BB&T 2007 Annual Report Download - page 46

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direct retail loans to lower-yielding mortgage loans and commercial and industrial loans. Second, higher levels of
nonaccruals have negatively affected net interest income and the net interest margin. Third, increased liability
costs, specifically a shift to higher-cost deposits from lower-cost transaction accounts, contributed to the margin
compression. The decline in the net interest margin during 2006 compared to 2005 was due to a faster increase in
the cost of funds compared to interest-earning assets. This was primarily a result of a delay in the repricing of
earning assets compared to interest-bearing liabilities and a change in the mix of funding sources with a higher
concentration of deposits in higher-cost products. In addition to the lag effect described above, the margin was
also negatively affected by a flat yield curve during 2005, which became inverted in 2006. The inverted yield
curve is a significant challenge for financial services companies, like BB&T, who borrow money from clients in the
form of deposits and pay short-term rates, and invest in assets with longer-term maturities, which generally
produce an interest spread. BB&T’s net interest margin in 2006 and 2007 was also negatively impacted by the
additional interest expense incurred in connection with BB&T’s share repurchase program.
46