Truist Financial Corp (TFC) 2007 Q2 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the BB&T second quarter 2007 earnings conference call on July 19, at 11 a.m.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

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

Tamera Gjesdal for BB&T.

Thank you.

Ms.

Gjesdal, you may begin.

Good morning, everyone, and thank you, and thanks to all of our listeners for joining us today.

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

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

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

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

Now, 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 31, 2006.

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

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

John Allison.

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

What I would like to talk about is our financial results for the second quarter of 2007 and year-to-date with a little extra focus on asset quality because that's one of the issues a lot of people have been talking about, share with you a few comments and updates on mergers and acquisitions and then I'll give you some thoughts about the future.

After that, Chris, we'll give you some more in-depth analysis of a number of areas and we'll have time for questions.

Looking at our second quarter performance our GAAP net income was $458 million, a 6.8% increase, operating earnings were very similar at $461 million, up 7.2%, GAAP EPS and operating EPS were both $0.83, a 5.1% increase.

We did meet the consensus estimate which was $0.83 and had a significant improvement from the first quarter where we made $0.78 which is a 25.7% annualized increase quarter to quarter.

Our cash basis EPS was $0.86, up 3.6%, and a 24.8% annualized increase over the first quarter cash basis EPS of $0.81.

Our returns were very strong, a cash ROA 1.61, cash ROE at 28.48.

The year-to-date numbers look similar.

Our GAAP net income was 879 million, up 2.2%, operating net income 886 million, up 5.4%.

GAAP EPS was $1.60.

Operating EPS, $1.61 up 3.9%.

Cash EPS $1.67 up 3.1%.

Our cash return on assets was 1.58 and cash return on equity, 28.35 for the first six months, again very solid returns.

If you look at the factors driving earnings, our biggest challenge has been our margin which continued to decline.

It declined from 3.61 in the first quarter to 3.55 in the second and it's down from 3.76 in the second quarter of last year.

Chris is going to give you some insight into what's happening with our margin and most importantly I think our future expectations.

On the positive side we had an excellent quarter in terms of noninterest income, very strong annualized growth rate.

If you take out nonrecurring items, purchases and the swing in mortgage service impairments, our annualized first to second noninterest income growth was 50.2% which was pretty good.

Second to second was up 12.3%, and year-to-date 8.9%.

Again excluding nonrecurring and purchases, look at the key components of noninterest income, insurance commissions continues to be our number one source of noninterest revenues, continued relatively strong growth rates, second to second up 8.3%, annualized link 74.6%.

Now, that is a seasonal factor, and year-to-date 8.8%.

That is a very strong growth rate.

As you know, the industry has basically been flat to down in revenue, so we're obviously moving market share pretty significantly in the insurance brokerage business.

Service charges on deposit accounts second to second at 5.6% annualized link 28.4%, year-to-date 4.7%.

We're seeing some more positive momentum on service charges charges which is encouraging because that's another major source of noninterest revenue.

We did add 28,000 net new transaction accounts, and have added 61,000 net new transaction accounts year-to-date so we continue to have strong momentum in attracting new clients.

Our non-deposit fees and commission which are primarily our debit card continued to have strong growth.

Second to second 12.3%, annualized link 45%, year-to-date 11.5%.

Investment banking and brokerage had a strong quarter, second to second up 12.7%, annualized link 34%, 6.9% year-to-date, trust revenues second to second up 5.3%, basically flat first to second, up 6.7% year-to-date, kind of relatively modest growth in our trust business.

Mortgage banking if you take out mortgage servicing rights actually had a strong quarter, up second to second 14.8%, annualized link 59.4%, 3.6% year-to-date, and production was relatively strong in the second quarter we originated a little over $3 billion in mortgage loans compared to 2.6 billion in the second quarter of 2006.

Our other income has fluctuated.

Second to second was up a lot, 38.6%, was actually down from the first quarter 6.5%, up 26.8% year-to-date.

If you look at the second to second change, we had a change in what's called a Rabbi trust for our 401(k) served that added $8 million in revenue that was partially offset on the expense side, and we also made a small gain, a $3 million gain on MasterCard stock which was the two primary changes second to second.

Again, strong noninterest income growth.

Net revenue growth again taking out purchases, nonrecurring items and fluctuations of mortgage servicing impairment, annualized first to second 21.3%, second to second 4.2%, and year-to-date 2.9%.

We were pleased with an improvement in our fee income ratio which in the second quarter was 42.6% compared to 40.8%, so we have got a very positive trend there.

Noninterest expenses year-to-date continues to be good news, and if you take out purchases, while we did have an increase from first to second of 17.1% annualized, that was largely incentives.

Second to second we were up 2.9% and year-to-date we're only up 1.1%.

Chris will give you insight into our noninterest expenses, but we're real pleased with our progress in that regard.

Our efficiency ratio on a cash basis in the second quarter was 51.7%.

We have got a long-term goal to get that ratio back under 50%, and I think we'll get there in the next couple years.

Loan growth, looking at annualized first to second on a GAAP basis total loan growth was 9.7%.

If you take out purchase acquisitions, securitizations, and leveraged leases, total loan growth first to second annualized was 6.1%.

Commercial loan growth did slow to 3.7%, direct retail at 2.7, our sales finance business did okay at 6.2% revolving credit which makes our credit card business 8.4%, mortgage at 12%, and specialized lending at 16.1%.

If you look at six second quarter to second quarter, total loan growth was 7.4%.

If you take out purchases, securitizations, and adjust for our AFCO acquisition, you had commercial loan growth 5.8%, direct retail at 3.3, sales finance at 11.1, revolving credit 8.1, mortgage at 10.6, specialized lending at 13 or 22.9% without the AFCO acquisition and total loan growth as I said 7.4%.

Year-to-date total loan growth without purchases leveraged leases, et cetera, 7.5% and that compares to a first to second growth rate of 6.1%.

It is clear that we did have some slowing of loan growth in the second quarter, primarily reflected in real estate markets both impacting our commercial real estate lending business and our home equity business which are both related to real estate.

Our sales finance and our credit card businesses were fairly healthy, and we had strong growth in mortgage and in specialized lending.

We're seeing -- actually seeing some pickup in our commercial and industrial lending business but it's being offset by slowness in commercial real estate which is from a volume perspective our biggest challenge.

Very pleased overall with our deposit growth.

Noninterest-bearing deposits still remain a challenge in a market where people are moving out of noninterest deposits into CDs, but we did make some progress.

Second to second, noninterest-bearing deposits if you take out purchases were down 1.9%, but annualized linked up 9.5%.

They're down 2% year-to-date, so we're getting a little better momentum in noninterest-bearing deposits.

Had very strong growth rate in our interest checking deposits of 35.4%.

Our client deposit growth which is really what we focus on again taking out purchases we're very pleased with second to second 7.7%, annualized linked 7.1%, year-to-date 8.3%.

Total deposit growth was slower because we simply made a decision based on costs to come out of money market instruments into Fed funds.

We obviously fluctuate those based on price.

Total deposits without purchases second to second up 4.9%, and annualized link down 6% and year-to-date up 6.3%.

The client deposit growth remained fairly strong.

Pricing is still tough, but we have seen some improvement in pricing, particularly as some of the community banks have backed away from more aggressive CD rates, so we are very pleased with our deposit momentum both in terms of the client deposit growth rate and an improving pricing environment.

While we had some deterioration objectively our asset quality remains very healthy, and I think that's important from a long-term perspective.

We did have a rise in nonperformers from 367 million to 423 million as a percentage of assets from 0.30 to 0.33.

Of the $56 million increase, 11.6 million came from the Coastal Federal acquisition, and you remember in purchase acquisitions you don't restate the base.

The majority of the remaining increase was in our commercial loan portfolio, a portion of that was commercial real estate although we just experienced what I would call some random increases in operating company problems.

Because of this visibility in the discussion I would just remind everybody we have a very small subprime mortgage portfolio that didn't have any material changes in that.

Our Alt-A mortgage portfolio continues to have excellent results with very few problems.

Our nonperforming assets do remain very granular.

We only had three nonperforming loans over $5 million.

The largest commercial loan that we have in the nonperforming status is 5.9 million which is a credit to a livestock feed meal.

If you look at charge-offs in the second quarter we charged off 76 million, that was a 0.35 loss ratio up a little bit from the first quarter of 0.29 and the second quarter of last year 0.23.

If you take out our specialized lending businesses our losses were 0.20 compared to 0.13 and 0.12.

The increase in charge-offs is partially related to a fraud situation which has gotten a lot of press attention.

We don't usually talk about specific credits, but we did have a $20.6 million exposure to the failed Village of Penland project.

We charged off $9 million of this exposure leaving us with a total of 11.6 million.

All the remaining credit is current and none of it is a 30 days past due.

Obviously based on the size of BB&T we don't expect any material impact on performance related to this remaining part of this credit.

We have done a careful review of this type credit situation and are confident we have no other similar exposures.

This was a very sophisticated fraud.

While we hate any loan losses given our size, it is not a material event for us.

Interestingly enough, if you were to exclude this one-time loss and our specialized lending portfolio, then our loan losses for the quarter were only 0.15 which is obviously a really good number.

Looking at the year-to-date charge-offs numbers, they're 0.32% compared to 0.24% last year, excluding specialized lending our charge-offs were 0.16 compared to 0.13.

Again, that's an excellent result, so we feel really good about that.

Provision for credit losses in the quarter we provided 88 million charge-offs, 76 million, so we added 12 million to the reserve.

Year-to-date we provided 159 million, charged off 137 million, so we've added $22 million to reserve.

Our loan loss reserve did go down 1 basis point from [105] to [104], but our coverage in nonaccruals remains very strong at 2.83 times.

If you look at the nonperforming and charge-off trends I believe we're simply returning to normalcy.

The nonperforming and charge-off levels were exceptionally low in 2006.

While we expect some continued rise in both nonperformers and charge-offs we're not expecting a significant deterioration in asset quality particularly assuming generally positive trends in the economic environment.

Let me change direction now for a minute and talk a little bit about merger and acquisitions.

We did complete the acquisition of Coastal Federal, a $1.7 billion company that gave us the number one market share in Myrtle Beach and added to our number one market share in Wilmington.

We will be converting Coastal Federal in August.

The usual challenges in community bank mergers, but everything overall is going very well.

We continue to look for other community bank acquisitions, but pricing is an issue to us.

We still think that community banks have some very significant challenges in he terms of future profitability and we only are interested in doing acquisitions that make economic sense to us, so we're continuing to pursue acquisitions, but they must work from an economic perspective.

We did announce two insurance agency acquisitions, one in Atlanta and one in Hilton Head, both great markets, and you will hopefully hear some more acquisition announcements for us in the insurance business what we're doing so well in, and we're continuing to pursue other nonbank acquisitions.

However, I strongly believe that acquisitions will be a secondary activity for us.

We're really focused on driving organic revenue growth.

With that said, let me share with you a few thoughts about the future.

I will begin by reinforcing Tamera's opening comments.

We do not make formal earnings projections and certainly anything I say about the future might be wrong.

Also, we're assuming that we have a relatively healthy economy based on all the economic forecasts that I have seen and the Fed does not raised interest rates in the immediate future.

It might be helpful to look a little bit at the future by extrapolating from where we are today.

Our primary challenges are continued margin decline and increasing loan loss provisioning.

As Chris will discuss, we think we're near the bottom in terms of net interest income which is -- net interest margin which is very good news.

We do expect nonperformers and charge-offs to rise to a normal level but don't expect any significant asset quality problems.

On the positive side we continue to have healthy loan and deposit growth although we are experiencing some slowing in the residential construction activity which will continue to be a drag on our commercial loan growth.

We do expect reasonably good roan loan growth and deposit growth going forward.

One of the good news is if our margin can stop declining, slower loan growth will actually turn into faster deposit growth, so our challenge has been the fact that the margin has been declining despite reasonable loan and deposit growth in the past.

Our fee income businesses are overall doing well.

There is certainly some challenges in the insurance market, but we have a lot of momentum and are moving market share and expect to continue to do that.

We're pretty optimistic about healthy fee income growth going forward.

Our expense control this year has been excellent, and we're absolutely determined to continue that trend.

We're working hard to drive our cash basis efficiency ratio below 50% which may take awhile but we're focused on making that happen.

That said, we're pleased with the second quarter results and are pretty optimistic about the remainder of 2007.

Now let me turn it over to Chris to give you some insights in a little more depth in a number of areas.

Thanks, John.

Good morning.

Also like to welcome each of you to the call.

As is normal I would like to just speak to you briefly about net interest income, net interest margin, a little more detail on noninterest expenses, taxes, and capital.

First, looking at net interest income based on operating earnings, if you look at linked quarter we had very healthy earning asset growth on average up 8.7% adjusted for purchases, produced $985 million of net interest income, 2% annualized increase over linked quarter, adjusted for purchases and leveraged leases.

On a common quarter basis earnings assets were up 6.3% adjusted for purchases.

Again, produced 985 million in net interest income and it represented a 1.2% decrease over the prior year quarter adjusted for purchases.

I will remind you that second quarter '07 did include the funding costs associated with the large tax payment we had discussed in prior calls in January, and if you excluded the funding costs from second quarter '07 comparing to second '06, net interest income growth rate would have actually been slightly positive.

On a year-to-date basis earning assets were up 6.2%, adjusted for purchases produced a 1.948 billion in net interest income.

1% decrease over prior year quarter adjusted for purchases and leveraged leases, and likewise the 2007 year-to-date net interest income also included the majority of the funding costs and if you excluded that comparing back to year-to-date '06 we also would have been slightly positive in net interest income in terms of growth rate.

Looking at the net interest margin based on operating earnings, just a quick recap, the margin was down 6 basis points as John just commented, 3.61 in first to 3.55 in the second.

8Experienced 21 basis points decline from second '06 to second '07 from 3.76 to 3.55, and a similar decline of 21 basis points on a year-to-date basis from '06 to '07 of 3.79 to 3.58.

During the second quarter we did remain liability sensitive and continued to operate in a, what I characterize as a challenging interest rate environment.

While we did continue to experience loan pricing pressure, total interest-bearing liability costs continued to stabilize, and what I really mean by that is it did continue to increase but at a much slower pace than in recent quarters, a trend we had been seeing, and that continued.

In fact, total interest-bearing deposit costs actually declined during the quarter, first time we've seen that on a linked basis in some time while the cost of long-term debt edged up just a bit when comparing by the first quarter.

Our deposit mix also stabilized somewhat on a linked quarter basis, and as we have seen in recent quarters, and really all the way back through 2006 we once again funded our loan growth with client deposits when comparing back to first quarter.

If you examine the yields and rates beginning with linked quarter, you can see the total earning assets were actually down 3 basis points and total interest-bearing liabilities up 4, creating spread compression of about 7 basis points.

However, the core securities portfolio really performed well in the mid 490s, since loan rates are moving up at a slow pace, increasing only 2 basis points during the quarter.

Again as I mentioned, total interest-bearing deposits actually declined at a 4 basis point clip driven primarily by 8-basis point reduction in interest checking and a basis point on other interest-bearing deposits, again a very positive move in our view.

On a common quarter basis, total earning assets were up 37 basis points, total interest-bearing liabilities up 55, and that 18-basis point spread compression caused primarily by CD rates increasing 64 basis points.

The drivers of the 6-basis point decline on a linked quarter basis in the margin really twofold.

One, loan pricing pressure and our insurance premium finance businesses, AFCO and prime rate both of which are included in the specialized lending category, AFCO as you may be aware primarily involved in larger ticket items primarily than smaller and most of the competitiveness is really at the large ticket and one of the reasons we acquired these companies or to be able -- AFCO to be able to push through their distribution system to the smaller loan with the higher yield ticket, and that is our challenge going forward, but that opportunity does exist and very pleased with the acquisition.

Second item was an increase in the cost of long-term debt.

We had some lower cost debt roll off and a portion of it replaced with higher cost debt such as a $600 million hybrid capital issue that we did during the second quarter.

Looking forward, just wanted to point out our Alco-model is based on blue chip consensus forecast assumes that the Fed funds rate will remain relatively stable for the remainder of 2007 and into 2008 which those represent a change from about a quarter ago.

Our forecast kind of looking forward to the third quarter, we do expect a few basis points of additional compression in the margin during the third quarter, and then stabilizing to slightly improved during the fourth quarter, remaining in the 350s, and as John said we do think the margin's nearing the bottom at or around year end.

Shifting gears to noninterest expenses, as you may recall from our January conference call, we highlighted improving expense control as a primary objective for 2007.

We targeted a 4% adjusted for purchase acquisitions as our noninterest expense growth goal for the year.

We have focused a lot of effort toward improving productivity throughout the entire company, and we're really pleased with the performance in this area to date.

During the second quarter we experienced favorable noninterest growth rates, as a result achieved positive operating leverage and improved operating efficiency as measured by the cash basis efficiency ratio for the third consecutive quarter.

Real pleased with our efforts there.

Also just wanted to point out that excluding the Coastal Financial acquisition we were able to open 11 net new offices, banking offices.

We actually opened 14 new de novos and closed three offices in other locations.

To open 11 net new banking offices during the quarter while decreasing FTEs by 313, again, if you exclude Coastal.

So core BB&T had good expense control.

If we drill down just a bit further and you look at the year-to-date numbers, we were up 1.1% over adjusted for purchases over last year versus the 4% target, if you drill down in that, that actually equates to being up about $20 million after purchases and it occurred in two places, personnel expense and occupancy and equipment.

Personnel was primarily an increase in salaries and fringes, and salary increases that are effective April 1, so at the beginning of the quarter for us every year and promotional increases.

In equipment expense it really occurred as a result of the de novo locations.

If you look on a common quarter basis you can see we were up 2.9% over prior year quarter adjusted for purchases, and drilling down in that, that was about a $26 million increase after purchases were moved and it occurred primarily in the area of personnel expense, 60% of that number was really due to salary fringes, annual salary increases that we talked about being effective April 1, and the balance would have been because of increased incentives, (inaudible) mortgage, Laureate capital and executive incentive program.

If you look at linked quarter you'd see a little different story, linked was up 17.1% annualized increase adjusted for purchases which we think is very appropriate given the seasonality from first to second and also the fact that the expenses really consist of incentives and revenue producing activities that directly relate to the 50.2% annualized linked quarter growth rate for noninterest income.

If we look at the 17%, that equates to about $38 million increase after purchases occurring in two areas, personnel expense and other operating.

Personnel is more of the same.

It is two-thirds of it primarily due to increased incentives due to the big fee income quarter we had and it arose in insurance investments, the banking network, mortgage, and Laureate capital, and then we had a small increase in the Rabbi trust.

On the other operating expense areas, really three items, increase in advertising expense, increase in deposit related expenses, and then a small increase in operating charge-offs.

All in all just feel really good about the effort and the hard work that's been put into controlling expenses.

Just to want give you also an update on expense savings for the recent bank acquisitions.

Main Street you might recall we targeted about 28 million.

We converted Main Street September of '06.

To date we have achieved 25 of the 28 million in savings, and 7 million of that came in the second quarter.

First Citizens we targeted 7.5 million.

We converted that Company November of '06.

Savings to date is right at $3.8 million and about 2 million of that was achieved in second quarter.

Coastal Financial, as a reminder we targeted 19 million.

The conversion is scheduled for August of '07, and just had to date about $0.5 million in savings all of that occurring in the second quarter.

Looking at taxes, want to just comment on the effective tax rate and what to expect going forward.

Fortunately not a lot of noise here, pretty stable in fact.

This past quarter we had kind of within the range we had commented on, 33.09% as an effective tax rate and going forward we really expect for the third quarter the effective tax rate to be in that 33 to 33.5% range for the second quarter.

Looking at capital, wanted to point out that during the second quarter we did issue as I had mentioned earlier 600 million of basket D tier 1 qualifying hybrid capital, it's our first foray into hybrid capital which obviously positively impacted some of our capital ratios.

Looking at the ratios, you see equity to total assets end of period was at 9.5%.

On the risk-based capital ratios, end of period, tier 1 actually increased from first to second, 8.7 to 9.3% second quarter total increased from 13.9 to 14.5%, second quarter leverage capital end of period increased from 6.9 in the first to 7.5 in the second quarter, well above our 7% target.

And intangible equity in the period was right at 5.5% equal to our minimum target.

Share repurchases, as a reminder, we've done none to date but do plan still to repurchase in the range of 7.5 million shares, 7 to 9 million shares, excuse me, during the remainder of 2007, beginning in the third quarter.

Then finally, just wanted to remind you that third quarter we did increase our dividend $0.04 to $0.46 per quarter and that represents 9.5% increase over the prior year quarter.

That concludes my comments.

Thank you, Chris.

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

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

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

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

Thank you.

(OPERATOR INSTRUCTIONS) Our first question is from Steven Alexopoulos from JPMorgan.

Please state your question.

Good morning.

Good morning.

John, you said you expect the level of nonperformers and net charge-offs to go back to a normal level.

What do you consider a normal level to be?

I think if you look at nonperformers, something like normal levels around probably 0.50 as a percentage of loans and leases, and it has been in the 0.40 category, so I think it is going to go back -- we're at 0.48 now, so I don't think, it might go a little higher than that, but I don't think it is going a lot higher than it is now.

Charge-offs in our nonspecialized lending businesses traditionally have run 20 to 25 basis points.

They've been running 10 or 12 which is extremely low levels, and I think they will drift back towards the 20 to 25-basis point level.

I don't think we are going to have any material rise and losses in our specialized lending businesses.

Only change happening there is they are growing a little faster than the rest of our portfolio.

You might have a little faster rise in total charge-offs, but that will just be a mix change not actually a -- I think the specialized lending businesses will remain, losses will remain pretty much in the range they're in today.

About 35 basis points for total charge-offs.

Yes, they could drift up -- yes, 35, something like that for total, maybe 37, 38.

That's obviously a guess.

Yes.

Right.

Right.

If I can just ask one clarification question to Chris.

On the margin expectations for pressure in the third quarter and then stabilizing in the fourth quarter, what is it that you see pressuring the margin next quarter that's going to go away in the fourth quarter?

Well, first, when we have in the past had a rate cut in our model which we don't have now, that change in the forecast, and then we have a little long-term debt I mentioned that we just had some lower cost private placement that was almost rolled off, so you have got a little bit of pick up in expense there.

Okay.

Thanks.

Our next question is from David Pringle from [Pells Point Research].

Please state your question.

Good morning and thank you.

Good morning.

You mentioned Alt-A.

About how much of that have you got?

Chris, have you got that number offhand?

Yes.

We got just a shade over 3 billion in Alt-A, and it was as I recall we had Beacon score in that portfolio running about 734, and our total mortgage portfolio I think was 720, so it out performs our overall mortgage portfolio.

And as a follow-up, do you know how many of the buyers of houses out of the projects that you are funding on the construction side have been using subprime or Alt-A loans or other goofy types of mortgages?

Do you know what they use to finance this stuff?

I would think in terms of the kind of subdivisions we finance, I think a very small percentage of them would be subprime buyers.

Alt-A, that's a pretty broad product range.

You have a lot of high net worth individuals that use Alt-A mortgages, so we probably have some more of that, but I would say our subdivisions are dominated by traditional mortgage type financing.

Have you guys asked?

Oh, yes, I haven't, but I am sure people that -- our people in the lending business look at all of those kind of statistics, but you can -- there are certain kinds of markets and certain kinds of subdivisions that tend to be focused on those market segments, and we tend not to be in that lending business.

Thank you.

I think the only way it would affect us is if in general if causes all real estate values to fall.

We are more likely to get an indirect effect than a direct effect.

Well, there have been in the other geographies a lot of purchases with 0 to 5% down and basically interest-only loans.

Yes, we wouldn't be financing from many of that style subdivision.

Right.

I understand that, but if that financing goes away, then it could affect your divisions?

It could affect anybody, right.

It could affect real estate mortgage, sure.

Thank you.

Yes, sir.

Our next question is from Christopher Marinac from FIG Partners.

John, Chris, good morning.

I wanted to ask you about the incident that happened in Western North Carolina with the fraud issue on a development that you may or may not be familiar with that one, but I am just curious as a result of that is there an increase in fraud that you see across the footprint in general that makes it more of a challenge to gauge credit quality going forward?

That's a good question, Chris.

We have taken a really careful look at that after what happened at the Penland subdivision, and we can't find anymore.

We can't find anything like that particular subdivision.

I think in general there was an increase in fraud but most of it was in the subprime market area, and so we're not seeing any systematic increase, and we haven't really discovered any major fraud except for this Penland deal in a -- in eighteen months, so I don't really think this is a systematic problem in the kind of business that we typically do.

Okay.

I guess my follow-up on a separate point is the new office space you're going to be taking in Atlanta, is that signal, do they have any increased movement in Atlanta or is that simply just a consolidation of all of your operations in that one location?

It is primarily a consolidation of our operations in Atlanta, but of course we have been opening lots of de novo locations in Atlanta.

It has been one of our real focal areas and of course through the Main Street acquisition we have moved to number five in market share in Atlanta, so Atlanta is definitely a focal market for us and while this is mostly consolidated space we have, it obviously will significantly increase our visibility, we believe in that market, so Atlanta is one of our real focal markets.

Thanks very much.

Yes, sir.

Our next question is from Matthew O'Connor from UBS.

Please state your question.

Hello, guys.

Hi.

You mentioned that the head count was down ex Coastal another couple hundred, and I think this follows a similar decline in 1Q.

What's the outlook on the head count side I think initially you had expected higher head count this year.

Is there to be some hiring in the back half of the year or are you clamping down a bit here?

I think, Matthew, you could see some of that.

Our target ultimately was 4%, we're at year-to-date 1.1, but you saw common is like 2.9.

We have focused on growing specifically specialized in lending business and insurance, soon to be growing at rapid rates.

We can see some additional pickup there, but the target we had at the beginning of the year was only net up 400 or so FTEs for the whole year, so yes, you could see some pickup, but I I don't suspect we will hit that target kind of being up 400 for the year.

I think we'll beat it.

Yes.

I am sure we'll beat that target.

Okay.

Versus the expense level of 918 this quarter, a little trend up from here, nothing significant?

No, I don't think so.

I would be guided by the 4% target and as John said, I think both FTEs and our target, our objective really is to try to beat that number.

I think we'll beat the 4% target.

Okay.

Just separately you mentioned about return in the market to buy back your stock in the second half of this year.

Is this still the case and can you just give us a sense of the timing and the magnitude of the buyback?

Again, the plan is still what we had alluded to earlier, and that is to repurchase 7 to 9 million shares beginning in the third quarter, so we will be starting in the third quarter as soon as we can to really kind of get that activity going again.

Thank you very much.

Yes.

Our next question is from Chris Mutascio from Stifel Nicolaus.

Please state your question.

Good morning, John, good morning, Chris.

Good morning.

Chris, just a quick question on in the release you all talked about other non-deposit fees and commissions being up I guess to 127 million in the quarter which is a nice move from first quarter, and I think they highlighted that it was growth in credit or excuse me, card related services.

Can you provide a little more color, what were card related services fees in the second quarter versus first quarter and is the second quarter level sustainable?

Yes, it would be about equally split.

Bank card income due to increased sales volume and then debit check card interchange income, just we just have more active cards in the market.

I think the debit check card interchange is certainly that's been moving sort of well all year long, and we actually have a pickup in bank card income.

Our sales volume in bank card we've tweaked our model a little bit and really getting more momentum, and my feeling is that it would be sustainable as we move forward.

And as a follow-up question, I think John had mentioned he was going through quarterly comparisons MasterCard gains, John, were you referring to a $3 million gain in second quarter of '06?

'07.

That was this quarter was about a $3 million gain.

Yes.

We sold part of our MasterCard stock, a little bit of it and made a $3 million gain.

Thank you very much.

Yes, sir.

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

Please state your question.

Hello, Chris and John.

How are you?

Hey, Gary..

Chris, sorry if I missed this.

What were the share repurchases in the last quarter.

No problem.

We had none in last quarter, Gary.

We had none year-to-date, but our plan is to purchase, repurchase 7 to 9 million shares for the balance of this year and to start just as soon as we can in the third quarter.

And the reason for not repurchasing shares in the most recent quarter?

Did you feel constrained in some way?

We haven't really purchased any for the last four quarters, and the objective was we were preparing for the tax charges that we took in the first quarter, and we have two capital targets leverage of 7, intangible of 5.5, and we were right on our 5.5 tangible target, so the strength would be the tangible.

Thank you.

John, stock has been trading in this range since early 2004.

A while ago you were discussing kind of how your view is to how BB&T could survive.

Could you just update us on your thinking with respect to mergers of equals and acquisitions and such?

Gary, I don't know that I have any new news.

Our major focus is on organic revenue growth, and we've been trying to drive that, and actually would have been driving it if it hadn't been for the margin pressure and the yield curve.

That's really been a big challenge for us.

We're still looking for Community Bank acquisitions, but the dilemma there is of course the pricing.

We're not going to do anything that doesn't make economic sense.

We're still looking for nonbank acquisitions particularly in the insurance business.

We're actually exploring there might be some niches we can get into insurance underwriting which we have a lot of expertise in given our brokerage volumes and our skillset and insurance.

In terms of mergers of equals, we're still in theory interesting in doing merger of equals.

The dilemma is actually doing it in practice because we have got to find both an economic fit and a cultural fit, and we have over the last several years have gone through the process of talking to a number of different companies.

It is a fairly short list.

It fits economically, and we've never been able to work anything out and we certainly don't have anything now that looks imminent.

On the other hand, we would like to long-term, we think that there is some tremendous economics can be really good for our shareholders to try to figure out how to do a merger of equals having been through that experience, and that's the reason that we're here today having had a successful merger of equals, but it has to work both economically and culturally, and that's the challenge, but I do think the forces in the industry will continue to make it a very competitive business and might motivate us and somebody else to get together because of the potential economies in a merger of equals, but things change fast in this business, but we certainly don't have anything imminent happening today.

Thanks.

Excuse me, thanks for your comment.

Yes, sir.

(OPERATOR INSTRUCTIONS) Our next question is from Jefferson Harralson from KBW.

Please state your question.

I was hoping to get some detail on the specialized finance growth.

Is most of that coming from premium finance or since that's the biggest piece of the loans or is it coming from elsewhere as well?

That's a good question.

It is primarily being driven by reasonable acceptance.

Our subprime, automobile business which continues to grow fairly rapidly.

We're also having pretty healthy growth in our traditional consumer finance business which is titled Lendmark, and we have a couple specialty areas such as Sheffield that does equipment financing and those kind of entities.

Interestingly enough while there has been a big, a lot of commotion in the subprime mortgage market, the subprime automobile market has not experienced any upset.

You may remember I guess it was three or four years ago there was a huge shake-out in that market similar to what's happening in the subprime mortgage business, and out of that shakeout the market rationalized and we're continuing to experience very healthy returns in that business.

The loss ratios remain high, but they haven't gotten any -- they've stayed basically the same.

It has been positively impacted by the Hispanic market which needs automobile financing and maybe doesn't have credit history that some of the -- because of new entry into the U.S.

economy, so that's where most of the growth is happening.

And which of those businesses are you investing the most in?

I think you mentioned you're investing in some of the specialized businesses.

We've been investing in all of them.

Regional has been opening new locations, and we last year made a pretty sizable acquisition that was integrated into regional.

We are also putting extra focus in our commercial finance businesses, and our factoring business which is actually doing very well.

We've moved into international factoring which is a nice niche for us given the nature of the economy in our market area, so we're focusing really on that whole set of businesses and are investing in every one of them including adding salespeople and hiring people from other of our competitors and having good experiences across that whole product line.

Okay.

Thanks a lot.

Yes, sir.

There are no further questions at this time.

I would like to turn the floor back over to management for closing comments.

Thank you.

Thank you for your questions.

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

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Thank you.

Thank you.

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

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