Add
BBT to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| BBT > SEC Filings for BBT > Form 10-Q on 6-Nov-2008 | All Recent SEC Filings |
6-Nov-2008
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements with respect to the financial condition, results of operations and businesses of BB&T. These forward-looking statements involve certain risks and uncertainties and are based on the beliefs and assumptions of the management of BB&T and the information available to management at the time that these disclosures were prepared. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following:
º general economic or business conditions, either nationally or regionally,
may be less favorable than expected, resulting in, among other things, a
deterioration in credit quality and/or a reduced demand for credit or other
services;
º changes in the interest rate environment may reduce net interest margins
and/or the volumes and values of loans made or held as well as the value of
other financial assets held;
º competitive pressures among depository and other financial institutions may
increase significantly;
º legislative or regulatory changes, including changes in accounting
standards, may adversely affect the businesses in which BB&T is engaged;
º local, state or federal taxing authorities may take tax positions that are
adverse to BB&T;
º adverse changes may occur in the securities markets;
º competitors of BB&T may have greater financial resources and develop
products that enable them to compete more successfully than BB&T;
º costs or difficulties related to the integration of the businesses of BB&T
and its merger partners may be greater than expected;
º expected cost savings associated with completed mergers may not be fully
realized or realized within the expected time frames; and
º deposit attrition, customer loss and/or revenue loss following completed
mergers may be greater than expected.
Regulatory Considerations
BB&T and its subsidiaries and affiliates are subject to numerous examinations by federal and state banking regulators, as well as the SEC, the Financial Industry Regulatory Authority, and various state insurance and securities regulators. BB&T and its subsidiaries have from time to time received requests for information from regulatory authorities in various states, including state insurance commissions and state attorneys general, securities regulators and other regulatory authorities, concerning their business practices. Such requests are considered incidental to the normal conduct of business. Please refer to BB&T's Annual Report on Form 10-K for the year ended December 31, 2007 for additional disclosures with respect to laws and regulations affecting the Company's businesses.
BB&T Corporation Page 30 Third Quarter 2008 10-Q
On April 1, 2008, BB&T Bankcard Corporation was converted into a federally chartered thrift institution and renamed BB&T Financial, FSB ("BB&T FSB"). As a federally chartered thrift, BB&T FSB is subject to regulation, supervision and examination by the Office of Thrift Supervision. In connection with the charter conversion of BB&T FSB, Sheffield Financial, LLC and MidAmerica Gift Certificate Company, which were previously direct operating subsidiaries of the Corporation, became divisions or subsidiaries of BB&T FSB. In addition, Liberty Mortgage Corporation, formerly a subsidiary of Branch Bank, was reorganized as a subsidiary of BB&T FSB. These organizational structure changes were made to optimize the operating efficiency of these divisions or subsidiaries and have no impact on BB&T's reportable segments.
On October 14, 2008, under authority granted by the Emergency Economic Stabilization Act of 2008 (the "EESA"), the United States Department of the Treasury adopted the Troubled Asset Relief Program ("TARP") and the Capital Purchase Program (the "Capital Purchase Program") pursuant to which the Treasury will purchase up to $250 billion of preferred stock and warrants to be issued by United States banks, savings associations and their holding companies. BB&T received preliminary approval to participate in the Capital Purchase Program on October 27, 2008. Under the Capital Purchase Program, BB&T will issue and sell to the Treasury preferred stock and warrants to purchase shares of BB&T common stock for an aggregate purchase price of approximately $3.1 billion. The Treasury will receive 10-year warrants to purchase shares of BB&T common stock with an aggregate market price of approximately $465 million as of the closing date. Upon the consummation of the transaction, BB&T will be subject to the terms and conditions of the Capital Purchase Program, which are generally described in the Treasury's term sheet available on the Treasury's website at http://www.ustreas.gov.
BB&T also is considering whether it will participate in other programs currently being offered under, or in conjunction with, the EESA including the FDIC's program to insure noninterest-bearing deposits, the FDIC's program to guarantee senior debt of FDIC-insured institutions, and the Federal Reserve Board of Governors' commercial paper funding facility, which will serve as a funding backstop to facilitate the issuance of unsecured and asset-backed term commercial paper by eligible issuers.
Critical Accounting Policies
The accounting and reporting policies of BB&T Corporation and its subsidiaries are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. BB&T's financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Different assumptions in the application of these policies could result in material changes in BB&T's consolidated financial position and/or consolidated results of operations and related disclosures. The more critical accounting and reporting policies include BB&T's accounting for the allowance for loan and lease losses and reserve for unfunded lending commitments, determining fair value of financial instruments, intangible assets and other purchase accounting related adjustments associated with mergers and acquisitions, costs and benefit obligations associated with BB&T's pension and postretirement benefit plans, and income taxes. Understanding BB&T's accounting policies is fundamental to understanding BB&T's consolidated financial position and consolidated results
BB&T Corporation Page 31 Third Quarter 2008 10-Q
of operations. Accordingly, BB&T's significant accounting policies and changes in accounting principles are discussed in detail in Note 1 of the "Notes to Consolidated Financial Statements" in BB&T's Annual Report on Form 10-K for the year ended December 31, 2007.
The following is a summary of BB&T's critical accounting policies that are highly dependent on estimates, assumptions and judgments. These critical accounting policies are reviewed with BB&T's Audit Committee on a periodic basis.
Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments
It is the policy of BB&T to maintain an allowance for loan and lease losses and a reserve for unfunded lending commitments that equals management's best estimate of probable credit losses that are inherent in the portfolio at the balance sheet date. Estimates for loan and lease losses are determined by analyzing historical loan and lease losses, historical loan and lease migration to charge-off experience, current trends in delinquencies and charge-offs, changes in commercial loan risk grades, plans for problem loan and lease administration, the results of regulatory examinations, and changes in the size, composition and risk assessment of the loan and lease portfolio. Also included in management's estimates for loan and lease losses are considerations with respect to the impact of current economic events, the outcomes of which are uncertain. These events may include, but are not limited to, fluctuations in overall interest rates, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting specific geographical areas and industries in which BB&T conducts business. The methodology used to determine an estimate for the reserve for unfunded lending commitments is inherently similar to the methodology used in calculating the allowance for loans and leases adjusted for factors specific to binding commitments, including the probability of funding and exposure at the time of funding.
A significant portion of BB&T's assets and liabilities are financial instruments that are carried at fair value. This includes securities available for sale, trading securities, derivatives, certain loans held for sale, residential mortgage servicing rights, certain short-term borrowings and venture capital investments. At September 30, 2008, the percentage of total assets and total liabilities measured at fair value was 17.4% and less than 1%, respectively. The vast majority of assets and liabilities carried at fair value are based on either quoted market prices or market prices for similar instruments. At September 30, 2008, 3.5% of assets measured at fair value were based on significant unobservable inputs. This is less than 1% of BB&T's total assets.
The fair values for available-for-sale and trading securities are generally based upon market prices or market prices for similar instruments. These values take into account recent market activity as well as other market observable data such as interest rate, spread and prepayment information. When market observable data is not available, which generally occurs due to the lack of liquidity for certain trading securities, the valuation of the security is subjective and may involve substantial judgment. As of September 30, 2008, BB&T had approximately
BB&T Corporation Page 32 Third Quarter 2008 10-Q
$53 million of available-for-sale and trading securities, which is less than 1% of total assets, valued using unobservable inputs.
BB&T has a significant mortgage loan servicing portfolio and related mortgage servicing rights. Mortgage servicing rights represent the present value of the future net servicing fees from servicing mortgage loans acquired or originated by BB&T. The methodology used to determine the fair value of mortgage servicing rights is subjective and requires the development of a number of assumptions, including anticipated prepayments of loan principal. The value of mortgage servicing rights is significantly affected by mortgage interest rates available in the marketplace, which influence mortgage loan prepayment speeds. In general, during periods of declining interest rates, the value of mortgage servicing rights declines due to increasing prepayments attributable to increased mortgage refinance activity. Conversely, during periods of rising interest rates, the value of servicing rights generally increases due to reduced refinance activity. BB&T has two classes of mortgage servicing rights for which it separately manages the economic risk: residential and commercial. Residential mortgage servicing rights are carried at fair value with changes in fair value recorded as a component of mortgage banking income each period. BB&T uses various derivative instruments to mitigate the income statement effect of changes in fair value, due to changes in valuation inputs and assumptions, of its residential mortgage servicing rights. Commercial mortgage servicing rights are carried at lower of cost or market and amortized over the estimated period that servicing income is expected to be received based on projections of the amount and timing of estimated future cash flows. The amount and timing of servicing asset amortization is updated based on actual results and updated projections.
BB&T originates certain mortgage loans to be sold to investors. The majority of these loans are carried at fair value based on the Fair Value Option. For these loans, the fair value is primarily based on quoted market prices for securities backed by similar types of loans. Changes in the fair value are recorded as a component of mortgage banking income while mortgage loan origination costs for loans held for sale for which the Corporation elected the Fair Value Option are recognized in noninterest expense when incurred. The changes in fair value of these assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage loan held for sale. BB&T uses various derivative instruments to mitigate the income statement effect of changes in fair value of the underlying loans.
BB&T uses derivatives to manage various financial risks. The fair values of derivative financial instruments are determined based on quoted market prices, dealer quotes and internal pricing models that are primarily sensitive to market observable data. BB&T mitigates the credit risk by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. In addition, certain counterparties are required to provide collateral to BB&T when their unsecured loss positions exceed certain negotiated limits. The fair value of interest rate lock commitments, which are related to mortgage loan commitments, is
BB&T Corporation Page 33 Third Quarter 2008 10-Q
based on quoted market prices adjusted for commitments that BB&T does not expect to fund and includes the value attributable to the net servicing fee.
BB&T has venture capital investments that are carried at fair value. Changes in the fair value of these investments are recorded in other noninterest income each period. In many cases there is no observable market value for these investments and therefore management must estimate the fair value based on a comparison of the operating performance of the company to multiples in the marketplace for similar entities. This analysis requires significant judgment and actual values in a sale could differ materially from those estimated. As of September 30, 2008, BB&T had $175 million of venture capital investments, which is less than 1% of total assets.
BB&T's mergers and acquisitions are accounted for using the purchase method of accounting. Under the purchase method, BB&T is required to record the assets acquired, including identified intangible assets and liabilities assumed at their fair value, which often involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective. The amortization of identified intangible assets is based upon the estimated economic benefits to be received, which is also subjective. These estimates also include the establishment of various accruals and allowances based on planned facility dispositions and employee severance considerations, among other acquisition-related items. In addition, purchase acquisitions typically result in goodwill, which is subject to ongoing periodic impairment tests based on the fair value of net assets acquired compared to the carrying value of goodwill. The major assumptions used in the impairment testing process include the estimated future cash flows of each business unit and discount rates. Discount rates are unique to each business unit and are based upon the cost of capital specific to the industry in which the business unit operates.
BB&T offers various pension plans and postretirement benefit plans to employees. The calculation of the obligations and related expenses under these plans requires the use of actuarial valuation methods and assumptions. Actuarial valuations and assumptions used in the determination of future values of plan assets and liabilities are subject to management judgment and may differ significantly if different assumptions are used.
The calculation of BB&T's income tax provision is complex and requires the use of estimates and judgments. As part of the Company's analysis and implementation of business strategies, consideration is given to the tax laws and regulations that apply to the specific facts and circumstances for any tax position under evaluation. For tax positions that are uncertain in nature, management determines whether the tax position is more likely than not to be sustained upon examination. For tax positions that meet this threshold, management then estimates the amount of the tax benefit to recognize in the financial statements. Management closely monitors
BB&T Corporation Page 34 Third Quarter 2008 10-Q
tax developments in order to evaluate the effect they may have on the Company's overall tax position and the estimates and judgments used in determining the income tax provision and records adjustments as necessary.
EXECUTIVE SUMMARY
BB&T's total assets at September 30, 2008 were $137.0 billion, an increase of $4.4 billion, or 3.3%, from December 31, 2007. The asset category that experienced the largest increase was loans and leases, including loans held for sale, which grew $5.0 billion, or 5.4%, during the first nine months of 2008.
Total deposits at September 30, 2008 were $88.4 billion, an increase of $1.6 billion, or 1.9%, from December 31, 2007. Long-term debt increased $2.6 billion, or 14.1%, and total shareholders' equity increased $303 million compared to December 31, 2007.
Consolidated net income for the third quarter of 2008 totaled $358 million, a decrease of 19.4% compared to $444 million earned during the third quarter of 2007. On a diluted per share basis, earnings for the three months ended September 30, 2008 were $.65, compared to $.80 for the same period in 2007, a decrease of 18.8% . BB&T's results of operations for the third quarter of 2008 produced an annualized return on average assets of 1.04% and an annualized return on average shareholders' equity of 10.86% compared to prior year ratios of 1.37% and 14.24%, respectively.
Consolidated net income for the first nine months of 2008 totaled $1.2 billion, a decrease of 8.2% compared to $1.3 billion earned during the first nine months of 2007. On a diluted per share basis, earnings for the nine months ended September 30, 2008 were $2.20, compared to $2.40 for the same period in 2007, a decrease of 8.3% . BB&T's results of operations for the first nine months of 2008 produced an annualized return on average assets of 1.20% and an annualized return on average shareholders' equity of 12.46% compared to prior year ratios of 1.42% and 14.74%, respectively.
Included in the results of operations for the third quarter and first nine months of 2008 were a number of notable items. During the third quarter of 2008, earnings benefited from $54 million in net gains from the sales of securities which was partially offset by $41 million in charges for other-than-temporary impairment. The first nine months of 2008 also included an additional increase in earnings from $36 million in gains on the early extinguishment of certain FHLB advances, a $94 million gain associated with the initial public offering and sale of Visa, Inc. shares, which included a $14 million reversal of a previously recorded liability.
The third quarter and first nine months of 2008 included $364 million and $917 million, respectively, in provision for credit losses. The provision for credit losses exceeded net charge-offs by $122 million for the third quarter and $380 million for the first nine months of 2008, which resulted in an increase in the allowance for loan and lease losses as a percentage of loans and leases held for investment to 1.45% compared to 1.33% at June 30, 2008 and 1.10% at December 31, 2007.
BB&T Corporation Page 35 Third Quarter 2008 10-Q
During the third quarter of 2008, BB&T continued to experience challenges resulting from the current credit cycle. These challenges resulted in additional credit deterioration during the quarter, which primarily related to residential real estate in Georgia, Florida and metro Washington, D.C. Management is working aggressively to deal with problem assets and continues to believe that BB&T's credit issues are manageable.
BB&T's core operations produced 7.7% growth in average loans and leases and 6.9% growth in average deposits compared to the third quarter of 2007. BB&T's net interest margin improved 1 basis point during the third quarter of 2008 compared to the second quarter of 2008, marking the fourth consecutive quarter of expansion.
As of September 30, 2008, BB&T's Tier 1 leverage and tangible capital ratios were 7.6% and 5.8%, respectively. In addition, BB&T's Tier 1 risk-based capital and total risk-based capital ratios were 9.4% and 14.4%, respectively, which are significantly higher than the average levels recently reported by BB&T's peers. BB&T's capital levels improved compared to the prior quarter and are well above the regulatory standards for well-capitalized banks.
In the third quarter the volatility and disruption in the financial markets reached unprecedented levels. In response to financial conditions affecting the banking industry and the financial markets, the U.S. government has taken a number of actions. Early in the fourth quarter, the U.S. Department of the Treasury announced plans to inject up to $250 billion of capital into the banking industry, by purchasing preferred stock and warrants from qualified banking organizations. BB&T has received preliminary approval from the Treasury to sell approximately $3.1 billion of securities to the Treasury under this program.
Please refer to the section titled "Executive Overview" in BB&T's Annual Report on Form 10-K for the year ended December 31, 2007 for additional information with respect to BB&T's recent accomplishments and significant challenges. The factors causing the fluctuations in the major balance sheet and income statement categories for the third quarter of 2008 are further discussed in the following sections.
ANALYSIS OF FINANCIAL CONDITION
Securities
Securities available for sale totaled $20.5 billion at September 30, 2008, a decrease of $1.9 billion, or 8.4%, compared with December 31, 2007. The decline in the securities available for sale portfolio was primarily the result of sales of securities in September that were not reinvested until early in the fourth quarter of 2008. Trading securities totaled $548 million, down $461 million, or 45.7%, compared to the balance at December 31, 2007. The decline in the trading portfolio was largely the result of a reduction in Scott & Stringfellow's trading portfolio primarily due to management's decision to reduce risk associated with trading activities. BB&T's trading portfolio may fluctuate significantly from period to period based on market conditions, which affect the timing of purchases and sales of securities classified as trading.
BB&T Corporation Page 36 Third Quarter 2008 10-Q
Average total securities for the third quarter of 2008 totaled $24.1 billion, a slight decrease compared to the average balance during the third quarter of 2007. Average total securities for the first nine months of 2008 totaled $23.8 billion, an increase of $710 million, or 3.1%, compared to the average balance during the first nine months of 2007. BB&T sold a total of $12.4 billion in available-for-sale securities during the nine month period ended September 30, 2008, which produced net securities gains of $107 million. In addition, BB&T recorded $41 million in charges for other-than-temporary impairment related to certain debt and equity securities.
The annualized fully taxable equivalent ("FTE") yield on the average securities portfolio for the third quarter of 2008 was 5.03%, which represents a decrease of 2 basis points compared to the annualized yield earned during the third quarter of 2007. For the first nine months, the annualized FTE yield was 5.07%, which represents a 5 basis point increase compared to the annualized interest earned during the same period of 2007. The fluctuations in the annualized FTE yield on the average securities portfolio were primarily the result of changes in the overall composition of the securities portfolio including purchases of higher-yielding mortgage-backed securities issued by government-sponsored entities and purchases of municipal securities.
Securities available for sale had net unrealized losses of $636 million and $45 million at September 30, 2008 and December 31, 2007, respectively. On September 30, 2008, BB&T held certain investment securities having continuous unrealized loss positions for more than 12 months. As of September 30, 2008, the unrealized losses on these securities totaled $179 million. Substantially all of these losses were in mortgage-backed, municipal and corporate securities, all of which were investment grade. The unrealized losses are the result of changes in market interest rates rather than the credit quality of the issuers. At September 30, 2008, BB&T had the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses.
Loans and Leases
BB&T emphasizes commercial lending to small and medium-sized businesses, consumer lending, mortgage lending and specialized lending with an overall goal of maximizing the profitability of the loan portfolio, maintaining strong asset quality and achieving an equal mix of consumer and commercial loans. For the third quarter of 2008, average total loans were $95.9 billion, an increase of $6.9 billion, or 7.7%, compared to the same period in 2007. For the first nine . . .
|
|