales finance 3.6, direct retail 8.8, revolving credit 6%, and mortgage 11.5, for a total of 8.4.

So, overall, healthy loan growth, clearly positive momentum in the commercial lending businesses.

You can see that the quarterly growth rates were better than the annual growth rate.

The flip of that is true in direct retail.

We are primarily a home equity lender.

Higher interest rates slowing down the home equity lending business and we're having slower growth in home equity lending.

Sales finance did slow in the fourth compared to the third primarily because there is a lot less automobiles sold, but we continue to show internal statistics and market statistics that we are moving market share in the sales finance business.

We are, in most of our markets, the leading bank lender in sales finance.

Our primary competitors are GMAC and Ford Motor Credit that are losing market share, so I don't predict exactly what automobile sales are going to do, but we think we will continue to move market share and we think we still have a secular turn in the sales finance business.

Deposit growth also continued to be very encouraging.

Looking at non-interest-bearing deposits, taking out purchase acquisitions, fourth-to-fourth up 7.3%, annualized link 6%, year-to-date 9.8% which is an excellent number.

Interest bearing transaction deposits, fourth-to-fourth, up 4.4, annualized link 6.4, year-to-date, 4.4.

Then total deposits, fourth-to-fourth, up 9.8%, annualized link 4.7, and year-to-date 7.5%.

So a pretty strong combination of both non-interest bearing and total deposit growth and an excellent combination of both loan and deposit growth.

Asset quality remains strong, actually showed a slight improvement in the quarter.

Non-performers declined to .27% of assets from .28 in the third quarter and .36 last year.

Charge-offs in the quarter were .37 compared to .38 last year.

If you take out specialized lending, charge-offs were .27 compared to -- excuse me .25 compared to 27 last year.

For the year charge-offs were .30 compared to .36 last year.

If you take out specialized lending, charge-offs were only .19 compared to .24 last year.

That's an excellent number in terms of loss numbers.

We did have a little higher losses in the fourth quarter, but our consumer finances businesses tend to have some seasonal swing.

We had some impact, although it wasn't huge, but we did certainly have some impact from the change in the bank subsidy law that would actually reduce losses, we believe in the future, but it created a little temporary blip.

For the quarter, we charged off 69 million and we provided 69 million.

So we basically provided what we charged off and for the year we charged off 215 million net and provided 217 million, so provided slightly more than we charged off.

Our reserve at the end of the fourth quarter was 110, that was down from 111 at the end of the third quarter, and down from 118 at the end of the fourth quarter 2004.

But that's what you would expect to happen and what has to happen, frankly, under the FASB rules because our credit quality continues to improve, and, in fact, our ratio of the allowance to non-accrual loans continues to rise.

At the end of the fourth quarter 2004 the ratio to non-accruals was 2.99 and at the end of the third quarter it was 3.54, and at the end of the fourth quarter it was 3.6, which is one of the higher numbers I remember.

So our reserve relative to non-performers continue to rise.

So overall our credit quality is excellent.

It is unlikely to get better frankly; however, we don't see a large increase in problems unless something happens in the economy.

We are pretty optimistic that we will continue to have good quality through 2006 under the current economic forecast.

Even with that, however, our provision expense will rise some because we are unlikely to continue to reduce the level of reserves, i.e., to recapture reserves from where we are now.

So we might have some rise in provision expense even though we are optimistic about credit quality.

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

We use the 1995 date when we did our merger of equals as kind of the beginning point and over that almost 11-year period now, compound annual growth rate and cash basis earnings per share on an originally reported basis is 10.9%.

If you look at kind of the overall, the fourth quarter was a little bit less than we had hoped for, but we were pleased with the results of the year end, pleased with the long-term trends.

Let me talk a little bit now more from a strategic perspective.

First, talk about merger and acquisitions.

I am sure you saw that we announced two mergers in the last six weeks or so.

The first is Main Street, a $2.5 billion, 24-location community bank in the metro Atlanta area, in fact the largest independent community bank in metro Atlanta.

It took us from 6th to 5th in market share in both Georgia and Atlanta, which is one of our goals to be in the top five market shares where we operate in.

We have been in the process of visiting their branches and shaking hands with their home office people.

In fact, we have done that, visited all their locations and I was very impressed with the people, very impressed with the locations, and very impressed with the markets.

I believe that we can either meet, or possibly exceed, the cost savings and revenue projections that we used in acquiring Main Street.

Atlanta is a great market.

It is interesting at the end of 2004 we had 48 locations.

By the end of 2006, including both Main Street and our De Novo effort, we will have over 80 locations in Atlanta.

Still need to do a few more but we are getting close to having market coverage in that excellent market.

The other acquisition was First Citizens which is a $686 million bank, headquartered in Cleveland, Tennessee, with 19 locations.

It's a great fill-in in the Knoxville-Chattanooga market, kind of the connector with north Atlanta.

They are good markets.

It is a real good fit.

Good people.

I think this merger will go well for us.

In both cases, we have been talking to these companies for over five years.

I am not sure they waited on us to get back into the merger and acquisition market but I think it did influence their decisions.

A lot of people have raised the issue of whether we are getting ready to do a large number of other deals and the answer is, no.

We don't have a huge pent-up demand.

Our goal, which is a very informal goal, is to do mergers equal to about 5% of assets which would be $5 billion or so.

These two mergers are $3.2 billion, so we, from a goal perspective, we don't expect to do a whole lot of additional deals in 2006.

We have kind of set a range of $500 million to $15 billion in terms of assets of acquisitions that we would consider.

We could have a large -- in the upper end of that range sometime during the year, but we don't expect one, we don't have any seriously in negotiations at this point in time.

We also said that we would do a merger of equals because that's how we got to where we were are, we're very successful at mergers of equals, but there's lots of social and other issues that determine merger of the equals.

None of that should be new news.

We are really reaffirming, I am really reaffirming the acquisition strategy we talked about on a number of occasions.

Frankly, community bank prices are so high it is very hard to figure out how to make economic deals that work.

I think we were very fortunate both in Main Street and First Citizens' case to be able to negotiate transactions that are very good for their shareholders but also very good for ours.

That's not generally the case.

Generally, when we run the numbers we can't afford to acquire community banks and we're not going to force an acquisition.

While we did not have any activity in the non-bank area we are still committed to non-bank acquisitions.

We're looking for insurance agencies, asset managers, consumer and commercial finance companies of the same size and nature as we have done in the past and, hopefully, will be announcing some of those mergers in the first half of 2006.

One important thing we are making clear organizationally is we are not going to let mergers keep us from focusing on internal growth.

We think internal growth is far, far more important us to at this stage than mergers.

Talk a little bit about our future strategic focus and a few thoughts on financial expectations.

Let me talk to you in terms of 2006 what I would call six areas for extra energy in terms of strategic focus.

First is driving a higher level of performance out of our new regions.

As we have discussed in the past over half of BB&T is new to BB&T in the last five years.

We're getting better performance.

Some of those regions really reached some performance milestones, but we still have a long ways to go in a number of our new regions and that's really a lot of strategic focus there.

Secondly, we're really putting some extra energy in retail deposit base relationship growth.

We have taken a little bit more aggressive strategy in terms of service charges, etc., like free checking.

We've substantially expanded our advertising and marketing budget, adding more resources to our marketing function and a new advertising agency.

In 2005, we started 50 De Novo branches.

We expect to start at least 60 De Novo branches in 2006.

As I mentioned earlier, we've added 90,000 net new accounts in 2005, so we are putting a lot of extra energy in retail deposit-based relationship growth.

We've always talked about deposits, but BB&T has been a lending-led organization in the past and we are putting extra energy on the deposit side.

Third focal area is commercial deposit base relationship growth.

We particularly think there is an excellent opportunity at the upper end of the commercial middle market.

The lower end of the large corporate market, which we've generally not been in to cross sell and lead with non-credit products and deposit products because we have a lot of strengths like outstanding distribution, for example, in the Carolinas and Virginia.

It's hard to match some of our distribution capabilities in those markets.

Fourth area that's one of the the easiest in my opinion to get the highest payback is insurance organic growth and insurance cross sell.

We have been moving market share, as I said, in the insurance business but we still have an awful lot of BB&T banking clients that don't buy their insurance products from BB&T and vice versa.

We've got a lot of insurance clients that don't buy their banking services from BB&T.

And we think there is a phenomenal opportunity for cross sell that exceeds potential in the merger business, although we're going to continue to look for mergers as I mentioned earlier.

So a lot of energy focused on insurance cross sell which we think is really some low-hanging fruit.

The fifth focal area is wealth management private banking.

Our history was that we largely built our Company from acquiring community banks and thrifts that either didn't have -- or didn't have a material trust business.

We have been growing our wealth management resources and wealth management capabilities, and we are real optimistic that we are kind of on the verge of having some pretty healthy growth rates in the wealth management private banking area.

The final thing I mentioned earlier we will continue our merger and acquisition role, but clearly secondary to internal growth.

Share with you a few thoughts on future earnings expectations.

We do not provide earnings guidance, and as Tom said earlier, anything that I say about the future could be wrong.

That's certainly true in the kind of environment we are in.

Our biggest challenge is clearly the flat yield curve and the speed the Fed has raised interest rates, all putting pressure on our margin.

If the yield curve remains flat but the Fed stops raising rates, that helps us fairly materially, and the inverted yield curve would be a challenge for us, especially if it were a signal for a recession.

Assuming the Fed does stop raising rates during 2006 and the economy continues to have reasonable growth rate, we are fairly optimistic, frankly, about 2006.

We have a lot of momentum in some very important areas.

We are experiencing a very healthy combination of loan and deposit growth, one of the best in our history.

We had a stronger net interest income growth rate as you saw in the fourth quarter and we are optimistic that will continue into 2006, particularly an opportunity for better performance in insurance markets.

As Chris will highlight, we are making a substantial amount of investments for the future, which impacted our fourth-quarter expenses, but, hopefully, will turn into revenues in 2006.

Investments include our De Novo branches, heavy marketing expenditures, large increase in the number of production base personnel, i.e., we're adding a lot of producers in the marketplace.

We're investing very heavily in the payroll business, payroll services business, where we think we have an opportunity to capture a lot of small business accounts with payroll processing services.

We expect these investments to drive a faster revenue growth rate in 2006.

While we don't expect asset quality to get any better because it is already so good, we do expect quality to remain excellent.

Our long-term goal is to grow operating earnings per share to 10% or better pace.

While we are not necessarily expecting to meet that goal in 2006, we do expect to achieve that level of growth over the long term and have exceeded it over the last 10 years.

Two items I would specifically note for the analysts who do prepare projections.

One, we do have significant seasonal factors in our earnings, particularly in the insurance business, and for those of you who do first quarter projections I just would remind you to look at the last couple of years and the fluctuations that happen in earnings in the first quarter driven a lot by insurance.

Secondly, we will be expensing stock options, i.e., equity compensation in 2006.

We are estimating the expense at about -- there is still some room here, but about $50 million pre-tax, which is about $0.05.5 per share after tax.

Interestingly enough, this portionate amount of the expense, about 40%, will occur in the first quarter because the front-end loading relative to officers that can potentially retire within a five-year period under the FASB interpretation of how you have to expense options.

In summary, while the fourth quarter bottom line was not as strong as we had hoped, we have some very positive trends in terms of asset quality loan growth, deposit growth, and improving non-interest revenues as we enter 2006.

We are also quite pleased with the overall results fourth to the year with operating EPS increasing 8.2%.

In the current environment we think it's more appropriate to evaluate results on the annual basis than on any one quarter.

With those comments, let me turn it over to Chris for some added insights into several important areas.

Thanks, John.

Good morning, everybody.

I would like to welcome each of you to our conference call, as well.

I would like to talk to you briefly about net interest income, margin, non-interest expenses, taxes, and capital.

First, looking to net interest income based on operating earnings, you can see that common quarter net interest income comparing fourth '05 to fourth '04 was $921 million, up 6.2% over prior year quarter adjusted for purchases, supported by a very strong earning asset growth of 10.2% adjusted for purchases.

If you look at link quarter, fourth '05 to third '05, you see a flat net interest income of $921 million, up only 0.5% annualized over link quarter after adjustment for purchase acquisitions, really due to margin compression and I will speak to that momentarily, but also supported by solid earning asset growth of 6.7% adjusted for purchases.

Then on a year-to-date basis, net interest income was $3,608 million, up 4.3% over prior year adjusted for purchases, again, supported by a very solid 8.2% earning asset growth adjusted for purchase accounting.

So in summary, I think net interest income really finished the year with a very respectable net interest income growth given the flat yield curve and the economic circumstance.

Moving to the net interest margin based on operating earnings, we obviously experienced further compression as the yield curve continued to flatten during the quarter.

Link quarter, as John pointed out, was down 6 basis points, 388 from third quarter '05 to 382 fourth quarter '05.

Common quarter down 15 basis points from 397 fourth '04, to 382 fourth '05, and by year decreased from 404 2004 year-to-date, to 389 2005 year-to-date, down 15 basis points.

While we still are slightly asset sensitive, the additional compression is really driven primarily by two items.

John commented on one of those, and certainly the yield curve flattened further from third quarter to the fourth quarter causing continued pressure on pricing of our assets versus liability is really offering us less spread opportunity, and we will speak to that in a moment, coupled with another point John mentioned, and that's the fast increase in rates, and really I guess the increase is greater impact on a small base rate.

It is just more impactful overall when rates move up fast.

Then a second item, pretty significant for us.

We have more liabilities that reprice in short periods of time, generally, overnight up to six months as compared to our loans which reprice over a longer period of time, generally, three months up to 18 months after a rate change.

Given the majority of our loan portfolio with variable rate price, this lag effect that we spoke about in the past in the repricing of the variable rate loans should be very meaningful when the Fed stops [Technical Difficulty].

In fact, when the Fed stops tightening and the yield curve steepens somewhat, we should see nice improvement in their margin.

If you look at the yields and rates, you can see common quarter total earning assets were up 77 basis points on interest bearing liabilities up 110 basis points.

And still the majority of the compression continued to be driven by the short-term borrowings which increased 175 basis points in the CD category, which increased 123 which thus giving us a spread compression of 33 basis points.

On a link quarter comparison, you see earning assets up 18, total interest bearing up 30.

We have similar situation as we did in common, but there was a new bit of a wrinkle that entered into the fourth quarter where we really were experiencing competitive pressure to convert variable rate loans to fixed rate loans, which is normal in that type of cycle, but I guess we see it -- saw it more prolific in the fourth quarter.

After that really provided additional training to the field personnel and feel like we've stemmed the majority of the pressure.

But it did impact us in the quarter.

So our spread down link quarter 12 basis points, as well.

Looking at our forecast for 2006, outcome model really calls for continued relatively stable kind of margin and does project a slight and gradual steepening in the yield curve throughout the year, and if additional slight compression is possible, if the curve remains at current levels or, i.e., retains its current slope.

But as we progress through the year, economic conditions change and we really feel pretty good about the prospects, as John pointed out.

Turning our attention to non-interest expenses, we did have -- we were challenged with abnormal non-interest expense growth on a link quarter basis, but really performed well on year-to-date basis.

Additionally, we completed the year 2005 ahead of goal with respect to our cost savings and revenue enhancement initiatives.

We achieved approximately 75 million versus an annual goal of 60 million and the 60 million was built into our plan.

Given abnormally high increase in expenses in the fourth quarter on a link basis, I'm going to give you some detail on that in a minute.

It may cause one to question the effectiveness of the cost-saving initiatives but I wanted to reinforce the fact that we have been and will continue to be successful in making progress toward our targeted initiatives.

We've stated in the past, some of the savings that have been taken out of the initiatives has just been partially offset by increased, regulatory, audit-related, legal, marketing and advertising and some consulting expenses.

Non-interest expense growth rates are as follows -- Common quarter was up 12.4% after purchases, as John pointed out.

Over 75% of the increase was really due to the hiring of 1,349 additional FTEs, the majority of which is revenue producers.

Increased incentives and increased benefit costs, which are really an adjustment in the pension and the [VIVA] health insurance plan, which is really based on actual claims and we have to deal with those quarterly.

Approximately 15% of increase was due to increased regulatory and audit-related legal, advertising and consulting type expenses.

And the remainder are relatively small items.

But I do want to point out that over half of the total expense increase in the common quarters is really related to production of revenue generation.

Link quarter was up 17.6%, annualized and adjusted over link quarter and adjusted for purchases.

I think given the significant increase we ought to drill down a little further, kind of look at that detail.

If you look at the total non-interest expense line on a link quarter basis, up 17.6.

After purchases it would equate to $35 million up over third quarter.

It's driven by three primary areas, personnel expense up about 16.5; occupancy and equipment up about 6; and other operating up about 12.6.

First, looking at personnel with the 16.5 million, that variance is primarily related to, in the quarter, hiring an additional 665 additional FTEs.

Again, the majority, two-thirds of which are revenue producers coupled with the increased incentive expense, primarily insurance corresponds to the higher levels of revenue you saw in the fourth relative to the third.

And that combination of salaries and incentive would total the $17 million.

Occupancy and equipment expense up just under $6 million is really a function of higher rent and higher levels of depreciation, some of which is related to our De Novo strategy.

And then other operating, which is the other large item of 12.6 million, is really an increase in consulting expenses of about 4 million that I commented on earlier.

And these are primarily folks we've engaged for efficiency gains.

An example is, we involved ourselves with -- to help us with the check vendor to really solicit savings for a new check vendor which we were able to get significant savings over the next five years far outweighs the cost of the consultant.

But we have the cost of the consultant in this quarter and we got the savings over the next five years.

Second example is we employed a vendor to look at some businesses, to help us determine whether it would be more valuable for us to do those in house as opposed to outsourcing.

So it's those kinds of things really focus on efficiency gain.

We have an increase also in this category.

Regulatory, audit related and legal costs of about $6.5 million.

About 3.8 is assorted regulatory items and increased audit costs that really are of the smaller nature.

An example would be we hired a vendor, for example, [Inaudible], to help us with our BSAA [mail] process, to help implement a process to meet regulatory requirements and certainly I mentioned the increased audit costs we experienced, as well.

Some other items in the legal area.

We have had an increase of about 1.1 million in legal expenses.

We increased our reserves for legal 1.5 million, which is just many assorted small cases, and then we had a settlement of 1.2 million of a situation we have been working on for some time.

In summary, I guess the link quarter expense story, I just want to leave you with.

It is about half, about 50% of the increase of the expenses or production are revenue related and about 3 to 5 million would be what I would call non-core type expenses, so it is a little lumpy in the core.

And obviously we have the expense of the new revenue producers, about 450 of them, but many of them hadn't been here long enough to yet contribute to revenue generation.

If you look at expense growth on a year to date basis, non-interest expenses adjusted for purchases was up 4.4%, which is very much in line with where we would have hoped to have been.

Looking to taxes, there continues to be no real significant changes in how we handle our taxes.

Our effective tax rate did decline from 33.03% third quarter '05, to 31.91% fourth quarter, due primarily to three items.

We had a subsidiary that had more municipal interest than in prior quarters.

Second item is we had settled an adjustment with the State of Maryland that we have been working on for approximately two years that finally came through in the quarter.

And we received some additional tax credits from partnership investments in the quarter.

As for '06, we do expect the effective tax rate to move back up closer to where it was the third quarter levels, in the 33.1 to 33.2 or 3% range in early '06.

Looking at capital, really not a lot new with capital.

We continue to maintain strong capital positions.

Our equity to assets in the period was 10.2%; that's for risk-based capital.

Our Tier 1 was 9.3% and total capital was at 14.4%.

Leverage capital finished the quarter at 7.18 in the period, and our target for leverage, which is really our primary capital target, continues to be to keep it at the lower end of the 7% to 8% range.

Comment on share repurchases in fourth quarter.

We did repurchase 6.5 million shares at a cost of about $252 million.

Average cost of $41.99 a share and for full-year 2005, we repurchased 12 million shares, cost of about $486.5 million, and average cost of $40.54 a share.

Looking forward to '06, we plan to repurchase in the range of 12 to 14 million shares next year.

And then, finally, I would just like to remind you that our first quarter dividend is $0.38 a share and that represents 8.6% increase over the prior year quarter.

And, Crystal, that concludes my comments.

[OPERATOR INSTRUCTIONS] We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Nancy Bush with NAB Research, LLC.

Hi, John, how are you?

Good morning, Nancy.

I have kind of a straightforward question here.

I realize you don't give earnings guidance, and -- but I still get the sense that you are a bit surprised by the level of expenses in the fourth quarter.

And I guess I would have to ask why?

I mean is there some deficiency in your financial controls that would have made that not foreseeable?

I guess I am just asking, why the element of surprise here?

There is no deficiency in our financial controls.

Absolutely not.

I think that we have had a number of projects for long-term investment that we think will have returns, frankly, next year.

Chris mentioned those.

We probably in our own minds hadn't really added together the total cost of all those projects and the time and when those expenses would be incurred.

We started out hiring -- the idea of hiring some more revenue producers, particularly in our new markets.

Commercial lenders, insurance people, investment banking people, et cetera.

And what happened is we weren't hiring them at a very happy -- we weren't happy because we weren't hiring enough of them and then all of a sudden we got lucky and hired a lot more than we expected in the fourth quarter.

I don't think it had anything to do with financial controls.

It just had to do that we didn't expect to be able to hire as many producers as we, in fact, were able to hire.

I would also ask, I mean, this issue that impacted a margin of variable rate loans, repricing to fixed rate.

Is this simply a by product of sort of the decentralized way that you operate or what is going on there?

I think it is a by product of a big focus on the small business marketplace.

We still have the best risk adjusted yield of any bank in our peer group, probably the best of any large bank in the country, in our lending businesses.

But in a rising rate market, when you are dealing with small businesses and customers, they are very price sensitive.

You have a lot of community bank competition.

I think there is a little drag on raising the rates.

Just like there is a little drag on the other side of raising deposit rates, they are not quite as sensitive as some other marketplaces are.

So I think that is all we are really seeing.

I think Chris's point about the Fed increases is the percentage increase off the base is probably the biggest ever, and that is not trivial because of the pace, in fact, of rate increases from the very low rate that the Feds had driven them was so fast that we have kind of been facing -- chasing a moving target.

I am fairly optimistic.

In fact, our numbers certainly show that when the Fed quits raising rates that we will be making a better improvement in our margin.

Okay, great, thank you.

Thank you.

Your next question comes from the line of Gary Townsend with Friedman, Billings, Ramsey.

Good morning, gentlemen, how are you?

Good morning.

Chris, is it more important that the Fed stops raising rates?

Or would you say the shape of the yield curve is more important to your --

Well, I think certainly the yield curve is critically important, but the composition of our portfolio bodes well for the rates to be stopped.

In terms of importance, I would say the yield curve long term is certainly important.

Over a period of a year subsequent to a stop, though, we're going to realize a pretty good benefit.

In fact, if you just look out 180 days, the point I was trying to drive just a minute ago is about 60% of our loans reprice six months out, and as you move further out, that picks up, whereas it slows.

Or said another way, deposits are repriced quicker early on and as we go longer into the future loans really begin to pick up.

It's sort of a short driver.

Thank you.

Your next question comes from the line of Betsy Graseck with Morgan Stanley.

Good morning.

Good morning, Betsy.

I wonder if you could give us some sense of the productivity levels that you are anticipating from the new folks you hired.

I realize they are across the board in the businesses.

But what kind of time frame do you anticipate it will take for them to get up to levels of average productivity for the organization?

Well, that's a good question.

That's a tough one.

My own feeling is we will still have a little bit of drag in the first quarter, but by the second quarter they will be earning their pay.

When they've worked for us a year, in the third or fourth quarter of next year, if we've hired right, and I believe we have, they'll be more than earning their pay.

They'll be profit contributors instead of profit drags.

I think we will still have a little drag, less -- you pay some front-end bonuses and other things in today's world to get the kind of people we want.

We will have some drag into the first quarter, less than in the fourth, and second or third will become neutral and positive by the fourth.

Is there any particular area where you focused the hiring?

It is focused primarily on the large growth markets that we have entered.

The Atlantas and D.C.s, and a lot of people in Florida.

But more corporate or consumer?

It is more commercial lending-type people and also a lot in our financial services area, in our capital markets area, in our insurance area, those kind of activities.

And these are folks that have books of business that you anticipate them bringing some, if not all, over to you?

Well, we hope they will bring some business with them, absolutely.

But we also think they are the kind of people that can produce new business for us.

Right.

Okay.

And then separately just on the margin, I know you mentioned that when the Fed stops raising rates, you're anticipating that your margin should expand assuming that the curve steepens a little bit at that point in time.

Can you talk about how you've been experiencing the deposit competition in your region and how you think that will change when the Fed stops raising rates?

Well, that is a good question.

Deposit competition is very uneven.

In some of our markets I would call it "intense."

In other markets it is there but it's not that intense.

We have, ourselves, become a little more aggressive in the CD market, in the retail CD market and in the mutual funds area.

But when we look at the cost of that versus having funded in the national money markets it's not a material increase in deposit costs.

Our -- most of our marginal effort has really been on checking accounts.

And I guess the cost has been free checking, free online banking, where we used to charge for a lot of those things.

And a lot of advertising and some promotions and giveaways behind it versus real intense competition in the CD markets.

Okay.

And you don't have any sense that the competition you are facing at least at this stage is likely to change much?

I don't see it.

I think everybody is struggling with margins and everybody is trying to drag their feet in terms of raising prices, but you have got to have the money, too.

So I don't see it intensifying.

Our deposit growth rates are still very strong.

Okay.

Thanks very much.

Yes, ma'am, thank you.

Your next question comes from the line of Kevin Fitzsimmons with Sandler O'Neill.

Good morning, everyone.

Hi.

John, I just want to get a sense over the next few quarters about expense levels.

I know we have had a few questions about it, but would you view -- you mentioned there was some expenses, I believe, you said 3 to 5 million that are non-core.

Do you see this kind of level of expenses kind of the peak and then maybe evening -- maybe kind of evening out in the first quarter and then normalizing?

Or is it just a matter of the growth slowing from here but still growing positive from here because it sounds like a lot of the hiring is still going on?

It hasn't necessarily stopped.

That is a good question.

Taking out the change in the accounting for stock options, our -- I will tell you what our goal for 2006 is to hold our expenses to 5% or less.

And we were up 4.4% in 2005.

The differential is that we are adding these producers and we have these producers in process but we are also really trying to drive a lot more efficiency through our new regions.

When we look at the statistics, the revenue per person, the deposits per person, there's a radical difference in our core markets and our new markets.

It takes a while to make that kind of transition, but we are working on that really hard.

So we are hoping to -- in fact we are very strongly planning on offsetting the investment in revenue producers to some degree with improving efficiency in the branch distribution network.

Our average branch has one more person than some of our competitors.

Most -- there is a quality differential, which is one thing we focus on, but also mostly driven by not as efficient operations in some of our newer markets, and that's really what we are putting a lot of focus on.

Okay.

Great.

John, can you also just mention or address the overall economy in the Carolinas?

I think last conference call we discussed how it really had turned for the better over the last several quarters and having had a tough time in the recession.

Are you still as enthusiastic about that or have we take a step back?

The economy is not phenomenal, but it's good.

We are experiencing what I would call not spectacular, but healthy growth in the Carolinas right now.

We are having a fair immigration of industry from other more expensive states, particularly states that have high union populations.

There -- kind of an announcement every week or every few days about somebody moving into the marketplace.

We are still experiencing immigration of population.

Our coastal areas are booming.

I think some of the growth comes from people who are actually moving back from Florida that miss seasons and still like the beaches.

So it's -- I wouldn't call it a boon, but I would call our economy is doing very well and I think you see that reflected in our non-performing numbers and our charge-off numbers.

We didn't have a big jump in -- we had some increase.

We had some hid in consumer losses related to the bankruptcy.

But just looking around at a few of the earnings releases, a lot less than a lot of other people had and I think that reflects the health in our markets of the typical consumer.

Great, thank you very much.

Yes, sir.

Your next question comes from the line of Christopher Marinac with FIG Partners.

Hey, John.

Good morning.

Hey, Chris.

I wanted to ask more about deposits.

We've heard a lot of banks this quarter talk about how CDs are the only thing that sells in the marketplace, and that's obviously not the case with BB&T given your results this morning.

Just curious what types of deposits do you think play well and do you think there's room for the organization to even get more proactive on non-CD types of funds?

That is a great question.

The answer is, yes, I think there is more room.

We really traditionally have been a lending driven business and we've had great margins in our loan businesses, and we've certainly paid attention to deposits.

But we've really done a lot of strategic analysis recently and it points out that by far our opportunity given our distribution network and the relative profitability is driving faster deposit growth rates, both commercially and retail and you can see the effort we have got doing that.

I think one reason we are maybe getting a little more marginal increase than other people is because we weren't spending anything on advertising, we didn't have free checking, we didn't have free anything.

We didn't have really a lot of retail deposit marketing effort, and we accelerated it, not for free, by the way.

It is expensive in loss of service charges when you go from charging people to going to free, and when you give up -- when you don't charge them for online banking, et cetera.

But I think with our huge distribution network and healthy market shares, when you start doing some advertising and sales focus, you get some benefit.

And I think that's what has happened with us.

We also like to use our money market product, we call it our investors deposit account product, as a leader and particularly we can be a little more aggressive with that in our new markets.

One advantage we have now is we have enough new markets that we can -- where we want to be more aggressive on pricing.

We can price in those markets without discouraging the price structure in the markets where we have large shares.

So I think the combination of expanded advertising budget, expanding marketing effort, more sophisticated marketing effort and a different pricing strategy.

I think we have a ways to go with faster transaction deposit growth.

Great, John.

That is helpful.

My follow-up, secondly, is about Atlanta.

Given the addition of Main Street, does that sort of solve your quest to have more here or would there still be more interest down the road in further acquisitions?

That is a good question, too.

I think I mentioned this.

With Main Street and our own De Novos in process by the end of 2006 we expect to have about 80 locations in metro Atlanta.

We think we probably need about 100 really.

Maybe you can argue for more.

But certainly about 100 to fully cover the market.

We can get there two ways.

One would be continue to add De Novos, which we think we can do, and do in a high quality manner at six or seven a year.

Or we could do another merger.

We really don't want to buy any new banks.

One of the appeals of Main Street, they have been in business for a long time which means they have client loyalty.

What we have found, we find a bank that is five, six, seven years old, they may have grown a lot but the clients have all been bought, as have the staff, and so we're trying to avoid those kinds of acquisitions.

That is one of the problems with Atlanta, there are lots of start-up banks but they are all new and we wonder what you acquire in that regard.

So there are a few candidates that have been around awhile, and we are certainly interested in talking to them, but we don't have to do that.

We can certainly De Novo the rest in Atlanta.

We have been running a test in Atlanta on our De Novos.

We do a projection on deposit loan growth profitability and we have been able in Atlanta and, I think, this is a little unique but with the right kind of focus we think we're going to be able to break our De Novos even in about 12 months and have them profitable with decent returns in 2 years, 2.5 years.

So the fact that we are adding, the marginal cost is less and we already have some recognition in the market the marginal profitability of the De Novos in Atlanta so far has been very encouraging.

Good, John, thanks again for the color.

Yes, sir.

The next question is from Jefferson Harralson with KBW.

Thanks, if I can I would like to ask a question on the specialty finance businesses.

Can you talk about the -- maybe the loan growth rates, loan/lease growth rates and maybe the highlights and lowlights of those businesses and if there is any change in the loss rates there?

That is a good question.

I think our specialty finance business overall had a really good year.

We had very healthy growth rates, very healthy loss ratios.

We exceeded our goals in terms of profitability and returns.

Basically, they are producing over 20% ROE on a cash basis, 20%, 25% with very healthy growth rates.

We did have some higher level losses in sub-prime businesses and regional and in our consumer finance businesses in the fourth quarter.

How much of that was this bankruptcy thing which tends to hit that business versus something more serious is difficult to know.

We are not projecting materially higher rates of losses in 2006.

We don't have any reason to believe at this point in time that we are going to see material credit deterioration in those businesses, and we are projecting very healthy growth rates.

So our sub-prime businesses are, frankly, doing well.

Regional, our sub-prime automobile business had a very good year.

It actually, after about 10 years, finally actually became accretive and I said that was a long time -- kind of a lousy deal for us initially.

We paid too much for it, but it finally is producing pretty healthy returns and very healthy growth rates.

So the specialty finance businesses really did well.

We have also imbedded in the manufacturing operation, a commercial finance business.

Our factory business, interestingly enough, is doing extremely well mostly because a lot of people have exited the market and we have moved into international factoring which has been a real nice niche for us.

They are doing well.

And if you could just -- I don't know if you can frame the growth rate that you expect from it, is it less than 10% or greater than 10% or 10 to 20 or greater?

Can you just provide, I guess, some framework of the type of growth you expect from those business as a combination?

About 15 as I remember.

Does that sound right, Chris?

That is about what I remember.

That is what I remember off the top of my head, I am pretty sure it's about 15. [Multiple Speakers]

Your next question comes from the line of Tony Davis with Ryan Beck.

Good morning, John.

Hey, Tony.

Just a couple of things here.

Can you give us any color on the degree to which you have penetrated your middle market customer base on the insurance side?

Where are you in that whole process?

How much is left to do there?

I think we are about 20%, it depends on how you define middle market, about 20% penetrated and 80% left to do.

Some of those people -- it's interesting.

What is a good banking client may or may not be a good insurance client.

So there's some percentage of that client base you want from a banking perspective but you may not want from an insurance perspective so you never would even want to get to 100%.

But I think we can take it easily from 20 to 50, 60%.

I think we can do it in a fairly short period of time in the next couple of years.

We have been so busy with acquisitions and it has been very good for us that, well we put a lot -- I don't want to diminish the effort we put on organic growth and the success we have had.

We have had a lot of success but there is still a huge opportunity.

Typically, when we bought these insurance agencies, they might have had 2% of their clients happen to be BB&T clients, not necessarily that big of overlap.

So we have been able to do a really good job of moving those clients but there is still a huge amount left to go.

A follow-up here.

The -- can you give us some color on the backlog at BB&T Capital Markets and your basis for optimism about the wealth management business?

BB&T Capital Markets, their merging acquisition, IPO activity has gone well.

They have got a number of things in process.

The challenge we have had there has really been in the fixed income trading business, which is where we have an awful lot of our resources, and it's just been a tough market with no yield curve.

It is really hard to trade in that market with a flat yield curve and so that has been our struggle there.

We are expanding our product line and product offerings in our capital markets.

We have added a lot of -- hopefully note -- definitely a sophisticated staff to do that.

In fact a number of them have just moved into place in the fourth quarter and we have got some strong revenue projections based on these new segments that we're going to be serving in the capital markets area.

In terms of wealth management and private banking.

About a year ago we reorganized in totality our wealth management business, maybe a year and a half now.

We had a very traditional trust business, really no wealth management function per say.

We put some really good people into working on upgrading our wealth management activity because we really didn't have much of a client base because of all these community banks and thrifts just weren't in the trust business or weren't in the wealth management business.

Although a lot of these people still had their deposit accounts with them and a lot of them were initially small business owners that we had helped get in business.

Our success so far is very encouraging, but we are just getting going.

We had to add a lot of people.

We had to -- some of our trust people made a great transition to wealth management.

Some didn't, as you might expect.

And we really, just in the last 90 days, got the staff in place, the organization in place to see the results.

It has been pretty expensive to do that because we did have to hire a lot of people outside although we got some cost savings out of the trust side of the business.

Could you give us any frame on revenue growth in those two segments this year?

Capital markets and wealth management?

I don't know off the top of my head.

Chris, do you know?

I don't -- I don't know for wealth management, capital markets, I really don't, John.

Tony, if you maybe call Chris back.

We can give you an indication on that.

I don't know off the top of my head.

We just don't have it.

Okay.

We will chat later, thanks.

Okay.

[OPERATOR INSTRUCTIONS] Your next question comes from the line of David West with Davenport and Company.

Good morning, John and Chris.

Good morning, Dave.

I wonder if you could provide a little bit more color around your hedging activities on the MSRs?

I was a little surprised by the net loss there.

Well, David, we try to hedge within plus or minus $5 million.

You can't really drive your hedges to zero except to spend an absolute fortune doing it.

What happened to us the yield curve -- it inverted, as you remember, during the quarter more than we expected, and the cost of having hedged that way when we didn't expect it to happen would have been [Inaudible].

So even though we hedge it, you can't really hedge it to zero without a tremendous amount of cost involved in it.

The forward curve where it is, are you lessening your hedging activity there?

No.

We are still trying to hedge within that small belt of plus or minus $5 million.

Now sometimes we've had a little bigger gains, we could have a little bigger losses.

It's really difficult to drive it -- One of the problems -- they are talking about changing the accounting rules.

The accounting rules are crazy.

You can't -- you always have to write down, but you can't write back up.

So you can have an account -- remember all this stuff is non-economic anyway.

That is what is so bad about it.

The mortgage servicing write accounting is not good in my opinion.

But anyway, you are capped on what you can write up if rates fall, but not what can happen to you if rates go down.

Because it is not really -- it is not -- you don't adjust hedging writes to markets.

You hedge it to lower cost or market.

So when you get back to where we were, one of our problems, we couldn't hedge the upside because we couldn't get a recapture of part of the upside on the hedging write due to the way the accounting system worked.

They are talking about changing that which would make a lot sense and, hopefully, they will.

And just one kind of unrelated follow-up, I guess.

On the deposit side.

To what extent are you using broker deposits as a source of funds?

No more than we have been in the past, even probably less.

Chris, do you have a number on that?

Yes, we actually, I would say, Tony, have made a lot of movement there.

We do what we have to do to fund loan growth, but if you kind of look at our average balances and end-of-period balances, year-over-year and link quarter all of the growth that you see there was driven by the retail component.

At the end of period, link -- or year-over-year we would be about 43% retail and about 57 wholesale.

Thank you.

And by the way the hedge coverage at the end of the quarter going into next quarter is about 94%.

There are no further questions at this time.

Mr. Nicholson, are there any closing remarks?

Yes, Crystal.

Thank you very much.

I would like to thank all of you who have participated in the call today.

If you need clarification on any of the information that has been presented either in the press release or during this call, I would invite you to call BB&T's Investor Relations Department.

Have a good day.

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

You may now disconnect.

Speakers, please hold.

Thank you.