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BB&T Corporation (NYSE:BBT)

Q4 2007 Earnings Call

January 17, 2008 11:00 am ET

Executives

Tamera Gjesdal - Senior Vice President, Investor Relations

John A. Allison IV - Chairman of the Board, Chief Executive Officer

Christopher L. Henson - Chief Financial Officer, Senior Executive Vice President

Analysts

Kevin Fitzsimmons - Sandler O'Neill

Nancy Bush - NAB Research

Matt O'Connor - UBS

Todd Hagerman - Credit Suisse

David Pringle - Fieldpoint Research

Christopher Marinac - FIG Partners

Greg Katran - Citigroup

Jefferson Harralson - Keefe, Bruyette & Woods

Operator

Greetings, ladies and gentlemen and welcome to the BB&T Corporation fourth quarter 2007 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Ms. Tamera Gjesdal, Senior Vice President for Investor Relations for BB&T Corporation. Thank you, Ms. Gjesdal. You may begin.

Tamera Gjesdal

Good morning, everyone and thank you, Diego, 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 review the financial results for the fourth quarter of 2007, as well as provide a look ahead. After John and Chris have made their remarks, we will have Diego come back on the line and explain how those who have dialed into the call may participate in the question-and-answer session.

Before we begin, let me make a few preliminary comments. BB&T does not make predictions or forecasts. However, there may be statements made during the course of this call that express management’s intentions, beliefs, or expectations. BB&T's actual results may differ materially from those contemplated by these forward-looking statements. Additional information concerning factors that could cause actual results to be materially different is contained in the company’s SEC filings, including but not limited to the company’s report on Form 10-K for the year ended December 31, 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, John Allison.

John A. Allison IV

Thank you, Tamera. Good morning and thank all of you for joining us. Areas that I’d like to discuss will be the financial results for the fourth quarter of 2007 and for the year. My primary focus will be on credit quality, which is obviously the big issue. I’ll share with you a few thoughts on mergers and acquisitions and a few thoughts about the future. Chris will give you an in-depth look at a number of issues, especially margin. And then after that, we’ll have time for Q&A.

For the quarter, our GAAP net income was $411 million. That was up 63.7%, primarily because last year we had a series of non-recurring charges related to taxes and security restructuring. Our operating earnings were $415 million, down 6.1%. GAAP diluted EPS was $0.75, up 63%; operating diluted EPS, $0.75, down 7.4%. The $0.75 was below the consensus estimate of $0.78. However, the range on the consensus -- I don’t think I’ve ever seen it this wide -- was $0.67 to $0.88, so I don’t know that there was a consensus. To the degree that we missed the consensus estimate was driven by a higher level loan loss provision, which we’ll talk about in a minute. Our returns on a cash basis were 137 ROA and cash ROE of 24.03.

For the year, we actually had a pretty good year, a very good year in light of the kind of environment we were in. GAAP net income for the year was $1.734 billion, up 13.5%. Operating earnings, $1.749 billion, up 2.5%. GAAP diluted EPS, $3.14, up 11.7%; operating diluted EPS, $3.17, up 1%. Cash ESP, $3.29, up about 1%; Cash ROA of 150, and cash ROE of 2682, very good returns.

This was our 26th consecutive year of record operating earnings and I think having record performance in this environment is something we are certainly pleased with.

If you look at the factors driving the earnings, we are very encouraged with the fact that our margin improved, although it only improved slightly from 345 to 346, which we think it is important that it stopped falling and Chris is going to share with you some insights into that.

Non-interest income had a pretty strong fourth quarter relative to the third. If you take our purchases and MSRs and non-recurring items, a kind of core non-interest income third to fourth annualized up 24.7%, fourth to fourth up 4.6%, and year-to-date, 5.8%.

Our single biggest driver in non-interest income is insurance commissions -- fourth to fourth, up 2.7, annualized linked up 24.1, year-to-date up 4.8%. That is really excellent results compared to the industry. Commercial insurance rates have been falling 10% to 15%, 20% and yet we’ve had internal revenue growth. We’ve had the fastest internal growth rate of any of the 10 largest brokers in the U.S. and have the most productive sales force in the industry.

Service charge on deposit accounts, fourth to fourth up 16.1%, annualized linked, 22.7%, year-to-date 9.2%. We developed a good bit of momentum in our service charge revenues. A lot of it is NFS fees and some different pricing strategies but also because we are opening a fair number of new accounts.

Non-deposit fees and commissions, which are basically debit and credit card fees, fourth to fourth, up 13.8, annualized linked, 9.2%, year-to-date, 12% -- nice momentum in that business.

Investment banking, fourth to fourth, up 10.5%, down 18% from the third annualized but up year-to-date, 7.5% -- a lot of that driven by our retail brokerage operations in [inaudible].

Trust revenues we were pretty pleased with. We’ve had several years of flat revenues in our trust business -- fourth to fourth, trust revenues were up 7.7%, 19.8% annualized link, and year-to-date 5.2%, so we are getting some momentum there.

Mortgage banking, excluding mortgage servicing rights, fourth to fourth was essentially flat, up 62% annualized link and 3.2% year-to-date. We had very strong mortgage production in the fourth quarter. It didn’t turn into revenues because of volatility and accounting factors but we think it will turn into revenue in 2008.

Our fourth quarter production was $3.2 billion compared to $2.5 billion in the fourth quarter of 2006, and given how much the market has shrank, obviously we’re moving marker share significantly.

We are a very traditional kind of bread and butter mortgage originator. What’s happened in the market is actually very favorable for us and we expect a pretty healthy growth rate in mortgage revenues in 2008.

Other income has been a challenge -- fourth to fourth is down 34% and it’s down year-to-date 13%. A good bit of that is capital markets related activities. We had capital market losses of about $17 million in the fourth quarter and about $33 million year-to-date. Those are actually small numbers given the size of our business, but they have a marginal effect on EPS growth and we don’t think we’ll have those losses in the future because we’ve exited a number of those businesses.

Our fee income ratio continued to improve, up to 41.7% against the long-term goal of 45.

Non-interest expense, this is an excellent story -- we did have an annualized increase from third to fourth quarter which Chris will explain to you, but fourth to fourth we were down 1% if you take out purchases and year-to-date, we were down seven-tenths of a percent, which is a real success story. And Chris will give you some more insight into that.

We were very pleased with loan growth. Again, if you take our purchases, securitizations, and leveraged leases and look at the growth rate from third to fourth and compare that to the momentum, strong commercial loan growth, up 10.9%; direct retail, 2.7; sales finance, 2.4 -- a lot of that is seasonality; revolving credit, very strong, 16.8; mortgage up 8.3%; specialized lending was down 3% but that’s basically in our AFCO-CAFO premium finance business where as premium prices has fallen, that business has shrank. If you take that out, it was up about 3.2%; and total growth without purchases was 7.6% -- if you take out AFCO-CAFO, it was about 8%.

If you look at the fourth to fourth as a comparison, commercial 7.6% compared to the 10.9 third to fourth, so we’ve developed some momentum in commercial. Direct retail was actually a little bit better -- fourth to fourth is 1.7; third to fourth, 2.7, et cetera. Sales finance is again a seasonal business, up 7.5% fourth to fourth, revolving credit, 13.6; mortgage, 11.3 -- we were portfolio-ing less of our mortgage production because spreads have improved in the Freddie Fannie market and we’re presenting a higher percentage to that market.

Specialized lending has slowed considerably compared to what it was doing. Fourth to fourth it is up 14.2% but our consumer finance business and our specialized lending area have all slowed down, reflecting the economy. And also maybe we were being a little tighter in terms of credit standards.

So if you look to the lending businesses collectively, a really strong fourth quarter, particularly strong in commercial CNI growth. I think some companies are coming out of the capital market. Some of the larger banks are facing some other challenges. We’ve got a lot of momentum in the CNI lending business.

We did see some improvement in direct retail -- not strong, but at least some improvement in direct retail business.

Our credit card business continues to do very well, based on client relationships. Very strong production in our mortgage. Our specialized lending businesses have slowed down some, so fourth quarter in terms of production from the loan side.

Looking at deposit growth, it has slowed for us partly by the market and partly by our own intent. Non-interest bearing deposits, fourth to fourth down 3.2%, annualized link down 6.2%, year-to-date 2.7% down. Basically what we are seeing is our clients are using up their liquidity and we think that’s what is happening there.

Client deposits -- all of these again without purchases -- fourth to fourth up 4.1, annualized linked 1.3, year-to-date 6.5. And total deposits, 5.3% fourth to fourth, annualized link 4.9, year-to-date 5.7.

We have consciously become less aggressive in CD pricing. In fact, the CD pricing makes no sense to us that’s going on in the marketplace. We think we can come back and be more aggressive when rates come down, so we backed a little away from the CD pricing and we do expect the market to correct at some time in the future.

And so that’s impacted our deposit growth but if you look at our deposit growth year-to-date overall, it’s still been very strong given the economic environment.

Let’s talk about asset quality -- clearly asset quality is a primary issue to focus on. I’ll talk about the overall results and then give you a more in-depth look at our various portfolio segments.

In terms of non-performers, they did increase from $547 million to $697 million from the third to fourth quarter, and that’s a percentage ratio increase from 0.42 at the end of the third quarter to 0.52 at the end of the fourth quarter.

We also did have an increase in our 90 day past dues. That both reflects an increase 90 day past dues for real and also a little bit of accounting changes where we align with the FFIEC standards where we had been actually more conservative in the standards and the regulators wanted us to line up with the standards, which raised our 90 day numbers. It actually probably reduced the amount of non-performers increase slightly. There was some trade-offs, so you can kind of add those two numbers together.

Still, the non-performing numbers we think are excellent at 0.52% of total assets. That’s an excellent non-performing number in a market environment we are in. Charge-offs for the quarter were $111 million. That was up from $90 million in the third quarter. As a percentage of loans, they increased from 0.40 to 0.48. Taking out specialized lending, it increased from 0.23 to 0.28. However, a 0.28 loss ratio excluding specialized lending in this environment we think is very good and we are very pleased with that result.

Year-to-date, we charged off $338 million, which is a loss ratio of 0.38 compared to 0.27 last year. If you take out specialized lending, the loss ratio for the year was 0.21 compared to 0.14 last year, so it was up from last year but still very good results in terms of losses for the year.

In the quarter, we did provision $184 million compared to $111 million in charge-offs, so we increased the provision by $73 million. Year-to-date, we charged off -- we provisioned, excuse me, $448 million in charge-offs, $338 million, so we added $110 million to the provision during the year.

Our coverage ratios are down some but they still remain strong. We’ve got 2.29 times charge-offs. That means we’ve got two-and-a-quarter years worth of charge-offs in our loan loss reserve and our reserve to non-accruing loans is still two-to-one, so strong coverage ratios.

We raised the reserve from the end of the third quarter from 104 to 110, so a fairly substantial increase in the loan loss reserve. Obviously we believe that this is an appropriate loan loss reserve level given what is happening in the economy and our market area and the trends we are seeing our loan portfolio. We’ve had a long-term strategy to take losses when they occur, which is reflected in our loan loss reserve position.

The primary concern that we’ve heard expressed in the market is about residential construction and development lending. We have provided some supplemental information with the earnings press release in that regard. For those of you that have the press release, I’ll just refer you to the last page. It’s page two in the supplemental study and make some comments about that.

Our primary focal area that we’ve heard most about is construction, development lending, residential construction development lending. We have a total of residential acquisition development construction loan portfolio of $8.725 billion. One thing you’ll note that we do very little condo lending and we got burned doing that years ago, so we are very small condo lender and condos traditionally have the big problems at this point in the cycle.

You’ll also notice how diversified and granular we are. Our average loan size is $427,000 and the average client relationship is $1.137 million, so we are very granular.

Our acquisition development construction loan portfolio is 9.5% of total loans. It is interesting to look at the performance ratios from a quality perspective at year-end. We had 1.30 non-accruals, which is obviously higher than it used to be but still a fairly low number, and our gross charge-offs, we don’t have net charge-offs by category but our gross charge-offs for the year were 0.21. That’s a very good number.

We also show you the diversification by states. Our biggest concentration is in North Carolina, followed by Georgia, Virginia, and then Florida. The two markets we have the biggest challenges in you can see are in Georgia, which is basically Atlanta, and in Florida.

One comment -- you see the biggest problems really where we have any size is in Florida. Florida represents about 10% of our residential construction development lending portfolio, which itself is 9.5% of our total loan portfolio, so Florida residential construction development lending represents less than 1% of our total loan portfolio. And I just reiterate that because I think that’s the market where the biggest challenges are. Florida represents less than 1% of our total loan portfolio in terms of residential construction and development lending.

We are also a pretty large other commercial real estate lender and this is where we have what I call the non-single family portfolio. It primarily consists of office buildings, hotels, warehouses, apartments, rental houses, shopping centers -- non-residential, non-single family residential construction related kind of lending. These are generally completed properties. There obviously is some construction lending in this business but it is mostly completed properties.

It is an average loan size of $433,000. The average client size is $604,000 -- again, very granular. It represents 10.7% of our total portfolio and our non-performing at year-end was only 0.37, a very low number, and charge-offs, 0.07.

We are seeing some deterioration in credit quality in this portfolio but we are seeing it on a very low base and a year-end 0.37 non-accruals is obviously a very low number so we don’t really at this point have any problems that are material in our other commercial real estate lending business.

Our total commercial real estate then is about $18.5 billion. It is very granular and you can see its gross charge-offs for 2007 were only 0.13 and gross non-performers or non-accruals were 0.81.

It is important to realize that it is $18.5 billion because there is some confusion that seems to come up fairly often. We have a fairly large amount of loans that are secured by real estate where the risk is not real estate related, and that’s important because the FDIC Cobb report numbers are really misleading. All the FDIC considers is collateral.

We have $10.2 billion in commercial and industrial loans which are secured by real estate. This inflates the real estate category in our Cobb reports to about $29 billion. We are a very large small business, low middle market lender and we often take real estate as collateral.

For example, we might help a dentist open his practice and he might buy a building for his own dental practice and buy the equipment and we take the building as collateral. Or an engineering firm might want to buy a building to run it to operate its firm in and we take the building as collateral. Or a light manufacturer, we might be financing accounts receivable and inventory and we take the building as back-up collateral.

So our total commercial real estate related risk is $18.5 billion, of which $8.7 billion is construction and development risk, 9.5% of our portfolio.

Another category that there’s been a lot of discussion back and you can go -- this is the page before, page one of the credit supplement if you are looking at the press release, relates to mortgage lending and also to home equity loans and lines.

Our mortgage lending portfolio is primarily a prime portfolio. This is loans that we’ve actually portfolio -- $12.2 billion in prime loans, and average size of $187,000, again small, great credit core, 720, almost all first and a loss ratio of 0.04.

Our Alt-A portfolio, interestingly enough, actually has better credit scores at 734 -- again, almost all first mortgages for all practical purposes, and a gross charge-off ratio of only 0.03.

We have a small construction perm portfolio where an individual buys a lot and then gets a builder to build on his lot, have a little higher loss ratios there, 0.26, but very good performance numbers there.

We have a very small sub-prime portfolio, 0.6-tenths of one percent -- less than 1% and it’s what I call a traditional sub-prime portfolio. It basically comes out of our Lendmark consumer finance subsidiary, which we’ve been in that business a long period of time and they make traditional loans to high risk borrowers, which is a legitimate market that has existed for a long period of time. They didn’t change their standards. It’s a very traditional business. It has a loss ratio of 0.78, which is higher than obviously the prime market but still a very good loss ratio.

If you look at the residential mortgage portfolio, it is also diversified. Our biggest concentration is North Carolina, followed by Virginia. We do have a fairly large residential first mortgage portfolio in Florida. It represents about 14.9% of the residential first mortgages. Remember, however, that if you look at it as a percentage of our total portfolio, it is less than 3%. We have a little higher non-accrual ratios there, 167. That’s still not a very high number and very good loss ratios of 0.04 in that market. Again, it’s an A grade loan portfolio.

The average loan to value, by the way, on our whole mortgage portfolio is 74%, so we’ve got a lot of equity. And the gross charge-off ratios for the whole portfolio was 0.08. That’s a very good number.

Looking in our -- another area there’s been a lot of focus is on direct retail loans, and we’d look at two categories -- home equity loans and home equity lines. We’re not really a very big home equity line lender. We have $4.5 billion. All of our home equity lines are originated for clients in our banks, branches where we have relationships with our clients. The vast majority of the loans have loan to values of less than 80%. We do do some more than 80% but they typically have less a loan to value than 80%.

They are small, an average loan size of $32,000 and very high average scores of 757. 23% of them are first mortgages. They have almost no non-accruals, 0.19 and a 0.26 charge-off ratio.

Home equity loans, these are what I would call traditional consumer loans. What they typically are are not loans for the purchase of a house but where somebody may own a home and want to add a bathroom, or they own a home and want to buy a car and they think they can get a better interest rate using their home as collateral, and we might refinance their first and give them enough money to buy a car. They tend to be small loans, with an average loan size of $47,000. Very good credit scores, 724. 77% of them are first mortgages, a very low non-accrual ratios of 0.32, gross charge-off ratios of 0.29.

You can also see they are very diversified by state. In this case, the portfolios look a lot like our deposits. Portfolios, a big concentration North Carolina, Virginia, South Carolina, and Georgia.

If you look at both our mortgage business and our home equity loans and home equity lines business, I’d really be surprised if we had any material problems in these businesses.

Going back and looking at residential construction and development lending, just a couple of comments -- this has been a core business for BB&T for over 30 years. We’ve successfully weathered real estate shakeouts in the past on a number of occasions. We only make loans in our markets where we understand the market, the builders where we know the builders. We very closely service a relationship.

We began tightening our standards in the summer of 2005. Our strategy, which has to happen before we get to this stage of the game is first to know the markets. We really like markets with in-migration to population and affordability. For example, I am a lot more worried about Florida than I am Atlanta because Atlanta has very affordable housing and a very fast in-migration rate. We know our clients. We think character and net worth and experience are important.

We control very tightly the number of unsold units and we can see we very much diversified the risk.

In terms of what we are doing right now, we are putting a lot of intensity on servicing to make sure we don’t over-advance. We are working with our clients. We think in the vast majority of places, the projects are legitimate projects -- it’s just a timing issue and we are going to help them get through this tough cycle to the degree that it is practical. We are going to work with them.

And when a borrower can’t be helped, then we’ll deal with our problems very aggressively and very rapidly. We think the first loss is the best loss, so we’ll do our best to help them through but if it can’t be done, if the project is not feasible, we’ll deal with it aggressively.

Let me discuss some other portfolio segments where there have been issues raised. Although we are a very small, very small sub-prime residential lender, we have a sub-prime automobile finance subsidiary, Regional Acceptance. Regional Acceptance has a portfolio of about $1.7 billion, which is 1.9% of our total loans, so it is a small percentage of our lending business.

It did have higher losses in the fourth quarter. They were up to about 9%. It’s normal loss ratio is high, 5% to 6%, but it was up a good bit. Part of that was we bought some portfolios and part of it we were accepting higher loss ratios out of our traditional office origination.

Interestingly enough, the expectation right now is that our losses will improve a little bit next year because we have worked through these purchase portfolios versus the fourth quarter, but we still they will run at about a 7.5% pace, which is higher than the normal 5% to 6% but better than the fourth quarter.

An interesting point on this business -- the break-even point on losses and regional acceptance is 10.25%, and that’s because the average rate is 20%. So due to the small size and the very wide spreads, while we might make a little less money on regional acceptance, it is very unlikely regional acceptance will have a material negative impact on our earnings. It could be a small drag but that’s not the mathematics of the business.

Other portfolios where concerns have been expressed in the market are the credit card and auto finance, sales finance, business. We have an A grade credit card portfolio, practically all of our credit cards are to our client base where we have relationships with the client. We have excellent loss ratio versus the industry. Actually, while we expect our losses to rise in this economic environment, we think the difference between us and the industry will actually get bigger because we underwrite an A grade portfolio in the credit card business.

We also have a very strong sales finance business, which is primarily focused on automobiles. We have the number one market share of banks in our footprint. Our approach to this business is a very traditional manner. We are primarily providing financing to dealers who are bank customers -- not all of them, but many of them. We are an experienced -- we use experienced lenders and we use a judgmental process and that’s a difference in kind and many of the people that are having trouble in this industry, the banks that have problems are scorecard lenders, and scorecards that have too short of histories are where you are going to have problems. And the same kind of thing is happening in the mortgage business.

We use judgmental lenders, experienced people. We are primarily an A grade lender. Again, losses are likely to increase in the sales finance business, reflecting the market. We think the difference between us and the industry will actually get bigger. We will do relatively better in this kind of environment.

Probably the best aspect of our asset quality is that we either totally didn’t do or only did on a very small scale the type of risk that have so significantly negatively impacted many large financial institutions. Our total trading losses in 2007 were about $33 million, which is $33 million but very small relative to our size. We had a small exposure to CMBS and RMBS and we practically eliminated those positions. We’ve done a very extensive review looking for this type of risk and we don’t have any.

In addition, our bond portfolio is a very traditional, very low credit risk portfolio. In fact, we actually had a gain yesterday, as of yesterday in the bond portfolio.

In summary, residential construction and development lending is a core business for us. It is where our risk is focused. We are good at it but this is objectively a difficult market. Excluding residential construction and development lending, while there is always risk in any type of lending and losses will rise if the economy is weak, we are conservative and likely to have better loss experience than competitors in these other businesses.

Leaving credit quality and refocusing a minute on overall results, it is interesting to look at our core financial performance, exclusive credit quality and capital market disruption. In the fourth quarter of 2006, our operating EPS was $0.81. If we simply held our loan loss reserve flat at 1.04 and not had to account for market losses of $17 million in the fourth quarter, our operating earnings per share would have been $0.84 in the fourth quarter of 2007, up 3.8%.

Obviously credit quality is a primary issue but it is encouraging that the rest of our business is doing fairly well.

A couple of quick comments on mergers and acquisitions, because there are a lot of questions over the years regarding mergers and acquisitions, we are for all practical purposes out of the community bank acquisition business. We have been approached by a number of community banks, but with our own stock price being what it is and with our concerns about real estate exposure, we are simply not looking for community bank acquisitions at the present time.

We are, however, looking for opportunities to acquire insurance agencies. This is a tough time in the industry but a great time for us in the sense that we have we think a far superior model. As I mentioned earlier, we have the best internal growth rate in the insurance industry and the most productive of the 10 largest agencies. You hopefully will see us do some more insurance agency acquisitions. They will typically be small agencies. We are particularly looking for what I call a niche acquisition. We like managing general underwriters in particular. We just announced an acquisition in that regard in Connecticut.

What we like about that business is we do not take the insurance risk. There should be no confusion about that, but we do do the underwriting and by doing the underwriting, we have the expertise that really gives us higher margins and more profitability in the business. So hopefully you’ll see some more niche insurance acquisitions.

With a great deal of trepidation, I’ll share with you a few thoughts about the future. First, just a reminder, we don’t make forward earnings projections and anything I say about the future may be wrong -- in fact, probably anything I’m going to say about the future right now will be wrong.

In our planning process, we use a blue chip consensus forecast, which is, at the end of December, was projecting a 40% probability of a recession. My own instinct from being in this business a long time is the probability of a recession might be higher than that. It might be 50% or higher.

I happen to think that housing has a little bit of ways to go in terms of values declining -- probably 5% to 10% during the first half of this year. However, I do suspect that the housing will be recovering by this time next year and I also say with confidence that housing prices will be higher three years from now than they are today, although in a few markets where there was such fast depreciation, it might take seven, 10 years before they get back to where they were at the peak levels.

The Fed will likely be forced to aggressively cut interest rates in this kind of environment. As we’ve discussed before, we’ve intentionally created a negative interest rate gap in our balance sheet that is at least partially hedge against real estate exposure, and we should benefit some, at least, from the falling rates, which Chris will talk to you about.

I suspect 2008 will be a challenging year for the economy and the banking industry. However, for what’s it worth, I think the economy and the industry will be recovering by the third or fourth quarter of 2008 and 2009 will be a pretty good year.

We certainly expect our non-performing assets to continue to rise, reflecting challenges in the real estate market and the economy. We also expect loan losses to rise.

Our guess -- and it really is a guess -- is that our net charge-offs in 2008 will be in the 0.50 to 0.60 range. We had been talking about 0.40 to 0.50 in 2007, which we actually did a little bit better than, but we think we’ll be a little bit higher in charge-offs in 2008.

While the short-term challenges are very real, I am confident BB&T is a solid and conservative financial institution and we will do well relative in the industry and come out of the correction process even stronger.

With that said, let me turn it over to Chris to give you some insights in a number of areas.

Christopher L. Henson

Thanks, John. Good morning. I would also like to welcome you all to the call and I am going to speak to you briefly, as usual, about net interest income, margin, non-interest expenses, taxes, and capital.

First, looking at net interest income based on operating earnings, if you look at linked quarter, earnings assets were up 5.4% adjusted for purchases. That generated $1.008 billion in net interest income, which was 6.1% annualized increase over linked quarter adjusted for purchases.

Looking at common quarter, earning assets were up a healthy 7.3% adjusted for purchases, again generated $1.008 billion and was a 1.3% decrease over prior year adjusted for purchases.

Looking at year-to-date, earning assets were up 6.7% adjusted for purchases and generated $3.948 billion, again a 1.1% decrease over prior year adjusted for purchases.

As John said, when you look at the margin on operating earnings, we had a one basis point increase in net interest margin, up from 3.45 in the third to 3.46 in the fourth, as we had mentioned last call it would be in the relatively kind of stable range. On a common quarter basis, we were down 24 basis points from fourth a year ago ’06 from 3.70 down to 3.46 fourth ’07. And by year, on a year-to-date basis we were down 22 basis points from 3.74 year-to-date ’06 to 3.52 year-to-date ’07.

During the fourth quarter, as John pointed out, we did remain liability sensitive and operated I think effectively in that manner. We experienced healthy growth in the balance sheet in what I would term extremely difficult market conditions.

While we did continue to experience an increase in non-accruals and an unfavorable change in the asset mix, and what I mean by that is we are continuing to book a declining percentage of higher yielding assets, such as commercial real estate and direct retail loans, while booking an increased percentage of lower yielding assets such as CNI loans and mortgage loans.

However, we were well-positioned to benefit from the falling interest rate environment which allowed us to maintain the stable margin.

Our client deposit growth, however, did slow in the quarter as a result of clients using their liquidity. As a result, our funding mix shifted toward higher cost funding. And that I think has continued but total interest bearing liability costs were well under control during the quarter.

If you look at the yields and rate chart, kind of just take a look at the linked quarter comparison, you can see that total earning assets were actually down 16 basis points but total interest bearing liability costs were down even more at 22 basis points, so linked quarter we had a spread improvement of about six basis points. And you can see also the securities portfolio again performed well overall, with yields moving up six basis points. A lot of loan yields were really declining as the driver was a 43 basis point reduction in commercial loans.

As I mentioned, total interest bearing liability costs declined significantly during the quarter, driven by big declines in other interest-bearing fed funds and other borrowings and also other client deposits. So I think we exhibited pretty good deposit pricing decisioning and control during the quarter. In fact, the rates for all deposit and funding categories declined during the fourth quarter 2007.

I guess in summary, really the main driver of the one basis point improvement was simply just the decrease in overall interest bearing liability costs.

Looking forward, as John pointed out we do use the blue chip consensus as well as looking at the forward curve, and based on that we believe the margin will remain relatively stable in the first quarter with potential for upside during the balance of the year. Obviously that is contingent on a number of things but we think we are well-positioned for that to happen in the last portion of ’08.

Shifting to non-interest expenses, we are very pleased with our expense control on a year-to-date basis versus a targeted expense growth goal that you remember us talking about a year ago this time of 4% for the year ’07 after adjusted for purchases.

During the fourth quarter, non-interest expenses adjusted for purchases increased in a linked quarter but decreased both on a common quarter basis by the 1% and then on a year-to-date basis by 0.7. In fact, we did achieve positive operating leverage when comparing the full year 2007 to the full year 2006 and maintained strong operating efficiencies evidenced by the cash basis efficiency ratio of 51.6 that was achieved during the year.

Also I think it’s interesting to note that during the full year 2007, excluding acquisitions we reduced FTEs by 504 and still added 33 net new branch offices, so we have been very focused during the year on expense control and will remain so as we move into ’08.

Drilling down a little bit more detail, if you first look at linked quarter, as I said we were up 16.3% annualized over link adjusted for purchase acquisitions. And looking at the detail, total non-interest expenses again adjusted for purchases were up $37 million. It was really driven by two categories, occupancy and equipment expense and other operating expense.

Frankly, the occupancy and equipment is no surprise. It’s primarily the result of increased lease expense due to the opening of the new de novo office.

Other operating expenses are really several items: one, increase in advertising -- we spent some money advertising our number one J.D. Power ranking around mortgage servicing. Also an increase in other marketing expense and we had a slight increase in operating charge-offs, as well as increases in additional license and maintenance fees for DP software, some legal fees, and had some increase in professional fees, which really is in support of our international outsourcing program.

So that is a look at the linked quarter. If you look at common quarter, you can see that we were actually 1%, experienced a 1% decrease over prior year adjusted for purchases. The detail there is the total non-interest expense line was down $9 million, or the 1%. It was driven exclusively by a reduction in personnel costs. And that came in the form of reduced incentives and insurance, wealth management, the banking network, and also a reduction in executive incentive comp program. We also had reduction in pension plan expense and then just a small change in market value due to [inaudible] trust.

On a year-to-date basis, we had a 0.7% decrease over prior year purchase and finished the year well ahead of our 4% target, as I mentioned. I think just an overall strong performance on a year-to-date basis, real pleased with it.

And look at the drivers there, the non-expense line was down $27 million adjusted for purchases, driven by personnel and other operating and some of the similar kind of items, Personnel were down in insurance incentives and also a reduction in banking network incentives, as well as some more reduction in pension plan expense.

And looking at detail, the other operating is really two areas. It experienced a decline in advertising as a result of our branding campaign and also in operating charge-offs as well.

So that’s a look at the detail of the various views. I also wanted to give you a brief progress update on our expense savings for the recent acquisitions, the bank acquisitions.

First, First Citizens, we had as a reminder targeted savings of $7.5 million, and you might recall we converted First Citizens in November of ’06. Savings to date is actually $7.6 million, so we have achieved our savings and $1.9 million of that was generated in the fourth quarter. So we will not be reporting on First Citizens going forward, given we have achieved our rate of savings there.

Coastal Financial targeted savings was $27 million. You might recall we converted Coastal in August of ’07. Our savings to date there is $11.7 million and we incurred $6.4 million as a savings in the fourth quarter 2007.

Looking briefly at taxes, I just wanted to comment on the effective tax rate. First, on a reported basis for the fourth quarter 2007, our effective tax rate was 29.5 and that did include a $7 million credit to the provision for income taxes related to leveraged leases. When we were refining the tax by year, we were able to recapture $7 million of the $139 million that we had reserved in the fourth quarter of 2006, and are likely to see little dribbles of that as we move forward in future years.

The effective tax rate on an operating basis actually declined from third quarter 2003 of -- of the third quarter of 2007, excuse me, of 32.83 to 30.83 in the fourth quarter of ’07, and that included a small $3 million year-end true-up.

Looking at the effective tax rate going forward, we would anticipate for first quarter an effective tax rate in the 31% to 32% range, and then in the 32% to 33% range for the full year 2008.

Looking at capital, really no changes to report to you on overall capital strategy during the quarter. Our overall capital position remains very strong. Equity to total assets at the end of period stood strong at 9.5% and looking at the risk-based capital in the period, tier one was down slightly from the third of 9.3 to 9.1 in the fourth and total risk-based capital was down slightly, 14.5 to 14.3 in the fourth. And I just want to underscore, our risk-based capital ratios are higher than our peer average, or average of our peer group consistently quarter in and quarter out.

Leverage capital was down slightly from the third of 7.3% to 7.2% in the fourth, well above our target of 7%. And finally, tangible equity was at 5.6, slightly above our target of 5.5%.

Looking at share repurchases for the full year 2007, we did repurchase 7 million shares for $254 million for the year. And then looking forward, we are not currently repurchasing shares or in the market but I just will say we are constantly reevaluating our position based on the market and capital projections, so we’ll keep an eye on that as we move forward.

I would also like to point out as a reminder, our first quarter dividend was $0.46, which represents a 9.5% increase over the prior year quarter. And then finally, I just wanted to mention that given our strong capital position and where we see our current projections, we do anticipate increasing our cash dividend in 2008.

Diego, that concludes my comments.

Tamera Gjesdal

Thank you, Chris. Before we move to the question-and-answer segment of this conference call, I will ask that we use the same process that we have in the past to give fair access to all participants. Due to heavy participation on our call today, I would ask that you limit your questions to one primary inquiry and one follow-up. 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, Diego, to come back on the line and explain how to submit your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Kevin Fitzsimmons with Sandler O'Neill. Please state your question.

Kevin Fitzsimmons - Sandler O'Neill

John, you made a number of comments on credit quality and how you feel the reserve is adequate and you took the provision up this quarter. But given what we saw in terms of increases in non-performers, given the pretty high growth in 90-day past due, which you said partly reflected some accounting, and given what we’ve seen from a lot of your peers, just that a lot of the peers took the opportunity to pre-announce and really ratchet their reserve up.

And I guess what I’m wondering, on one hand you all were one of the few banks that didn’t pre-announce and I guess should be commended for that, and what looks like underlying is a pretty decent quarter.

But what I wonder is when we are coming out of this quarter, is BB&T going to end up looking like you have one of the lower reserve-to-loan ratios? And how do you wrestle with that decision of -- you know, credit is obviously deteriorating, investors are not necessarily focused on quarterly earnings. They are looking for capital and reserve strength. Should I take this opportunity to really ratchet the reserve up even more so than what I think is adequate right now? And if you could just reconcile that thinking for us.

John A. Allison IV

Well, you know, it’s interesting -- there are accounting rules and we try to do what the accountants tell you you’re supposed to do. We try to do it right. And based on the information that we had, we raised our reserves the way we thought we were supposed to based on the accounting rules.

Now obviously if the economy does worse than we expect and we have more problems than we expect, we’ll have to raise our reserves accordingly. But as I understand what the SEC requires, you’re not supposed to just dump a whole bunch of money in reserves and then come back and recapture them some day in the future. That’s exactly what the SEC is trying to prevent.

And so we really took a very careful look at where we were. This is a very volatile environment and we might have been wrong in terms of where we are. I don’t want to -- I’m not going to say that we couldn’t have been wrong. We could have. But based on the facts that we had, the numbers are, we still have very good coverage in non-accruals. We have very good coverage in charge-offs. We certainly have had some rise in non-performers. We think that will continue.

We did what we thought was right in terms of the accounting rules for the reserves and obviously think they are adequate. Will they -- could they rise during 2008? Possibly and you know, probably would if the economy -- certainly will rise if the economy is weaker or if we go into a recession.

We just really tried to follow what we understand the accounting rules to be and not to follow our peer group. Since we hadn’t done any of the more dramatic things, it looks like a lot of people had pretty dramatic negative events and they threw in some extra loan loss reserves around those events. We don’t think that’s the way the accounting system is supposed to work. And of course, we didn’t have the dramatic negatives to deal with either.

But I mean, setting loan loss reserves is part science and part judgmental and we just used our best judgment about what was right for us.

Kevin Fitzsimmons - Sandler O'Neill

Okay, so I guess in your view, part of it is the relative absence on your part of some of these real negative events but maybe part of it is do you think you may be a little more optimistic on the economy than some people are and maybe depending how that plays out, you might have to adjust?

John A. Allison IV

I don’t know how to judge [other people’s] optimism. We think it’s about 50-50 that we’ll have a recession and it could be that we have to raise our reserves. Certainly if the economy goes into a recession, we will have to raise our reserves during the course of the year.

But you have to make the call based on the best information you have at the time, and so we did raise our reserve fairly materially and we added over $100 million extra during the course of the year. So it’s a judgment call. And also we were just trying to play by the rules as we understand them.

Kevin Fitzsimmons - Sandler O'Neill

Okay. All right, understood. Thanks, John.

Operator

Our next question comes from the line of Nancy Bush with NAB Research. Please state your question.

Nancy Bush - NAB Research

A couple of questions -- number one, the trading loss in the fourth quarter I believe you said was $17 million, and that the year-to-date trading losses were 33. Seventeen is not a huge number but it is a big chunk for you guys. Can you just elaborate on that a little bit, please?

John A. Allison IV

It was basically CMBS and RMBS. We had small portfolios that we liquidated, got out of those portfolios and we took $17 million in losses to get rid of them. So we exited and we don’t have any -- we have a tiny bit of CMBS left but we basically exited the business.

Nancy Bush - NAB Research

On Regional Acceptance, as I recall a number of years ago we were having the same conversations that we are having now as far as high losses, although I think at that time it was right after you’d acquired them or just a couple of years after you acquired them, and you were still getting accounting policies, et cetera, in line.

What about now? You made a comment about your company being a very conservative company, et cetera, et cetera. Do you really need Regional Acceptance and specialized lending businesses?

John A. Allison IV

Well, they produce very high returns in the interim period. They do have volatility in them. They are -- Regional Acceptance is a very small portion of our portfolio, less than 2%.

I actually -- it’s interesting. I don’t perceive Regional Acceptance to be particularly risky. I think it has a fairly predictable range of losses and there will be times when you make more profit and times you make less profit in the business, and this is one of the times you make less profit in the business. But it is a very diversified business and you have lots of small loans in the business.

We could consider exiting the business. Now would not be a good time to exit it because you couldn’t get what -- you know, you’d get a very depressed price relative to what it’s long-term profitability is.

It is consistently producing economic profit of over 20% -- in fact, way over 20% over the years. It’s just in a cyclical downturn and it’s just a small part of our business.

Nancy Bush - NAB Research

All right. Thank you.

Operator

Our next question comes from the line of Matt O'Connor with UBS. Please state your question.

Matt O'Connor - UBS

If I could just ask a big picture question, just in terms of how BB&T can take advantage of the current environment. I think we all appreciated letting your capital build and not using it to buy back stock -- there’s a lot of uncertainty and not issuing stock to do community bank deals at this point.

But at the same time, the tough times provide very good opportunities that might be able to provide years and years of returns. How do you think about that conceptually and are there other areas that you are looking to take advantage of where we are right now?

John A. Allison IV

That’s a very good question. It’s very tempting. It’s very tempting, for example, to buy a bunch of our stock back because we think it is significantly undervalued but on the other hand, if you do need extra capital in today’s world, it is very, very expensive to get. So we are passing on that, at least in the interim, seeing how that goes.

I do believe that there will be some acquisition opportunities on the other side of this cycle. I think there will be -- I think community bank prices will finally get rational because I think there are going to be some real challenges for community banking. And I think we’ll have some opportunities when it becomes clear where the commercial real estate markets are in and we hope and we’ll see that we’ll have a little better currency to make some acquisitions with.

The one area that we are focused on is in the insurance agency business and it’s not a big bet because of the size of the agencies but we do really want to take advantage of the opportunity now in that market and we are going looking for -- and hopefully you’ll see a fair, a large number, a fairly large number of niche acquisitions in the insurance brokerage business.

But it’s an interesting concept and I do think that there will be a point where there may be some opportunities but I just think it is too early to call the ball in the kind of environment we are in. There’s too much uncertainty.

Matt O'Connor - UBS

Okay, thanks, appreciate that. And then just my follow-up question, a little more numbers oriented, as you are guiding to, or guessing that credit costs might be in the 50 to 60 basis point range if there’s not a recession, any guess in terms of where that could go if there’s a recession?

John A. Allison IV

It just depends on how bad of a recession it is. I think if it’s just a mild recession, we’d probably stay within the 50 to 60 basis point range. If it is a serious recession, it would obviously be higher.

I don’t know how to guess that without trying to really think about how deep the recession would be, how much it would affect our core markets. I mean, if you look at the statistics, our core markets in the Carolinas and the Virginias are still doing pretty well. The problems we are having more are in Atlanta and in Florida.

We are still having pretty healthy in-migration of population into our core markets. We didn’t have the crazy appreciation in real estate that happened in some of the other markets, so I tend to be fairly optimistic that those markets will be less impacted by an economic correction than the nation as a whole. But again, it depends on how severe a correction we actually get.

Matt O'Connor - UBS

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Todd Hagerman with Credit Suisse. Please state your question.

Todd Hagerman - Credit Suisse

John, following along those same lines, just looking at your residential construction portfolio, non-accrual loans for the most part trending above 1% today, gross charge-offs between 20 and 30 basis points. Historically for BB&T if we go back to 1990, or given your comments on the housing outlook in terms of further price declines, where do you think that those loss rates could trend? And what is your sensitivity analysis telling you?

John A. Allison IV

They are obviously going to trend up. Exactly where they are going I don’t know. I can -- my guess is that the residential construction, the development loss ratios will go up into the 0.50 to even potentially as high as 0.75 loss ratios. I don’t think they will be any worse than that unless we have a much deeper recession and much longer than at least the economists anticipate at this point in time.

The non-performing ratios tend to move up more than the loss ratios because we are a -- we are secured lender. A lot of people we deal with have extra assets and net worth and we get that as part of this process, and you end up owning property and then are able to liquidate it over some period of time without that big of losses.

I would just be guessing on where the non-performing ratio would go.

Todd Hagerman - Credit Suisse

Okay, so just to clarify, I don’t know if you can just recall back to 1990 for BB&T where the loss rates went on the commercial real estate portfolio. And then just to clarify your comment, 0.5 to 0.75, does that incorporate management’s expectations in terms of the 10% to 15% decline in home values, just broadly speaking? Or is there any --

John A. Allison IV

Yeah, of course, I said more like 5% to 10% decline in home values from here. Yes, it would incorporate that and probably the best thing to do would be to get you to call Chris with that number from the ‘90s because I don’t really know it off the top of my head and I don’t think we’ve got it easily available. Do you, Chris?

Christopher L. Henson

No, I don’t have a number for that.

John A. Allison IV

We just don’t really know the answer right now.

Todd Hagerman - Credit Suisse

Fair enough. I appreciate the comments.

Operator

Our next question comes from the line of David Pringle with [Fieldpoint] Research. Please state your question.

David Pringle - Fieldpoint Research

Good morning. I would like to thank you very much for the additional disclosure this quarter. It’s quite helpful.

I think you were saying that your weaker markets are Florida and Atlanta.

John A. Allison IV

Yes.

David Pringle - Fieldpoint Research

Just aside from the construction, which is going to do what it’s going to do, are you seeing in those weaker markets any fallout on the consumer side or the commercial real estate side?

John A. Allison IV

Not in Atlanta. In fact, Atlanta is doing, except for residential construction development for our business, Atlanta is very strong -- very strong.

Florida has slowed and we haven’t seen any material deterioration in credit quality outside of residential construction and development but we don’t have a big portfolio outside of that in Florida, so you probably would get better information from somebody that’s got a bigger portfolio than we do in the Florida market for outside of residential construction development.

David Pringle - Fieldpoint Research

Well, how about something like up here in Maryland or Virginia?

John A. Allison IV

It has not weakened materially yet. The only place, if you looked at the numbers, I mean, it’s a quirky, it’s a small amount, but West Virginia shows up as a high level of residential development construction problems as a percentage is a small number but the reason for that is the West Virginia panhandle, which is kind of the metro D.C. market. Where there seems to be more economic disruption, it would be the peripheral of metro D.C. But outside that peripheral area, our business is very, very strong in metro D.C. and we’re not having a material rise in consumer problems or sales finance problems in that market area.

David Pringle - Fieldpoint Research

Or commercial real estate?

John A. Allison IV

Or commercial real estate -- no, we’re not.

David Pringle - Fieldpoint Research

And then as a follow-up, these bond insurers are just melting down. Do you guys have any exposure to the Ambacks and Magics and [inaudible] of the world?

John A. Allison IV

We have some bonds where they have -- where we have their guarantees. But we underwrote the bonds ourselves and we don’t have -- where we have the exposure is basically in municipal bonds and we basically have all rated bonds in the pens of the Amback guarantees.

So we feel like if all of those guys went broke, it would not pose a -- it would be a very small risk for us because the underlying bonds, they are not mortgages, in general. They are municipalities that have very good credit ratings independent of the guarantees. We never really relied on the guarantees. We may have relied on the guarantees on the pricing but we didn’t do essentially anything that wasn’t credit rated well by ourselves.

In general, frankly, we’ve never relied on Moody’s or Standard & Poor’s either to do credit ratings. We never had great confidence in not doing it ourselves and so we’ve always underwritten on our own standards.

David Pringle - Fieldpoint Research

That’s proving well-placed. Thank you.

Operator

Your next question comes from the line of Christopher Marinac with FIG Partners. Please state your question.

Christopher Marinac - FIG Partners

I wanted to ask about your philosophy about the footprint. You’ve always been true, John, to going into high growth markets and to being weary of jumping into markets with weaker demographics. Is there a price in any individual transaction or opportunity that would from a banking perspective have you deferring to other slower growth areas?

John A. Allison IV

I hate to ever say never but probably not. Certainly not now. It is very interesting; a lot of people -- we’ve done, and you can argue how you study markets but we look at two factors. We look at the population growth rates and the market shares. And we think you have a great franchise if you have a large market share of -- with markets with superior population growth.

Based on those statistics, the value of our franchise is second only to Wells Fargo. Wells Fargo has better economics and demographics than we do but we are second by that measure of performance. You can measure it different ways. And we really don’t want to dilute that.

The only time we ever make an exception to that is when we went to West Virginia where we got a whopping market share. We believe if you have large market shares in slower growth markets, you can still make money if the competitive situation is rational.

I don’t ever want to say never but we are certainly not thinking about pushing outside of our footprint at all right now and for a long time, I think we’ll be focused on where we operate really because we like to have big market shares and the demographics in our markets overall are very good.

Christopher Marinac - FIG Partners

Very well. Thank you so much.

Operator

Our next question comes from the line of Greg [Katran] with Citigroup. Please state your question.

Greg Katran - Citigroup

I just had a question regarding the margin and maybe this is more for Chris -- Chris, you had stated the first quarter margin expectation was to hold its own and then you had a potential to see a rising margin in 2008. I was just hoping to get a little additional color behind that in terms of maybe what kind of rate forecast you are using to view that and whether you expect low cost deposit growth to actually accelerate in that type of environment. And what impact the Fed easing may have on you in terms of passing through that benefit to the deposit?

Christopher L. Henson

Good question. We use a combination of the blue chip and implied forward curve. I think the blue chip is currently down 50 basis points, January to May, something like that and I think the forward curve is down 150 or more basis points. So we are probably a blend of those two.

And in terms of what does that do for us going forward, I think that we are liability sensitive, clearly and I think it only helps us. To the extent it gives us opportunity and positions us to be able to take advantage of an opportunity, to the extent we can control deposit costs. And I think your point is sort of primary to the environment, and I think a lot of that depends on what the economy does, how much pressure it puts on competitors to drive deposit rates down further because of liquidity concerns, et cetera, and we have to pay attention to that.

I think our ability to take advantage of the liability sensitivity that we have is directly related to the economy and liquidity concerns of the other companies and how we have to react in response to those things.

I think we have a really good upside potential the back side of the year especially but certainly after the first quarter to be able to benefit, but it’s contingent on all those items.

Greg Katran - Citigroup

Great. Thank you.

Operator

Our next question comes from Harralson Jefferson with KBW. Please state your question.

Jefferson Harralson - Keefe, Bruyette & Woods

A question I was going to ask John on one of his favorite topics of mortgage accounting, you have mortgage assets lengthening but you have the cost of service probably increasing and you’ve got probably some contingency risk increasing in the mortgage asset, mortgage servicing right. Could you talk about the mortgage servicing right and how you expect it to behave in 2008?

John A. Allison IV

Well, that’s a great question. We were really trying very hard to hedge the risk away in mortgage servicing right. It’s very tricky. As I guess you implied, I wish they had left the accounting like it used to be and you just did it on a cash basis. It is a tricky environment.

One of the things that is happening is we are experiencing a pretty big pick-up in refinances but at the same time, not relative to what you would expect where rates are. Rates are really -- have really dropped pretty significantly for long-term mortgage loans and you would expect refinancing to be picking up even more. And the way the models work, they are actually projecting faster refinance rates than are happening in the marketplace.

Now, will the rates suddenly accelerate? I think the reason you are seeing lower refinance rates is people have less equity and it is harder to refinance and they can’t refinance and take cash out, and they might be surprised to go in and get an appraised value that they can’t refinance at all.

We model that stuff as best you can possibly model it. I feel like we are very close to being hedged and if you -- you might see us make $5 million one quarter and lose $5 million on the mortgage servicing right but I don’t think you’ll see anything material in the effect of income through changes in the mortgage services valuation.

Jefferson Harralson - Keefe, Bruyette & Woods

How about the effect of cost? Can costs rise high enough because of more touches and higher loss rates to effect the valuation of your MSR?

John A. Allison IV

It’s a very interesting statistic. We are very -- we have the number -- we are ranked by J.D. Powers as the best in America in service quality of our mortgage servicing operation and yet our mortgage servicing costs compared to the industry is much better and it is much lower than our much bigger competitors. And the reason is, and if you can look at our mortgage portfolio, we just don’t do risky mortgages.

And the problems you have that a lot of these guys are having is once the quality starts to deteriorate, the cost goes up on the servicing side and a lot of these servicing operations are worth a lot less than it appears because now they’ve got big problems.

We’re having higher collection ratios and high past dues but the numbers are still small, so the marginal increase in costs for us won’t be significant unless something really weird happens based on -- just because we just got an A grade portfolio and you are just not having that big of -- I saw a statistic the other day and I can’t, this is not -- don’t quote me exactly on this but we’ve only done like 200 modifications out of all the thousands of mortgages we have in our mortgage business, simply because we don’t have that class of mortgage that tends to have that kind of problem.

Jefferson Harralson - Keefe, Bruyette & Woods

Thanks a lot. That’s very helpful.

Christopher L. Henson

Jefferson, I would also our hedge performance net of the last three years has been positive between $4 million and $9 million.

Jefferson Harralson - Keefe, Bruyette & Woods

All right. Thanks a lot.

Operator

Thank you. Ladies and gentlemen, there are no further questions at this time. I will turn the conference back over to management for closing comments.

Tamera Gjesdal

Thank you for your questions today and 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. Thanks again and have a good day.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you all for your participation. All parties may disconnect now.

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