Truist Financial Corp (TFC) 2006 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and thank you for holding.

Welcome to the BB&T quarterly earnings conference call.

At this time, all participants are in a listen-only mode.

A brief question and answer session will follow the formal presentation.

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As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Tom Nicholson, Executive Vice President of Investor Relations.

Thank you, Mr. Nicholson.

You may begin.

Thank you, Dan.

Good morning to everyone and thank you for joining us today.

This call is being broadcast on the Internet both from our website at BB&T.com/Investor and from investorcalendar.com.

Whether you're joining us this morning by webcast or by dialing in directly, we're very pleased to have you join us.

We have with us today our Chairman and Chief Executive Officer, John Allison, and Chris Henson, our Chief Financial Officer.

They'll be looking at the financial results for the first quarter of 2006 and also providing a look ahead.

After they've made their remarks, we'll pause for a moment and have Dan come back on the line to explain to those who have dialed into the call how to participate in the question and answer portion of the call.

Before we begin, let me make my customary preliminary comments.

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

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

Additional information concerning the factors that could cause actual results to be different is contained in the Company's SEC filings which include, but are not limited to, the report on Form 10-K for the year ended December 31, 2005.

As always, copies of this document may be obtained by calling the Company or contacting the SEC.

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

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

The areas that I will discuss and I want to talk about our first quarter financial results, give you a brief update on mergers and acquisitions, discuss some of our key strategic initiatives and then share with you a few thoughts about future results.

In terms of financial results, we were very pleased with the first quarter.

Our GAAP net income was $431.5 million, up 9.1%.

Operating earnings were $427.7 million, up 8.6%.

The difference between GAAP and operating, we had one large gain on the sale of a facility which we took out of operating earnings and we also, for comparison to last year purposes to give the proper kind of growth rates, we took out the equity-based compensation which we hadn't been expensing in the past.

And I'll give you a little more detail on that in a minute.

Our GAAP diluted EPS for the quarter was $0.79, up 11.3%, and operating diluted EPS for the first quarter was $0.79, up 11.3%.

The consensus was $0.76.

How much we beat the consensus by is argumentative in the sense that I'm not sure who and how equity-based compensation was considered in the consensus.

I think some people certainly considered equity-based compensation.

However, I think our equity-based compensation expense was higher in the first quarter than most people expected because of the change in accounting rules that I'll talk about in just a minute.

In my own guess is we probably beat the consensus by a couple of pennies, or a penny or two versus $0.03.

Earnings were up $0.01 compared to the fourth quarter which is unusual for us.

We usually have a pretty meaningful seasonal downswing in the first quarter.

Our cash basis EPS was $0.82, up 9.3%.

The returns by some operating earnings were very strong.

ROA 1.59, ROE 15.58 and cash ROA 1.74, cash ROE 28.41, some really strong returns.

If you look at the factors driving earnings, we're very pleased that our margin quit following.

It was down from last year when it was 395 in the first quarter to 382 in the first quarter of this year but our fourth quarter was also 382 so the margin flattened out.

Chris will give you some deeper insight on the margin which we know has been an important issue.

I would say that if the idea that the Fed would stop raising interest rates is very good news for us and would be very helpful to us, our margin.

Non-interest income growth was very, very healthy.

It was down from the fourth quarter which is a normal seasonal factor.

But looking first to first, non-interest income growth, if you take out nonrecurring items, purchases and the MSR impairment, we get the core non-interest income growth of 15.1% which is obviously healthy.

If you look at the segments of non-interest income growth and again take out non-recurring items and purchases, our biggest non-interest income business by far is insurance.

Our insurance commissions first over first were up 8.7% and that's pretty close to a same sale store number.

I haven't seen the first quarter numbers but I know through the end of the year insurance commissions industry wide were actually declining so there is some real strong evidence with an 8.7% growth rate on same store sales that we're continuing to move market share in the insurance business which is our biggest fee-based business.

Service charge on deposit accounts, we're down link quarter, but that would be a typical kind of factor but compared first to first, we're up 8.7%.

And something we're very excited about, we added net new transaction accounts of 49,000, the best quarter in our history by far.

Combination of factors are driving that.

We are spending a lot more money on advertising.

We have become more price aggressive with more free this and free that.

And we've also put a lot more focus on operational perspective on driving deposit accounts based on the strategic analysis we shared with you last time.

Non-deposit fees and commissions which are primarily bank card and debit card were up 26.4% first to first.

Investment banking and brokerage was up 13.7% first to first.

Capital markets did well.

Our Scott and Stringfellow retail brokerage operation did very well.

While investment banking in brokerage is variable from quarter to quarter, we feel like the revenue rates that we're getting in our investment banking business are sustainable with ups and downs but sustainable for the rest of this year.

We have invested very heavily in human resources in the investment banking business.

Trust revenues were up 2% which pretty flat reflecting the fact the stock market hadn't done that well which drives a lot of your trust revenue business.

Mortgage banking was interesting.

If you take out mortgage servicing rights, mortgage banking first to first is up 43% including mortgage servicing rights, 5.3%.

But what's interesting in the mortgage banking business is we've had some really strong results from our commercial mortgage operation that we don't talk a lot about.

We own a company called Laureate Capital.

We do a lot of construction lending and Laureate Capital takes those construction loans to the permanent market and with rates rising a lot more, people have been interested in doing that.

Our revenue from Laureate Capital in the first quarter was $8.4 million which is essentially double a year ago.

Our commercial mortgage servicing portfolio has now grown to $8.3 billion and it is up 23.5% from a year ago.

So our commercial mortgage business is doing very well.

Residential mortgage originations were essentially flat compared to last year but the mix improved as we did more home purchases versus refinance.

So our home purchase business is actually up pretty substantially and in both quarters, we did a total of about $2.3 billion in originations.

Net revenue growth was, fourth to first was down, again a seasonal factor but looking first to first, and taking out your non-recurring items, purchases and mortgage servicing rights, looking at core net revenue growth was 9% which is very good.

The income ratio continued to improve last year in the first quarter was 36.8.

It was 39.7 this first quarter.

Non-interest expenses, we did have an improvement relative to the fourth quarter.

Down 2.7% annualized but we're up 10.1% first to first and Chris is going to give you some insight on that.

I just wanted to talk about two things in relation to expenses.

One, we are investing very heavily in people to drive revenue.

We're getting some results from that.

The second item we just talk a little bit about equity comp expense which is not actually that we took out equity comp, the 10% rate but it is in the expense category.

Our equity comp expense was 16.4 million after tax.

It was really more than we expected in the first quarter.

And the reason for that is about 50% of our total equity comp expense occurred in the first quarter, basically because of changing how FASB interpreted how you expense equity comp in that anybody that's qualified for early retirement, i.e., in our case, 55 years or older, you have to expense the whole equity comp in the first quarter when you issue your stock options and restricted stock.

In the past, that expense was amortized over the vesting period, i.e., in our case, five years.

So you really caught -- in a lot of your people to get stock option restrictions are older people and will qualify for early retirement.

So you get a heavy front end load of your stock option restricted stock expense in the first quarter and again, almost 50% of the total expense for the year if we captured in the first quarter.

Now you get that back obviously because once you've expensed it, then you won't be amortizing it over the next five years but it takes you five years to get it back and that's something we had not totally anticipated the effect of.

Let's talk a little bit about growth.

Very pleased with our loan growth numbers.

Annualized fourth to first and this is without purchasing add-back securitization although it is not much different between these and the GAAP numbers but there is a little difference.

Commercial loans grew 7.7%.

That's pretty healthy given the seasonality factor.

Sales finance was down 7.7%, direct retail up 4.1, revolving credit 2.8, mortgage 13.7, specialized lending 16.2.

Looking first to first, total loan growth on a GAAP basis was 10%.

You take out purchases and securitizations total was 10.3.

Commercial up 9.3, very healthy.

Sales finance 2.2, direct retail 6.2, revolving credit 5.2, mortgage 19.2, and specialized lending 21.6%.

Couple of comments about that.

Our commercial lending business seems pretty strong and pretty healthy.

Continuing to have pretty good demand in that area.

Direct retail is weak.

We're seeing as interest rates rise and people face higher costs on their home equity loans, less willingness to borrow and so direct retail has slowed considerably.

Sales finance is an interesting story.

We've been very optimistic about sales finance and still remain optimistic.

We are moving market share in that business but we're -- we do a lot of domestic cars in our sales finance business and domestic car sales are very weak and so even though we're moving market share, our sales finance growth has been disappointing because the sale of cars has been so disappointing for the domestic manufacturers.

We -- our mortgage growth, it has been pretty strong.

We do portfolio ARMS.

We have traditionally maintained 18% to 20% of our loan portfolio in mortgages.

They're very low-risk products with practically no credit risk in them.

And while people rising rates, mortgages answers over the long-term, that's been a very profitable product for us and diversified our risk.

We will start selling some our ARM production as we get close to that 20% of the total loan portfolio.

So mortgage loan growth will slow as we've been selling almost all of our fixed rate production but we'll be selling our ARMS also.

Our specialized lending businesses, while a relatively small part of our portfolio, are growing at a very healthy rate and are doing very well.

The risks of returns are extremely good in these businesses.

We're having a lot of success with our reasonable acceptance subprime automobile business and very healthy growth, Lendmark, our consumer finance operation, is doing well.

Buy and Street, which is our SBA lending arm, is doing well.

Sheffield, our power equipment and snowmobile business, is doing well.

Our specially-financed businesses are producing superior returns and growth rates right now.

Looking at deposit growth, we are very pleased and there is no purchase effect by the way in the positive numbers of the GAAP in the purchase -- without purchase numbers are the same.

First over first, non-interest bearing deposits grew 5%.

They were actually down from the fourth quarter which you would have expected with the seasonal factor.

However, non-interest bearing deposit growth has slowed from where we were -- the pace we were experiencing last year and the reason for that, we're seeing a lot of our clients move out of non-interest bearing accounts into interest bearing accounts as interest rates rise.

We're also seeing people reconnect cash management systems and treasury systems, et cetera, because of higher interest rates, so that is slowing somewhat our non-interest bearing deposit growth.

We are adding a lot of accounts, however, as I just described earlier.

That's reflected in our interest checking deposits have grown first to first, 14.9%.

And total deposit growth annualized link quarter fourth to first was 7% and considering the seasonal factor, that's a strong number, and total deposit growth first over first, 10.2%, very healthy growth rate.

Another piece of good news, our asset quality remains very strong.

Our non-performers continue to decline, although slightly, but they did decline from 300 million to 296 million.

A year ago they were 333 million.

At the end of the first quarter last year, non-performers as a percentage of assets were 0.33 to 0.27 now.

Chargeoffs for the quarter were 47.6 million.

They continued to improve compared to the past quarters and it is a percentage of average loan chargeoff of 0.26 compared to 0.37 in the fourth quarter, 0.28 a year ago.

If you take out our specialized lending businesses, our chargeoffs were only 0.13 compared to 0.17 a year ago so great chargeoff numbers.

We did provide equal to chargeoffs.

Our reserve at the end of the first quarter did decline some.

It declined from 2109 from 110 at the end of the fourth and 116 at the end of the first quarter last year.

That was basically driven by the fact we used pretty much mathematical miles.

There is some judgment but largely mathematical miles and they're all looking good in terms of the future credit quality.

Also, the ratio of our allowance for loan and lease losses to non-accrual loans has increased significantly from a year ago.

It was 3.14 to the end of the first quarter of 2006, 3.59.

So, the reserve simply reflects the risk in the portfolio.

Comment on credit quality.

I would say our credit quality remains excellent.

We are not seeing any evidence of deterioration.

There's no evidence in any of our numbers that quality's getting ready to deteriorate.

It probably can't get any better than this and it certainly could get worse.

But there's no evidence that it is it is getting worse but it won't get any better.

If the economy remains sound, we expect really good credit quality numbers for the rest of this year.

Also interesting to look at our long-term trends which we think are very good.

We do that in the context of the merger of equals which we did now 11 years ago, kind of a starting point for us.

Over that 11-year period, the compound annual growth rate and cash basis EPS as originally reported is 10.6% which is very, very healthy.

Let me change direction now and briefly comment on merger and acquisition activity.

As you know, we have two bank acquisitions in process, Main Street which is a $2.5 billion company headquartered in Atlanta.

It will take us to number five in Georgia and number five in the Atlanta market.

We expect to close the Main Street acquisition this quarter and convert it in September.

There is always the usual commotion around mergers but overall, things are going very well with the Main Street acquisition.

I think we will meet or exceed the kind of projections we used when we made that acquisition.

First Citizens is a $700 million bank in Cleveland, Tennessee.

We expect to close First Citizens actually in the third quarter.

We've had a little bit of a delay because we got a small divestiture and we got to go through that process that slows us down a little bit.

We think everything is working well and feel good about the First Citizen acquisition with the usual noise around mergers.

In regards to other acquisitions, we continue to look but frankly, community bank prices are simply too high.

I know some of you said that we're getting ready to do a whole bunch of acquisitions.

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

I'm not sure if we'll do anymore community bank acquisitions this year.

We might but we're certainly not going to do a lot of them unless prices change.

The prices are simply too high and we can't make them work.

So, while we're continuing to talk to people and we're optimistic we may do some more community bank acquisitions, we may not because of the pricing.

We do continue to look for non-bank deals, have had relatively little activity.

Again, it's around the pricing issues.

We are still looking for insurance agencies and hope to announce some of those.

Asset managers and consumer finance operations.

We did make an acquisition of FSB Financial which has been integrated with our regional acceptance of prime automobile lender which expands our scope in that business that we're doing very well in now.

Make a few comments on strategic focal areas.

Our main focus is really around revenue growth, and I think you see that in our numbers.

Really tremendous amount of energy going into revenue growth.

Part of that is the excellent execution of our sales system which we've had for a number of years.

But also it is reflected in a lot of investments that are showing some of our cost numbers.

For years, we basically built no de novo branches because we were doing lots of mergers and acquisitions.

We changed that about two years ago.

Last year, we started 50 de novos.

This year we'll start about 60 de novos.

That's not -- you're not seeing huge increase in our branch numbers because we're still continuing to close locations in kind of the third phase around First Virginia where we had two branches near each other but we couldn't find the right side to build one to replace them and we're still going through that process.

You'll see our branch numbers start picking up pretty soon.

If you look at the 50 plus 60, the 110 locations kind of in process, about 40 of them are in Florida.

One of our big focal areas has been the Atlanta market.

Atlanta is an interesting story.

About 18 months ago, we had 45 locations in Atlanta with a combination of Main Street and their own de novo expansion, we'll have 80 in Atlanta and two years after that, we'll probably have 100 locations in Atlanta which is a great market and we're doing really well there after a real tough start.

We really got the momentum in that market now.

Some our de novos are going into markets like the research triangle in North Carolina where we have a big sheer and have done very well, in fact, one of our most profitable markets.

But maybe we've under-invested in that market.

We're starting to put some more facilities in there.

We're adding a lot of producers in these growth markets since the increase in cost.

Some of them are business services people.

Some of them are financial services people.

And we're spending a lot more on advertising in our markets which fortunately has been extremely well-received so far.

You also remember we talked about the strategic study that we did with Dalton Company and kind of the redirection and a lot of that redirection was really focusing on the positive acquisition and we're seeing great performance there with the net new accounts of $49,000 and very healthy deposit growth rates and some very successful relationship building.

So that refocus on the positive has been a very good thing for us.

Let me share with you a few comments on future financial results.

I'll make the disclaimer and just reinforce what Tom said and say that anything I say about the future could easily be wrong.

I would say, however, that we really have healthy momentum going into the rest of this year.

Loan deposit growth numbers are certainly positive.

Fee income growth is healthy.

Credit quality is excellent.

We're very optimistic about the rest of 2006 assuming the economy stays healthy and nothing dramatic happens in the economy.

We are making substantial investments in the future, facilities, people, primarily focused on driving revenue growth, which will start paying back this year but mostly will pay back more in 2006 and 2007.

If you look at the first quarter results, and you get 10% loan growth, 10% deposit growth, 15% non-interest income growth and excellent credit quality, that's a pretty healthy combination and a really strong start to 2006.

With that said, let me turn it over to Chris for some more in-depth insight into several critical areas.

Thanks, John.

Good morning, everybody.

I would also like to extend a welcome to each one of you for joining the call.

As John just mentioned, we are really excited about the overall results of the first quarter and really feel like we're off to a great start.

As usual, just want to speak to you briefly about net interest income, margin, non-interest expenses, a little about taxes and capital.

First, looking at net interest income, based on operating earnings, if you look at link quarter, we generated 919 million in net interest income, 2.3% annualized decrease over link quarter adjusted for purchases, and had earning asset growth of 5.3% adjusted for purchases.

That was really driven by the fact that the first quarter had two less days compared to the fourth quarter.

Looking at year-to-date, maybe more fair comparison, you would see 919 million in net interest income, up 5.3% over prior year adjusted for purchases, and good solid earning asset growth at 9.4% adjusted for purchase acquisitions.

If you move into net interest margin, based on operating earnings, you can actually see that the margin has begun to stabilize during the first quarter as evidenced by the link quarter comparison.

John pointed out we were 382 in the first quarter flat with fourth.

Nice to see.

And if you look at first quarter '06 to prior year quarter, obviously we were down 13 basis points from 395 to 382.

Just a few comments about the margin.

We've continued to reduce our asset sensitivity and move to a more neutral position in anticipation of the Fed nearing the end of the tightening cycle.

As we've said many times in the past, we've got meaningful upside in the margin when the Fed does stop tightening as a result of the lag in the repricing of the variable portfolio, our loan portfolio, especially given the majority of the portfolio is variable rate priced.

Interest sensitivity, the loan portfolio overall is such that we should realize the majority of the repricing benefit beginning in three months and up to about a year after a rate increase.

You can see that -- you could see that our rate change -- you can see that the rate increases are beginning to flow through to the yields in the portfolio, especially seen in the consumer portfolio this past quarter.

Additionally, we've temporarily postponed reinvesting current cash flows in the non-investment portfolio given the flat yield curve, just not a lot of opportunity there.

Looking at the detail in the rates and yields, we are still experiencing a little spread compression.

If you look at link quarter, total earnings assets were up 26 basis points while interest bearing liabilities were up 29 so we got spread compression there of 3 basis points but I'll point out that is significantly less than what we've experienced in the last several quarters.

The majority of that is coming from -- continues to be driven by increase in other interest-bearing deposits which were up 51 basis points in the competitive pressures related to costs of the acquisition which was up 37 basis points.

If you look at a year-to-date basis, total earning assets were up 81 and total interest bearing liabilities up 112 basis points.

Little more characteristic of the spread compression we've been seeing which is down 31 basis points, again driven by other interest bearing and other borrowings.

Looking at our forecast for the balance of the year for the margin, it is really pretty much the same as I communicated at Investor Day in the middle of February. [ Inaudible ] continues to call for a relatively stable margin in the 385 to 390 range, projects a rate increase around midyear with a fairly flat curve thereafter.

We anticipate margin to remain around its current level in the second quarter and improve somewhat during the second half of the year assuming the Fed does, in fact, stop the tightening cycle around midyear.

Turning attention to non-interest expenses, we did experience, as John pointed out, higher than normal non-interest expense growth on a year-to-date basis but performed very well on a link quarter basis.

Update of our cost savings revenue enhancement initiatives, as you might remember, commented last that we had achieved 75 million in 2005 in the savings revenue enhancements and plan to achieve the balance, the remaining 100 million in -- by early '07 as originally planned, and we are on target to do that.

In fact, first quarter, we achieved 23 million in savings bringing our total savings revenue enhancements as of the end of March to just under 100 million.

As previously mentioned, the savings continue to be partly offset by increased costs such as regulatory, audit related, legal, increase in marketing for a new campaign that John commented on, and some consulting costs that we've used for various efficiency gain opportunities, as well as investments for the future such as de novo banking and additional sales staff which is consistent with our plan.

If you look at first the non-interest expense growth on an operating basis at year-to-date, we were up 10.1% and I think we ought to look a little bit at that detail.

If you look on a total non-interest expense line, after purchase acquisitions, we were up just under $76 million.

Two drivers of that -- personnel expense and other operating.

First looking at personnel, of the $76 million, that made up just under $63 million of the number and that was, 70% of that number fell in really three areas.

Increase in salaries due to adding an additional 1,484 FTEs, that's an after purchase number.

If you look on the press release, it would be more like 1,774.

Additional salaries related to FTEs, salary increases and incentive cost.

That makes up again about 70% of that $63 million increase.

The balance would be found in adding some new employees to senate programs, increasing targets in senate programs to remain competitive in the market, a small amount of staff relocation costs and additional Social Security taxes related to the hiring of the new FTEs.

Look at the second driver of the operating expense which makes up a little less than $12 million after purchases.

Almost all of the, about 85% of that number can be accounted for in an increase in professional services.

Again, such as legal fees, and several lawsuits that had some work and I see professional services and some consulting services.

Again, in every case, consultants were either helping us with regulatory matters or some efficiency gain opportunities which we'll come back to us in future quarters.

The small balance left would be found in advertising and marketing.

If you look at link core, which was much better, we saw a 2.7% annualized decrease adjusted for purchases and if you remember back to the fourth quarter call, we mentioned some expenses that were likely abnormal expenses in the quarter.

Now we're in fact experiencing the reduction of those expenses when we compare first quarter '06 back to fourth quarter '05, as we had thought we might see.

Looking at that in more detail, the total non-interest expense line after purchases is down just under $6 million which equates to that 2.7% reduction.

All of that can be accounted for really in one area and it is reduction of professional services comparing link quarter.

And it's items that are very similar to what we've already commented on.

Decreasing consulting expenses and also decrease in audit, accounting and legal.

That really accounts for reduction in the expense link core.

Looking to taxes, really not a lot to talk about there.

Continues to be no real changes in our income tax strategy.

Our effective tax rate did increase as we expected from 31.91% in the fourth quarter '05 to 32.63% first quarter of '06.

Going forward, we expect the effective tax rate to drift up to the low 33% range in the second quarter.

Look at capital.

Continue to maintain very strong capital positions.

Nothing really new to discuss there.

Equity assets were very solid, 10%.

Risk base capital tier one was at 9%.

Total capital at 14%.

And leverage capital which is really the one target that we pursue was at 7.01 and as you know, we continue to target leverage capital at the low end of the 7 to 8% range.

Look at share repurchases, in the fourth quarter, we repurchased 8.3 million shares at the cost of $334 million, average cost of about $40.20 a share.

We did push some of our share repurchases planned for the second quarter into the first quarter because we had some excess capital that we wanted to deploy so we did that in an accelerated share repurchase program so we did that some share repurchase activity.

Still plan to do for the full year in the 12 to 14 million share range.

Lastly, looking at second quarter dividend of $0.38, just wanted to point out that represents an 8.6% increase over the prior year quarter.

And so Dan, with that, that concludes my comments.

Chris, thank you.

Before we move to the question and answer segment of the call, I will remind you that we need to be conscientious of the others who have joined the call and I'll ask that you limit your questions to one primary inquiry and one follow-up and then if you still have questions, re-enter the queue but give others a chance to have an opportunity to participate also.

Now, Dan, if you'll join us.

I would appreciate your coming back on the line and explain how folks can participate in the Q&A segment.

Ladies and gentlemen, at this time, we'll be conducting a question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question will be coming from Jon Balkind of Fox-Pitt.

Good morning, guys.

Good morning, John.

Quick question on the insurance business.

The growth has been very strong and I know you mentioned market share and I'm wondering if you could give a little more color on who you're stealing share from.

Is it the regional local guys or the big guys, and then I guess part two to that question is I know McGris Siebels had a very good energy business which was probably Gulf-centric.

How much is that helping you from a rate perspective?

That's a good question.

I think we're stealing business on both fronts, from both the small and the large.

On the small front, frankly, we've got stronger relationships with the companies and we also had the [inaudible] coming out of our banking operations that's helping us move some market share there.

On the bigger front, I think some of the problems some of our larger competitors have had have opened some doors for us.

I know we're doing very well in the energy business but I don't really know how much of it is -- how much of the revenue growth is related to that.

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

Thank you very much, John.

Appreciate it.

Yes, sir.

As a reminder, ladies and gentlemen, if you do have a question, it is star one on your telephone keypad at this time.

Our next question is coming from David Stumpf of AG Edwards.

Good morning, John and Chris.

Good morning.

I just want to get a little clarification.

I want to make sure I understand how you're treating the charge or the cost I should say of SFAS 123R.

The 16.4 million which from an operating earnings perspective, you've excluded.

That, John, if I understood you, 50% of that or so is related to the change or the -- that we're seeing from a lot of banks anyway, the deduction of the new sort of interpretation for retirement eligible employees, is that correct?

What I actually said, David, I understand how this is confusing.

What I said is the 16.4 is about half of what our total year cost will be.

Oh, okay.

Does that make sense?

That does.

That helps a little bit.

We had -- this is a before tax number, about $18 million in before tax inquiries in equity comp expense because of the retirement treatment, the change in retirement treatment.

Okay.

So will you continue -- so is this just a one -- the portion you're excluding, is this a one-time exclusion?

You're not going to exclude equity-based compensation expense from operating numbers all year long, are you?

The only thing would be getting our history right.

We wanted to be sure everybody got history right so if the consensus is we shouldn't exclude it, we won't.

But we thought it was very confusing to get the growth rate right because of the change in the accounting treatment.

Okay.

David, I think the thought was to do it this year and then next year, include it.

I see what you're saying.

So we have fair comparison this year and once we get it all in, fully loaded the numbers, then next year, we would include it and have a fair comparison.

Okay.

I understand.

Thanks a lot.

Yes, sir.

Our next question is coming from Kevin Fitzsimmons of Sandler O'Neill.

Good morning, guys.

Good morning.

Could you just give a little more detail on your -- you referred to the opportunity for the margin to expand once the Fed has stopped and I think you referred to the catch up on the loan side.

What kind of magnitude would something like that be, especially as you're getting more to a neutral position?

What kind of upside to the margin could we expect over a half year period?

I think the way I would answer that, Kevin, is you could expect to see us for full year, kind of be flat with '05.

We finished '05, I think in the 488, 489, I mean 388, 389 range.

So it should be enough to get us in that 385 to 390 range we gave you which would keep us flat with '05.

Several things going on.

You've got -- you're seeing the consumer portfolio a little bit of benefit now because the repricing occurs in the first day of the subsequent month of a change depending on their statement cycle.

Commercial loans does not necessarily work that way.

You have some that changes on the first of the month but you have equally as much or more that changes 90 days out and if you catch it early, it really could be more like four months out.

And then you get about 50% of the increase then and then you pick up more inquiries for the next nine months or so up to a year, the way the sensitivity works.

At the end of the year, we'll get about 60% of that increase back.

So it is kind of like a gift that keeps on giving in a small way until you get far enough out that you've been able to sort of make up for these number of increases.

It really needs to stop.

The tightening just needs to stop to help us.

And that occurs to some extent whether we have spread built in the yield curve or not.

Of course, we get spread all the better that, helps you everywhere else in your lending business and in the investment portfolio and the like.

Does that kind of help?

Yes.

That's very helpful.

But also, on the subject of the margin, can you address the funding side?

A lot of companies this quarter have been really saying that they're being helped by lagging the deposit rate increases and kind of hinting that that ability to do that is kind of waning at this point and has that helped your margin this quarter and how do you look at it going forward?

Yes, I mean I think if you look at just outright compression for just kind of spread compression based on -- you ask the question of price, the last couple of quarters, we've had in that 30 basis point range of compression.

Well, this quarter it was 29.

But if you look -- kind of -- you look at link, excuse me, that was for common.

Link quarter, as I pointed out, compression overall was about three basis points.

So it was a little less this quarter.

But we also had a -- I think, a very positive event.

If you looked at our funding, we funded loan growth through retail deposits from quarter to quarter on an average basis and really have been able to rely less on wholesale funding.

So yes, it helps somewhat but we're -- as John said, have very focused on funding our loan growth with retail deposits and to the extent that we have maybe had few more promotions than we typically would.

We probably spent some of that savings back, if you will, to grow the deposit base to keep up with loan growth.

Okay, great.

Thanks, guys.

Thank you.

Our next question is coming from Tony Davis of Ryan Beck.

Please proceed with your question.

Good morning.

Just a follow-up on this compensation issue again one more time, Chris.

What is a reasonable growth rate looking for the rest of the year in head count and expenses off the current base, Chris?

Our core expenses that we were looking at bank wide was in that 5 to 6% range.

And I would also -- I don't have the FTE plan in front of me, I don't believe.

Maybe I could just restate it.

You've added 1,400 people over the last year or so.

Where are you, I guess, in gearing up in this additional staff of the new markets?

Well, in the fee income lines, I think we're for the most part there, to the extent we're adding de novo branches in the network.

Certainly you have to staff those.

Right.

And as you build more infrastructure, for example, in an Atlanta, we pretty much have a full complement of staff.

As we add more branches, it will not require a lot of additional fee income, just people for the branches.

I wouldn't see a huge spike but you are going to have some level of increase.

I don't know, John, if you've got any better insight to that or Paul?

I think the growth rate in the number of people will slow significantly.

And as Chris said, excluding the change in equity comp, we had a goal of 5 to 6% for core expenses this year and we hope to be on that goal before the year is over.

I think what -- in fairness, what we call it here from first quarter '05 to '06 is part of the ramp-up that's been required to kind of get some of these facilities open.

Even though we're not showing large numbers, as John said, we are closing some so we're opening more new ones than that shows.

So I think we've gotten some of the ramp-up.

I would not see that kind of FTE growth going forward from that level.

Okay.

That's helpful.

Thanks.

Our next question is coming from Gary Townsend of Friedman, Billings, Ramsey.

Good morning, John and Chris.

Could you talk about you're re-emphasizing deposits and just -- if you could discuss the almost cultural change going on in your Company in order to really affect that on the ground and in the branches.

That's a good question, Gary.

You may remember that we went through a major strategic analysis last fall that showed disproportionate percentage of our economic profit was coming from deposits.

We knew deposits were profitable.

We didn't realize quite how profitable they were.

We began by communicating that to our senior leadership team.

Then we started changing everybody's goals pretty dramatically in terms of their financial incentives to reflect higher goals for deposit growth and higher incentives based on deposit growth.

We simultaneously made it possible by changing our pricing strategy because we had not gone to free checking and everybody else had.

We had not gone to free lots of stuff.

We really matched up more with the market in terms of pricing and simultaneously put more advertising behind it.

We have a very good sales culture we've had for a long period of time and we can, through our incentive programs, can change direction reasonably rapidly because of the way the incentive system works.

So I'm not sure on the commercial side we've gotten quite as far as we would like to although we are having pretty nice net growth in commercial accounts now.

But on the retail side, we've really got the effort and energy and cultural focus on the deposits that we need.

You can always get better but I think we've already turned the ship pretty quick on the retail side.

I don't know that we can keep up these net new account numbers because they're pretty strong.

But I think we'll continue to have very healthy growth rates.

And you mentioned, too, I guess this makes perfect sense, but you had corporate customers that effectively dropped out of cash management when rates were very low.

Now they're buying it again?

Yes.

Can you put some dimension as to what that might mean to the bottom line?

I don't really know the numbers, Gary.

What you're -- what happens to you in a rising rate market, of course, people are getting -- they're getting higher payment on deposits they keep.

Therefore they offset more of their service charges so there's less motivation to keep deposits.

Also they're foregoing the interest income they could get if they moved into a -- some kind of interest-based account so they do gear back up the cash management system but you do charge them for the cash management system.

You have a fee for that kind of service so it helps your service charge revenues even though your deposits go down.

Net net it's probably a slight negative because they're going to outsmart you but they're going to manage very closely for their optimum advantage in that kind of environment.

But it is not a huge negative because you are getting the return from the service charges on the cash management product itself.

Thank you.

Yes, sir.

Our next question is coming from Christopher Marinac of Fig Partners.

Please proceed with your question.

Thanks.

Good morning, John and Chris.

Chris, I wanted to ask you about the amount of the loan that renew in the next 12 months.

I figure it was around 50% at year end.

Would that have been materially different at the end of March?

Well, no, what I was speaking of was the sensitivity kind of on an ongoing basis.

In about 90 days, about half and some of those are fixed rates that just come due.

It is just speaking to repricing.

And then a year out, that 50% only goes to 60 so my point is you get most of it in the first 90 days just the way the sensitivity works but you do get more as you go out a year.

You'll even get some after a year.

But I just didn't comment on that because you're getting 2/3 of it or so in a 12-month period.

I would not think that had changed any, Chris.

I don't think we've extended the pricing.

It wouldn't be any different.

No.

The only thing that's changed slightly is our fixed rate component.

But it is growing fairly slowly.

Okay.

Great.

Thanks.

As my follow-up, John, on the M&A front, do you have any sense on any break in pricing compared to what you've seen the last quarter or even going back a couple of years?

That's a great question.

I mean the problem is the market prices.

It is not so much that the companies aren't interested in selling.

They have so much higher expectations.

When you run the numbers, you can't even pay what the market price is and a lot of times you can't pay it with 40% and 50% cost savings.

So, it is just really -- I don't know why community bank prices are so high.

It doesn't make any economic sense to me.

Of course, you've got small banks buying small banks.

I guess people think they're doing well.

Everybody is trading monopoly money.

That's why I don't think you're seeing many larger banks buy small banks because it just doesn't work.

And in some cases, not because management isn't interested in selling frankly.

They just obviously want a big premium but -- and you just can't make it.

You can't even match the market price in many cases.

Great.

Thanks.

Our next question is coming from Theodore Kovaleff of Sky Capital.

Please proceed with your question.

Yes.

I'm interested in knowing roughly, the cost of your de novo branches and how long it takes for them to get to a break even?

Good question.

Costs obviously varies by market but I would say they average $2 to $3 million a piece and some are more than that.

And our break even, just break even profit, runs between two and three years in terms of our projections.

Now we have been really focusing, since we weren't in the de novo business until recently, on following the de novos that we have been starting the last 12 months.

We have been in Atlanta.

We've been running a pilot with a lot of advertising promotion and focus on management support and we've been able to break even those new de novos in 12 months.

I don't know if we can keep doing that but if we can keep doing that, obviously that makes the de novo dilution a lot less.

But typically, they run 24 to 36 months to break if you really load in all of the costs and count it right to break even.

But we've been able to drive faster growth rates and quicker payback when we've really, really focused on the de novos.

Very good.

Yes, sir.

Thank you.

Our next question is coming from Nancy Bush of NAB Research.

Please proceed with your question.

Good morning, guys.

John, this is a question for you.

You mentioned specialized lending as one of the areas that you would be interested in acquiring in and that's a little bit of a contrarian stance right now.

We are beginning to see some stress in some of these specialized lending businesses.

I'm just wondering as these things come on the market if perhaps they've got a few dings and dents in them, if that's something that you're sort of willing to take a chance on.

In other words, if there are higher losses or higher non-performers in some of these businesses, if that's something you're willing to absorb or if that would have to be priced out?

Nancy, we've traditionally not bought things that we thought were broke.

We bought things that were doing mediocre and tried to make them better and so if we found a subprime lender that had some real problems and we're really tough on due diligence, we would pass.

If they weren't the highest performer but we didn't see significant problems, we would look at some of those kind of operations.

So, but we won't buy anything that we view as broke.

It is just not what we like to do.

Would you include subprime mortgage in that classification?

We would look at subprime mortgage but frankly, one of the problems of subprime mortgage, a lot of the issues we run into there is compliance.

And we're very meticulous -- we don't want to get into any reputational risks around any of these businesses.

We've looked at a number of subprime mortgage buys and we -- it wasn't economics.

It was just that they weren't doing the compliant stuff that we think you have to do and we backed away.

If we could find somebody that had the compliance standards that we had, then we would certainly look at them.

We're not opposed to looking at them.

I would say we've looked at a number of them and walked away ourselves over non-economic issues, over just we don't want to have a reputational risk buying into that business.

Great.

Thank you.

Yes, ma'am.

Our next question is coming from David Pringle of Hoefer and [inaudible].

Please proceed with your question.

That's Hoefer and Arnett.

Good morning.

I'm looking at the three charges in the quarter which would be the gain on the facility sale, the one-time123R and the merger-related.

If I look at the income statement, I can pick up the equity-based compensation and the merger related which would put your sort of run rate for expenses more to roughly an 800 million a quarter number.

Is that a way to look at it?

I'm not sure.

Chris, can you help me a little bit?

Well, right.

You essentially printed 819 million of expenses in the first quarter.

Right.

If you take out the 26 and the merger-related, it sort of gets you to an 800 million.

Is that the run rate that we can work off of going forward for the rest of '06?

I see what you're asking.

You know, what you don't -- while this quarter was not as seasonal as most first quarters have been, it still is more seasonal than our future quarters will be with respect to our non-banking subs so you could have as insurance proliferates throughout the balance of the year, you would have more incentive comp in there.

So it is possible that you could have a little additional bump but I think that's a good starting point.

I think that's a good starting point.

I would hope our revenue would drive -- I would go back to that 5 to 6% core expense growth rate that we talked about earlier which really takes -- that's kind of an all end number for us.

One thing, the equity based comp will decline significantly relative to the first quarter but it won't go to zero.

What should that run on a quarterly basis going forward?

The 26 million is about half.

So another 26, 27 million.

Divided by 3/4.

So, it is another 8 million.

Yes.

And then the 18 million in the after tax gain on the facilities was how much pretax?

28.2.

Where did that come in?

For the income statement?

Non-interest expense on that item, 171.3.

The 819 number.

So that was a credit to an expense.

So both of them flowed through the non-interest expense line.

Okay.

Because that's where the gains and losses are.

So do you go back to a 200 plus million non-interest expense level?

That was where -- essentially what happened from the third, fourth quarter to the first quarter was that you went from roughly 200 million of other interest, non-interest expense, to 171 and it should bounce back up to 200?

It certainly looked like the last three quarters have been in that range.

Our next question is coming from David West of Davenport and Company.

Please proceed with your question.

Good morning.

I was wondering if you could discuss a little bit about your loan trends.

You've seen very good growth across the franchise.

But are there any particular regions that are particularly standing out?

Then I'll ask my follow-up or adjunct to that.

Your Carolina franchises for a while lagged economically.

Are you starting to see some economic improvement there?

Yes, that's a good question, David.

A lot of the growth is across the whole franchise.

We're having particularly strong success in places like Atlanta.

North Florida, where we did a merger years ago, but it hadn't been affected recently by a merger, we're doing very well.

East Tennessee, where we did a merger several years ago, is doing very well.

But our core markets are also experiencing a stronger growth than they had for a while.

The economy is picking up across the whole footprint.

We've had some transition out of textiles into actually better jobs.

Still going on in some of the smaller towns but we've got an in-migration of industry out of the northeast, midwest and west coast into the southeast because of better labor pricing of the unions.

And so we're seeing -- I would say relatively low unemployment rates in most of our core footprint now and improving economies.

In places like West Virginia, of course, are really doing well relative to what they traditionally did because the coal business is really driving the economy there.

So it is pretty much systemwide.

But a lot of it, the Atlantas and North Florida is doing particularly well.

Thank you.

Yes, sir.

Our next question will be coming from from Jefferson Harralson of KBW.

Thanks.

The $77 million left in your efficiency program from last year, what types of projects are underway?

Or have already begun that's going to generate that savings and/or revenue enhancement?

Good question, Jefferson.

Some of those are continuations of what has started such as vendor management which we have gotten some benefit out of frankly not even trying real hard.

We kind of geared up with a more in-depth process and we really expect that to help us in a pretty big way going forward.

Facilities is an area that, for example, this sale that we saw here, this duplicate facility, was prompted out of this cost savings process.

It was kind of identified through that process that we implemented.

But we've gotten most of -- most of those -- I won't say all but most of those out.

Going forward, we've got some things like printers which sounds simple and mundane but printer consolidation projects which we think is worth a $2 million.

We've got a teller staffing optimization project which has a lot of potential up to the $20 million kind of range.

And you've got call center potential although we're just kind of beginning to get into that in detail.

Some of these that were more meaty have taken more time and we've postponed.

We'll get some back end benefit from.

But some of the ones we implemented up-front continue to pay dividends.

Another that I did not mention was legal.

It is real simple.

When we can do it cheaper in house as opposed to paying outside legal fees and we've got a kind of process we go through, we hire attorneys.

So we have in our plan to hire a number of attorneys this year to drive our legal costs down.

So those are some thoughts.

As I recall, when the project started, it seemed like the expense savings pieces of it were up-front and the revenue pieces were coming later.

Are there things on the revenue side that should come to fruition with the back half of this year or later?

Yes, it was mostly expense.

But we are seeing revenue pick up a little.

We in fact, are.

In fact, this number that I mentioned a minute ago, the 23, of that, this quarter, I'll say month but quarter, about 6, 7 million of that is revenue for the quarter.

So it is beginning to pick up.

But it is still going to be mostly an expense savings mantra.

Can you just give me -- if you have it, the ending balance level of specialized lending balances and thanks a lot, I appreciate it.

Yes.

Total balance, is that what you're looking for?

Yes.

It is about, the total loan portfolio is about 3 billion.

All right.

That's perfect.

Thank you.

We show no further questions in the queue at this time.

I'll turn the floor back over to management for any further comments.

Okay, thank you, Dan.

Thanks to all of you who have participated in our call this morning.

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

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.