Truist Financial Corp (TFC) 2006 Q2 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the BB&T second quarter 2006 earnings conference call. [OPERATOR INSTRUCTIONS] It's 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, Jan and thanks to all of our listeners for joining.

This call is being broadcast on the internet and our web site BB&T.com/investor.

Whether your 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 second quarter of 2006, and also providing a few comments looking ahead.

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

As we customarily do, let me make a few preliminary comments before the content of the call begins.

BB&T does not make predictions or forecasts.

There maybe some statements made during the course of this call that express management's intentions, beliefs or expectations and of course, BB&T's actual results may differ materially from those contemplated by these forward-looking statements.

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

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

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

Thank you, Tom, and good morning.

I thank you all of you for joining us.

The areas I would like to discuss to give you an overview on the financial results of the second quarter and year-to-date, update you on our merger and acquisition activity, discuss how we are doing on a few of our key strategic objectives, share with you a few thoughts about the future and then Chris will give you some more in depth analysis of several areas and then we will have time for questions.

We were pleased with the first quarter results.

In terms of looking at GAAP earnings versus operating earnings, we did have $7.2 million that we changed or deducted from GAAP earnings, or GAAP expenses related to equity compensation.

Of that about $1 million was also merger-related expenses.

Last year, we had about $26 million in nonrecurring lease adjustments, which obviously impacts the calculations of the percentage changes.

GAAP net income for the second quarter was $429 million, up 10.9%.

Operating earnings for the quarter were $436 million up 5.6%.

GAAP diluted EPS, the second quarter was $0.79 or 12.9%.

Operating diluted EPS, the second quarter by our method was $0.81, up 80%.

The consensus estimate was $0.80.

I don't know whether the consensus had equity comp in it or not.

Equity comp is a little more than a $0.01, so we were either a $0.01 over the consensus if you take the equity comp out or right on top of the consensus if you count the equity comp as ordinary expenses.

Our cash basis EPS was $0.84, up 6.3% compared to the same quarter last year, and 9.8% annualized compared to the first quarter of this year.

We are very pleased with the returns.

We had a 156 ROA, a 1560 ROE, and on a cash basis a 170 ROA and 2896 ROE.

We think it's helpful to look at the 6 month results, because we did have some very positives in the first that didn't fall into the second.

So the 6 months is a good way to look at our results.

Our GAAP net income for the first 6 months was 860 million, up 10%.

Operating earnings 864 million, up 7.1%.

GAAP diluted EPS was $1.59, up 12%.

Operating EPS was $1.59, up 8.9%.

Cash basis EPS for the 6 months was $1.66, up 7.8%.

The returns for the 6 months are similar to those for the quarter, 157 ROA, 1559 ROE, a cash ROA of 172 and a cash ROE of 2869.

If you look at the factors driving the earnings by far the biggest challenge we have is in our margin.

Our margin declined from 389 the first quarter to 376 in the second quarter, down 6 basis points and was down from 392 in the second quarter of 2005.

Chris is going to give you some insight into what happened to the margins and what our expectations are going forward.

We were very pleased with non-interest income growth, annualized first to second, and taking out purchase acquisitions.

Non-interest income grew 20.9%.

Second to second up 8.3% and year-to-date, up 10.6%.

So very healthy growth rate if you look at some of the key components of that and again, taking out purchase acquisitions we really had some strong results in the insurance.

Our insurance commission, second to second was up 14.7%, annualized link up 80.5%.

That's a seasonal factor.

Year-to-date up 11.9%.

Basically the numbers I see -- I haven't seen all the second quarter numbers but basically the numbers I have seen, we are growing a good bit faster than the industry.

It's pretty strong evidence that we are moving market share in our insurance business.

Service charge on deposit accounts, second to second were actually down 1.3% but we did have very healthy first to second annualized growth rate of 18.8%.

Year-to-date up 3.3%.

You compare this year to last year, and we have many more free checking accounts which is one reason that we weren't getting any growth year-to-year and we also have had a rise in the earnings credit, which impacts the service charges on commercial accounts.

On the other hand, we had nice growth first to second and that's primarily because we have been adding a lot of new accounts and are getting more in excess volumes out of those accounts.

A net new transaction account for the quarter we had 35,000, which took us to 84,000 year-to-date.

We didn't have quite as big a number in the second quarter.

We had some special things happen in the first quarter, but we are very pleased with the growth rate in those net new transaction accounts.

Non deposit fees and commissions, which are primarily our bank card and debit card are very strong growth.

Second to second 21.3%, first to second annualized 36.6%.

Year-to-date 23.6%.

Really pleased with the growth rate in those categories.

Investment banking and brokerage second to second was actually down 6.5%, down first to second 15.2%, year-to-date up only 2.8%.

We did not have any large transactions in the second quarter.

Last year in the second quarter we had some large transaction.

We had the large transactions in the first quarter this year, so the comparisons didn't work out too well.

We do have a number of large transactions in process, that we expected, and we are optimistic will close in the third quarter and some in the fourth quarter and we expect going forward that we'll have a healthier growth rate in investment banking and brokerage revenues.

Obviously, the volumes in that business are dependent on specific transaction.

Trust revenue growth, second to second, 2.8%. annualized length, 7.8%, year-to-date 2.4%.

Still need for the stock market to be more positive to drive trust revenues.

Mortgage banking income taking out mortgage servicing rights, second to second up 14.7%, first to second down 40% but year-to-date up 26.9%, in the mortgage banking business.

Our residential mortgage originations in the second quarter of 2006 were 2.7 billion which was almost exactly the same amount as in the second quarter 2005, which is also $2.7 billion.

Commercial mortgage have been very strong.

Laureate Cap our commercial mortgage subsidiary were seeing a lot of commercial real estate go to fixed rates, as the yield curve has gone inverted in the the short-term costs [inaudible] going to long-term.

Commercial mortgage second to second was up 55%.

For the first 6 months, revenues in commercial mortgages were up over 100%.

Our commercial servicing portfolio has increased from $7 billion to $8.6 billion, a 22% increase.

So very -- doing very well in the commercial mortgage business.

Net revenue growth, annualized first to second was 10.1%, some of the best growth we've had in a while.

Second to second is 4.8% and year-to-date 6.5% and that's despite the fact that we are having a real depression in our margin.

Fee income ratio went over 40% at 40.8% compared to 39.8% in the second quarter last year.

That's been one of our goals.

We would like to have gotten there just by fee income going up not by the margin pressure we've had on the lending business side.

Non interest expenses, annualized first to second 9.8%.

Second to second 6.2%, year-to-date 8.1%.

Chris is going to give you some more insight into that.

I would just note that we have been making a lot of investments to the future, additional producers and new branch locations and in our marketing program.

Looking at loan growth, we were overall pleased.

I would note if you look at the GAAP numbers, there's a purchase accounting from main stream, basically one month in those numbers.

On a GAAP basis, annualized first to second, total loan growth was 13.5%; however, if you take out purchase accounting, average loan growth first to second was 9.6%.

Commercial grew 7.5%, sales finance 2%, direct retail 5%, and bottom credit was actually down 2.6%.

Mortgage was strong at 18.6%, specialized lending was very strong at 34.9%.

Second to second, you get some of the same kind of numbers.

Again, taking out purchase accounting, total loan growth was 9.9%.

Commercial was 8.5%, which was a little more than we had on the first to second basis.

Sale finance 2/3, revolving credit, 5.3, excuse me, direct retail 5.3, revolving credit 4.8.

You also had the strong mortgage growth at 19.2%, and specialized lending at 23.3%.

Year-to-date, total loan growth without purchase accounting is also right at the 10% level and the growth rates are similar.

If you look at what happened in the second quarter, we did have some slowing in commercial loan growth, primarily driven by a little weaker demand in commercial real estate as the housing market has slowed some.

And particularly, the amount of new activity has slowed down.

Retail continued to be slower than it had been for a period of time.

We are seeing people being cautious, because of higher rates for home equity lines and a number of people switching from home equity lines to fixed rates, even second mortgages which does not necessarily impact the volume but does impact the profitability of that product.

Revolving credit is an interesting story.

We are getting huge transaction volumes on our credit cards.

A lot of people have started using credit cards, particularly in our niche which is high-quality clients, as a purchase mechanism and then they pay off the balances at the end of the cycle, so they don't have to pay any interest.

Sales finance is -- I don't know kind of mixed news.

Our numbers show we are actually gaining market share but the new car business has been so weak, we are not getting any healthy growth there.

Our mortgage growth has been strong, as has specialized lending.

So we have the least risky and our the most risky business are having healthy growth rates.

We will be securitizing some of our ARMs.

We traditionally have portfolio ARMs, we will be securitizing some of our ARMs going forward and so we'll probably have a little slower mortgage growth rate.

Our specialized lending businesses are doing extremely well with high returns and very low charge-off relative to the typical loss ratios in the -- in those businesses.

So we'll keep growing those businesses because they are producing excellent results.

Overall, we were very pleased with the loan growth.

Deposit growth was also another good story.

Deposit second to second, if you take out purchase acquisitions of 2.5%, annualized link quarter, 7.7%, and year-to-date 3.7%.

Interest checking was very interesting.

Without purchase acquisition, interest checking second to second was up 16.4%, annualized link 49.7%, year-to-date 15.1%.

We're seeing a lot of people switch into interest checking, as interest rates go up.

Our total deposit growth, second to second again, without purchase acquisitions, 8.6%, annualized link 4.4%.

Year-to-date 9.3%.

What's more interesting, if you just look at client deposits, if you take out Cayman deposits and broker deposits, which we aren't growing because we don't need too because we are getting such strong growth in the client deposits.

Our client deposits grew, second to second , 10.2%, first to second link annualized, 15.6%, and year-to-date 8.6%.

So we're having very healthy deposit growth, along with healthy loan growth.

Another key area, of course, is asset quality and the good news our asset quality remains excellent.

Non-performers in dollars increased slightly from the first to second quarter from 396 to 319 million; however, that was totally because of adding the non-performers from main street.

Remember, you don't restate in the purchase acquisitions now, main street had $26.8 million in non-performers.

If you take out the main street numbers, BB&T non-performers actually declined $3 million.

So excluding the main street acquisition, our non-performers continued to decline, which we are very encouraged about.

Our charge-off numbers were excellent.

Charge-offs were 45 million in the second quarter which is actually down from about 48 million in the first quarter, flat with last year, 45 million as a percentage of loan charge-offs were 0.23, which was down from the first quarter, 0.26.

I don't ever remember when we had a better second quarter than the first quarter.

You usually clean up at year end.

The second quarter last year was 0.25 and if you take out our sub prime lending business or our specialized lending businesses.

The charge-offs are only 0.12.

That's down from the first quarter 0.13 and down form the second quarter last year, 0.16.

So excellent directions there.

Year-to-date charge-offs have been 0.24, compared to 0.27 last year.

And taking out specialized lending charge-offs, 0.13 compared to 0.16 last year so excellent numbers.

We did provision more than we charged off.

We provisioned about approximately 58 million, and charged-off a little over 45 million.

So we had a net increase in the provision of about 12 million.

You can -- you can carry that.

If you want to look at operating earnings you can compare that to the equity compensation expenses.

They were about the same numbers and offset each other.

Year-to-date, our provision for credit losses was 105 million, we charged-off 93 million and as of year-to-date added 12 million to the reserve.

The reserves at the end of the quarter did decline slightly from 109 to 108, it had been 113 last year; however, if you look at the reserve to non-accrual loans, it continued to increase.

End of the second quarter last year was 351 and end of the first quarter was 359 and end of the second quarter 363.

So in relation to the problem with credits we actually increased our reserve.

Our credit quality remains excellent.

We are really not seeing any signs of deterioration.

All of our forward earnings, our forward loss projections are encouraging at this point.

It's certainly unlikely to get any better.

At some point, it may get worse but we are not seeing any evidence of it getting worse right now.

We also would like to take a look at the long-term trends and we -- we have always evaluated ourself against our merger vehicles now, 11.5 years ago, but over that 11.5 year period the compound ending growth rate in originally reported cash basis EPS has been 10.6% which is a good number for that long period of time.

Let me change direction from talking about our financials and briefly discuss mergers and acquisitions.

We did close the main street acquisition $2.5 billion in Atlanta which took us to number 5 in the market share in Georgia and number 5 in Atlanta.

Overall, the acquisition is going well.

We have lost a few people.

We have the normal commotion you have around any kind of merger, but I'm confident we'll accomplish our financial objectives over the next several years.

We've got a target for a systems conversion in September and that appears to be doing very well.

The other merger process is First Citizens a $708 million company in Cleveland, Tennessee.

We got regulatory and shareholder approval.

We expect to close that in early August and convert in November.

Overall, that's going well too although we have the usual challenges around people, but I think that merger is going very, very well.

Looking at other banking and thrift acquisitions going forward, we're still looking but we really don't expect much activity, frankly.

We have looked at some of these recent deals, in fact, people have contacted us, and our pricing is dramatically below what some of these transactions are being done at.

We don't know how you can make them work at the prices that people are paying for acquisitions.

So I don't know that we won't do anything, but I don't expect to do any of our typical community bank acquisitions until the pricing gets more in line.

We just simply can't make them work from an economic perspective.

We do continue to look for non-bank acquisitions.

We are looking at insurance, asset management, consumer and commercial financing.

And I do expect to announce some of the typical kind of deals that we have been doing in that area.

Let's talk a little bit about our strategical focal areas, with a lot less energy devoted on M&A.

We have been able to crank up our energy on organic growth, which is reflected in some of these numbers.

Partly a lot of that is redirected at deposit growth from the strategic study that we mentioned the last time.

In a broader context to drive organic revenue growth, we had four focal areas.

The first has been improving the excellent execution of our BB&T [inaudible] our traditional sales system and our new markets and we are starting to get some pay back and better sales results in the new markets from that effort.

We are investing pretty heavily in branch distribution.

We went through about a 10 year period where we were doing lots of mergers and acquisitions, we actually closed about 500 locations, overlapping in those mergers and improves our efficiency but closing stores is not in the way to drive revenue, about 2 years ago, we got redirected and last year, we started 50 Denovo locations.

We are going to start about 60 this year and we'll probably start 60 next year.

Of the 50 plus 60 to the ones we did this year and last year, of 110 about 40 are in Florida with the focus on the Jacksonville, Orlando, and Tampa/St.

Pete markets.

Also we are focused on Atlanta, with an interesting -- with the main street acquisition, and our own Denovo investment, we'll go from 45 to about 80 locations in Atlanta in about 18 months.

We are investing in places like metro D.C. and places like Raleigh and Charlotte, where we already have distribution but the markets are continuing to grow.

We are able to afford this investment because we already have the infrastructure in place and the marginal cost is fairly low.

We are developing an excellent opening process, and we're following each one of the Denovos very carefully and so far the results are very encouraging.

We are ahead of our projections.

In the second quarter, you might have noted that our branch locations went from 1409 to 1443, up 34 locations, 24 of those came out of main street.

We actually opened 16 Denovos but we closed 6 other locations as we continue to get what I call the third phase integration of our first Virginia acquisition.

The third point on our strategic focus on revenue growth has been adding producers and this is reflected in our cost numbers.

Our FTEs went up 716 people from first to second, 492 of those were main street.

The other 224 were net additions and the vast majority of those were producers in our growth markets.

The final component of driving revenue growth is the big increase in advertising for us.

A lot of targeted deposit acquisition on -- we are testing that as best as we can, we are not through that test.

The results are pretty encouraging.

The net new account numbers reflect that up 84,000 year-to-date with strong deposit growth, it's clearly faster than the market in many cases and we are getting very positive feedback from both our employees and clients.

One reason that we were motivated to enhance our advertising a major study was done that we participated in, and the study showed that we were the best bank and cross seller once the client got into the bank, but we weren't getting enough clients in the bank, so we need to get more clients in the bank to use our very effective cross selling program.

The other strategic objective that we are focusing on is what we call a perfect client experience.

There's clearly more price competition in the market place and we are responding to that but we are still a quality differentiated competitor.

We sell quality, not price.

We know that price matters but we try to differentiate on the quality side of the equation and deliver greater value to client.

We are in the process of really focusing on that with a new program as it has been upgraded what we call our perfect client experience.

It focuses on the certain kinds of behaviors that we know produce results.

It does have an intense level of inspection in that regard.

And it focuses on our value proposition, which is to provide more reliable, more responsive, and more 'em pathetic and more competent client service.

As we bring more clients in the bank, we want to be sure that they get a quality experience so we have the opportunity to cross sell more services, which is how we make those relationships profitable.

We seem to be moving in the right direction on both our sales and service strategies.

Now, let me share with you a few comments on the future.

We do not make formal earnings estimates, as Tom noted, and I would just reinforce this disclaimer and say again, anything I say about the future may be wrong.

In looking at where we're going; however, we do seem to have very healthy momentum, solid loan growth, solid deposit growth, strong fee income growth, our insurance business, in particular, is doing very well.

Excellent asset quality.

Economies in our market are not booming but they are still doing well.

We haven't gotten any evidence of economic correction yet.

Obviously our primary challenge is our margin.

Chris is going to share with you the expectations of the margin, but fundamentally what we need to do is prepare to stop raising interest rates and hopefully at some point the inverted yield curve will be eliminated.

That's our challenge.

However, excluding the recession or some kind of major international disruption, I'm very optimistic about the continued solid performance for the rest of the year for BB&T.

We are making heavy investments to the future and keep production people and distribution and marketing that I think will continue to pay off.

Before I turn it over to Chris, I do want to mention a personnel issue, and one that I'm a little sad about in some ways, and that is that Tom Nicholson has announced his retirement at the end of the September.

So this will be Tom's last call.

Tom has done a spectacular job in our investors relation function and were certainly going to miss him.

I think he's looking forward to his retirement.

He's a person not only of competence, but he's also a person of a very high character and he has done a super job for us.

The good news is Tom like any good manager has done an excellent job of training his replacement, which I think many of you have met, Tamara [Justall] , will be taking Tom's place.

She's been working with Tom for several years.

She's highly competent and very familiar with our investors relations function and I think will do an excellent job for us.

With that said, let me now turn it over to Chris for some additional insights into several very important areas.

Thank you, John.

I will also congratulate Tom and Tamara as well.

Good morning.

I would also like to welcome each of you.

John mentioned, we are pleased with our overall results and really feel like we're building momentum and progressed for 2006.

I wanted to just comment on an interest income, net interest margin, non-interest expenses, taxes and capital.

First, looking at net interest income linked quarter, was 939 million, up 3.1% annualized increased over linked quarter invested for purchases.

Driven by very healthy earning asset growth of 8.2%, adjusted for purchases.

The common quarter, similar net interest income 939, up 2.6%, over prior year quarter, adjusted for purchases.

Also supported by healthy earning asset growth of 8% adjusted for purchases.

On a year-to-date basis we are at 1 billion, 858 in net interest income, up 3.9 % over prior year and invested for purchases and nice, strong earning asset support there, of 8.6% adjusted for purchase accounting.

Look at net interest margin, based on operating earnings, as Tom pointed out, we did experience some further compression during the second quarter, as evidence specifically in the linked quarter comparison where we were down 6 basis points from 382.

First quarter '06, to 376, second quarter '06.

The prior year comparison we were down 16 basis points from 392, in the second quarter '05 to 376 in the second quarter '06.

And then looking at it by year, we were down 15 basis points year-to-date '05, 394, down to 379 in year-to-date '06.

Just a few comments on the margin.

We have continued to reduce our asset sensitivity and move to a neutral position.

Still in anticipation [inaudible] and as we end that cycle, we should see a variable rate loan portfolio reprice to current levels as we talked about; although, it could be a little less beneficial in a neutral position, but still helpful.

The primary issues in the quarter; however, were continued to flatten the yield curve, as Tom pointed out and also rising liability cost, associated really with 3 primary areas.

First, just this level of competition, clearly.

Second the migration of existing clients from lower cost deposit products into higher cost deposit products.

We kind of hit that magic 5% deposit rate, to really see a number of changes in behavior and begin to move money out of lower cost instruments into higher cost instruments.

And then lastly, just our general focus on organic deposit growth.

We, in the quarter -- really, this is the second quarter, on a linked quarter basis we have done this.

We were able to fund our loan growth with client deposits, which I think as John pointed out, not having other borrowings, having to play a heavy role that has been helpful to us.

But as a result, we did experience a shift in the mix of our overall deposit base towards higher cost deposits and also a flat or reverted yield curve continue to negatively affect the loan investment portfolio, just during the lack of spread that's available.

If you look at the yields and rates, you can see the compression, first linked quarter, earning assets were up 21 basis points but then interest bearing liabilities were up 31.

The majority of that comes to us in the form of other interest bearing deposits up 46 basis points and then other borrowings up 35.

CDs, were up 33, which gave us that 10 basis point compression.

On a common quarter basis, total earnings assets were up 85 and total interest bearing up 120, spread down 35 basis points, again driven by other interest bearing deposits and other borrowings of 191, and 144 basis points respectively.

Now, looking forward, our forecast for the balance of 2006, the [inaudible] projections further declined.

We got a finding in the third quarter, similar to the levels experienced in the second quarter, and stabilizing in the fourth quarter around 370 range.

Also just finally like to mention the model, Alco model does assume one additional rate increase in August, a fairly flat yield curve thereafter.

Moving to non-interest expenses, we did experience a little higher than normal non interest expense on linked quarter basis, I think it's important to note that we did achieve positive operating leverage, as an increase in revenues that exceeded that of expenses comparing first quarter '06 to second quarter '06.

We'll look at that in a little more detail in a moment.

With respect to our cost saving revenue enhancement initiatives, just as a reminder we did achieve $75 million of that in 2005, planning to get the remaining $100 million on the -- by first half of '07 as originally planned.

We are basically on target.

We achieved 36 million thus far year-to-date, [inaudible] bringing our total savings enhancements to 111 million through June.

They seem to be partially offset by regulatory, legal and marketing and advertising costs and also some investments for the future, as John commented on like the Denovo branching and additional sales staff.

Looking at non-interest expense growth rates on an operating earnings basis, the common quarters up 6.2, which I think is a fairly lead indicator of kind of where we are headed we do see it leveling off a little.

Year-to-date, up 8.1, increase over prior year, adjusted for purchases.

On a linked quarter, as I pointed out, we were up 9.8% annualized over linked quarter adjusted for purchases.

Even though we did achieve positive operating leverage on a linked quarter basis and we thought it appropriate that we look at a little detail on linked quarters while we experienced that growth.

Look at total non-interest expense after purchases, was up 20.6 million, or 9.8%, really driven in two categories, the largest is other operating expense which was up 15.7 million, personnel was up 3.1.

Looking first at other operating, you can see the increases came in the form of rent retail loan expense due to increased loan volume, increased deposit-related expenses due to higher transaction volumes, and then some advertising and public relations, all of -- all of which are revenue-related activities.

Then we also had some increase in employee travel.

Primarily in the mileage, the -- you can see in the gas prices, I think the effect of that is coming through. [inaudible] ATMs charge-offs and some legal fees and also a little increase due to a less gain on sale of other real estate in the second quarter compared to first quarter.

We kind of rounded out the other operating.

Looking at personnel, again up 3.1.

The primary result of the increase of the largest item was 6.4 million annual salary increases where we hired an an additional 186 FTEs and again, that is after pulling out all acquisitions and probable half of those are revenue producing.

I would point out that 186 is a little less than half the amount of increase in FTE additions you have been seeing from quarter to quarter so we do see that leveling off.

Also in that number is an increase thrift plan expenses due to increased compensation.

Mortgage loan incentive due to higher level projection and all of those increases were offset by a couple of declines, social security and unemployment taxes due to less expense incurred in the second quarter when individuals begun to reach their limits.

And then smaller decline in [revenue] trust.

So that sort of details for you a little bit of the linked quarter increase.

Overall, I feel like we are still on target for the expense growth we talked about in the 6% range.

Looking at taxes, first I want to comment on the tax related accounting standards that were just recently finalized on FASB, these being the FAS-109, uncertain tax position and also the FAS 13, dealing with leverage leases.

And I wanted to acknowledge that we do have some lease in and lease out transactions and service contracts.

Due to FASB's recent ruling, we are in the process of doing calculations to determine the account of adjustments that we'll be making equity for those standards in the first quarter of 2007.

But the standards are effective January 1, '07.

As a reminder there will really will be no impact to the income statement, this is just impact to the balance sheet.

I just wanted to acknowledge that.

Secondly, let me comment on the effective tax rate.

The effective tax rate increase from 32.63% in the first quarter of '06 to 34.07 in the second quarter of '06.

Going forward we expect the effective tax rate to be 33.4 [inaudible] to 34.5% range for the third quarter.

And shifting to capital.

We continue to maintain strong capital positions with the equity of assets of 9.6% in the quarter.

Tier one was at 9.1% into June, and total 13.7%.

Leveraged capital was 7.27% and a little ahead of our leveraged capital target of 7%.

And share repurchases, I want to give you a little detail on share repurchases, so we have had a little activity in the quarter.

On a year-to-date basis, we have repurchased 22.3 million shares at an average cost of $41.13 a share. $8.3million of that 22.3 shares were executed in the first quarter and I mentioned on the last call that part of our normal repurchase program.

The balance were 14 million shares were repurchased on June 7th, using the proceeds from a $600 million capital securities issue, [inaudible] qualifying that we used to effectively finance the purchase of main street and the legal acquisition of main street was June 1.

I wanted to give you that detail.

And looking forward, for future buybacks, we'll continue to monitor our capital position obviously given the equity adjustment required and FAS 109 and FAS 113.

We possible could repurchase up to approximately 5 million additional shares during the last half of the year but we'll monitor our capital position in that regard.

Finally as a reminder, I just wanted to enforce the fact that we did increase our third quarter dividend up $0.04.

The last several years we have bumped it up $0.03 annually.

We did moved it up by $0.04 to $0.42.

That represents a 10.5% increase over the prior year quarter.

With that, that concludes my comments.

Okay.

Thank you, Chris.

We're going to move to th question-and-answer portion of the conference call at this moment, but before we do, let me ask that we use the same approach we have used in the past to make sure everyone has fair access.

Please limit your questions to 1primary and 1 follow-up and then if you have additional questions come back into the queue, but give others a chance to participate as well.

Now, Jan if you will come back on the line please to explain how folk's may submit there questions.

[OPERATOR INSTRUCTIONS] Our first question is from Kevin Fitzsimons from Sandler O'Neill.

Good morning, everyone.

Good morning, Kevin.

First question I had is on the equity compensation.

This might be more just a technical issue but I understand why we pull it out if you are comparing year-over-year, but now as I recall from last quarter, a portion of that 26 million or so, I thought, was -- you know this was a portion that was over and above what was recurring, but there was definitely an amount, which I thought was in the $8 to $10 million range which was considered recurring.

So I guess my question is, if that's the case, you know, especially comparing linked quarter, why wouldn't you add back in that $10 million on that?

Is this really a recurring source of expenses that we will have going forward?

And then secondly, John, you can just address -- you know, you addressed your appetite towards acquisitions but could you also address potential opportunities that are out there, given the acquisitions that have been announced, specifically disruption in terms of gaining customers, in terms of gaining employees, both in Florida or just in the market overall with the regions?

Very good.

Chris, do you want to answer the equity question?

Kevin, you are exactly right.

The retirement eligibility fees were buried in the first quarter of that 26 million number.

And the -- I think the recurring number would be similar to what would you see in the second quarter.

So that piece really would be -- would be a part of the normal operating expenses.

There's no intent to pay it.

I think the primary reason that we excluded it.

The idea was to exclude it in the year '06 so we could get fair comparisons and numbers going forward.

Then in '07 they would be included in operating numbers, there's nothing more than that.

I see.

Great.

In terms of the acquisitions, I think they are good news for us, Kevin.

I don't know how big good news they are.

Obviously, in the case of Wachovia, that's a large acquisition of a company that they will have to transform and I would suspect they would have to send some people to make that happen.

And that -- Wachovia is really our single biggest competitor, it's just so much on top of us, we on top of theirs.

I don't say we will get a huge benefit but I think we will get some benefit out of that.

I feel the same way about AmSouth and the Regions, now, we don't compete against AmSouth and Regions in a lot of our foot print but we do in Florida and Georgia and Tennessee.

That merger, where the primary goal is efficiency will create some disruption and we are certainly looking for people.

And even have a conscious program of how we might hire some people from both of those companies, as the process evolves.

An both of them have some good people.

So I think we will be somewhat beneficiaries of both of those mergers.

I don't think they are huge events for us, but they are positive and broad context.

Okay.

And John, just, you know on a related note, I believe you said back at your investor day that you saw -- the way you saw the industry evolving was that there would be a few regional oligopolies. [inaudible] Does that -- in terms of, you know, changing the map of how you see things turning out, any significant change or causing action on our part in terms of them coming together and now really leaping you in terms of asset size?

Thank you.

Well, that's a good question.

We certainly would have been interested in a partnership with either one of those companies over the long term.

There may have been reasons we couldn't get together now.

But I don't really think it changes the game for us.

They are not that much a direct competitor with us.

There are going to be some other opportunities I think in the long-term, for us to look at, but we are really focused on organic growth now, trying to get our performance to the maximum performance and honestly, in some ways, it's an advantage.

Having been through lots of mergers.

It is a very disruptive activity.

It can be a beneficial activity but it can be disruptive.

So I think we're probably in a good position with some of these large mergers going on around us and that's focused on organic, on our organic growth.

So, you know, we keep looking at how the strategic positions are.

We would consider mergers of equals but there's really not one that fits economically with us today, and fits from a cultural perspective.

But we are still open to that idea.

Okay, thank you.

Thank you.

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

Good morning.

Tom, congratulations and best wishes.

Thank you very much, Gary.

Chris, can you talk about your margin guidance very briefly?

Does it include the planned acquisition, for example?

Yes, that's all in.

That's all in.

And I would say, Gary, again we said third quarter we would look for a similar type of decline as we just experienced in the second quarter, leveling off at, the range of that level for the fourth quarter.

Again that assumes one increase in our model, in August.

And in terms of looking forward, normalized net interest margin for you and a more normal yield curve environment?

Yes, I mean more normal yield curve environment.

I think obviously we would see some sort of pickup.

If you do the math on sort of where that takes you for the year, I would say that you have a more normal yield curve, some pickup, for 4, 5, 6 basis points or so and a normal yield curve to what the map would give you on this year.

I don't think you really save a lot.

I think in the long term we would be more back in the 390 range.

That would take a couple of years of stabilization for that type of thing to happen right.

Thank you.

Yes, sir.

And the next question is from Jason Goldberg with Lehman Brothers.

Thank you. [ Inaudible ] And some other names.

Could you just touch on the portfolio that you are seeing.

Our business is doing great in terms of the sales from the inside of the business -- the side of the business is doing extremely well in terms of charge-off, way below what I call the normalized levels.

Now we don't tend to buy these and we have never done some of the special things that other people have had.

You know, some of the dealers are having a little less fund, particularly the G.M., Ford dealers, but, you know, we're not seeing any big -- you know, there's an individual dealer here or there that might be struggling, but that's almost always going on.

But we are not seeing any big deterioration in our market and the credit quality in the sales finance business is very good for us.

I would even add, you know, the substandard business is even solid to slightly improving.

Great point.

Thank you, and congrats, Tom.

Thank you very much, I appreciate it.

Our next question is with Nancy Bush from NAB Research LLC.

Good morning, guys.

Good morning.

A south Florida thrift just sold at prices that astonished us all.

John, I wonder if you were surprised by that pricing.

Do you regard it as a one off or do we reach a level of silly pricing for Florida properties.

And what are your thoughts about buying thrift at this point.

I was stunned at the price!

That's the only word I would say.

We had looked at that company and it was dramatically higher.

It was a good company, don't get me wrong.

It was dramatically higher than our models would come out.

It's hard for me to answer.

It seems, Nancy, every time there's kind of a low in activity, there's one deal that upon everybody prices back up.

We just can't figure out to make them work.

We run models where we have 30 to 40% cost save and we can't even pay the current market price based on our model.

So at some point, I think economic rationality will return.

When it will, I don't know.

I think also people are -- well, we are doing fine in Florida.

Florida is a brutally competitive market.

I think people are a little naive, boy, I will go to Florida and everything will be easy.

I think that's just not the reality of that market.

Well, never estimate a desperate buyer.

Well --

Just secondly, if you guys would just speak to, you know, your mortgage has been a big part of your earnings over the last few years.

If you could just kind of speak to what you see in the second half of the year, as far as production, et cetera, and, you know, if you agree with Mr. Bernanke's commentary about sort of an orderly slowdown and what that kind of means for consumer activity in the area.

Well, excellent question.

I mean I think what we think we will have is very much what he describes as an orderly slowdown.

We think we are seeing some of that in the lower level of commercial real estate activities.

Fewer homes getting started.

The inventory getting bigger and therefore fewer homes getting started.

Some softness in prices in the markets that had so much appreciation, which you would expect.

Condo marks would be a concern.

Fortunately we are not a very big condo lenders.

I think condos are particularly vulnerable.

We are seeing solid activity, though and I think that's encouraging as to what's going on.

But we think we will have kind of an orderly slowdown.

It will impact our mortgage business; although, our servicing portfolio gets significantly more profitable.

You know people who sold servicing the least will be the ones who have problems now.

We made a lot less money selling servicing, but now our servicing business is very profitable.

Our returns on our mortgage business have actually gone up because of the servicing end of the business.

But our production side is down.

And we'll probably be down some -- the rest of the year.

Second to second -- I say second to second production was actually flat and I think if we did that in the second half of the year, we would be happy.

The mix is improving in a way in that we're getting more new homes and less refinanced and that's a very positive thing for the profitability, because the new home mortgage is much more profitable than a refinance situation.

Great.

Thank you very much.

Thank you.

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

Good morning.

And you have my congratulations to Tom as well.

Tony, I appreciate your comment.

Back on the other question, John, what is the name plat mix of your deal or customer base right now?

And looking out over the next few quarters, what should we expect in terms of growth mix?

That's a great question.

We have a fair number of domestic dealers.

I don't know the percentage off the top of my head, but we would have -- we have all brands but domestic would be a fairly large portion.

A lot of our dealers, though, have multiple brands.

A lot of them might have Ford and Toyota, you know.

So we would -- many of our dealers would have multiple different brands, including domestic and foreign brands.

The dealers did very well, all of these, you know, vision programs and calls, but the dealers themselves are doing very, very well, up to relatively recently.

I think we'll get a little better growth out of the sales finance business than we have been getting.

I would hope we would get back up to the 5% level.

Now I'm thinking more like 3 or 4%.

Yes.

Car sales just aren't that strong.

Yes.

And I think that is going to continue probably for another 6 months, maybe even another year, because it looks like to me what the manufacturers did is steal sales from the future.

Right.

With very aggressive programs.

I think we'll have six months to a year of relatively slow sales volume and then it will pick up again.

You have been enriching staff in your new markets here for a while now in pursuit of that, I think, potential billion dollars or so in incremental revenues, but you still missed, I guess, between existing core markets and new markets.

And I just wondered if you can give us any color or guidance on when is a reasonable time to see that gap really begin to close or if you can give us some update on kind of where you are in that process.

Oh, that's a good question.

I think we are making good progress.

I looked this morning at our regional performance numbers, with a couple of exceptions our new regions are all significantly improved from last year.

And if you look at our revenue growth, I think it's very healthy, if you take out the real -- if the margins would just stay flat, we have some pretty spectacular revenue growth, but the volumes would be able to be produced on the loan and the fee income side.

I think we're getting enhanced productivity in our new markets.

It's -- our internal management, almost all the markets are moving up pretty significantly in terms of their performance and I'm very encouraged about that.

It's getting obscured by what's happening with the margins.

But we held our margin flat and you see some very healthy growth rates.

We are still struggling in a few cases.

Kentucky is a struggle for us.

It's a very competitive, irrationally competitive market and that has been a challenge for us but we are making a lot of progress there.

I feel across our footprint in our new markets, we are going in the right direction.

You get some dissolutions in Florida where you had improving performance, but you are opening a lot of new locations.

Right.

The same-store sales are looking good but your stores per branch are down.

And that's a fairly dilutive effort for really two years, two to three years.

But I think we're moving in the right direction.

I feel good about it.

Thanks.

Yes, sir.

Our next question is from Chris Mutascio with Credit Suisse.

Thank you I have two quick questions.

But on the reserve side, or the provisioning side, in this quarter, you over provided the net charge-offs.

If we were to see some more net charge-offs going forward and similar type of loan growth, do we start seeing this type of action?

Do we have to overprovide the net charge-offs as opposed to just matching charge-offs?

And the follow-up, can you comment on the sustainability on the strong insurance commissions that were posted during the quarter?

On the provisioning, we are not 100% formalistic, but we are very influenced by formulas that include projections about the economy and non-performers, et cetera.

But the fact is we continue to have the strong loan growth as we have, we probably will be providing some more than charge-offs, unless we continue to have more improvement in non-performers, et cetera, which, you know, it's hard for me to guess that that will keep at it, because the numbers are so good at this point in time.

So I would guess the most likely scenario is some more provisioning than charge-offs but how much depends on a lot of the formulas we use.

In terms of insurance, I would say I'm relatively optimistic.

It sure has seasonality in its business but traditionally the third quarter is a strong quarter for insurance, as it is the fourth quarter.

So I'm fairly optimistic about our -- about continued healthy growth rate in our business.

I think we are benefiting from some of the struggles, some of the larger insurance agencies have in reaction to the regulatory environment, and we are -- it looks like we were losing or gaining market share fairly healthily in our insurance business.

So I'm optimistic about it.

Thanks, John.

And Tom, happy, healthy retirement.

Thank you very much, Chris.

Our next question is from Howard Shapiro with KBW Asset Management.

Just a question on credit quality.

You had mentioned earlier in the call that your usage of credit card revolvers were up.

I wanted to make sure that it was revolvers because some are saying increased use of cards is maybe a sign of -- or a leading indicator of consumer distress.

And also can you give us some parameters of how much that usage has increased.

I don't know if I can answer your second question.

What I said is that we're actually -- our revolving credit is actually down because people are paying off their cards earlier.

But we're getting a lot of big jump in fee income because what a lot of consumers -- and I'm in this category -- don't use -- or instead of using debit cards are using credit cards as a debit card and then paying off the credit card balance in the time frame so they don't get any finance charge.

And because our credit card portfolio is much lower risk than is typical for the industry, we are getting more of that type of activity.

So if we have a disproportionate number of revolver, or people that never actually borrow into the card.

They just use it for transactions and pay off at the end of the month.

Our charge-off and non-performers in our credit card business is the best I can remember.

But our losses and non-performers in the credit card are getting better every month.

So what do you attribute that jump in kind of the revolving usage to?

I think it's the same thing that's driving people to debit cards.

I mean if you look, the debit cards have exploded.

I think some people that used to use checks yesterday, I will use debit cards, but then why not use the credit card because I get a free float.

And so I think it is part of that transition away from checks.

And a lot of it is on the debit eliminate cards but a lot of people pay off their credit card.

If you go to pay off your credit card being the best thing to do is use your credit card because you get that free float on the credit card.

Okay.

Thank you very much.

Yes, sir.

Our next question is from John Pandtle with Raymond James.

My question is efficiency ratios have been bouncing around in the 53, 54% range and getting your outlook for investments in people, and the distribution network.

Talk a little bit about, you know, where you see, if at all, potential for incremental improvement and operating leverage over the next year?

Yes, what I was getting at earlier was we had -- I think in our investor day we had said we would look at core expenses in the 6% range and you have seen most of the expense coming in the form of additional FTEs in the prior quarter comparisons.

This quarter -- I'm talking core BB&T, excluding acquisitions this quarter we saw that number cut in half.

We have been running, you know in the neighborhood of 4, 450.

This time it was link quarter was, I think 186 FTEs.

So I think we're already beginning to see that -- the number of FTEs fall, which was predominant piece of our expenses.

I do see it leveling off as we go forward and I think operating leverage would be certainly available to us as we move on.

I think we'll get our efficiency ratio headed down.

The biggest pressure is the margin pressure which fits into the efficiency ratio, but the point we stabilize our margin, I think efficiency ratio will improve.

I do too throughout the year.

Okay.

And then as a follow-up question, in Florida, are you seeing much change in the rate of drawdowns on, you know, existing construction commitments and kind of what is your thought on commercial real estate and your appetite in general through your markets.

Well, it's interesting.

We are seeing some higher utilization, but we tend to go with the old line, builders that have been in business a long time, and most of them had accumulated a fairly large amount of cash, because they have been really doing well the last four or five years.

And what we are seeing they are still financing a large percentage of their inventory.

So our spec construction and those kind of things, in terms of the percentage financing is really not seeing any material change in activity.

We're seeing them start fewer subdivisions, and that could impact loan volumes in the future.

So far, we just went through a really thorough analysis of our real estate portfolio, because of, you know, concern about what might happen with our interest rates.

We are just not seeing any deterioration.

We're seeing less activity, but our builders seem to be in financial condition that unless it's a real -- much more dramatic decline in prices than we expect, we think that most of them will be okay.

We have avoided the condo market largely.

We have a few condos.

I would be worried about the condo market.

What is obviously, particularly in Florida, is a lot of -- there were a lot of speculators in the Florida market and a lot of units that were sold are not really sold and I think that would be the niche that would concern me the most.

But fortunately that is something that we have largely avoided; although, we do have a few condos.

But we have a very low percentage there.

We are pretty much plain vanilla home constructions and home residential development.

That's our main forte in the commercial real estate area.

Okay.

Thank you.

Our next question is from David West with Davenport Company.

Good morning.

Hi, David.

Actually I was going to ask about the construction loan activity.

What is the approximate size of that portfolio?

Seriously, do you have that number.

Yes, our CRE is about 45% of our business loan portfolio or about 20% of our total loan portfolio.

Talking total CRE?

Well, more specifically about the construction loan portfolio.

Residential includes land acquisition and construction, is right at $8 billion.

Okay.

Thank you.

Most of my questions have been addressed but one I was curious about, your net account growth, which you cited earlier in the presentation.

Approximately how much of that is coming from your Denovo branch activity?

Our Denovo is growing very fast, but it's a small percentage.

They just started going.

I don't know the numbers off the top of my head, but it would be -- you know it would be a relatively small percentage because we have got so many other branches.

Yes, I will add, John, two-thirds of the Denovos's are in Florida and Atlanta.

We are seeing nice new healthy growth there.

I, like you, don't have the details of the actual number.

And lastly, follow up on your economic activity across your franchise.

I guess in the past, the Carolinas have somewhat lagged some other areas of the franchises.

Is that still true or is that improving on a relative basis?

It's improving.

Particularly North Carolina.

I would say in North Carolina, we really took a beating with the textile and the furniture industries, and some degree with agri business and tobacco 3 or 4 years ago.

It impacted us and it really hit hard a lot of mid-sized communities where we tend to have dominant market shares.

But pretty much across the board, we are seeing healthy movement.

We're seeing a lot of light manufacturing coming out of California and Midwest and foreign investment in light manufacturing across our footprint, and unemployment rates have gone down considerably.

In some markets, I would say they are as low as they will get because there's nobody really looking for work.

But in many areas the unemployment rates have fallen.

I won't say it's booming but I would say it's healthy and frankly, I would guess the Carolinas would be a lot better off 5 more years down the road because the kind of jobs that left in textile, in particular, were not very good jobs and the kind of jobs that are coming in are better jobs.

We are doing very well in biotechnology, and particularly again in North Carolina.

We have had several large pharmaceutical announcements recently in the biotech area.

I think North Carolina is second in biotechnology.

So the markets are getting better in our core areas.

I think that's encouraging to us.

All right.

Thank you very much.

Yes, sir.

The next question is from David Pringle with Hoefer & Arnett.

Good morning, all.

Good morning.

You know, my questions have been asked.

But I wanted to add my appreciation, Tom, for all of your efforts over the years, and sincerely wish you the best.

David, you're very kind.

Thank you.

Thank you.

I'm showing no further questions in queue at this time.

Thank you, Jan.

I would certainly like to express my appreciation to John Allison and to Chris Henson for their remarks and to all of you that I have worked with for a number of years in this business.

You have been very helpful and helped me to learn as I was going.

I very much appreciate it.

I want to thank all of you who have asked questions today, give special thanks to those who participated by telephone.

And let me say once again, if you need any additional clarification on any of the information that was presented during the call, please call BB&T's investor relations department.

Have a good day.

Thank you.

Ladies and gentlemen, this does conclude this teleconference.

You may disconnect your lines at this time.

Thank you for your participation.