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| BBT > SEC Filings for BBT > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
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:
• 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;
• 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;
• competitive pressures among depository and other financial institutions may increase significantly;
• legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which BB&T is engaged;
• local, state or federal taxing authorities may take tax positions that are adverse to BB&T;
• adverse changes may occur in the securities markets;
• competitors of BB&T may have greater financial resources and develop products that enable them to compete more successfully than BB&T;
• unpredictable natural and other disasters could have an adverse effect on BB&T in that such events could materially disrupt its operations or the ability or willingness of its customers to access the financial services offered by BB&T;
• costs or difficulties related to the integration of the businesses of BB&T and its merger partners may be greater than expected;
• expected cost savings associated with completed mergers or acquisitions may not be fully realized or realized within the expected time frames; and
• 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, 2008 for additional disclosures with respect to laws and regulations affecting the Company's businesses.
BB&T Corporation and Subsidiaries
Management's Discussion and Analysis-(Continued) Third Quarter 2009
As part of the U.S. Federal government's Financial Stability Plan, on February 25, 2009, the U.S. Department of the Treasury (the "U.S. Treasury") announced preliminary details regarding the Capital Assistance Program (the "CAP"), which, according to the U.S. Treasury, is designed to restore confidence throughout the financial system that the largest U.S. banking institutions will have a sufficient capital cushion for larger than expected potential future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers. Pursuant to the CAP, the capital needs of major U.S. banking institutions were evaluated to determine whether an additional capital buffer is warranted and, if warranted, the U.S. Treasury committed to make capital available to eligible institutions if they are unable to raise the necessary capital through private sources.
To implement the CAP, the Board of Governors of the Federal Reserve System, the Federal Reserve Banks, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency commenced a review of the capital needs of the largest U.S. banking institutions. This review was called the Supervisory Capital Assessment Program (the "SCAP"). The SCAP review process involved a forward-looking capital assessment, or "stress test", of all domestic bank holding companies with assets of more than $100 billion at December 31, 2008, which includes BB&T. The stress test was intended to estimate credit losses, revenues and reserve needs for each of these bank holding companies in 2009 and 2010 under a macroeconomic scenario that reflected a consensus expectation for the depth and duration of the recession and a more adverse scenario that was designed to reflect a recession that was longer and more severe than consensus expectations.
On May 7, 2009 the Board of Governors of the Federal Reserve System announced the results of the final SCAP assessments for the 19 largest U.S. bank holding companies, including BB&T. The SCAP assessment for BB&T indicated that BB&T did not need to raise additional capital.
On June 17, 2009, BB&T repurchased all 3,133.64 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series C, $1,000,000 liquidation preference per share (the "Series C Preferred Stock") issued to the U.S. Treasury on November 14, 2008, as part of the Troubled Asset Relief Program - Capital Purchase Program (the "Capital Purchase Program"). The aggregate purchase price paid to the U.S. Treasury for the Series C Preferred Stock was approximately $3.1 billion, including approximately $14 million of accrued and unpaid dividends. On July 22, 2009, BB&T repurchased the warrant to purchase up to 13,902,573 shares of its common stock for $67 million, which was also issued to the U.S. Treasury on November 14, 2008, as part of the Capital Purchase Program.
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 ("GAAP") and conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. 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 of operations. Accordingly, BB&T's significant accounting policies and
BB&T Corporation and Subsidiaries
Management's Discussion and Analysis-(Continued) Third Quarter 2009
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, 2008.
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 the Audit Committee of BB&T's board of directors 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 represent 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, current assessment of 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.
Fair Value of Financial Instruments
A significant portion of BB&T's assets and certain liabilities are financial instruments 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, 2009, the percentage of total assets and total liabilities measured at fair value was 24.1% 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, 2009, 4.5% of assets measured at fair value were based on significant unobservable inputs. This represents 1.1% of BB&T's total assets. See Note 12 "Fair Value Disclosures" in the "Notes to Consolidated Financial Statements" herein for additional disclosures regarding the fair value of financial instruments.
Securities
The fair values of available-for-sale and trading securities are generally based upon quoted market prices or observable 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 securities, the valuation of the security is subjective and may involve substantial judgment. As of September 30, 2009, BB&T had approximately $884 million of available-for-sale and trading securities, which is less than 1% of total assets, valued using unobservable inputs. These securities were primarily non-agency mortgage-backed securities. BB&T conducts periodic reviews to identify and evaluate each available-for-sale security that has an unrealized loss for other-than-temporary impairment. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. The primary factors BB&T considers in determining whether an
BB&T Corporation and Subsidiaries
Management's Discussion and Analysis-(Continued) Third Quarter 2009
impairment is other-than-temporary are the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and BB&T's intent to sell and whether it is more likely than not that the Company will be required to sell these debt securities before the anticipated recovery of the amortized cost basis.
Mortgage Servicing Rights
BB&T has a significant mortgage loan servicing portfolio and related mortgage servicing rights ("MSRs"). BB&T has two classes of MSRs for which it separately manages the economic risk: residential and commercial. Residential MSRs 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 MSRs. MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs do occur, the precise terms and conditions typically are not readily available. Accordingly, BB&T estimates the fair value of residential MSRs using an option adjusted spread ("OAS") valuation model to project MSR cash flows over multiple interest rate scenarios, which are then discounted at risk-adjusted rates. The OAS model considers portfolio characteristics, contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. BB&T reassesses and periodically adjusts the underlying inputs and assumptions in the OAS model to reflect market conditions and assumptions that a market participant would consider in valuing the MSR asset. When available, fair value estimates and assumptions are compared to observable market data and to recent market activity and actual portfolio experience. Due to the nature of the valuation inputs, MSRs are classified within Level 3 of the valuation hierarchy. The value of MSRs 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 MSRs declines due to increasing prepayments attributable to increased mortgage-refinance activity. Conversely, during periods of rising interest rates, the value of MSRs generally increases due to reduced refinance activity. Commercial MSRs 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.
Loans Held for Sale
BB&T originates certain mortgage loans to be sold to investors. The majority of these loans are carried at fair value upon the election of 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.
Derivatives
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
BB&T Corporation and Subsidiaries
Management's Discussion and Analysis-(Continued) Third Quarter 2009
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 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.
Venture Capital Investments
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 are no observable market values 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, 2009, BB&T had $229 million of venture capital investments, which is less than 1% of total assets.
Intangible Assets
BB&T's mergers and acquisitions are accounted for using the acquisition method of accounting. Under the acquisition 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, which are inherently subjective. The amortization of identified intangible assets is based upon the estimated economic benefits to be received, which is also subjective. Acquisitions typically result in goodwill, which is subject to ongoing periodic impairment tests based on the fair value of net assets acquired compared to their carrying value. 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. As a result of the challenging economic environment and the decline in market capitalization, the excess of the fair value over the carrying value of several reporting units has narrowed. A continuing period of depressed market conditions, or further market deterioration, may result in impairment of goodwill in the future.
Pension and Postretirement Benefit Obligations
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 assumptions used in the determination of future values of plan assets and liabilities are subject to management judgment and the valuations may differ significantly if different assumptions are used.
Income Taxes
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 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.
BB&T Corporation and Subsidiaries
Management's Discussion and Analysis-(Continued) Third Quarter 2009
EXECUTIVE SUMMARY
Consolidated net income for the third quarter of 2009 totaled $157 million, down $205 million, or 56.6%, compared to $362 million earned during the third quarter of 2008. On a diluted per common share basis, earnings for the three months ended September 30, 2009 were $.23, compared to $.65 for the same period in 2008, a decrease of 64.6%. BB&T's results of operations for the third quarter of 2009 produced an annualized return on average assets of .40% and an annualized return on average common shareholders' equity of 3.90% compared to prior year ratios of 1.05% and 10.86%, respectively.
Consolidated net income for the first nine months of 2009 totaled $683 million, a decrease of $539 million, or 44.1%, compared to $1.2 billion earned during the first nine months of 2008. Consolidated net income available to common shareholders for the first nine months of 2009 totaled $544 million, a decrease of $670 million, or 55.2%, compared to $1.2 billion earned during the same period in 2008. On a diluted per common share basis, earnings for the nine months ended September 30, 2009 were $.88, compared to $2.20 for the same period in 2008, a decrease of 60.0%. BB&T's results of operations for the first nine months of 2009 produced an annualized return on average assets of .60% and an annualized return on average common shareholders' equity of 5.09% compared to prior year ratios of 1.21% and 12.46%, respectively.
Results of operations for the third quarter of 2009 included a $25 million (pretax) contingency reserve and a $12 million benefit to the provision for income tax related to leveraged lease transactions. In addition to these items, results of operations for the first nine months of 2009 and 2008 included the following significant items. The first nine months of 2009 included a $68 million (pretax) FDIC special assessment, $47 million in accelerated amortization on the preferred stock repaid to the Treasury and $41 million (pretax) in gains from the early extinguishment of debt. Also in the first nine months of 2009, BB&T recorded securities gains of $200 million (pretax), which was net of $40 million (pretax) of other-than-temporary impairment charges, compared to $66 million (pretax) of securities gains, net of $41 million (pretax) other-than-temporary impairment charges, during the same period of 2008. In addition, during the first nine months of 2008, BB&T recorded $15 million of charges resulting from valuation adjustments for bank-owned life insurance, $17 million (pretax) of additional income in connection with the implementation of fair value accounting standards, $37 million (pretax) in gains on the early extinguishment of debt and a $94 million (pretax) increase in income associated with the initial public offering by Visa, Inc. including a $14 million (pretax) reversal of a previously recorded liability.
On August 14, 2009, BB&T acquired certain assets and assumed substantially all of the deposits and certain other liabilities of Colonial Bank ("Colonial"), headquartered in Montgomery, Alabama, from the Federal Deposit Insurance Corporation ("FDIC"), as receiver for Colonial. Colonial operated 357 banking offices in Alabama, Florida, Georgia, Texas and Nevada. The acquisition significantly strengthened BB&T's banking franchise, moving BB&T to fifth in deposit market share in Florida and fourth in Alabama. BB&T issued 38.5 million shares of common stock to the investing public at $26 per share in connection with the Colonial acquisition to further strengthen BB&T's capital levels. Please refer to Note 2 "Business Combinations" in the "Notes to Consolidated Financial Statements" for additional disclosures about the Colonial acquisition.
BB&T's total assets at September 30, 2009 were $165.3 billion, an increase of $13.3 billion, or 8.8%, compared to December 31, 2008. Total loans and leases at September 30, 2009 were $107.0 billion, an increase of $8.4 billion, or 8.5%, compared to the balance at year-end. The increase in total loans and leases included increases of $1.7 billion in loans held for sale and $8.3 billion in covered loans acquired in the Colonial transaction. Securities available for sale increased $1.3 billion compared to the balances at December 31, 2008. In addition, BB&T recorded a $3.3 billion receivable from the FDIC in connection with the Colonial acquisition. The FDIC receivable represents the fair value of amounts expected to be received under the agreement with the FDIC, whereby the FDIC will reimburse BB&T for the vast majority of losses on the assets acquired.
BB&T Corporation and Subsidiaries
Management's Discussion and Analysis-(Continued) Third Quarter 2009
Total client deposits at September 30, 2009, were $103.7 billion, an increase of $20.2 billion, or 24.1%, from December 31, 2008. Total deposits, which include wholesale deposits sources, totaled $114.5 billion at September 30, 2009, an increase of $15.9 billion, or 16.1%, compared to December 31, 2008. The increase in client deposits was a result of the Colonial acquisition as well as BB&T's success in attracting new accounts. BB&T also has seen an improvement in the deposit mix, with noninterest-bearing accounts representing 18.0% of total client deposits at September 30, 2009, compared with 16.3% at December 31, 2008.
Total shareholders' equity increased slightly compared to December 31, 2008. BB&T's common equity increased as a result of the issuance of $2.6 billion in common stock during the second and third quarters of 2009, which was offset by the repayment of the $3.1 billion of preferred stock issued to the U.S. Treasury. The Tier 1 common ratio was 8.4% at September 30, 2009 and June 30, 2009. In addition, the Tier 1 risk-based capital and total risk-based capital ratios were 11.1% and 15.6% at September 30, 2009, respectively, compared to 10.6% and 15.2%, respectively, at June 30, 2009. The improvement in the regulatory capital levels reflects the common stock issuance. BB&T's risk-based and tangible capital ratios remain well above regulatory standards for well-capitalized banks. As of September 30, 2009, measures of tangible capital were not required by the regulators and, therefore, were considered non-GAAP measures. Please refer to the section titled "Capital Adequacy and Resources" herein for a discussion of how BB&T calculates and uses these measures in the evaluation of the Company.
Early stage delinquencies and net charge-offs for the third quarter of 2009 were largely stable compared to the second quarter of 2009, while nonperforming assets and credit costs continued to increase during the third quarter of 2009. BB&T recorded a $709 million provision for credit losses in the third quarter of 2009, which exceeded net charge-offs by $263 million. This compared to a $364 million provision for credit losses recorded during the third quarter of 2008. For the first nine months of 2009, the provision for credit losses totaled $2.1 billion, compared to $917 million for the same period of 2008. The increases in . . .
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