Truist Financial Corp (TFC) 2002 Q4 法說會逐字稿

Good morning.

My name is Taprica and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the BB&T 4th Quarter Earnings Release Conference Call.

All lines have been placed mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period.

Instructions will be given at that time.

I would now like to introduce Mr. Tom Nicholson, Director of Investor Relations.

Mr. Nicholson, you may begin your conference.

Thank you, Taprica and good morning, everyone.

Thank you for joining us today.

Whether you've joined us by webcast or dialed directly into the call, we appreciate your interest in BB&T.

You've already seen our press release announcing excellent results for the fourth quarter and for the year of 2002.

This morning, we have John Allison, our Chairman and CEO, and Scott Reed, Chief Financial Officer, to review financial results for the fourth quarter of 2002 and for the year just ended and also to look ahead at 2003.

After John and Scott have made their remarks, we will pause and ask Taprica to come back on the line and explain how those who have dialed into the call may participate in the question and answer session.

But before we begin, let me make a brief comment about forward-looking statements.

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 differ materially from those in the forward-looking statements 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, 2001.

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

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

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

Let me outline the areas that I will discuss.

I want to talk about our financial results for the fourth quarter and for the year.

Especially discuss asset quality trends and what's been happening in our mortgage banking business.

I want to share with you, then, a few thoughts on some nonfinancial objectives that we have talked about in the past.

Then I will provide a few comments on mergers, and then we will try to give you some thoughts on future earnings expectations.

Scott will cover in some more detail margin noninterest expenses, capital, share buybacks and taxes.

And then we will have time for questions, as Tom mentioned.

We're certainly very pleased with the fourth quarter and with the 2002 results, particularly considering the kind of environment we're in, which is certainly very challenging.

On a GAAP basis, our net income for the quarter was $337 million, up 21.3%.

Operating earnings, which exclude merger charges, were $343 million, up 19.5%.

On a GAAP basis, diluted EPS for the quarter was 70 cents, up 14.8%.

On an operating earnings basis, which excludes merger-related charges, we made 72 cents, an increase of 14.3% compared with the fourth quarter of last year.

The 72 cents beat the consensus estimate by 1 cent.

There is a -- could be a little confusion on that because we reformatted our press release to conform with the new SEC rules but the consensus estimate is based operating earnings and the consensus estimate was 71 cents and on an operating earnings basis, we actually made 72 cents.

So, we did beat the consensus estimate by a penny.

Looking at operating earnings, they were also up 2 cents over the third quarter and we made 70 cents.

Which is an annualized increase quarter-to-quarter of the 11.3%.

On a cash basis, our EPS was 72 cents, an increase of 9.1% compared to the same quarter last year and 5.6% annualized increase over the third quarter of 2002 when we made 71 cents.

Our operating ROA was $1.74, ROE, $18.32.

Cash ROA, $1.79, cash ROE $24.58.

Obviously very good numbers.

The numbers for the year look similar.

GAAP net income was $1,303 million, up 33.8%.

Operating earnings were $1,317.9 million, an increase of 19.8%.

On a GAAP basis, we made $2.72, up 28.3%.

Operating earnings were $2.75, up 14.6%.

And that operating earnings of $2.75 exactly met the consensus EPS estimate, the current consensus estimate for the year.

So, we beat the estimate by a penny for the quarter and exactly met it for the year for $2.75.

It's interesting to go back, I looked at my notes, when we talked to you this time last year, the consensus estimate this time last year was $2.79.

So, we missed the estimate by 4 cents looking back a year ago.

However, given the environment was far, far more difficult than any of us anticipated, I feel extremely good about being that close to the original estimate that was in place this time last year.

Based on operating earnings for the 12 months, we had an ROA of $1.74 and ROE of $18.53 and on a cash basis of $1.79 ROE and 23 -- I mean $1.79 ROA and cash ROE of $23.93.

Obviously very, very good numbers.

Trying to give you some insight into what are the factors driving the earnings.

We did have some decrease in our margin from the second -- I mean from the third quarter to the fourth.

From $4.25 to $4.22.

But this time last year, our margin was $4.20.

So, we forked -- the fourth margin actually was up.

The big positive news -- excuse me, Scott will have more detail on the margin.

The big positive news is in our noninterest income growth, which was excellent.

If you take out both merger-related activity and purchases, annualized third to fourth, noninterest income was up 58%. fourth to fourth, up 21.9% , and for the whole year of 2002 compared to 2001, up 14.4%.

Looking at noninterest income, the big news is clearly the mortgage business, where we just flat had a banner year and a spectacular quarter in mortgage production.

Mortgage revenue was $137.8 million.

We had a couple odd items in a certain sense.

We did recaptured $4 million in mortgage servicing writedowns, but that, again, that's not a very significant number.

We also refined our methodology for valuing mortgage loan interest rate lock commitments based on the new accounting guidance issued in 2002 and the evolution of industry practice surrounding the accounting valuation of these commitments. [inaudible]

As a result, we had a positive adjustment of $14.5 million in mortgage banking income to reflect the fair value of these interest rate lock commitments at the end of the quarter.

But the big news was simply originations.

Our originations were $5.5 billion, up 60% quarter-to-quarter and for the year, $14.1 billion, up 34%.

So, mortgages really on force and remain strong.

Investment banking and brokerage did very well.

Fourth to fourth, again, excluding purchase, we were up 18.1%.

Our insurance is booming.

On absolute basis insurance was up 75.8%.

But even if you take out purchase acquisitions, insurance revenues were up 18%.

Our other nondeposit fees, excluding purchase, were up 15.3%.

The only weakness we had really in our fee-based businesses where our trust business continues to be disappointing, reflecting the stock market performance.

Ironically, though, we're having a banner year in terms of selling new trust accounts and new trust relationships, but we just can't overcome the challenge in the stock market.

We only took $1 million in security gains which is, obviously, a trivial number.

So this is a clean quarter in that regard.

So, we obviously had a very strong quarter from a noninterest income perspective.

Which was clearly the best piece of news.

Net revenue growth annualized third to fourth was 19.9%.

Fourth to fourth, 8.9% and year to date, 7.5%.

The income ratio improved from the fourth quarter last year, when it was 34.6 to 39.7, which is the best ratio we've had by far.

Year to date was 33.4, compared to last year, 36.7% in 2002.

Noninterest expenses were up a good bit and Scott will talk about that in some detail.

You take out [inaudible] third to fourth annualized were up 29.2%.

Fourth to fourth, 9.7%.

But year to date, up only 4.4% without purchases.

If you look at revenue taken out, purchase was up 7.5.

Managed expenses only up 4.4.

So, the revenue to expense ratio obviously improved.

Average loan growth continues to be a challenge for us.

If you take out purchase acquisitions and securitizations, third to fourth, our commercial loans grow 3.2%, consumer actually grew 7%, which is a pretty healthy number in the current environment.

Mortgage was up a bunch at 26.4%, but that's basically the warehouse and total up 8.7%.

Fourth to fourth, commercials up 2.4.

Consumer, 7.1.

Again, a nice number.

Mortgage is essentially flat and total 3%.

If you look at the whole year, 2001 to 2002, commercial 3.1, consumer 4.5, mortgage down 3.6 and the total 2%.

Based on the numbers on other banks and heard from other people in the industry, I think our relative loan growth looks pretty good, but it's certainly not what we're used to, I mean compared to our long-term trends.

If you, kind of, look not just at loan growth, but look at all aspects, what I would say is our retail business, which is about 50/50, we're designed from a brisk management perspective to get 50% of our revenues from retail and 50% from commercial.

I would call our retail pretty good.

In fact, almost strong.

On the other hand, our commercial, I would call slow.

And probably the slowest that I've seen in 30 years.

And if it's very mixed in markets.

Some metro markets like the metro D.C. area seem to be doing very well.

On the other hand, rural markets are not doing too well.

The Carolinas, which has about 35, 40% of our business, is overall slower than we're used to and certainly slower relative to the national economy than we have typically seen.

The positive growth, some very good news, our noninterest bearing deposits taking out First Accounting official checks, fourth to fourth up 9.4%, annualized linked quarters, 22.2%.

Year-over-year, 9.1%.

Interest-bearing transaction deposits, again, taking out purchase accounting, up 5.8% fourth to fourth, annualized linked, 8.7%.

Year-over-year, 7%.

Now, total deposits, we're seeing much slower growth.

If you take out the purchase and official checks, fourth to fourth, 2.8.

Annualized linked, actually down 2.7%.

And year-over-year, 2.9%.

We are consciously choosing to lose expensive CDs.

We simply don't need the money, we've done a lot of acquisitions of community banks and [thrifts] that pay very high rates for single service households.

We've been consciously willing to lose some of that.

In addition to that, we're having phenomenal success selling annuitiys to our CD client base, particularly older customers that are looking for guaranteed yields.

And one of - probably the primary reason you're seeing such strength in our investment banking activity, that 18.1% real increase in investment banking revenues; is our capacity to sell annuitiys to our clients.

We're keeping the client relationship, they're just putting it in an annuity instead of a CD.

Talk about asset quality which, obviously, remains a major issue.

The good news is our asset quality is still strong in comparison to peers.

We did have some increase in nonperformers from the third quarter to the fourth, they went up from $425 million to $551 million.

As a percentage of assets, went up from .54 to .56.

Fourth quarter of last year, they were .53.

Interestingly enough, however, in the first quarter of 2002, they were .56, which is exactly the same as the fourth quarter of 2002.

So, our asset numbers have stayed relatively flat.

We were hoping for some improvement in the second quarter and compared to the first we had some improvement, but we're back flat with the first quarter of 2002.

So, you -- you kind of look at those numbers and call them stable.

Charge-offs for the quarter, we charged off $68.6 million.

That was a .51 charge-off ratio.

Up from the third, when we had .49, but actually less than the charge-off ratio in the fourth quarter of 2001 when we had .54.

So, charge-offs compared to the fourth quarter were actually improved.

For the year, our losses were .48 compared to .40 last year. interestingly enough, if you take out our specialty lending businesses, our losses were .39 for the year, which is a pretty spectacular number given the kind of economic environment we're in.

We did provide more in the fourth quarter, our provision for the quarter was $84,700 million compared to $68,600 million, or $16 million more than charge-offs.

It was a $20.7 million increase in the third quarter.

The reason we did it is because we did have some rise in nonperformers and wanted to maintain our reserve coverage.

The year we provided $263.7 million, charged off $246.5 million, so, we provided $17.2 million more than we charged off, given the low growth rate that seems like an appropriate number.

Reserve at the end of the fourth quarter was 135, end of the fourth quarter last year, it was 136.

So, down 1 basis point.

But if you take out mortgage warehouse, or our loans held for sale which would make up the mortgage warehouse, at the end of the fourth quarter of 2002, we were 142, at the end of the fourth quarter of 2001, we were 142.

So, we basically stayed flat relative to our loans excluding the warehouse.

Looking at the relatively modest increase in nonperformers in the quarter it was kind of across-the-board, we didn't have any really large credits that went on and nonperforming status.

Looking at the mix of our portfolio, manufacturing is still weak.

Every time we think it's getting better it backs away.

We're not seeing a lot of new problems in manufacturing, but the old ones aren't getting well.

There was a minor deterioration in commercial real estate, maybe on [logic] or two, but nothing dramatic.

Residential real estate, overall, still doing very, very well.

We do expect some continued deterioration in nonperformers in the first quarter.

We don't think it will be dramatic, but they might up 56 basis points from 58.

We hope to see it flatten in the second and expect improvement in the third and fourth quarter of the year.

Looking at fourth quarter charge-offs, we had a few 2,3, $5 million charge-offs, those are for us but small for a bank our size.

Most of the charge-offs were small loans.

Small business losses in general continued to be pretty high.

Consumer, I would call okay expect for the auto-related area, where we're not having a lot higher delinquency or foreclosure ratios, but the loss per used car is significantly higher because of what the manufacturers have done, discounting new car prices.

In the fourth quarter, we did record a balance sheet adjustment which reduced goodwill as well as allowance for loan losses, resulting from the finalization of our accounting related to the acquisitions of Mid-America, Airy and Regional.

Beginning with due diligence and continuing through the systems conversion, loan administration personnel work with our merger partners, conform their credit policy and allowances with ours.

Now, the system conversion as occurred,and conforming of the credit policy is completed in the fourth quarter, an adjustment of $16.1 million was made to reduce the preliminary allowance for loan loss originally recorded with a corresponding decrease in goodwill.

We usually do -- we did this year, what we call a year-end clean-up, we try to be particularly aggressive in charge-offs, in the past it means we have lower losses in the first quarter and that's exactly what we would expect in the first quarter of this year.

And we're also anticipating slightly lower losses for all of 2003 based on our own economic forecast, our target for this year is .44 compared to the .48 we had in 2002.

So, looking at the hard numbers, basically things seem kind of flat from a quality perspective.

But we're hoping for some improvement as we see some improvement in the economy.

Kind of backing up and looking at long-term trends, fortunately they have been excellent.

Our compound annual growth rate since our merger of equals, which is now almost eight years ago, on diluted EPS, on an originally reported basis, has been 14%.

So, over almost eight years, a strong number.

And fortunately, our shareholders have done well.

In 2003, our stock price, you know, total return to shareholders including the dividend was 5.5%, compared to a negative 22.1% for the S&P 500 and negative 1% for banks.

The last three years is 13.9 total annual return for BB&T shareholders compared to the 14.5 for the S&P 500 and 5.6% for banks and over 10 years, total annual return to shareholders, 17.6%, compared to 9.3 for the S&P and 13.8% for S&P banks.

This is an interesting number.

I don't have a comparative here, but over the last 15 years, the compound annual return to our shareholders has been 17% over 15 years.

So, we've been a very good stock goods to buy and hold even for institutional investors.

So, fortunately we've done well over the long-term.

Leading the financial numbers, talking a little bit about our nonfinancial objectives.

As you would expect, our corporate plan includes a long list of nonfinancial objectives that specifically relate to our key strategic objectives.

If we go through that list, the vast majority of those nonfinancial areas that we accomplish, probably the most significant that, in fact, impacted financial; was some pretty dramatic progress we made in our integrated relationship management, which is our cross referral system.

And, I believe, the cross referral system, particularly as it's been executed in new markets; is a primary reason we've had such a great growth rate in fee income in a tough market.

We also implemented what we call, the perfect clone experience in our branches.

Customer service models in over a hundred home office departments resulting in even more reliable and empathetic service for our clients.

That's nice recognitions.

We were selected by the FBA as the second best small business win.

We've been first or second every year for five years in small business lenders.

JD Powers did a study of quality of mortgage servicing.

We were selected second in that study and best in the banking service and service quality in the mortgage servicing.

Money magazine looked at corporate America's best benefit programs, we were the second highest-rated bank and in the top 10% of all S&P through the top S&P 300 companies and have a very cost effective program.

We felt good about some of the intangible things that relate to future earnings.

Now I'll talk a little bit will merger and acquisition activity.

In the fourth quarter, we successfully converted Regional Financial, our $1.6 billion Florida acquisition to BB&T systems.

The conversion went extremely well.

Everything is going great.

They're targeted at construction lending and mortgage origination in Florida and they are doing very, very well.

They're clearly going to beat our expectations.

That's a good deal for us.

We're expected to close our Equitable acquisition, the $477 million [thrift] in Weaton, Maryland in March and we'll probably convert them to our systems at the same time.

We've reapplied the OTS to acquire Florida First and hope to hear from the OTS in the reasonably near future.

In the fourth quarter, we incurred merger-related charges of $6.5 million after tax, it is actually substantially less than we communicated last time.

We expected have $11 million after tax and so we had a lot less than we expected.

For the year, in fact, merger-related charges were $24.7 million, compared to the $33.2 million we originally estimated, which didn't even include Regional Financial.

So we have found ways of substantially improve the efficiency of our conversion process and coming in way under our original estimates in the conversions.

While we only announced two bank deals, Regional and Equitable in 2002, we actually had a big year in terms of mergers and acquisitions.

We converted F&M, a $4 billion company in Virginia and Century -- Community First at $600 million bank in Atlanta.

We also acquired and converted Area, $3 billion in Kentucky, Mid-America, $2 billion in Kentucky and Regional Financial, $1.6 billion.

In every case, the integrations have gone extremely well and we will exceed our savings goal in every case.

And our conversion costs were less than we communicated in the market.

So, we had a great performance in terms of execution of mergers in 2002.

In addition, as Kelly King will show you, those of you that choose to come to our investment conference, across the board, every region we've acquired in the last two or three years, are showing consistent improvement of performance.

In fact, it is a very good thing we diversified our markets, 'cause our core markets in the Carolinas, economically, are doing relatively poorly even though the performance of the banks remains pretty good.

But the new markets is where the performance improvements.

So, our investments are, in fact, paying off.

Looking forward, we're going to continue with the strategy that we've communicated to you in the past.

It is difficult to predict how many mergers we'll do, it is a very fickle environment we're in.

My intuition tells me that we will probably see a pickup in activity in 2003 due to the more challenging environment for community banks.

We're also very pleased with our insurance agency acquisition program, which has been extremely successful and we expect that to continue in 2003 and we've really got a homerun in the insurance business.

All right, let's now talk little bit about future earnings expectations.

I'll share with you our thoughts for 2003.

First.

Let me just reinforce all the caveats that Tom expressed.

Anything we saw say about the future may be wrong.

That's pretty critical to remember.

I do empathize with the management's of some of the companies that are refusing to discuss future earnings, but I honesty don't think it is fair to investors.

Obviously, we do and should have opinions about the future performance of our company, that's part of our job.

On the other hand, we could easily be wrong because we don't know what the economy is going to be.

All we can do is give your our honest thoughts, knowing that in today's world, those honest thoughts could be wrong because a lot of things can happen that we don't know are going to happen.

In that context, First Call estimate is $2.99 or a range around of that $2.95 or $3.05.

There are a few outside that range, but the core range is $2.95 to $3.05.

We think the First Call estimate and ranges are reasonable.

Our assumption is that the economy will begin to get stronger at mid-year with interest rates rising slightly in the second half of the year.

If you have a double-dip recession, then all bets are off.

We would expect earnings to be relatively flat in the first quarter compared to the fourth because, while our mortgage business remains strong, it will not be as strong as it was in the fourth quarter.

We just had a banner quarter there.

On the other hand, we hope to be able to reduce our loan loss provision because we provided a lot more than we ordinarily have to provide.

In summary, first, particularly considering the environment, we're very pleased with both the fourth quarter and 2002 results.

While the economy remains soft, we're relatively optimistic about 2003, assuming some economic pickup in the second half of the year.

BB&T's long-term performance has been excellent and while we will have our ups and downs, I believe the philosophy, systems and [policies] by which we run our business will continue to produce superior results.

Now I will turn over to Scott for some comments.

Thank you, John.

Great review of our overall performance.

Good morning to everybody.

I wanted to, as John outlined, take just a few moments to drill down and discuss, in a little bit more depth, net interest income on operating earnings.

On an operating earnings basis and also our margin and then talk about noninterest expenses, taxes briefly and then finish with some comments about our balance sheet strengths and balance sheet position in regard to capital.

Beginning with net interest income.

Fourth quarter, on a tax equivalent basis, $743 million, up 10.1% over the fourth quarter of last year.

That's pretty much in line with growth and earning assets, which were up 9.7% or about $6 billion.

And as John's already indicated, our margin improved by 2 basis points.

So, good balance sheet growth and a little uptick in the margin produced nice results in terms of growth and net interest income, fourth over fourth.

I would add that we are seeing the impact of slower loan growth and balance sheet growth overall.

If you take out purchase acquisitions, our quarter-over-quarter growth in net interest incomes, 2.3%.

Looking at linked quarters, we had practically no growth in net interest income, .1% annualized.

Earning assets on average increased only about $2 billion or 4% again, on an annualized basis.

As all of you know, we had a reduction in rates on the 6th of November as the Fed cut rates by 50 basis points.

And as John's already indicated, we fell 3 basis points fourth quarter compared to the third of '02.

I will get into a little more depth on the spread squeeze that we suffered in linked quarters.

Year to date, $2,898,000,000 of net interest income, up 10.3%.

Earning assets on average grew 8.5% or $5.3 billion.

And we were very pleased that our year-over-year margin improved seven basis points from 4.18 to 4.25%.

Taking out purchase acquisitions, 4.1% growth in net interest income with about 1.4% growth in earning assets, only about a billion dollars of improvement.

Looking more specifically at the margin, we are very pleased with what's happened with our margin, it's been very stable the last five quarters. $4.20 margin in the fourth quarter of '01, then a $4.26, $4.27, $4.25, then a little dip in the fourth quarter of '02 to $4.22.

And I've already mentioned the year-over-year margin being up 7 basis points.

If you look fourth to fourth, we had 88 basis points decline in yield on earning assets while interest-bearing liabilities fell 98 basis points.

So, we had a pretty nice spread enhancement and in addition, we've had very strong growth in DDA, fourth quarter to fourth quarter, 18.2% growth in demand deposits, 9.4% without purchase acquisitions.

The linked quarters, total earning assets fell 22 basis points, total interest bearing liabilities fell only 21 basis points, even though long-term debt fell 40 basis points.

So, while there wasn't much change, we did suffer some spreads squeeze.

However, we were able to stay very close to our third quarter margin in the fourth due, again, to pretty significant growth in DDA on an annualized basis, up 19.9%. 22.2% annualized growth without purchase acquisitions and excluding the official check outsourcing program.

Year to date, total earning assets fell 129 basis points, led primarily by loans, down 145 basis points.

But interest bearing deposits fell even faster at 173 basis point decline and total interest bearing liabilities falling at 152 basis points.

A comment that I think I made last time regarding earning assets, we've had some propping up, if you will, of that decline and some lessening of the overall decline in yield on earning assets because of mortgage loans.

They have remained fairly stable.

They're only down 50 basis points year-over-year.

Securities, other earning assets only fell 87 basis points, where our interest-bearing deposits were down 173 as I mentioned and short-term borrowed funds were down 202 basis points year-over-year.

Looking to 2003, from an asset liability management perspective, we are still positioned for rising rates, however, we have moved ourselves much closer to a neutral position in the last three to six months.

Our rate projections are that we would have flat rates through July of '03 and then start seeing rates tick up a very modest 100 basis points between August and December of '03.

This produces for us about a 4% increase in net interest income on a T.E. basis year-over-year and a margin that's somewhere right around 4.20%.

Shifting gears now to noninterest expenses, John's already covered some of the numbers.

I think we continue as a company to show very strong controls of our noninterest expenses.

We are continuing to realize cost savings from acquisitions and in most cases meeting or exceeding our given public projections.

Looking at the fourth quarter and I am talking about operating earnings here, noninterest expense growth was 23.5% but only.7% increase when you eliminate purchases.

Personnel expense was up 6.7%, again, this is without purchase accounting.

Most of that increase, which was a little over $19 million, fourth to fourth, was in incentive programs, including insurance, particularly mortgage loan incentives, investment incentives.

Tracking the substantial growth on the revenue side.

And then our pension plan expense also increased about $10 million fourth to fourth.

A couple of other areas of note, occupancy and equipment expense was up about $6 million, 8.4%.

In the fourth quarter of 2001 we had about a $4 million accrual adjustment to real estate tax expense.

We did not have such an adjustment in '02 and therefore most of the increases came from that one item.

Other operating expenses were up almost $25 million or 15.6%.

A large percentage of that, almost $20 million of the 25 was related to mortgage servicing right amortization increase year-over-year.

And quarter-over-quarter.

Linked quarters, expense growth of 33.8%, annualized, taking out purchase accounting up 29.2%.

Again, pretty large increases on personnel expense in linked quarters.

Obviously in the fourth quarter, we do a lot of booking of incentives.

We had a great mortgage quarter so we had a lot of incentives on the mortgage loan side as well as our banking network.

Incentives increased, insurance incentives and again, investment incentives.

And then the other major increase which was $19 million in linked quarter, 10.3% over 40% annualized, was another operating expense.

And two major items there was the amortization of mortgage servicing rights, which were up almost $6 million in linked quarters and also we gave away a building in downtown Winston-Salem and took a donation charge of $4.8 million in the fourth quarter versus the third.

Year to date, we're up 15.6% of noninterest expenses, only 4.4% when you look at removing purchase accounting.

And, again, the same drivers, particularly the mortgage servicing right increase.

We also had one other driver and that was $8 million increase in data processing software expense due to the rollout of our branch automation system that we've talked about for quite some time now.

Turning to taxes, our effective tax rate fell a little bit in the fourth quarter.

We'd been running 28 to 29%, very stable effective tax rate.

It fell to 27% in the quarter.

We continue to work very diligently and hard to search for and find strategies to reduce our federal and state tax burdens.

Particularly state tax minimumzation program that we've had in place for a number of years.

However, the effective tax rates on the fourth quarter really do to that donation of the Nisan building in downtown Winston.

That was very nice tax benefit giving that building to the city of Winston-Salem.

Looking forward into 2003, as I've mentioned before, a couple of our federal strategies are going to have less impact on 2003 than they did in 2002.

We're expecting our effective tax rate to be somewhere between 30 and 31% quarter-to-quarter and for the full year of 2003.

Lastly, turning to capital, we continue at BB&T to keep a very strong relative capital position.

Our equity to total asset ratio at the end of the period was 9.2%.

Certainly buoyed by strong earnings.

Our risk-based capital at the end of the period on Tier 1 was 9.2% and 13.4% in total risk based capital.

I think both in excess of peer averages.

Our leverage capital ratio did slip from 7.3% on September 30 of '02, down to year-end the 6.94%, almost rounded to 7.

That was impacted by our share repurchase that we mentioned to you at our last conference call was going to pick up in the fourth quarter.

We will attempt to keep our leverage capital ratio at 7% or greater, our target is 7 to 8% and we're certainly wanting to keep it at the bottom end of that.

In terms of share repurchase in the fourth quarter, we bought back 11.3 million shares.

We did an accelerated share repurchase of 8 million shares on the 8th of November.

Total cost of the share buyback in the fourth quarter was $404 million.

Year to date, we bought back 21.8 million shares, so, you can see the bulk of it was in the fourth quarter.

Total cost to us during the year was $801 million.

As we look to '03, we will continue periodic repurchases to manage our leverage ratio to around 7%.

As best, we can estimate that, it's probably 20 to 22 million shares that will be spread out and repurchased throughout 2003.

One last little reminder and PR note.

BB&T concluded in 2002, its 31st consecutive year of increasing our cash dividend.

Our current dividend rate is 29 cents a share which translates into $1.16 annual rate, which, on a $38 stock price, is over a 3% yield.

We increased our dividend during the year 11.5% and our five-year compound annual growth rate is 13.3% and our 10-year compound annual growth rate in dividends is 16.1%.

Tom, with that, think it's time for questions and answers.

All right.

Thank you, Scott.

Before we move to the question and answer segment of the conference call, I'm going to make the same request that I've made the last several calls, to try to structure the call in a way that gives fair access to all the participants.

Please limit your questions to one primary inquiry and one follow-up and then if you have further questions, re-enter the queue so that others may also have an opportunity to participate.

Now, let me ask to Taprica to come back on the line and explain how to submit your questions.

Ladies and gentlemen, at this time, if you would like to ask a question, please press star, then the number one on your telephone keypad.

If you would like to withdraw your question, press the star key, then the number 2.

If you're using a speaker phone, please pick up your handset before asking your question.

We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Betsy Grasskey with Morgan Stanley.

Hi, Betsy Grass.

Good morning, how you doing?

Hey, Betsy.

A couple of simple questions, one on the bond portfolio.

Wanted to just touch base with you on the duration of the securities portfolio and how that changed during the quarter.

We notice that average was, you know, declined during the quarter, where it ended the period --

Betsy, you are cutting out, At least for me.

I'm losing part of your conversation.

Excuse me?

Can you hear me now?

I can hear you, then you drift away.

Are you hearing it Tom?

I'm hearing it barely.

It's kind of weak.

I'm sorry.

Is this better?

That's a little bit better.

Okay.

Just had one quick question on the securities portfolio.

So, I want to understand how the duration changed during the quarter and if you could explain briefly how averages declined but end of period increased?

When you say averages you're talking about balance sheet averages?

That's correct.

Let me -- John, I will give it a first shot and you can add to it.

If you look at the end of the third quarter, we were at $16.4 billion in our available for sale, $16.6 in total securities.

During the third quarter, we took sizeable bond gains as an offset to our mortgage servicing right impairment writedown.

Right.

So, we sold a lot of securities just from a pure timing standpoint.

A lot of those didn't get reininvested until the fourth quarter, which pushed up both -- which pushed up the end of the period balance in the fourth quarter to $17.6 billion.

Right.

On available for sale and 17.8 in total.

So, that was the flip-flop that you can see happening in the third quarter versus the fourth.

And you can go back, Betsy, to the first and second and see more 17 to $18 billion size portfolio.

Right.

And do you have the duration for the portfolio?

Yes, the duration is approximately 1.88 years.

Yep.

It's a fairly short portfolio.

That duration's been coming down a tad, but not much.

I don't think or don't have the September 30 number, but it hasn't clanged that much.

Okay.

Thank you.

Under two years.

Next you have a question from the line of John Paulkind with Fox-Pitt.

Good morning, guys.

Good morning, John.

Quick question on DDA.

The average growth very good in the quarter, but the end of periods was down.

Did something happen late in the quarter to push the end of period down?

I think that's just a quirk, John.

Maybe year-end or something, the -- the activity -- it wasn't that we had a great October and a bad December, we just brought, I don't know, one day must have caused that for one reason.

I'd say, John, just Christmas activity, shopping use of money by corporations right at year-end making -- maybe paying some bills or whatever, pushed that down.

Sounds good, thank you very much.

Sure.

Okay, your next question comes from the line of Jason Goldberg with Lehman Brothers.

Thank you.

Good morning.

John, appreciate the earnings guidance.

If you could, if -- if it's roughly $3 to $3.10 you gave us three months or so ago.

When you compare your outlook at this point compared to three months ago, what are the major changes to your forecast, in light of the fact that the economy it hasn't improved or deteriorated much since then.

Or maybe it has.

I would say that at that time, we were more optimistic the economy would improve, not necessarily in the fourth quarter, but faster in 2003 than we're seeing now.

Our commercial loan growth is slower than we would have expected.

So, I think, in a certain sense, we kind of pushed out the timeframe when we see an economic turn around.

We expected it to be starting now and, you know, in motion in the second quarter this year and we're now saying it's probably going to start later and have less effect on 2003.

So, I think that would be the reason our numbers are coming out different.

Our loan growth rate [inaudible] net interest income growth is a little lower than we had just a few months ago.

Okay.

And separate -- on the unrelated question, if you could go through, again, that $16 million in terms of the reserve adjustment, just go through how it impacts the P&L?

It doesn't have any effect on the P&L.

It is just a balance sheet adjustment.

We, you know, we -- we estimate loan loss reserves when we do acquisitions and true them up as we go through the conversion process and in a certain sense, their portfolios were better than we expected and therefore we -- we -- end up less reserves out of the acquisition because the portfolios were better and more goodwill.

So it's just a balance sheet effect.

Okay.

Thank you.

Yes, sir.

Your next question comes from the line of Chris Marenet with SunTrust Robinson Humphries.

Yes, hi, good morning.

Scott and John, I had a question for you on the trust business.

What were the trust assets at the end of the year?

Is there a difference in timing when you price accounts?

Scott, have you got that?

Trust assets at the end of the year were about 21, $22 billion, I don't have that flight front of me.

Tom, do you happen to have that anywhere?

No, Scott, I don't.

Okay.

A little over $20 billion under management.

No, Scott that, would be flat with what you reported in the Q, last quarter.

So, if that's the case, is there anything different on pricing, then, that changes the fee income so much this quarter?

Well, quite candidly, we attempt to accrue as we go through the year, as we get late into the year and we don't have any rebound in the marketplace in terms of investments, which we have some this year, but not a lot.

You can see, last year fourth quarter was also down.

It tends to fall in the fourth quarter as you're looking quarter-to-quarter.

Okay.

So, it's basically the market and market -- driven -- a lot of our fees now are based off of the fair market value of what's being managed and we just never got the recoup and the boost we were expecting in the fourth quarter.

And so we had to make adjustments to true it up for the full year.

So, if things stay flat for the first quarter, just for example, would it mean that the $20 million run rate would be identical or actually increased?

I think certainly 20 or below 20 is where our run rate currently is.

Because I don't think we've had major additions to trust assets under management and until the market really starts to turn around, kind of on a broad base -- basis, across all sectors, I don't think we're going to get a lot of uptick in pricing.

My guess, if you were modeling it, Chris, would be somewhere in the 20 to $22 million a quarter range.

Okay.

Fair enough.

And Scott, one quick follow-up on the new fair value on a lock agreements.

How will those work when -- when and if refinancing slow down and your mortgage pipeline slows down?

Well, basically what we are doing is just changing our methodology and refining our methodology in valuing those interest rate locks.

And following the new guidance.

Obviously if the pipeline slows and the interest rate locks slow there, could we have been less income regardless and there will be less in the pipeline, less commitments and interest rate locks to mark-to-market.

So, it will decline.

Okay.

It really will depend on the volume and the amount of locks that are -- that we have to handle our whole pipeline.

Your next question comes from the line of Robert Patton with UBS Warburg.

Good morning, guys.

Good morning, Bob.

Hi, Bob.

Give me a little color on credit, in terms of where you're seeing, you know, obviously manufacturing and textile, you made the comment that next year's outlook was based on improving credit.

I guess with minimal inflows or minimal outflows going on, where do you see credit improving, for you guys specifically?

Well, I think the reason that we're somewhat optimistic, I wouldn't want to overstate that, I thought it would rise in the first quarter, one assumption is the economy gets better and that always improves credit.

And second, the number of new watch list credits we're adding to our watch list has declined.

And that's usually the earliest indicator.

So, we're seeing fewer new problems across the spectrum than we were at one point in time.

Normally, that ultimately reflects lower charge-offs, nonperformers, six months, nine months down the road.

In terms of the composition of our problems, except for manufacturing which is - we are not a big manufacturer lender in terms of percentage of our portfolio, [big concentration of problems in manufacturing] they're kind of spread out across a lot of different industries and a lot of different geographic footprints.

As I mentioned earlier, a few more problems in commercial real estate, but not a lot.

An apartment project here or there, residential real estate is doing extremely well.

Charge-offs, a lot of them in the small business area.

And that could be retailers across the whole spectrum in small business.

So, the optimism is based on the reduced level of new, larger credits going on the watch list and the assumption that the economy is going to get some better this year.

How are you finding the tourism segment in terms of the commercial real estate focus is on hotels and the shore communities holding up?

You know, we don't have many or any big hotels, most of ours tend to be, not many hotels that we have are truly resort-related.

Ours would be Days Inn - not Days Inn any more - the Best Western that, style hotel that, would be more modestly priced and more smaller projects and overall, our hotels are doing fine.

We have one or two problems, but in not a big percentage of the portfolio.

We have one or two problems related to Myrtle Beach, but, again, it would be a small percentage of our portfolio.

And I don't know that Myrtle Beach is doing poorly, I think the two hotels are doing poorly and maybe it reflects the market, maybe it doesn't.

We're not seeing anything significant, but we're not, if you -- if you looked at tourism, we would not be a big tourism lender in the broader context.

Thanks, John.

Yes, sir.

Your next question comes from the line of Nancy Bush with NAB Research LLC .

Good morning.

Good morning, Nancy.

John, you've been good at staying close to your clients, and sort of giving us anecdotal evidence of how everybody feels, you know, at one point or another.

Can you just tell us what you're hearing right now?

I mean is everybody as scared as they seem?

That's a great question, Nancy.

I don't know if scared is the right word, but everybody is more ambiguous than I've seen in a long time.

I do have the chance to talk to a lot of our local Board members that run small businesses and most of what they say is things aren't bad, but they're not good, I'd thought they'd be getting better by now, but they're not getting better.

Most of them in the retailing had mediocre Christmases.

You know, not -- not bad, but not -- not particularly good.

You got a few areas between textiles and small towns that are textile-related, they are very depressed.

Furniture has been struggling.

A lot of small towns are furniture-related and they're struggling.

But not -- I wouldn't call it the kind of pessimism you might read about in the paper.

I call it more uncertainty, ambiguity and most of them aren't saying their businesses are doing terrible, they're saying they're not doing particularly well and they're very cautious.

Okay.

I think probably the caution is what you see reflected in our lending activity.

People just aren't willing to make capital investments.

Any particular markets that you can point to that you have concerns about, either from a credit quality perspective or from sort of just the town of business?

Is there any -- and particularly in the southeastern markets, in a appear particularly weak?

The larger cities across the spectrum seem to be doing okay.

Some well, like metro D.C., where our tax dollars are being sent rapidly.

But others, even Atlanta, I would say some slowing but still okay.

What we're hearing more is smaller towns, rural areas where one industry is under stress and that's impacting the market of renewed - Florida.

Florida, on the residential side, doing very well by what we're seeing.

That's a small part of our business.

Rural Carolinas, rural Virginia, slower than -- than is typical.

Usually those kind of areas do pretty well in tough times and have basic end issues, but the basic end issues have been hit this time around.

Okay, great, thank you.

Yes, ma'am.

Your next question is from the line of Casey Emberek with Millennium.

Thank you very much for taking my call.

I wondered if you could get into a little more detail, the $14.5 million gain from the accounting policy regarding the mortgage portfolio.

I'm not sure what to tell you about.

Scott, do you got anymore?

I don't know -- it's just...

Is that going to be a recurring pattern?

No, it's a one-time -- no, the way I look at it is a one-time gain.

We won't have a negative going forward because of it.

We just are basically marking the derivatives to market, which we've done in the past, but they're bigger this time and we made adjustments reflecting, you know, kind of what's been going on in the industry.

And so, but we won't get in next quarter, but on the other hand, we won't lose it, it's kind of -- we were already accruing and weren't going from cash to accrual, but in a certain sense, it's analogous if you were going to a cash to accrual with a one-time benefit, but not getting the benefit going forward, but on the other hand, you don't lose anything.

So its kind of a one time benefit.

That was that included in your core operating number?

Yes, it's included in the revenue, sure.

If you tax adjust it it sounds like it added over two cents this quarter.

Yeah, it was -- yeah.

Yeah, I think you have to look at an offset to it, Casey, in terms of the much larger provision that we made, which was up about $20 million more than we would have normally provided.

We looked at that as pretty much of offset between each other, at least canceling the bottom line impact out and, in fact, patriot vision was err $20 million where the change in methodology of looking at the interest change locks was only 1.5.

Thank you very much.

Sure.

Your next question comes from the line of David Stump with AG Edwards.

Good morning.

Good morning.

Not to beat a dead horse on mortgage banking, but a slightly different angle on it.

Could you talk a little bit about the size of the servicing portfolio, the current valuation of MSRs any impairment reserve, I guess the size of that reserve and what I want to get down to, Scott, is, sort of, what should we thinking about in terms of the potential impairment recapture that we could see over the course of the year?

I know it depends on interest rates, but what the triggers really are, I guess, with regard to rates. 'Cause it seems like that could be a big swing factor one way or another this year in terms of the magnitude of MSR recapture.

Those are all good questions and I think there is a lot of unknowns in terms of the servicing rights and the recapture of the reserve.

It's gotten pretty sizeable, at least for us at BB&T.

Let me go through and think of this in a logical order and try to answer all your questions, David.

Okay.

We currently service, and I'll round these numbers, $35 billion.

Of which about $11 million is on our own balance sheet and we own.

About $24 billion is investor-owned.

That makes up for the $35 billion.

As John said, we originated a huge amount, particularly late in the year.

Almost $5.5 billion was originated in the fourth quarter and 14.1 for the year.

The servicing rights are now on the balance sheet at -- what number here? -- they're on the balance sheet, I think it's $318 million, then we have a $318, $319 million in servicing rights.

We also have a reserve of $218 million.

So, if you add it together, the gross servicing rights that have been capitalized are 536, $37 million.

We took a small recapture of about $4 million in the fourth quarter after taking pretty large impairments the four or five quarters prior to the fourth quarter of this year.

And, we think, if rates start turning up that we're going see some more recapturability of that reserve.

As you know, it's done by traunches, we are able to go back and recapture it.

It's a low comp concept.

We recapture only what we've put into the reserve, nothing beyond that, but it is available to us.

When it comes depends on long-term mortgage rates and and maybe more importantly than that, prepayment speeds.

Okay.

And I was going to say with the prepayment speeds, in theory you don't need a significant increase in rates.

If you just had a significant decrease in the amount of refinancing activity, fever rates are flat, do you recapture anything under that scenario?

Yes, I think you do, as prepayment speeds fall and what we're putting on the books now in terms of future servicing, we think is the most valuable servicing we've ever booked and that it's going on at 5 3/4, 6%, 6 1/4 style rates versus what's been prepaying, which is 7, 8, 9, 10% rates.

Right, right.

Yes.

They both work together.

It is a pretty complex formula.

We value it in the last month of each quarter and you're very right.

Rates don't have to change a lot much prepayment speeds can slow and can get recapture.

Thank you.

Did I get to everything?

Yes, I think so, thank you.

Okay.

Your next question comes from the line of Ed Najarian with Merrill Lynch.

Yeah, good morning.

Hi, Ed.

Most of my questions were answered in Dave's question.

Just had -- just wondering, are you including a forecast of any mortgage servicing impairment reserve recapture in terms of saying your comfortable with the $2.95 to $3.05?

And, you know, given such an outsized mortgage fee income number in the fourth quarter, can you give us any perspective on how to forecast where things might be or some kind of a range for the first quarter in terms of mortgage fees?

Thanks.

Okay.

John, I'll try the first one.

Yes, we do have, as I mentioned to you, our rate scenario for next year is flat rates through July and then a mild, very slow 100 basis point increase from August to December.

And that scenario we have built in some recapture into our numbers.

Most of it occurring, all of it occurring in the third and fourth quarters of the year.

And we think that will happen whether it happens as -- in the third and fourth quarter and as smoothly as we think it might, we've taken far less than half of the reserve, we have not gone in and taken all of the 218 or some huge number like that, but we have booked some in the third and fourth quarter and it is part of our projections.

They could be much greater than what we are projecting.

Again, depending on prepayment speeds and rates.

What was the second part of your question, Ed?

Just some -- any kind of insight how to forecast mortgage fee income, you know, say in the first quarter.

You know, at what pace, maybe, do you see that number decelerating?

You had such an outsized number this quarter, it's sort of hard to have insight on mortgage banking revenue over the next quarter or two.

Yeah, let me give you some history.

Taking out all impairments and recaptures and this is talking about real mortgage banking income in its various forms.

The fourth quarter of last year, 2001, we had about $72 million in income.

It dropped to $60 million for the first and roughly $60 million into the second, then was $71 million in the third quarter.

My guesstimate is, we're still going to see residual effects to our pipeline and some closings will be heavier than normal in January and February.

My guess is that we will be probably somewhere between 75, $80 million, something like that,the first quarter as a run rate.

I think we're going to do better than the 71, $72 million that we did in the third.

How much better?

I really don't know.

Mortgage rates seem to bounce around every other day and every week that are going up a quarter or down a quarter.

My guess is we will see real improvement.

Some will be a natural carry over.

We have a very large pipeline, we have huge applications in the fourth quarter.

Some of those, obviously, didn't get closed by year end.

So, I think we will see a pretty strong January/February at least.

I think we'll beat the number you're talking about, Scott, if rates stay down.

We had such a large carry over.

I'd say we'd be --

Maybe a size 85, 90, John?

I think it 100.

If -- if rates stay down.

Okay.

Great.

Thanks.

Your next question comes from the line of Jefferson Harrelson with KBW.

Good morning.

Good morning.

Hey, Jefferson.

I have a question on the mortgage servicing income again.

Of that 137 you reported this quarter, can you break that down into how much of that was from servicing, how much was from the new assets booked, from the originations?

You mentioned that amortization was up $6 million.

What was total amortization?

And MSR was written up by four and one-time accounting changes were 14.5.

That's in that number.

And in addition to that; there anything else in the number that I've left out?

Yeah, I can give you a breakdown of the 138 and then let's also hone in on the amortization.

Servicing fees were up significantly, they've been trending up as obviously the portfolio of servicing continues to grow.

They were almost $25 million to compared to only $19 million in 2001.

So, they were up $6 million.

Gains, obviously, as loans were passing through, we were selling our -- the fixed rate mortgages into the market, gains were up, they were about $34 million in the quarter.

The gains taken as part of FAS 125 were about $30 million which was about $6 million more than they had been running, 6 to $7 million more.

You already mentioned the recapture of the -- of the mortgage servicing right reserve of about $4 million.

Origination fees were huge, over $11 million, compared to under $7 million in the third quarter.

So, a very large jump in originations as you would guess.

Also, a large jump in mortgage loan underwriting fees, they were almost $8 million versus under $5 million in the third.

[inaudible capital on the commercial side, commercial loan servicing income, also over more than doubled and was about $7 million and then the mark-to-market on the interest rate loss at 14.5, that basically should foot to the 138 with some other smaller items.

Okay.

In terms of amortization, it's also going up.

You might recall that we currently book all mortgage banking income in impairments or recaptures of reserve under noninterest income.

However, we have the mortgage servicing rights as an other expense.

Come next year, we're going put those together, all up under mortgage banking, which we think is a better preferred practice.

But for this quarter and year, the amortization of mortgage servicing rights is still in the expense category.

It jumped from about $28 million in the third quarter to $34 million in the fourth, so it was a $6 million increase in amortization.

Obviously, even a bigger increase on fourth to fourth where it was $14 million fourth quarter of last year and its now $34.

So, it went up $20 million.

Jefferson, did that get to your questions?

It did.

And just a follow-up on the one piece of it, the $34 million in gains, that's based on how much of loans sold?

Let's see if I have that. [pause] It was a lot.

It was significantly higher than last quarter?

In terms of the loans sold?

Yeah.

Yes.

Loans sold in the fourth quarter, we sold 28,000-plus loans.

About $4 billion, compared to about 17,000 in loans, $2.3 billion in the third quarter.

So, you know, a huge increase in loans sold and also in both dollars and numbers.

Great.

And Tom, tell me if I go through my time, but if we had a 30% reduction in mortgage originations next year, kind of like the Mortgage Bankers Association is saying, how would that, you know, kind of work through, you know, this line item and your earnings forecast the next year?

You've got 30% reduction, which is driven by a rise in interest rates, next year we'd probably make more profit because we've had a huge positive swing on the mortgage servicing right recapture.

Whereas, this year we ate a tremendous writedown on mortgage servicing rights.

So, you know, if it happens, it would cause rising rates and it doesn't reflect in the turnover, the refinance numbers, than would hurt our earnings.

But actually, slower production year based on rising rates and/or lower refinance would improve earnings in 2003 because of the impact mortgage servicing rights.

Okay.

Thanks a lot, guys.

Yep.

Your next question comes from the line of Chris Mestassio with Legg Mason.

Hi.

Good morning.

Good morning, Chris.

Quick question for you, given your capital ratios and assuming some form of Bush's proposal goes through on the double taxation of dividends, would that impact your overall dividends payout ratio or any thought on that aspect, vis-a-vis share repurchase program?

John, I will let you handle that one.

Good question.

Not initially.

You know, we've been an organization that's focused pretty aggressively on growing our dividends and plan to continue to grow our dividends at a pretty healthy pace going forward.

We have been able to create excess capital.

In addition to that healthy dividend growth rate and have used share repurchases when that excess capital was created.

And also, acquisition programs often create excess capital.

We often acquire companies that have excess capital.

I guess we would see how the market reacts and what the actual dividend tax proposal is, but right now, we don't -- we would continue with our current strategy, which is a pretty healthy dividend growth rate in the double digit numbers and fill in with share repurchase.

The one thing to be careful in your dividends is not get ahead of yourself [audio cutout] if you had a bad year or a couple of bad years, don't get your dividend payout too high fever there were tax advantages.

Because we've raised ours, as Scott mentioned for 31 consecutive years and we'd hate to be in a position where we would then have to decrease it.

So, we try to be cautious in that regard.

All right.

I would only add, Chris, that as you well know, BB&T, for long periods of time, has been a vast majority owned by individual shareholders.

The current number is 74, 73% individual shareholders.

I think everything John said is predicated on, you know, who owns us and that those people look to dividends often and want some decent dividends so we try to deliver that.

Thank you.

Taprica, we've actually run close to our time limit.

Let's take one last call, please.

Your final question comes from the line of Jason Goldberg with Lehman Brothers.

Thank you.

Last quarter we had about a $3.7 billion jump in the portfolio, this year, another $2.2 billion increase. n you just extrapolate on that?

Yes, we have been adding a lot of it -- a lot of the addition is because of the mortgage loan business forward commitments and derivatives on forward commitments as well as we've done some long-term debt issues in the last couple of quarters and been adding.

We swapped all of the fixed coupon debts that we went to market with and so we've been up from $5.8 billion at the end of June to about $11.7 billion so that's an increase of almost $6 billion.

And, again, a lot of it is very traceable to the very large increase in mortgage banking activity and other cash flow hedges and than also some fair value hedges on long-term debt.

Which while we'd love the fixed rate, still was costly versus swapping off to 90-day liable.

Great.

Thank you.

Uh-huh.

I wanted to add one comment since there were a number of issues about the mortgage revenues, which is legitimate because we had such a nice revenue number.

I just remind everybody that there is also a big increase in expenses that Scott mentioned related to mortgage incentives.

So, if revenues drop back some, a fairly high percentage of that, initially, is absorbed by reduction and mortgage incentives. 'Cause you pay out in the front end a fair chunk of your profits you make in the servicing business to your producers.

So, the -- there is some correlation on the expense side up and down with changes in mortgage revenues.

There is no further questions at this time.

Mr. Nicholson, any closing remarks?

Yes, Taprica.

I just want to thank those of you who have asked questions and, in fact, all of you who have participated in the conference today.

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

Have a good day.

Thank you.

Thank you for participating in today's BB&T conference call.

You may now disconnect.