Truist Financial Corp (TFC) 2007 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the first quarter 2007 BB&T earnings conference call on April 19th, 2007.

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

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

[OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms.

Tamera Gjesdal, Investor Relations Manager for BB&T.

Thank you.

Ma'am, you may begin.

Good morning, everyone!

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

This call is being broadcast on the Internet from our website at BBT.com/Investor.

Whether you are joining us this morning by webcast, or by dialing in directly, we are very pleased to have you with us.

As the our normal practice, we have with us today John Allison, our Chairman and Chief Executive Officer, and Chris Henson, Chief Financial Officer, who will review the financial results for the first quarter of 2007, as well as provide a look ahead.

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

Before we begin, let me make a few preliminary comments.

BB&T does not make predictions or forecasts.

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

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

Additional information concerning factors that could cause actual results to be materially different is contained in the Company's SEC filings, including but not limited to the Company's report on Form 10-K for the year ended December 31st, 2006.

Copies of this document may be obtained by contacting BB&T or the SEC.

And now, it is my pleasure to introduce our Chairman and CEO, Mr.

John Allison.

Thank you, Tamera, and thanks all of you for joining us this morning.

Areas I would like to discuss will be the financial results for the first quarter of 2007, hopefully giving you a qualitative, as well as a quantitative feel for the results.

I will share with you brief updates on merger and acquisition activity, and then outline a few thoughts about our future results.

Chris will give you some more in-depth analysis in some key areas, and then we will have time for questions.

In the first quarter, our GAAP net income was 421 million, down 2.3%.

Operating earnings for the quarter were 425 million, up 3.4%.

GAAP diluted EPS for the first quarter was $0.77, down 2.5%, and operating diluted EPS for the quarter was $0.78, up 2.6%.

Let me make a comment on the operating earnings.

We're now including equity compensation expense in operating results and have restated all prior periods accordingly.

Also, about the first quarter GAAP and operating results include a few items both positive and negative that essentially offset each other, that we did not exclude these amounts so we did not exclude these amounts from operating results.

The items include the 11 million in security losses you can see in the income statements and additional tax reserves related to FIN 48, that will not affect later quarters.

These amounts are largely offset by a gain on the sale of a small business.

The net after-tax impact from all of these items is a loss of $3 million, so we treated them basically as a wash.

The $0.78 operating diluted EPS met the Consensus estimate.

It is down from the fourth quarter of 2006, which we would expect as we have had that typical seasonal pattern, for I guess forever.

Our cash basis EPS for the quarter was $0.81, an increase of 2.5%.

And I think that is probably the best measure of our performance up about 2.5% compared to last year.

Looking at the returns, the cash ROA was 154, the cash ROE was 28.20, which are very good returns.

Looking at the factors driving the earnings, margin continues to be a challenge.

Our margin declined from 370 to 361, down 9 basis points, and down from 382 in the first quarter 2006.

Chris is going to give you some in-depth insight on the margin in his comment area.

Noninterest income growth was down, noninterest income was down fourth to first, which again would be typical looking at our seasonal pattern.

If you look at first to first, which is a better measure, and you take out nonrecurring items, purchases in the MSR impairment, noninterest income was up 5.3%.

We had some good stories, and some areas that are kind of mediocre, again excluding nonrecurring purchases, insurance commissions, first to first up 9.4%.

Those of you that follow the insurance brokerage industry know that revenue has been pretty flat or down in that business, and we are obviously moving market share pretty rapidly in the insurance brokerage business.

That is our #1 source of noninterest income.

Service charge on deposit accounts were up 3%.

We added net new transaction accounts of 33,000.

We were actually very pleased with that number.

It was a little less than last year, but last year, we were really entering the free checking business, and so we are pleased with that net new transaction growth.

Nondeposit fees and commissions, which are primarily debit and credit cards, up 10.7%.

Investment banking and brokerage was largely flat.

Trust revenues up 8%, and that's a better growth rate than we've been seeing there.

Mortgage banking excluding mortgage servicing rights was actually down 10.3%, despite the fact that production volume was up, in the first quarter of 2006, we did about 2.3 billion, first quarter 2007, we did 2.461 billion.

So obviously margins were under pressure in the origination businesses.

Other noninterest income was down from the fourth quarter, but up 19% first to first.

Part of of that increase was a $19 million gain on the sale of a small business, that was offset by those other items that I mentioned.

If you look at our noninterest income pattern, it bounces around but we have been fairly consistently running at that kind of run rates for the last several quarters.

If you look at our fee income ratio, it was 40.6%, up from 39.7% in the first quarter of last year, our goal has been to get that ratio over 40%, we have gotten there, we have a new goal to get it to 45%, and we think we are headed in the right direction there.

Noninterest expenses was a great story.

Annualized fourth to first down 19.4% and first to first down 1%.

We are very pleased with that result, and again Chris is going to give you some detail on what's happening on the expense side.

Loan growth, overall, pretty encouraging.

If you look at annualized fourth to first on a GAAP basis, total loans grew 10.8%.

If you take out purchases, securitizations, and leveraged leases, fourth to first annualized growth rate was 6.5%.

Pretty healthy commercial growth at 8.6%, direct retail is actually down 0.5%.

Sales financed at 8%, revolving credit 7.4, mortgage 11.4, specialized lending down 4.8%.

That is a little misleading.

We acquire a company called AFCO, which is in the insurance premium finance business.

They have a lot of big-ticket finance transactions that didn't have much margin.

That business has been running off some, even though the profitability of AFCO has actually improved.

If you take that out, our specialized lending fourth to first grew at a 10.2% growth rate.

Which is pretty healthy, because first quarter is a slow quarter in the specialized lending businesses.

If then you look at fourth to first total loan growth, instead of 6.5%, if you take AFCO out it was 7.4%, pretty healthy.

Looking at first to first, the trends are a little different, commercial 6.8, a little slower, retail was better, 3.9%, sales financed 9.9, revolving credit, 5.3%.

Mortgage 12.5, Specialized lending 14.4, but again taking AFCO out, specialized lending is growing at a very healthy pace at 25.5%.

And total growth of 7.9, or without AFCO 8.2%.

Kind of qualitatively looking at what we are seeing, commercial growth was pretty healthy in the first quarter, but it is slowing.

We are seeing less commercial real estate lending activity, which you would expect in the cycle, and we are a pretty big commercial real estate lender, so we're having some slowing activity there.

Direct retail, the first quarter was disappointing, I think reflecting the economy.

We are see something early improvement in April, which may be seasonal, but we think we will be doing better in direct retail going forward than we did in the first quarter.

Our sales finance business is very encouraging.

We mentioned this in the past on one of these calls, that we thought the challenges at GMAC and Ford Motor Credit had would help us in that sales finance business, and it is.

We are having pretty healthy growth in the sales finance business.

We are the leading bank sales finance provider in our footprint.

We are pretty optimistic about that business.

We have recently entered the boat financing and RV financing markets, which we haven't been in the past, and we think we will do well there.

So we are encouraged about that business segment.

Specialized lending is also doing very well as you can see from the numbers, taking out the adjustments around AFCO, and we are very encouraged about that.

Looking at the deposit growth, noninterest bearing deposits taking out purchase acquisitions, were down pretty significantly from the fourth quarter, 10.5%, that is a seasonal pattern, but we are also down first to first 2%.

Interest checking deposits without purchases down from the fourth, up 3.4% compared to the first quarter.

And client deposits taking out purchase acquisitions up 4%, fourth to first.

And up 9.2% first to first, which is obviously a strong growth rate.

Total deposits again without purchases up 13.4% annualized.

And up 7.9% first to first.

So if you look at those numbers and recognize the seasonal patterns, we are having very healthy deposit growth rates, we are actually rationalizing our deposit pricing strategy, we are becoming less price aggressive on CDs, but I would also say competition has diminished some in the CD marketplace.

We still have the big challenge of transaction movement out of low-cost deposits to higher cost deposits, like CDs and money funds because of the higher interest rates, and that activity continues to go on.

You see that obviously in our numbers.

But we are experiencing healthy deposit growth rate, and particularly in our core client relationships.

Asset quality remains excellent and obviously that's a big issue at this point in the cycle.

Our nonperformers did increase slightly from 349 to 367 million, and increased from 0.29% of assets to .30, but those are still great numbers by long-term standards.

Our charge-offs were 61 million.

That was up a little bit from the first quarter of 2006, but down from the fourth quarter when we charged off 68 million, as a percentage of loans charge-offs were 0.29.

Compared to 0.26 the first quarter last year, but down from 0.33 in the fourth quarter, and if you take out our specialized lending businesses, our charge-offs in the first quarter were only 0.13, which was better than the fourth quarter 0.18, and the same as the first quarter of 2006.

So the charge-off numbers are really good.

We provisioned 71 million, we charged off 61 million, so we grew our reserve by $10 million.

Provisions expense was up from last year, and I will give you a little more detail on that in just a minute.

The reserve at the end of the quarter was 105, which was down slightly from 106 from the end of the fourth quarter.

But remains very strong if you look at the reserve relative to nonaccrual loans at 3.24%, so we were very well reserved.

We can view our asset quality as good news.

It remains extremely strong.

We did have slight rise in nonperformers, but the level is excellent compared to historical standards.

We did have an improvement actually, in specialized lending nonperformers from fourth to first as we projected, that's a seasonal factor.

We had a slight rise in commercial nonperformers, but our commercial charge-offs were very, very small.

Let me discuss a subject that's big in the news, and that is subprime mortgage and Alt A mortgage business.

Let me give you one important reminder.

Our primary subprime business is autos not mortgage.

There was a shakeout in the subprime auto business several years ago, we almost got shook out, some of you that followed us remember that.

It was a very tough time.

We are not seeing any kind of significant deterioration in subprime auto at this time, and we really don't expect one, because the irrational competitors got driven out of business.

The biggest single driver, by the way in subprime auto losses is used car prices, because you always have fairly high repo rates and your car prices are holding up fairly well.

The other big factor is unemployment rates, because you have to have a car basically to work.

And as long as unemployment stays relatively low, you just don't have big shakeout in the subprime automobile business.

So we don't think there are any excesses, and there are no real problems that we see in the subprime auto side.

If you look at the subprime mortgage business, it's a very small business for us.

In fact, we only had $369 million in total portfolio subprime mortgage loans, which is 0.4%, i.e.

.004 of our loan portfolio.

We did not engage in any of the excesses that some of our competitors did in that market.

We ave been a long-term player in the market.

Our client base is our own customers in our market.

We didn't do brokerage.

One of the more important things, we had a standard of what was called a net tangible benefit test.

A big portion of our subprime businesses is refinance, where somebody has, they have a first mortgage and maybe a second mortgage, and then they have a car loan they have a credit card, and we refinance their debt.

We only do that if they are better off, i.e., if we can reduce their payment.

That has kind of been a long-term standard.

So we just haven't done the nutty stuff that's happened in the subprime market.

We did sell a small amount into the secondary market.

We are getting very few putbacks, we got a total loan of 7 loans back in the first quarter where 6 are performing, so we just don't have any real risk in the subprime mortgage business.

The Alt A mortgage business, we have 3.3 billion outstanding, which is 3.9% of our total loans.

Our average loan to value is 67%.

The average FICO is 734, which for those of you that know, that is a really good credit standard.

Our 60-day delinquencies are 0.56%, a half of 1%.

Our loss ratio is very low at 0.0027%, basically none.

We did not offer negative amortization loans.

We didn't offer payment option ARMs, and we didn't do any of the exotic products.

And basically it really goes to our philosophy, we thought a lot of these products were bad for our clients, so we didn't do them even though there was a lot of pressure from our own production people.

We probably lost some market share over that.

We thought it would come back to haunt some of our clients, so we just didn't get into those businesses.

And if you look at the Alt A market today, there is no firm definition, and some of what people are calling Alt A are really subprime, and what people are calling subprime are loans that never should have been made because people thought they could dump them in the secondary market, and they got caught holding the bag.

If I had a list of of 100 concerns about BB&T AltA and subprime mortgages wouldn't make that list We just don't have any issues there.

The only thing it may indirectly impact us, and I don't think this would be important, but it would be indirectly to the degree it might slow the housing market as we work through that cycle, we are a big residential construction lender.

We are having some more watch list credits in residential construction, but so far we have been able to work through them very well and are not getting any charge-offs, we deal with local builders, we don't deal the national builders generally.

It's in market lending.

We have tight controls on specs, our builders generally had a long run, and made a lot of profit, have a lot of equity.

There is low unemployment rates in our markets, low long-term mortgage rates, the migration of population, you know, we are going to have some more problems in residential real estate than we were having, because we were having none, but we really don't see any significant shakeout going there.

One comment on the provision for charge-offs, it was up considerably compared to the first quarter of last year, primarily because last year first quarter was unusually low, due to the extraordinarily good credit environment that existed at that time.

The provision expense is actually slightly down from the fourth quarter.

If you look at some of the causes in the increase, of course we added to our loan loss reserve, and we had increases in loan growth.

Also, we increased our provision for unfunded commitments, which is kind of an accounting type phenomena.

In addition our mix changed, our specialized lending businesses increased as a percentage of our total business, and we have higher reserves in those businesses, although the loss ratios in our specialized lending businesses are essentially flat.

If you adjust out for the accounting factors that are going on in that business.

So we really aren't seeing any kind of material impact increase on loss ratios in the specialized lending businesses.

We expect obviously our provision is going to be higher this year, because we can't recapture probably much in the kind of environment we are in.

But we don't expect the kind of percentage increase that we had in the first quarter going forward.

If you look at the first quarter, we are very pleased with results, particularly when you consider the economy, and the inverted yield curve, and happy with the high credit quality we have been able to maintain, and the improvement in expense control.

With that said, let me change directions, and talk just a minute about mergers and acquisitions.

We did consummate the AFCO deal.

We have had reduced volumes as I described.

But our margins have improved and we are meeting our profit objectives so far.

We as you know, announced an agreement to acquire Coastal Federal, a $1.7 billion community bank headquartered in Myrtle Beach, South Carolina, that will take us to #1 in Myrtle Beach, and enhance our already #1 market share in Wilmington.

We are expecting to consummate that merger in the second quarter, and everything seems to be going very well.

I think that will be a very good transaction for us.

We continue to look for community bank acquisitions, insurance agencies, consumer finance asset management.

Frankly, it's a tough market, the pricing is too high in our opinion.

Most of there are a fairly large number of companies for sale, but most of them don't work when we run our pricing model.

Hopefully, we will find a few good deals, but we are unlikely to have a lot of activity based on the pricing.

As we have said on a number of occasions, we continue to look for merger of equal opportunity.

That's no news.

It has to be a merger of equals would have to be one from that have would work for our shareholder's economically, and would work culturally, which is always a challenge.

But we continue to explore merger of equals.

Our primary focus however by far is on organic growth.

Probably five years ago we were spending 60% of our energy on mergers and acquisitions, and 40% on organic.

Now we are spending 95% on organic, and 5% on mergers and acquisitions, which probably was good timing to us, because we made pretty major investments through the acquisition process and growth markets, and really focusing on the organic side is a good thing for us, and that's really where we are focused today.

Let me share with you a few thoughts about the future.

I will begin by reinforcing Tamera's opening comments.

We don't make forward earnings projections, in addition anything I say about the future could be wrong, particularly in today's world.

There are some tangible things that I did want to share with you, that will be significant in terms of impacting earnings for the remainder of this year in comparison to the first quarter.

Due to the new accounting procedures, LILO income was $10.5 million less in the first quarter, than it will be in the second and other quarters going forward.

So we will get a 10.5 million accounting impact from LILOs, and also I would remind you that equity-based compensation expense is front-end loaded, in the sense it's much higher in the first quarter, because we have to expense 100% for anyone that could retire in the next five years, and we have a 55-year early retirement window.

So equity-based compensation expense was approximately 28 million in the first, and it will drop to approximately 13 million each of the next three quarters.

So it will be 15 million less than it was in the first.

Obviously if you add both of these are before-tax numbers.

If you add the $10 million from LILOs, and the $15 million from equity-comp, you are looking at a $25 million improvement in earnings, compared to the first quarter and the next several quarters.

In a broader context, I feel reasonably optimistic about our future performance.

There obviously are caveats out there.

We do not think the economy is going into a recession.

We expect modest economic growth, controlled inflation, and relatively low unemployment.

We do expect the real estate markets to remain slow, probably for up to another year.

But we don't expect there to be any shakeout in real estate.

While there have been excesses in some real estate markets like northern Virginia and parts of Florida, we think our markets will continue to be relatively, do relatively well because of the immigration of population, and the continuing investment in second homes by Baby Boomers on our coasts and in our mountains.

While we are not certain and despite their talk, we think the next move by the Fed will probably be down, not up, it may be the end of the year, or even early next year, before that happens, but we don't expect the Fed to be raising rates.

Probably the next quarter or so, may be continue to be challenging, but we are very optimistic about the second half of 2007 and 2008.

And I feel like we really have got some nice momentum in place going forward.

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

Thanks, John.

Good morning.

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

I would like to speak to you as normal about net interest income, net interest margin, noninterest expenses, taxes and capital.

First looking at net interest income, based on operating earnings, you can see earning asset growth was up a solid 6.2%, adjusted for purchase acquisitions on a year-to-date basis, which produced 963 million in net interest income, 0.8% decrease over prior year adjusted for purchases and leveraged leases.

If you look at a linked quarter basis, earning assets were up 3.8% adjusted for purchase accounting.

Again, 963 million with 13.3% annualized decrease over the linked quarter, adjusted for purchase acquisitions and leveraged leases.

As a reminder from our last call, I did want to point out the first quarter of 2007 net interest income was negatively impacted by changes related to leveraged leases, and I will discuss those in a little bit more detail in the margin discussion.

And also first quarter '07 had two less days than fourth quarter 2006.

Looking at the net interest margin based on operating earnings first year-to-date, John said we were down 21 basis points, 382 in the first a year ago to 361, first quarter '07.

Linked quarter down 9 basis points, 370, first last year to 361 to first this year.

During the first quarter we did remain liability sensitive, and continued to operate in as you well know, a difficult rate environment due to the extended inversion of the yield curve.

We did continue to experience some loan pricing pressure, but liability costs did continue to stabilize, as we rationalized our pricing.

As in all of last year, we really continue to focus a lot of energy on organic deposit growth and once again, if you remove the AFCO capo acquisition, we funded the majority of our loan growth with client deposits on average.

Our deposit mix did shift toward higher cost deposits, but the impact was somewhat offset by slower rate of increase in the liability costs.

If you look at the yields and rates, first the year-to-date, exceed total interest-bearing liabilities were up 82 basis points, while earning were up 61, so we did have 21 basis points of spread pressure, and that was primarily caused by CD rates increasing 94 basis points.

If you look at linked quarter, interest-bearing liabilities were up only 9 basis points, total securities were up 34 basis points, the nicest increase we have seen in some time.

And loans, loan yields were flat.

So total interest-bearing liability rates are obviously increasing at a slower rate compared to our recent quarters, while loan yields were flat, and securities portfolio yield increased at a faster rate than prior quarters, partially as a result of receiving a full quarter's benefit from our fourth quarter bond restructure.

I did want to comment on the drivers of the 9 basis point decline from fourth to first, the decline 9 basis point decline in margin and reduction in net interest income during the first quarter, was really related to leveraged leases, and really two reasons for that.

First, the quarter included the funding cost associated with making the IRS deposit in early January to preclude the accrual of interest and subsequently making the payment to the IRS, so we had the funding costs for the whole quarter.

Secondly, it included the recalculation of the cash flows and related charges required by FAS 13-2 commensurate with making the tax payment.

We had those two items really driving the margin in the first quarter.

Looking forward, I just want to point out our [Alco] model, again which is based on Blue Chip Consensus forecast, assumes a 25 basis point reduction in the Fed fund's rate in August, with a slightly inverted yield curve for the balance of 2007.

We expect the margin to remain relatively stable, somewhat flat during the second quarter for the balance of the year.

However could realize some improvement if the Fed in fact does reduce rates later in the year.

Now I wanted to kind of look at noninterest expenses, which is really a bright spot in the quarter.

You might recall during our last conference call, we highlighted expense control as a primary objective for 2007, and we targeted 4% after adjusting for purchase acquisitions as our noninterest expense growth rate goal for the year.

We focused a lot of energy and effort on this objective thus far in the year, and are really pleased that we have gotten off to a good start.

During the first quarter we experienced very favorable noninterest expense growth rates, both on a common quarter and linked quarter basis, and as a result Ray will achieve positive operating leverage using either comparison, either view you wanted to take.

Also really important to note that we were able to open 13 net new banking offices during the quarter, while simultaneously decreasing FTEs by 468.

We actually opened 18 new offices and closed 5 other older offices throughout the system, for a net number of 13 new offices open.

But really pleased with overall noninterest expense start, and if you really drill down in that, and look at the growth rates on an operating earnings basis, first year-to-date, good to see we were down 1% over prior-year quarter adjusted for purchase acquisitions.

I want to give you some detail on that.

Total noninterest expenses were down $8.1 million, or 1%, primarily the result of three items, or categories.

Occupancy & equipment expense was actually up 4.1 as a result of increase in denovo branches and increase in rent.

But that 4.1 was offset by two other areas, Personnel expense and Other operating expense.

Personnel expense was actually down 7.7 million after purchases.

And it was primarily in the areas of reduced incentives in the area of insurance and banking network, and also had a slight decrease in the change in the market value of rabbi trust.

Also Other operating expenses were down 4.6 million, and that was directly related to a small reduction in branding campaign.

Also professional services and consulting services and then a slight decrease in software depreciation.

So, common quarter total interest expenses again down $8.1 million, driven by reductions in personnel and other operating expenses.

Very nice to see.

On a linked quarter basis, we experienced a 19.4% annualized decrease over linked quarter adjusted for purchases.

Kind of drilling down into that total noninterest expenses were down 44 million after adjusting for purchases.

And that breaks out as follows.

Personnel expense was down 13.6 million, primarily the result of decreased incentives in insurance, Laureate Capital banking network and trust.

Occupancy and equipment expense on a year-to-date basis was down 2.5 million due to decreased repairs expense in the branches.

And then Other operating expense, which is a fairly large number, down about 28 million after purchases.

And I think here is where we get some pickup maybe even going forward.

The professional services were down, consulting services, legal fees were down as an example.

Our IRS lawsuit related to LILOs, we have digested most of that.

And will not have that going forward, as is the case with some of the consulting services.

Advertising was down slightly, primarily due to some timing, and then we had small decreases in charge-offs and taxes and licensing.

So overall, total noninterest expenses on a linked quarter down 44 million, and I think there will be some pickup going forward out that we will not be repeating some of these expenses, specifically in professional, consulting and legal fees, as we had a little bubble up in those areas over the past year.

So, good overall start to the quarter with respect to expense control.

I did want to give you an update as well on our expense savings for recently announced acquisitions.

Mainstreet, as you might recall we had targeted savings of 24.6 million, you recall we converted them in September, and our savings to date is 18 million, 7 of which was achieved in the first quarter.

First Citizen's we had targeted 6.6 million.

You might recall we converted them in November, and savings to date is 2 million and all of that was achieved in the first quarter.

And then Coastal, as John pointed out really just announced, and we're targeting 19 million in savings there, and hope to close that in the second quarter.

Looking to taxes, want to comment on the effective tax rate, kind of what to expect going forward.

Fourth to first, we were actually up 31.68 to 34.51.

Had a little bit of a whipsaw in that situation, I commented last time our fourth quarter, we had a year-end true-up, credit true-up in the area of state and federal taxes, and then as John had already pointed out, reiterated his comments, first quarter we included tax reserves related to FIN 48, that won't affect later quarters.

We going forward expect effective tax rate to be in the second quarter in the 32.5 to low 33% range, so a return to normalcy.

Looking at capital, I wanted to point out two items.

First, we did a private placement of $4 billion in long-term debt in the quarter, and I wanted to make you aware of that.

And also we had as you might have seen, an increase in derivatives in the notional amount, and really two reasons for that.

The first was, we did a swap to convert the fixed rate on the private placement to floating rate.

And also the mortgage division implemented a new hedge strategy, to hedge float and escrow deposits in the mortgage side, just wanted to make you aware of those items.

Our primary capital targets continue to be to maintain leveraged capital at 7%, and tangible equity at 5.5%.

Looking at our capital ratios, equity to total assets at end of period was 9.6%.

Looking at risk-based capital, Tier 1 was at 8.7, total was at 13.9%.

Leveraged capital was at 6.9, just slightly below our target, and certainly move that back up second quarter.

Tangible equity was right on our target at 5.5%.

With respect to share repurchases, we have done none year-to-date.

We do however, plan to repurchase in the range of 7 to 9 million shares in 2007, and we still expect most of that activity to occur in the last half of the year.

Finally, our dividend for the second quarter is $0.42, and that represents a 10.5% increase over the prior year quarter.

So Feras, that concludes my comments.

Thank you, Chris.

Before we move to the question-and-answer segment of this conference call, I will ask that we use the same process as we have in the past, to give fair access to all participants.

Please limit your questions to one primary inquiry and one follow-up.

Then if you have further questions, please re-enter the queue, so that others may have an opportunity to participate.

Now I will ask our operator, Feras, to come back on the line and explain how to submit your questions.

Thank you, ma'am.

Ladies and gentlemen, at this time, we will be conducting a question-and-answer session.

[OPERATOR INSTRUCTIONS]

One moment please, while we poll for questions.

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

Please proceed with your question.

Good morning, John.

Good morning, Nancy.

Could you elaborate a little bit on your comment about residential development?

As you are well aware, there is still a lot of building going up in very overbuilt markets in the Southeast, particularly around Atlanta.

So if you could just sort of give your view overall on where those loans may be going, and secondly, are there any particular markets that are looking bad in your market area right now?

Residential development activity in most of our market area has slowed.

Our builders in general are not doing as well as they were a year ago, because they were doing great.

We are not seeing huge backups of unsold inventory in the single-family market.

In our case, most of our builders, we had pretty restricted speculative limits.

The markets that were growing the fastest are the ones having the most corrections in price, like metropolitan D.C., Florida are having more corrections in prices.

The corrections tend to be worse in most cases at the higher end of the marketplace.

But there are certain projects that I would say are vulnerable.

You have got to worry about the condo market in resort areas, particularly where people had, the builders thought they had presales, but their presales were to speculators.

The single-family housing market, which is really where we are focused, while it's slow, we are not having a large number of projects that are in trouble.

We are having slowing projects, slowing construction that impacts our marginal loan activity.

Most of our builders have some accumulated resources, liquidity and net worth from the long positive cycle.

So, right now, it seems okay.

If we have a really bad spring, that would be a problem.

But our mortgage activity remains pretty strong.

The markets that I think you have got to worry the most about, are the ones where the income ratio to real estate prices are out of line.

Atlanta is not one, by the way.

Atlanta is actually, work the pricing Atlanta has remained pretty rational, and that's probably one reasons why you are seeing building continue to go in the Atlanta market, because the average income, the average person can afford to buy a house in Atlanta.

One of the problems in northern Virginia, the average person can't afford to buy a house in northern Virginia, which means the prices have got to come down, or income has got to come up a lot, and so the markets that are vulnerable I think, and this is certainly true just looking at nationally, at places like southern California, are the ones where the price of the homes got out of line with the income of the potential purchasers.

And we don't have too many of those markets in too many projects that are related to that.

You mentioned that you were see something some increased watch list credits there.

Is there any kind of common characteristic in those credits, either geographical or otherwise?

I don't know, Nancy.

We have had a few people on the development end that have been hurt by the national builders cancelling contracts.

Typically they had a contract where the national builder would agree to buy X number of lots.

They made some kind of deposit, and they are just leaving the deposit on the table, and walking from the project.

In our case, most of the time there is enough equity in the project, and particularly when you get often 20% down payments, it's not going to make the project viable in the long term, but it's going to delay the payout on the project.

So we are not having the kind of dramatic problems that we have, which I remember very well in the early 1990s.

We are just having more slower projects going on right now.

I don't know, I would say that the places, if you look at places like Winston-Salem and Raleigh, where you didn't have the real rapid depreciation, we are not seeing any problems.

The problems you would be seeing would be along the coast, or in metro D.C.

Okay.

Thank you.

Our next question comes from the line of Michael [Orolean] with Sun Life Investments.

Please proceed with your question.

Hi, guys.

It is a really quick question on the net interest margin.

Have you figured out what'the impact would be if you factored out some of the sort of one-time events that caused it to decline, by 9 bips?

Any idea what that would be?

If you took out -- we really have not looked at it without all the LILOs, if that is what you are--

Just, I think you, maybe I misheard what you had said, but had you said that --

I'll tell you.

Our core, if you are after really what our core margin in the banking network, we do kind of look at it this that have way, and it is very stable, it has been stable pretty consistently quarter to quarter.

So most of the movement has come from the recent past in the LILOs.

Okay.

Thank you.

Okay.

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

Please proceed with your question.

Hey, John and Chris, good morning.

Good morning.

I wanted to tag onto the question you were answering a few caller ago, about overbuilt markets in the southeast.

John, you were talking about your portfolio and your experience.

But when you look at the totality of the markets, whether it be in Atlanta or Columbia on the smaller side, do you find that these markets are overbuilt, compared to what you have seen in the '90s and '80s in your career?

I think that some, a few markets are overbuilt.

I think the coastal areas are vulnerable.

I think the big overbuilding risk is in the condo market.

And I think maybe builders got fooled by how many, I think people underestimated the number of speculators that were in that market.

I don't think they are dramatically overbuilt, though Chris, except for the condo market, and a few of the coastal areas.

I think the core markets, you mentioned Columbia, I don't think they are overbuilt at all, unless something really happens to the economy.

If we had a recession and/or we had a real spike in mortgage rates, yes, they'd be overbuilt.

But in that kind of market, maybe the absorption rates have expanded but this is, to me it looks nothing like what happened in the early '90s.

We don't have any of that, we had a lot less craziness in those markets, and we have a pretty healthy economy.

So I think that the absorption rates could slow.

If you were in a market that didn't have in migration of population, that obviously it doesn't take much overbuilding to create problems in those kind of markets.

Fortunately, across our footprint, generically speaking, the places where people are building homes, there is in migration of population, and that takes care of problems pretty quickly.

Great.

And I guess there is the follow-up you mentioned about concern on the coast.

There is a different coast in Myrtle Beach where you're doing an acquisition, compared to other markets, say perhaps in Florida where you are not present today.

Myrtle Beach just doesn't have the high-income market that you see, say, on the west coast of Florida.

It is much more of a bread and butter market.

And so far, of course these things can change, Myrtle Beach has benefited from the pricing in Florida.

The homes are so much cheaper that people that had been headed for Florida stopped at Myrtle Beach.

While the tax, no income tax is a big deal for a high-income person, for a moderate income person that is maybe moving out of the northeast, the savings on not having to pay income taxes is not anywhere near the material issue, and the real estate tax in Florida may make up for it.

So you are seeing a market like Myrtle Beach, I wouldn't call it a blue collar, but more of a middle-collar, middle market actually may be in some ways benefiting by what happened on the price side.

Now, I do think the condo market in Myrtle Beach is probably overbuilt.

We're not in that and Coastal Federal is not in that to any material degree.

But the single-family residential market seems to be moving fine, and seems to actually be benefiting from the relatively lower prices versus Florida, and particularly even though there's trouble with insurance, not the dramatic flood insurance issues you have got in parts of Florida.

Great, John.

Thank you very much.

Yes, sir.

Our next question comes from the line of David Pringle with [FELS New Workpoint] Research, please proceed with your question.

Good morning, all.

Good morning.

Good morning.

I think I am going to hat trick you here.

At the end of the first quarter you had about 17.5 billion of construction loans, and I think the last time we got an update on sort of that composition was in the third quarter, so I would like to go through it again.

Of the 17, were the construction loans up again in the first quarter?

I can give you sort of a breakout of --

You got all that, Chris?

Yes.

Commercial real estate is I think is what you're referring to.

Commercial real estate --

I am going back to your call reports which are actually construction and land development loans.

Which at the end of the fourth quarter, were 17.553 billion.

Are you including residential and commercial?

Yes, sir.

Okay

And how much of that was actually was single-family, and is that portfolio growing?

Right.

The answer of how much is single family would be, you are interested in land and condominiums and just residential construction.

All three, yes.

It would be about 8.5 to 9 billion.

And yes, it would be growing.

I am not sure we are comparing apples to apples.

But if you look at single family residential loans, acquisition and development, it was about 4.3 billion, and construction was about 6.6 billion.

So the acquisition development is 4.3, and the construction is 6 billion?

6.5 to 7 billion.

Okay.

So $7 billion.

So that's about 11.3 out of the 17.5?

Yes, I'm not sure what else is, those call reports don't do it by much logic.

I can't remember the rules on that.

It's all we got.

Yes, I know it.

We are having some growth in those categories.

And we are having really good performance in both the acquisition development and the single family residential construction areas so far.

And how much condo do you have now?

I think it was 700 million in the third quarter last year?

That's about 790.

790 million.

And, you know, every once in a while I wander into the house builders and their orders, even in the Southeast, are down between 30 and 50%.

And just curious, at what point would you expect the construction portfolio to start to decline on the single-family side?

Well, we hope it won't decline because we hope they keep going through the homes and selling them.

The issue is, how many of them are sold and our inventory of spec homes has not grown materially so we don't have builders building houses that they haven't got presolds on.

And so we are not having a big increase in unsold homes inventory.

But we have had pretty tight constraints on the number of speculative homes that a builder could have.

You are having some fallout of contracts, people walking away from contracts, and the builder gets whatever the down payment was, but they obviously in most cases would rather sell the house.

In a single family market, that has not been a big factor.

It has been a big factor in the condo market, but as you saw from those numbers, we are not a very big condo lender.

So it has not been a big factor in the single-family market.

Great.

And nice going on the subprime and Alt A, if I may, not being gratuitous, but it's really nice to see somebody holding the line.

Thanks.

Actually, one other question, if I may?

You mentioned MOEs.

And maybe, why are you looking for one?

And I can image whan the constraints are, is there less than equal.

But why would you consider one?

Well, BB&T kind of got here with an MOE, we did a merger of equals in 1995 with a company called Southern National, and in that process we dramatically improved the operations of BB&T.

We had major cost savings, but also we were able to take advantage of each other's product lines, that one of us was strong in and the other wasn't.

In a consolidating industry, we think scale matters, and we also think the diversification and products and technology matter.

So, you know, we would only do one that we thought would make economic sense to us.

It is a challenge, because we always have the cultural issue, and making sure that the cultures fit once you get the benefits from the economics.

But I was sitting in our DP Steering Committee yesterday, listening to the long list of DP projects we have got going on, and I sure every bank our size is doing exactly the same thing.

And in a certain sense you could argue doubling your cost in these marginal investments, and the reason I think it is more of an issue, I have never much believed in scaling the business, and I don't want to exaggerate the scale issue in the business.

But if you take something like online banking, we should be becoming far more important to us over time than it used to be, most of our customers still mostly depend on our branches, but a rapidly growing percentage of our customers mostly do their banking online.

And they want the best online banking whistles.

Basically the product we put out there competes against Bank of America, and it doesn't cost them anymore to develop the new technologies than it does us.

So there are some scales in the business, and I think it's becoming again I don't want to overexaggerate the issue, and I don't think it is a trillion dollars necessarily, but I do think that there is some scale issue, as the nature of the industry evolves.

And most of the scale factor is in the backroom technology side of the business.

That is conceptually why we would to consider something like that.

And your last MOE was sort of within the southeast banking compact.

And if you have a preference on geography at this point, given the antitrust implications now of trying to do the same thing?

Well, I mean, in theory, you would like to have have something that totally geographically fit, in practice, I don't know how, there are not that many candidates.

So that is one of the issues that you struggle with in thinking about an opportunity like that.

Thank you very much.

Sure.

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

Please proceed with your question.

Good morning, John and Chris.

How are you?

Good morning.

Chris, could you, I see the improvement in efficiency and it's very welcome.

Could you project that out a bit, or would you care to just how much more efficiency you can bring out of the company as we move into 2008?

I will take a shot at it.

On our base, probably back into it from taking our base of expense last year and really trying to apply that 4%, and kind of back into it that way, we tend to see first quarter's efficiency being a little less impactful, than we tend to get a little bit more momentum as we move forward.

So we are 52.1, you could probably expect to hang I would say in that 52, 51.5, 52.5 kind of range.

But the point I made early on the linked quarter expenses is the one I would just reiterate, we have had some expenses in the past in the area of legal fees, and some consulting, and some smaller level and professional services, that we don't think we are going to continue to incur going forward.

So I do think efficiency will continue to improve.

But I would anchor myself to that 4% number off of last year's base, that is really our target for this year, in terms of noninterest expenses.

Thank you.

As when we met with you a year ago, I guess down in your lovely city, you mentioned the new focus on deposits.

Right.

You just talk about what has happened in the past year with regard to building that into your culture, your view of how well the new emphasis on that side of the balance sheet has gone, and again where you think you can take the company?

Sure.

Want me to take that John, or you want to take it?

I will make some comments.

We have really significantly changed our focus to drawing deposits as you can see, and the numbers reflect that.

We will grow them in an economically rational manner, we gained market share in every market that we operate in, with the exception of West Virginia last year, where we maintained the #1 share there.

We had a great year in terms of net new transaction growth.

We did become more price aggressive, mostly by more free checking products than we had traditionally had, and a little more aggressive on CD pricing than we had been.

In terms of the cultural change, we've done in a couple of fairly material ways, one with lots of management focus and evaluation around deposit growth, and the other through the incentive system.

We have changed the weight, in terms of what we reward people from an incentive perspective, with a much heavier weight on growing transaction deposits, and that is really where our focus is, even though the numbers might not reflect that because of what is happening, people moving out of deposit accounts, but we have been adding a lot of new deposit accounts.

And in terms of people's incentive programs.

Traditionally, we have been very loan-weighted and we still have a lot of focus on growing our lending business, but we have changed the incentive systems pretty significantly.

And in terms of communicating our corporate plans, we talk about our #1 objective is to grow our transaction deposit, deposit base.

We have also changed the financial measurement systems, in terms of how we allocate capital so that if you are running the region, you are getting effectively far more incentives to get our deposits, by how the measurement system works, and how our President's Award system evaluates the performance of the region works.

So the incentive and reward systems have been changed pretty radically, to put a greater focus on transaction deposit gathering.

Gary, I might add, been a focus really, we tried to comment on it over the past year, to really try to fund loan growth with customer deposits, as opposed to broker deposits, because you have the opportunity to cross-sell, and generally there's a cost pickup there.

And this whole value improvement project that I think John commented on a year ago, has really provided an effort, and a mechanism try to reach out into other parts of the company.

For example, insurance and try to tap into the client relationships and insurance, through incentive programs that John was mentioning.

And really changing the culture in the nonbanking areas of the bank, which I think is really kind of a long-term future of where we can really have some pickup and deposit gathering.

So a year ago when we talked, if you would have asked our people, I think you would have probably gotten a good number that would have focused on the positive.

I think today if you ask him what is very important, across the board, they clearly understand the message, that deposits are culturally an imperative at BB&T.

Thank you.

One final question if I may.

Just noticing your Tier 1 capital ratio is now under 9%, leveraged capital under 7.

Is that impactful in any way on your share repurchase activity going forward?

Well, we obviously had the implications of the 13-2, and FIN 48 that we prepared for.

We knew we were changing accounting methods effective January 1.

And so that is really why the share repurchases are gauged for the back half of the year.

We are really mindful of targets.

Thank you.

Sure.

Our next question comes from the line of Matt O'Connor with UBS, please proceed with your question.

Good afternoon.

Good morning.

Chris, I was wondering if you could provide a little more detail on your net interest margin outlook?

I think you said it would be relatively stable, obviously the LILO impact should provide some upside.

I am just wondering some of the moving pieces there?

Yes.

That is the primary moving piece.

The point was really for the quarter for the year, we are really seeing it in a stable sort of range, and as John pointed out, net interest income will be helped in the second quarter, about $10 million.

And we won't have, I mentioned the recalculation for making the payment.

When we made the payment, it forces you, 13-2 forces you to recalculate the payment, and take a cumulative catch-up charge, we won't have that going forward.

So it really, we sort of see it stabilizing from here with our core banking margin being pretty stable, it has been in the past.

So that is the primary moving part, and again see that stabilizing going forward.

So just to clarify, when you talk about stabilizing for the year, you are talking about versus 361?

Yes.

From where we are right now, we see for the next quarter and for the year sort of a stable margin and a stable range.

And then separately, John, I was just wondering, there is a couple of your bigger competitors, have a lot going on.

One is trying to integrate a big mortgage company.

One is in the early process of a large cost-saving initiative.

I am just wondering in some of your metro markets where you compete with some of these players, are you seeing anything different in the marketplace?

That is a fair question.

To give I guess specifically Wachovia credit, they have certainly improved their service quality, particularly relative to the old First Union.

They are not improving it anymore.

They kind of went from a low level to a better level, and but their objective is to be a tougher competitor.

The only thing we are seeing from both Bank of America and Wachovia that is interesting is maybe more price competition than we have traditionally seen from them.

And I don't know if that reflects struggles they're having with volume, or what that reflects.

But they are very strong competitors.

They do a really good job.

And I don't think the nature of the competition has changed fundamentally, but they are I would say, a little bit more bright competitive than they have traditionally been today.

Okay.

All right.

Thank you very much.

Yes, sir.

Our next question comes from the line of David West with Davenport & Company.

Please proceed with your question.

Good afternoon.

Hi.

First, I guess kind of a follow-up on earlier questions about deposit growth.

You mentioned your net branches increased 13 this quarter.

Wonder if you would comment, do you still expect to open about 50 to 60 for the year?

And also with that maybe comment on are you seeing the type of performance you envisioned over the past, from the branches you have opened over the past 1 or 2 years?

That is a great comment.

We're actually, we opened 39 denovo last year, we opened 52 branches, 39 were denovo, we are actually planning to open 35 denovos this year.

Which is, that's what we had actually adjusted down that number a little while ago.

And we will do that.

We are following the performance of the denovos very closely.

They are basically as a group on target, particularly ones that have matured a little bit.

We are having interestingly enough, we are having better results where we were building where we had what we call brand equity, i.e., we are adding denovos in Charlotte where we are very well known.

We are having very good results in Atlanta.

We are having a much bigger struggle in Florida, maybe because some of the economics in the marketplace some of the community bank competition.

But we do, our denovos to-date have created about $25 million in dilution.

If they do what we expect, based on what they already have in process, the denovos that we have started, not the ones we will be building, the ones we already have a start, in February of 2008, will become as a group, collectively accretive.

They won't make up for all we have spent on them, but in February 2008, based on the current performance as a group they'll move from pretty majorly dilutive to slightly positively accretive.

So collectively they are doing what we expected.

Some are better than others.

Some markets have worked out better than others.

And they are going to turn into at least that group that's in process, is going to turn into a positive instead of a pretty major drag in February 2008.

So overall, we feel really good about it.

Of your slightly lessened objectives there for this year.

I think in the past, you had planned Atlanta to be a major expansion and Florida, are you pulling back in Florida?

Some.

Some.

We're not having as good, we still got a lot in process, and that is what a lot of our focal area.

But we are pulling back some in Florida, yes.

Very good.

Lastly, following up on your comments about M&A pricing, particularly wanted to focus in a little bit on the insurance brokerage side, since you are a very active acquirer there, we have had a couple of transactions from the private equity folks.

Have they disturbed the pricing models a little bit?

Yes.

They are crazy deals.

We're not going to do it, but we said maybe we ought to sell our insurance business for the price.

I know this.

The market doesn't give us credit for the insurance business, that it ought to give based on what the private equity funds are selling, or paying for the insurance business.

So we have looked.

In fact, we have been invited in to look at these companies, and they are very interested in us acquiring them, and the prices were just off the wall.

Now those have been bigger deals.

We haven't done that size of acquisition.

So I don't know that it impacts the kind of insurance agencies we traditionally acquire.

But it's got to impact some people's psychology.

Probably more in terms of their willingness to sell versus what the prices they might actually get.

But yes, it is interesting what private equity funds have been paying.

Thanks very much.

Yes, sir.

One other thing would I say, David.

That will come back because they are paying too much for this business.

We may buy them two years down the road at cheap prices, because they can't make them work.

Gentlemen, there are no further questions at this time.

I would like to turn the conference back over to Ms.

Gjesdal.

Thank you for all of your questions.

We appreciate your participation today in this teleconference.

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

Thank you, and have a good day!

Thank you.

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