DBRS Comments on Q1 Earnings of BB&T Corporation– Senior at AA (low)

DBRS has today commented on the Q1 2009 earnings performance of BB&T Corporation (BB&T or the Company). DBRS rates BB&T’s Issuer & Senior Debt at AA (low) with a Stable trend.

BB&T reported net income available to common shareholders of $271 million for the quarter, down from $284 million in the fourth quarter and $428 million a year ago. On a sequential quarter basis, net income available to common shareholders was pressured by a 28% increase in provisions for loan loss reserves, an 11 basis point (bp) narrowing of net interest margin to 3.57% and a full quarter of preferred dividend expense, partially offset by a 28% increase in non-interest income, spurred by higher mortgage banking and insurance fees. DBRS notes that earnings for the quarter also benefited from a sizeable increase in net securities gains, which should not be considered recurrent. The decrease in annual quarterly results was due to a 2.0x increase in provisions for loan loss reserves, dividends on preferred stock, and a 14.3% increase in non-interest expense. Somewhat offsetting was an increase in mortgage banking revenues, insurance fees, net securities gains and a 3 bp widening of NIM.

The deepening recession continues to place pressure on BB&T’s asset quality, in particular its residential acquisition development and construction (ADC) portfolio. At March 31, 2009, non-performing assets increased to 2.72% of total loans, up from 2.04% at December 31, 2008 and 1.05% at March 31, 2008. During Q1 2009, net charge-offs increased to 1.58% of average loans, from 1.29% for the prior quarter and 0.54% for Q1 2008. BB&T’s challenges remain in residential real estate markets, particularly in the Georgia, Florida and metro Washington D.C. areas. The Company’s $7.5 billion ADC portfolio remains the most problematic with over 7.2% of the portfolio currently on nonaccrual, up from 6.3% at December 31, 2008. Overall, management expects net loan losses in the 1.5% range in 2009 and the Company will continue to build its loan loss reserve. For Q1 2009, loan loss provisions totaled $676 million, 42% of which was for reserve build. BB&T’s allowance for loan loss reserves to nonaccruals and restructured loans was 1.08x. While loan losses and corresponding credit expenses are likely to increase over the intermediate term, due to the downturn in the economy, DBRS notes that BB&T has substantial earnings generation capacity, with roughly $900 million in quarterly operating income before provisions and taxes, to absorb likely further credit losses without impairing its capital.

During Q4 2008, the Company settled with the Internal Revenue Service, regarding its leveraged lease transactions. The settlement resulted in a 21 bp decrease in NIM. Excluding the impact of the settlement, Q4 2008 NIM was 3.68%. The Q1 2009 11 bp narrowing of core NIM to 3.57% reflected increased levels of lower yielding securities, somewhat offset by conservative funding and deposit costs.

Capital remains solid, buttressed by BB&T’s Q4 2008 issuance of $3.1 billion of preferred stock to the U.S. Department of the Treasury (the Treasury), as part of the Treasury’s Capital Purchase Program, which helped augment regulatory capital ratios and provide more of a cushion to absorb credit losses. At March 31, 2009, BB&T’s estimated Tier 1 and Total risk-based capital ratios were solid at 12.1% and 17.1%, respectively.

DBRS believes that BB&T is well positioned to manage through the prevailing difficult market environment, while maintaining solid credit fundamentals. This opinion is supported by BB&T’s strong and diversified franchise in an attractive footprint, which has top-tier deposit market shares in many of its markets, a broad range of low-risk financial services that generate attractive fee income, and a conservative management style that has avoided risk exposures that caused substantial losses for others.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.