Truist Financial Corporation (TFC) Q2 2007 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, and welcome to the BB&T Second Quarter 2007 Earnings conference Call on July 19th at 11 AM. 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, for BB&T. Thank you, Ms Gjesdal, you may begin.

Good morning, everyone and thank you, Latonia, 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 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 will pause to have Latonia come back on the line and explain how those who have dialed into the call may 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, 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 the company or the SEC. And 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 in year-to-date with a little extra focus on asset quality because that is one the issues a lot of people have been talking about, share with you a few comments and updates on mergers and acquisitions and then give you some thoughts about the… about the future. After that, Chris will give you some more in-depth analysis of a number of areas, and we will have time for questions. Looking in our second quarter performance, our net… 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 didn't 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. Our cash ROA was 161, cash ROE of 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 a $1.60. Operating EPS, a $1.61, up 3.9%. Cash EPS, a $1.67, up 3.1%. Our cash return on assets was 158 and cash return on equity 28.35 for the first six months. Again, very good solid returns. If you look at the factors driving earnings, our biggest challenge has been our margin which continued to decline. It declined from 361 in the first quarter to 355 in the second and a stands from 376 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 non-interest income, a very strong annualized growth rate. If you take out non-recurring items, purchases in the swing and move your service impairments, our annualized firs- to-second non-interest growth was 50.2%, which was pretty good. Second-to-second was up 12.3% and year-to-date 8.9%. Again excluding non-recurring in purchases, look at the key components in non-interest income. Insurance commissions continues to be our number one source of non-interest revenues. Continued relatively strong growth for '08. Second-to-second up 8.3%, annualized link of 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 is basically been flat to down in revenue. So we are obviously moving market share pretty significantly in the insurance brokerage business. Various charges on the positive account, second to second at 5.6%, annualized link, 28.4%, year-to-date 4.7%. We are seeing some more positive momentum on service charges which is encouraging because that is another major source of non-interest 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 a strong momentum in attracting new clients. Our non-deposit fees and commission which are primarily our debit card continue 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. Our trust revenues second-to-second at 5.3%, basically flat first-to-second, up 6.7%, year-to-date. Kind of relatively modest growth in our trust business. Our mortgage banking if you take out mortgage servicing, it 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. And 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 reserve that added $8 million in revenue that was partially offset on the expense side and we also made a small gain of $3 million gain on MasterCard stock which were the two primary changes second to second. So again, strong non-interest income growth. Net revenue growth, again taking up purchases, non-recurring items and fluctuations in mortgage service 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. Non-interest expenses year-to-date continues to be a 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 are only up 1.9%. Chris will give you some insight into our non-interest expenses, but we are really pleased with our progress in that regard. Our efficiency ratio on a cash basis in the second quarter was 51.7%. We've got a long term goal to get that ratio back under 50%. I think we'll get there in the next couple of 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 was mostly our credit card business 8.4%, mortgages 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, we had commercial loan growth 5.8%, direct retail at 3.3%, sales financials 11.1%, revolving credit 8.1%, mortgage at 10.6%, specialized lending at 13% or 22.9% without the AFCO acquisition and a total loan growth as I said, 7.4%. Year-to-date, total loan growth without purchases, leverage leases et cetera at 7.5%. That compares to a first-to-second growth rate of 6.1%. It's clear that we did have some slowing in loan growth in the second quarter, primarily reflected in real estate markets, both in packing, our commercial real estate lending business and our home equity business which is… are both related to real estate. Our sales finance and our credit card businesses were fairly healthy. We had strong growth in mortgage and in specialized lending. We are seeing… actually seeing some pick-up in our commercial and industrial lending business that has been offset by slowness in commercial real estate, which is from a volume perspective our biggest challenge. We are pleased overall with our deposit growth. Non-interest bearing deposits still remain a challenge in the market would be for moving in non-interest spot into CD's but we did make some progress. Second-to-second non-interest deposits if you take out, purchases were down 1.9%, but annualized link, up 9.5%. They are down 2% year-to-date. So we are getting a little better momentum in non-interest bearing deposits. Had very strong growth rates in our interest checking deposits of 35.4%. Our client deposit growth which is really what we focus on, again taking out purchases we were very pleased with, second-to-second 7.7%, annualized link 7.1%, year-to-date 8.3%. Total deposit growth was slower because we simply made a decision based on cost to come out of some money marketing instruments in the bid fund, we obviously fluctuate those based on price. Total deposits without purchases, second-to-second, up 4.9%, annualized link down 6%, year-to-date at 6.3%. The client deposit growth remained fairly strong. Pricing is till tough, but we have seen some improvements in pricing particularly as some of the community banks have backed away from more aggressive CD rates. So we are very pleased with the positive 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 non-performers from $367 million to $423 million as a percentage of assets from 0.3% to 0.33%. Of the $56 million increase, $11.6 million came from the Coastal Federal acquisition, and you remember purchase acquisition, you don’t restate the base. The majority of the… the remaining increases was in our commercial loan portfolio, a portion of that was commercial real estate although we just experienced, what I'd call some random increases in operating company problems. Because of this visibility in discussion I would just remind everybody we have a very small sub prime mortgage portfolio we didn't have any material changes in that. All our mortgage portfolios continues to have excellent results with very few problems. Our non-performing assets still remain very granular. We only have three non-performing loans over $5 million. The largest commercial loan that we have in the non-performing space is $5.9 million which is a credit to a livestock feed meal. If you look at charged-offs in the second quarter, we charged off $76 million, that's a 0.35% loss ratio, up a little bit from the first quarter 0.29% and in 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 false situation which has got 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 paying, none of it is paid, is 30 days past due. Obviously paid from the side 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 tight credit situation and we are confident we have no other similar exposures. This was a very sophisticated fraud. And while we had a loan loss, given our size it is not a material event for us. Interesting 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-off numbers, they were only 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, really good about that. Provisions for credit losses in the quarter, we provided $88 million, charged off $76 million, so we added $12 million to the reserve. Year-to-date, we provided $159 million, charged off $137 million, so we have added $22 million to the reserve. Our loan loss reserve did go down one basis point from 105 to 104 but our coverage of non-accruals remains very strong at 2.83 times. If you look at our non-performing and charge-off trends we obviously were simply returning to normalcy and non-performing and charge-off levels were exceptionally low in 2006. While we expect some continuing rise in both non-performance and charge-offs, we are not expecting a significant deterioration in asset quality, particularly assuming general positive trends in the economic environment. Let me change direction now for a minute now and talk a little bit about mergers and acquisitions. We did complete the acquisition of Coastal Federal, a 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 terms of future profitability, and we only are interested in doing acquisitions that make economic sense to us. So we are continuing to pursue acquisitions, but they must work from an economic perspective. And we did announce two insurance agency acquisitions, one in Atlanta and one in Hilton Head, both great markets. And you'll hopefully hear some more acquisition announcements from us in the insurance business where we are doing so well. And then we are continuing to pursue other non-bank acquisitions. However, I strongly believe that acquisitions will be a secondary activity for us. We are really focused on driving organic revenue growth. With that said, let me share with you a few thoughts about the future. I’ll begin by reinforcing Tamara's opening comments. We'll not make formal earnings projections and so anything I say about the future might be wrong. Also we are assuming that we have a relatively healthy economy based on all the economic forecasts that I have seen, and that the Fed does not raise the interest rate 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 continuing margin decline and increasing loan loss provisions. As Chris will discuss, we think we are near the bottom in terms of net interest income which is net interest margin, which is very good news. We do expect our performance and charge-offs to rise to a normal level but don’t expect any significant asset quality problems. From a positive side, we continue to have a healthy loan and deposit growth, although we are experiencing some slowing in the residential construction activity which will be continue to be a drag on the commercial loan growth. We still do expect reasonably good loan growth and deposit growth going forward. One of the good news is if our margins can stop declining, slower loan growth will actually turn into faster deposit growth. So our challenge has been the fact that our margins have been declining despite reasonable loan and deposit growth in the past. Our fee-income businesses are overall doing well. There are certainly some challenges in the insurance market, but we have a lot of momentum in our moving market, should insurance continue to do that. So we are pretty optimistic about healthy fee-income growth, going forward. Our expense control this year has been excellent and we are absolutely determined to continue that trend. We are working hard to drive our cash flow to efficiency ratio below 50%, which may take a while, but we are real focused on making that happen. That’s said, we are 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, and I also would like to welcome each of you to the call, As is normal I would like to speak to you briefly about net interest income, net interest margin, a little more detail on non-interest expenses, taxes and capital. First, looking at net interest income based on operating earnings. If you look at link 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 link quarter, adjusted for purchases on leveraged leases. On a common quarter basis, earning assets were up 6.3%, adjusted for purchases again produced $985 million in net interest income and 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 in 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 $1.948 billion in net interest income, 1% decrease over prior year quarter, adjusted for purchases in leveraged leases. And likewise the 2007 year-to-date net interest income also included 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 361 in first to 355 in the second, experienced 21 basis points decline from second ’06 to second ’07 from 376 to 355 and a similar decline of 21 basis points on a year-to-date basis from ’06 to ’07 of 379 to 358. During the second quarter, we did remain liability sensitive and continued to operate in a, what I'd 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, the trend we had been seeing and that continued. In fact total interest bearing deposit costs actually declined during the quarter, first time we are seeing that on a link basis in some time. Lot of costs on long-term debt edged up just a bit when comparing back to the first quarter. Our deposit mix also stabilized somewhat on a link quarter basis. And as we have seen in recent quarters, and really all the way back to 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 link quarter, you can see that total earning assets were actually down 3 basis points and total interest being liabilities up 4, creating spread compression of about 7 basis points. However, the core securities portfolio really performed well in the mid 490s since the 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 points clear, driven primarily by 8 basis points reduction in interest checking and a basis point in other interest driven deposits. Again a very positive move, in our view. On a common quarter basis, total earning assets were up 37 basis points, total interests bearing liabilities up 55 and that 18 basis point of credit compression costs primarily by CD rates increasing 64 basis points. The drivers of the 6 basis point decline on a link quarter basis in the margin, really twofold. One, loan pricing pressure on our insurance premium finance businesses, AFCO and prime rate, both of which are included in specialized lending category. AFCO as you may be aware primarily involved in larger ticket items, primary and smaller and most of the competitiveness is really the large ticket. And one of the reasons we acquired these companies are to be able to or AFCO to be able to push 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 I'm very pleased with the acquisition. Second item was the 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 $600 million hybrid capital issues that we did during the second quarter. Looking forward just want to point out, our ALCO model 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 does represent a change from about a quarter ago. And 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 improve during the fourth quarter remaining in the 350s. And as John said, we do think we are at the margins nearing the bottom at or around year-end. Shifting gears to non-interest expenses, as you may recall from our January conference call, we highlighted improving expense control as a primary objective for 2007, and we targeted a 4% adjusted for purchase acquisitions as our non-interest expense growth goal for the year. We have focused a lot of effort toward improving productivity throughout the entire company and really pleased with the performance in this area to date. During the second quarter, we experienced favorable non-interest growth rates. As a result to achieve positive operating leverage and improved operating efficiency as measure by the cash basis efficiency ratio for the third consecutive quarter. Real pleased with our efforts there. So also, I just want 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. So opened 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 you drill down just a bit further to look at year-to-date numbers, we were up 1.1% over adjusted for purchases over last year, versus the 4% target. And 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 office and equipment. Personnel was primarily increase in salaries and fringes and salary increases that are effective April 1st, so at the beginning of the quarter for us every year and promotional encouragement. And in office and 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 removed and it occurred primarily in the area of personnel expense. 60% of that number was really due to salaries, fringes, annual salary increases that we talked about being effective April 1st and the balance was then because of the increased incentives, Scott & Stringfellow, mortgage, Laureate Capital and executive incentive program. If you look at link quarter, you see a little difference story. Link 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 expenses really consisted of incentives and revenue producing activities that directly relate to the 50.2% annualized link quarter growth rate for non interest income. So, if you look at the 17%, that equates to about $38 million increase after purchases occurring in two areas, personnel expense and other operating. Personnel was kind of more the same. It’s… two-thirds of it primarily due to increased incentives due to the big fee income quarter we had and it arose in insurance, investments, banking network, mortgage and Laureate Capital. And then we had a small increase in the rabbi trust. On other operating expense areas, really three items increase in advertising expense, increase in deposit rate of expenses and then a small increase in operating charge-offs. So, all in all, just feel really good about the effort and the hard work that we put into controlling the expenses. Just want to 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 million of the $28 million in savings and $7 million of that came in the second quarter. First Citizens, we targeted $7.5 million and converted that company in November of ’06. Savings to date is right at $3.8 million and about $2 million of that was achieved in the second quarter. Coastal Financial, as a reminder, we targeted $19 million conversion scheduled for August of ’07 and just have to date about $0.5 million of savings. All that occurred in the current second quarter. Looking at taxes. I want to just comment on the effective tax rate, on what to expect going forward. Unfortunately not a lot of noise here, and 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 the third quarter effective tax rate to be in that 33% to 33.5% range for the second quarter. Looking at capital. I wanted to point out that during the second quarter we did issue, as I had mentioned earlier $600 million of basket deed tier-1 qualifying hybrid capital. It’s our first foray into hybrid capital. Obviously, positively impacted some of our capital ratios. Looking at the ratios, you see equity to total assets in the period was at 9.5%. On a risk based capital ratios in the period tier-1 actually increased from first to second 8.7% to 9.3% in second quarter. Total increased from 13.9% to 14.5% in the second quarter. Leveraged capital in the period increased from 6.9% in the first to 7.5% in the second quarter, well above our 7% target. And intangible equity, end of period was right at 5.5%, equal to our minimum target. Commenting on share repurchases, as a reminder we have done none to date but do plan still to repurchase in the range of 7.5 million shares, 7 million to 9 million shares, excuse me, during the remainder of 2007 beginning in the third quarter. And then, finally just want to remind you that in the third quarter we did increase our dividend $0.04, $0.46 per quarter. And that represented 9.5% increase over the prior year quarter. And Tamera, 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 prospect 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 re-enter the queue so that others may have an opportunity to participate. Now I will ask our operator, Latonia to come back on the line and explain how to submit your questions.

Thank you. Ladies and gentlemen we will now be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Steven Alexopoulos from JP Morgan. Please state your question.

Hi good morning.

Good morning.

John, you said you expect the level of non-performers and the charge-offs to go back to a normal level. What do you consider normal level to be?

I think… if you look at non-performers something like a normal level is around probably 0.50 as a percentage of loans and leases. And it’s been in the 0.40 category. So, I think it’s going to go back we are at 0.48 now. I don’t think its going outright… it might go a little higher than that but I don’t think it's going a lot higher than it is now. Charge-offs in our non-specialized lending businesses traditionally run 20 basis points to 25 basis points. They have been running at 10 basis points to 12 basis points which strength that levels. And I think they will drift back towards the 20 basis points to 25 basis point level. I don’t think we are going to have any material rise and losses in our specialized lending businesses. The only change happening there is that they are growing a little faster than the rest of our portfolios. You might have a little factor rise in total charge-offs but that will just be a mix change not actually… I think the specialized lending businesses will remain… losses will remain pretty much in the range they are in today.

So, about 35 basis points for total charge-offs?

Yes, I think could drift up. Yes, 35 so far that’s sort of maybe 37, 38. And that’s obviously a guess.

Right. If I could just ask one clarification question to Chris. On the margin expectation 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 last when we had in the past had rate cut in our model which we don’t have now. So, that’s changing forecast. Then we have a little of this long-term debt I mentioned that, we just had some [Technical Difficulty] lower cost, private placement that was on this, rolled off and so you got a little bit pick up in expense there.

Okay. Thanks.

Our next question is from David [inaudible] from [inaudible] 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?

Yes, we have got just a shade over $3 billion in Alt-A. And it was… as I recall we had Beacon score in that portfolio is running about 734 and our total mortgage portfolio I think was 720. So, that outperforms 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 sub-prime or Alt-A loans or other goofy [ph] types of mortgages? Do you know what they used to finance the stuff?

I would think in terms of the kind of sub divisions we finance, I think a very small percentage of them would be sub-prime buyers. Alt-A, that’s a pretty broad product. And we have a lot of high network individuals that use Alt-A mortgages. So, we probably have some more of that, but I would say our sub divisions are dominated by traditional mortgage type financing.

Have you guys asked?

Yes, I am sure. I haven’t, but I am sure people in the lending business look at all those kinds of statistics. But you can… there are certain kinds of markets, there are certain kinds of sub-divisions that tend to be focused on those market segments and we tend not to be in that lending business.

Thank you.

And I think that the only way it would affect, does in general, it causes all real estate value to fall, that would be… we would be… we are more likely to get an indirect effect than the direct effect.

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

We wouldn’t be financing for many that sell subdivisions.

Right. I understand that, but if that financing goes away that it could affect subdivisions.

It could affect anybody. Yes, right it could affect, let’s say mortgage.

Thank you.

Certainly.

Our next question is from Christopher Marinac from FIG Partners. Please state your question.

Hi. John and Chris good mornings.

Good morning.

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

That’s a good question Chris. We have taken really careful look at that after what happened at Penland subdivision, 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 sub-prime market area and we are not seeing any systemic increase and we haven’t really discovered any major problems except for this Penland deal in 18 months. So I don’t really think this is a systematic problem in the kind of business that we typically do.

Okay. And I guess my follow-up on a separate point is the new office base, you are going to taking in Atlanta, is that any signal of any increased movement in Atlanta versus some of the consolidation of volume operations in that one location.

It is primarily a consolidation of our operation at Lambda Core, so we have been opening lot De Novo locations in Atlanta. It’s been one of our real focal areas and of course is the Main Street acquisition we've moved to five in market share in Atlanta. So Atlanta is definitely a focal market for us. And while this is mostly consolidated base we have, it obviously will significantly increase our visibility we believe in that market. So Atlanta is one of our real focal markets.

Great. Thanks very much.

Yes sir.

Our next question is from Matthew O'Connor from UBS. Please state your question.

Hi guys. You had mentioned that the headcount was down, ex Coastal another couple hundred, and I think that this follows a similar decline in 1Q. What’s the outlook on the headcount side? I think, initially you had expected higher headcounts this year. Was there to be some hiring the back half of the year or are you clamping down on that here?

Yes. I think Matthew, you could see some of that. Our target offering was 4%, we're at year-to-date 1.1, but you saw common as like 29. We have focused on growing specifically specialized in lending business and insurance, seem to be growing at rapid rates, we could see some additional pick there. But the target we had at the beginning of year was only net up 400 or so FTEs for the whole year. So, yes, you could see some pick up, but I don’t suspect we will hit that target, kind of being up 400 for the year.

I think we will beat it.

Yes.

We will beat it, that target.

Okay, so first with the expense level of 918 this quarter, a little trend up from here, looking significant?

No, I don’t think, I would be guided by the 4% target. And as John said, I think both FTEs in our target, our objective really is to try to beat that number.

I think we'll beat the 4% target.

Okay. And then just separately you’ve mentioned about return to the market to buyback, stock in the second half of this year, is that still the case and can you just give us the sense of the timing and the magnitude of the buyback?

Yes. Again the plan is still what we had alluded to earlier and that is to repurchase 7 million 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.

Okay. Thank you very much.

Our next question is from Chris Mutascio from Stifel Nicolaus. Please state your question. Christopher Mutascio - Stifel Nicolaus & Company: Good morning John, good morning Chris.

Good morning. Christopher Mutascio - Stifel Nicolaus & Company: Chris, I just had a quick question on, in 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 you highlighted that there was growth in credit, excuse me, card related services. Can you provide a little more color what were card related services fees in second quarter versus first quarter and is the second quarter level sustainable?

Yes. It would be about equally split, bank card income due to increase sales volumes and in debit check card interchange income, we just have more active cards in the market. I think that debit check card interchange is certainly, that’s been moving sort of way all year along and we actually have a pick up in bank card income. Our sales volume in bank card, we've tweaked our model a little bit and really get more momentum and my feeling is that it would be sustainable as we move forward. Christopher Mutascio - Stifel Nicolaus & Company: Okay. And as a follow-up question. I think John had mentioned when he was going through quarterly comparisons in your master card gains. John, were you referring to $3 million gain in the second quarter of ’06.

In ’07. Christopher Mutascio - Stifel Nicolaus & Company: '07, so this quarter was about $3 million gain?

Yeah. We sold part of our MasterCard stock a little bit of it, and made a $3 million gain. Christopher Mutascio - Stifel Nicolaus & Company: Okay. Thank you very much.

It’s all right.

Our next question is from Gary Townsend from Friedman, Billings, Ramsey & Company. Please state your question. Gary Townsend - Friedman, Billings, Ramsey & Company: Hello, Chris and John, how are you?

Pretty good. Yes. Gary Townsend - Friedman, Billings, Ramsey & Company: Chris, sorry if I missed this. What was the share repurchases in the last quarter?

Not a problem. We had none in last quarter, we had none year-to-date, but our plan is to purchase… repurchase 7 million to 9 million share for the balance of this year and to start as soon as we can in third quarter. Gary Townsend - Friedman, Billings, Ramsey & Company: The reason for not repurchasing shares in the most recent quarters, did you feel constrained in some way or was it… John A. Allison – Chairman and Chief Executive Officer: Yes. 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 5.5 and we were right on our 5.5 intangible target, so the restrain will be the tangible. Gary Townsend - Friedman, Billings, Ramsey & Company: Thank you. John, stocks been trading in this range since early 2004, a while ago you were discussing kind of how year-over-year, let’s say 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 have any new news. Our major focus is on organic revenue growth and we have been trying to drive that and actually would have been driving it, iff it hadn’t been for the margin pressure on the yield curve. So that’s really been kind of a big challenge for us. We are still looking for community bank acquisitions, but the limit there of course is the pricing, we are not going to make, if it doesn’t make any economic sense. We are still looking for non-bank acquisitions, particularly in the insurance business. We are actually exploring, there might be some niches we can get into insurance underwriting, which we have a lot of expertise in given our brokers volumes and our skill set in insurance. In terms of mergers of equals, we are still in theory. We are interested in doing merger equals, but the limit is actually doing it in practice because we've got to find both an economic fit and a cultural fit. And we have, over the last several years, gone through the process to talk… or talk into a number of different companies, there's a fairly short list, that fit economically and we’ve never been to work anything out, and we certainly don’t have anything right now that looks imminent. We certainly… on the other hand we would like to, long-term. We think that there is some tremendous economics and it would 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 we are 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 changes fast in this business, but we certainly don’t have anything imminent happening today. Gary Townsend - Friedman, Billings, Ramsey & Company: Thanks. Excuse me, thanks for your comment.

Yes sir.

[Operator Instructions]. Our next question is from Jefferson Harralson of KBW. Please state your question Jefferson Harralson - Keefe, Bruyette & Woods: I was hoping to get some detail on the specialized finance growth. Is most of that coming from premium finance or since that's I think the bigger piece of the loan or is it coming from elsewhere as well?

Well, that’s a good question. It is primarily being driven by regional acceptance, our sub-prime automobile business continues to grow fairly rapidly. We are also having pretty healthy growth in our traditional consumer finance business which we just titled. And to mark, we have a couple of specialty areas such as Sheffield, it does equipment financing and automobiles and those kind of entities. Interestingly enough, while there's been a big, lot of commotion in the sub-prime mortgage market, the sub-prime automobile market is 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 sub-prime mortgage business and after that shake out the market rationalized and we are continuing to experience very healthy returns in that business. The loss ratios remain half, they haven’t gotten any… stayed basically the same. It’s been positively impacted by the Hispanic market, which deals with the automobile financing and maybe don’t have a credit history that some of the… because of the new entry into the U.S. economy. So, that's where most of the growth is happening. Jefferson Harralson - Keefe, Bruyette & Woods: And which businesses are you investing the most? I think you mentioned you are investing in some of the specialized businesses?

Yes, we have been investing in all of them. Richfield's [ph] been opening new locations and last year we made a pretty sizeable acquisition within a greater 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 provides niche for us given the nature of the economy in our market area. So, we are focusing really on that whole set of businesses and are investing in every one of them, including adding sales people, hiring people from other of our competitors and having good experiences across the whole product line. Jefferson Harralson - Keefe, Bruyette & Woods: Okay. Thanks a lot.

It’s all right.

There are no further questions at this time. I would like to turn the call back over to management for closing comments.

Thank you, Latonia. And thank you for your questions. We appreciate your participation in this teleconference. If you need clarification on any of the information presented during this call, please call BB&T's Investor Relations Department. Have a great day.

Thank you.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.