DBRS Comments on Q4 Earnings of BB&T Corporation– Senior at AA (low); Trend Negative

DBRS has today commented on the Q4 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 Negative trend.

BB&T reported net income available to common shareholders of $185 million for the quarter, up from $152 million for the prior quarter, yet down from $284 million during Q4 2008. On a sequential quarter basis, higher earnings reflected a 5% increase in revenues, driven by a 7% increase in net interest income and a 3% increase in non-interest income, partially offset by a 3% increase in non-interest expense and a 2% increase in provisions for loan loss reserves. Higher net interest income was driven by 12 basis points (bps) widening of net interest margin (NIM) to 3.80% and a 3% increase in total average earning assets, spurred by the Colonial Bank acquisition. Non-interest income expansion resulted from slight increases across most revenue sources, except for investment banking, brokerage fees and commissions, and mortgage banking income, which contracted modestly, and a $27 million pre-tax gain related to the sale of BB&T’s payroll services division. Higher non-interest expense reflected a material increase (20%) in foreclosed property expense and more modest increases across most other expense accounts.

Given the steep downturn in the housing market and high unemployment, BB&T continues to struggle with its asset quality deterioration, especially within its residential acquisition development and construction (ADC) portfolio. On a geographic basis, the Company’s credit challenges remain concentrated in Georgia, Florida and the metro Washington D.C. area and more recently in the Carolinas, along the coast. Reflecting these headwinds, the Company’s non-performing assets, which excludes covered FDIC loans and foreclosed property, increased to 4.24% of total loans and foreclosed property (at December 31, 2009), up from 3.95% at September 30, 2009 and 2.04% at December 31, 2008. Meanwhile, net charge-offs increased to 1.98% of average loans, from 1.79% for Q3 2009. Positively the Company has seen some stabilization in early stage delinquencies and the pace of increasing non-performing assets has somewhat moderated.

The increase in nonaccruals during the quarter was driven by a 15% increase in mortgage loans and 5% and 3% increases in direct retail loans and commercial loans and leases, respectively. The Company’s $5.8 billion residential acquisition, development, and construction (ADC) portfolio remains the most problematic with 14% of the portfolio in nonaccrual status, up from 12%, at September 30, 2009. BB&T’s residential mortgage portfolio, which totals $15.7 billion, the bulk of which is prime, is showing some strain within its much smaller alt-A, construction/permanent, and subprime portfolios. DBRS notes that BB&T has $2.3 billion of residential mortgage loans in Florida, of which 11% are in nonaccrual status and bear watching. BB&T’s allowance for credit losses to non-performing assets (excluding covered assets) was moderate at 63% (at December 31, 2009).

The Company’s solid, albeit stressed, earnings benefit from a diverse community-centered commercial and consumer banking business, a broad range of fee-based products and services that contribute over 40% to net revenues, and a solid, core deposit base, which represents 87% of net loans (at September 30, 2009). BB&T’s margin remains sound and compares favorably with other super-regional banks. For Q4 2009, BB&T’s NIM widened 12 bps to 3.80% from the prior quarter, as loan yields increased and the cost of interest bearing liabilities declined.

The Company’s capital position remains solid. At December 31, 2009, BB&T’s Tier 1 and Total risk-based capital ratios were healthy, at an estimated 11.5% and 15.7%, respectively.

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.