Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

 

 

Annual Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

 

For the fiscal year ended:

 

December 31, 2008

 

Commission File Number: 1-10853

 

BB&T CORPORATION

(Exact name of Registrant as specified in its Charter)

 

North Carolina   56-0939887
(State of Incorporation)   (I.R.S. Employer Identification No.)
200 West Second Street
Winston-Salem, North Carolina
  27101
(Address of principal executive offices)   (Zip Code)

 

(336) 733-2000

(Registrant’s telephone number, including area code)

 

 

 

Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class

 

Name of each exchange
on which registered

Common Stock, $5 par value   New York Stock Exchange

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES þ    NO ¨

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act    YES ¨    NO þ

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     YES þ    NO ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by references in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   þ    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    YES    ¨    NO þ

 

At January 31, 2009, the Corporation had 559,298,182 shares of its Common Stock, $5 par value, outstanding. The aggregate market value of voting stock held by nonaffiliates of the Corporation is approximately $12.7 billion (based on the closing price of such stock as of June 30, 2008).

 

 

 


Table of Contents

CROSS REFERENCE INDEX

 

               Page

PART I

  

Item 1

   Business    4
  

Item 1A

   Risk Factors    4
  

Item 1B

  

Unresolved Staff Comments

None.

  
  

Item 2

   Properties    27
  

Item 3

   Legal Proceedings    124
  

Item 4

  

Submission of Matters to a Vote of Security Holders

None.

  

PART II

  

Item 5

   Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   

29, 72

  

Item 6

   Selected Financial Data    80
  

Item 7

   Management’s Discussion and Analysis of Financial Condition and Results of Operations   

39

  

Item 7A

   Quantitative and Qualitative Disclosures About Market Risk    64
  

Item 8

   Financial Statements and Supplementary Data   
      Consolidated Balance Sheets at December 31, 2008 and 2007    83
      Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2008   

84

      Consolidated Statements of Changes in Shareholders’ Equity for each of the years in the three-year period ended December 31, 2008   

85

      Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2008   

87

      Notes to Consolidated Financial Statements    88
      Report of Independent Registered Public Accounting Firm    82
      Quarterly Financial Summary for 2008 and 2007    79
  

Item 9

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

  
  

Item 9A

   Controls and Procedures    81
  

Item 9B

  

Other Information

None.

  

PART III

  

Item 10

   Directors, Executive Officers and Corporate Governance    *
  

Item 11

   Executive Compensation    *
  

Item 12

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   

*

  

Item 13

   Certain Relationships and Related Transactions, and Director Independence    *
  

Item 14

   Principal Accounting Fees and Services    *

PART IV

  

Item 15

   Exhibits, Financial Statement Schedules   
  

(a)

   Financial Statements—See Listing in Item 8 above.   
  

(b)

   Exhibits   
  

(c)

   Financial Statement Schedules—None required.   

 

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  * For information regarding executive officers, refer to “Executive Officers of BB&T” in Part I hereof. The other information required by Item 10 is incorporated herein by reference to the information that appears under the headings “Proposal 1-Election of Directors”, “Corporate Governance Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s Proxy Statement for the 2009 Annual Meeting of Shareholders.

 

The information required by Item 11 is incorporated herein by reference to the information that appears under the headings “Compensation Discussion and Analysis”, “Compensation of Executive Officers”, “Compensation Committee Report on Executive Compensation”, “Compensation Committee Interlocks and Insider Participation”, and “Compensation of Directors” in the Registrant’s Proxy Statement for the 2009 Annual Meeting of Shareholders.

 

The information required by Item 12 is incorporated herein by reference to the information that appears under the headings “Security Ownership”, “Compensation of Executive Officers” and “Equity Compensation Plan Information” in the Registrant’s Proxy Statement for the 2009 Annual Meeting of Shareholders.

 

The information required by Item 13 is incorporated herein by reference to the information that appears under the headings “Corporate Governance Matters” and “Transactions with Executive Officers and Directors” in the Registrant’s Proxy Statement for the 2009 Annual Meeting of Shareholders.

 

The information required by Item 14 is incorporated herein by reference to the information that appears under the headings “Fees to Auditors” and “Corporate Governance Matters” in the Registrant’s Proxy Statement for the 2009 Annual Meeting of Shareholders.

 

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OVERVIEW AND DESCRIPTION OF BUSINESS

 

General

 

BB&T Corporation (“BB&T”, “the Company” or “the Corporation”), is a financial holding company headquartered in Winston-Salem, North Carolina. BB&T conducts its business operations primarily through its commercial bank subsidiary, Branch Banking and Trust Company (“Branch Bank”), which has offices in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky, Alabama, Florida, Indiana and Washington, D.C. In addition, BB&T’s operations consist of a federally chartered thrift institution, BB&T Financial, FSB (“BB&T FSB”), and several nonbank subsidiaries, which offer financial services products. Substantially all of the loans by BB&T’s subsidiaries are to businesses and individuals in these market areas.

 

Forward-Looking Statements

 

This Annual Report on Form 10-K 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;

 

  ·  

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 may not be fully realized or realized within the expected time frames; and

 

  ·  

deposit attrition, customer loss or revenue loss following completed mergers may be greater than expected.

 

Risk Factors Related to BB&T’s Business

 

Changes in national and local economic conditions could lead to higher loan charge-offs and reduce BB&T’s net income and growth.

 

BB&T’s business is subject to periodic fluctuations based on national and local economic conditions. These fluctuations are not predictable, cannot be controlled, and may have a material adverse impact on the Company’s operations and financial condition even if other favorable events occur. BB&T’s banking operations are locally oriented and community-based. Accordingly, the Company expects to continue to be dependent upon local business conditions as well as conditions in the local residential and commercial real estate markets it serves. For example, an increase in unemployment, a decrease in real estate values or increases in interest rates, as well as

 

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other factors, could weaken the economies of the communities BB&T serves. Weakness in BB&T’s market area could depress the Company’s earnings and consequently its financial condition because:

 

  ·  

customers may not want or need BB&T’s products or services;

 

  ·  

borrowers may not be able to repay their loans;

 

  ·  

the value of the collateral securing loans to borrowers may decline; and

 

  ·  

the quality of BB&T’s loan portfolio may decline.

 

Any of the latter three scenarios could require the Company to charge off a higher percentage of loans and/or increase provisions for credit losses, which would reduce the Company’s net income. For example, beginning in the third quarter of 2007 and continuing through 2008, BB&T experienced increasing credit deterioration due to ongoing challenges in the residential real estate markets. This period of credit deterioration combined with flat to declining real estate values resulted in increasing loan charge-offs and higher provisions for credit losses, which negatively impacted BB&T’s net income.

 

Weakness in the markets for residential or commercial real estate, including the secondary residential mortgage loan markets, could reduce BB&T’s net income and profitability.

 

Since 2007, softening residential housing markets, increasing delinquency and default rates, and increasingly volatile and constrained secondary credit markets have been affecting the mortgage industry generally. BB&T’s financial results have been adversely affected by changes in real estate values, primarily in Georgia, Florida and metro Washington, D.C. Decreases in real estate values have adversely affected the value of property used as collateral for loans and investments in BB&T’s portfolio. The poor economic conditions experienced in 2007 and 2008 resulted in decreased demand for real estate loans, and BB&T’s net income and profits have suffered as a result.

 

The declines in home prices in many markets across the U.S., including a number of markets in BB&T’s banking footprint (primarily Georgia, Florida and metro Washington, D.C.), along with the reduced availability of mortgage credit, has also resulted in increases in delinquencies and losses in BB&T’s portfolio of loans related to residential real estate, including its acquisition, development and construction loan portfolio. Further declines in home prices within BB&T’s banking footprint (including markets that to date have not experienced significant declines) coupled with a deepening economic recession and associated rises in unemployment levels could drive losses beyond the levels provided for in BB&T’s allowance for loan losses. In that event, BB&T’s earnings would be adversely affected.

 

Significant ongoing disruption in the secondary market for residential mortgage loans has limited the market for and liquidity of most mortgage loans other than conforming Fannie Mae, Freddie Mac and Ginnie Mae loans. The effects of ongoing mortgage market challenges, combined with the ongoing correction in residential real estate market prices and reduced levels of home sales has resulted in price reductions in single family home values, adversely affecting the value of collateral securing mortgage loans held and mortgage loan originations. Continued declines in real estate values and home sales volumes within BB&T’s banking footprint, and financial stress on borrowers as a result of job losses, or other factors, could have further adverse effects on borrowers that result in higher delinquencies and greater charge-offs in future periods, which would adversely affect BB&T’s financial condition and results of operations.

 

Market developments may adversely affect BB&T’s industry, business and results of operations.

 

Significant declines in the housing market in recent months, with falling home prices and increasing foreclosures and unemployment, have resulted in significant write-downs of asset values by many financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs, initially of mortgage-backed securities but spreading to credit default swaps and other derivative securities, caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. To date, BB&T has not experienced material asset write downs and it has produced quarterly earnings during 2007 and 2008, however, during this time BB&T has experienced significant challenges, its credit quality has deteriorated and its net income and results of operations have been adversely

 

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impacted. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced, and in some cases, ceased to provide funding to borrowers including other financial institutions. Although to date BB&T has performed relatively well during the current financial crisis as compared with the Company’s peers and several of the largest financial institutions, BB&T is part of the financial system and a systemic lack of available credit, a lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could materially and adversely affect BB&T’s business, financial condition and results of operations.

 

The capital and credit markets have experienced unprecedented levels of volatility.

 

During 2008, the capital and credit markets experienced extended volatility and disruption. In the third quarter of 2008, the volatility and disruption reached unprecedented levels. In some cases, the markets produced downward pressure on stock prices and credit capacity for certain issuers without regard to those issuers’ underlying financial strength. If these levels of market disruption and volatility continue, worsen or abate and then arise at a later date, BB&T’s ability to access capital could be materially impaired. BB&T’s inability to access the capital markets could constrain the Company’s ability to make new loans, to meet the Company’s existing lending commitments and, ultimately, jeopardize the Company’s overall liquidity and capitalization.

 

In response to financial conditions affecting the banking system and financial markets and the potential threats to the solvency of investment banks and other financial institutions, the U.S. government has taken unprecedented actions. These actions include the government assisted acquisition of Bear Stearns by JPMorgan Chase, the federal conservatorship of Fannie Mae and Freddie Mac, and the plan of the United States Department of the Treasury (the “Treasury Department”) to inject capital and to purchase mortgage loans and mortgage-backed and other securities from financial institutions for the purpose of stabilizing the financial markets or particular financial institutions. Investors should not assume that these governmental actions will necessarily benefit the financial markets in general, or BB&T in particular. BB&T could also be adversely impacted if one or more of its direct competitors are beneficiaries of selective governmental interventions (such as FDIC assisted transactions) and BB&T does not receive comparable assistance. Further, investors should not assume that the government will continue to intervene in the financial markets at all. Investors should be aware that governmental intervention (or the lack thereof) could materially and adversely affect BB&T’s business, financial condition and results of operations.

 

The soundness of other financial institutions could adversely affect BB&T.

 

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. BB&T has exposure to many different industries and counterparties, and BB&T and certain of its subsidiaries routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. Many of these transactions expose the Company to credit risk in the event of default of its counterparty or client. In addition, the Company’s credit risk may be exacerbated when the collateral held by it cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due BB&T. These types of losses could materially and adversely affect BB&T’s results of operations or earnings.

 

Changes in interest rates may have an adverse effect on BB&T’s profitability.

 

BB&T’s earnings and financial condition are dependent to a large degree upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest rate spreads, meaning the difference between interest rates earned on loans and investments and the interest rates paid on deposits and borrowings, could adversely affect BB&T’s earnings and financial condition. The Company cannot predict with certainty or control changes in interest rates. Regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the Federal Reserve Board, affect interest income and interest expense. The Company has ongoing policies and procedures designed to manage the risks associated with changes in market interest rates. However, changes in interest rates still may have an adverse effect on BB&T’s profitability. For example, high interest rates could adversely affect the Company’s mortgage banking business because higher interest rates could cause customers to apply for fewer mortgage refinancings or purchase mortgages.

 

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Changes in banking laws could have a material adverse effect on BB&T.

 

BB&T is extensively regulated under federal and state banking laws and regulations that are intended primarily for the protection of depositors, federal deposit insurance funds and the banking system as a whole. In addition, the Company is subject to changes in federal and state laws as well as changes in banking and credit regulations, and governmental economic and monetary policies. BB&T cannot predict whether any of these changes may adversely and materially affect the Company. The current regulatory environment for financial institutions entails significant potential increases in compliance requirements and associated costs, including those related to consumer credit, with a focus on mortgage lending. For example, the North Carolina legislature has passed a number of bills that impose additional requirements, limitations and liabilities on mortgage loan brokers, originators and servicers. Generally, these enactments cover banks as well as state-licensed mortgage lenders. The legislatures of other states, such as Georgia, Maryland and South Carolina, may enact similar legislation in the future.

 

Federal and state banking regulators also possess broad powers to take supervisory actions as they deem appropriate. These supervisory actions may result in higher capital requirements, higher insurance premiums and limitations on BB&T’s activities that could have a material adverse effect on the Company’s business and profitability.

 

Legislative and regulatory actions taken now or in the future to address the current liquidity and credit crisis in the financial industry may significantly affect BB&T’s financial condition, results of operation, liquidity or stock price.

 

The Emergency Economic Stabilization Act of 2008 (the “EESA”), which established the Treasury Department’s Troubled Asset Relief Program (“TARP”), was enacted on October 3, 2008. As part of the TARP, the Treasury Department created the Capital Purchase Program (“CPP”), under which the Treasury Department will invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the “ARRA”) was enacted as a sweeping economic recovery package intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. There can be no assurance as to the actual impact that EESA or its programs, including the CPP, and ARRA or its programs, will have on the national economy or financial markets. The failure of these significant legislative measures to help stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect BB&T’s financial condition, results of operation, liquidity or stock price.

 

In addition, there have been numerous actions undertaken in connection with or following EESA and ARRA by the Federal Reserve Board, Congress, the Treasury Department, the FDIC, the SEC and others in efforts to address the current liquidity and credit crisis in the financial industry that followed the sub-prime mortgage market meltdown which began in late 2007. These measures include homeowner relief that encourages loan restructuring and modification; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the lowering of the federal funds rate; emergency action against short selling practices; a temporary guaranty program for money market funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; a mandatory “stress test” requirement for banking institutions with assets in excess of $100 billion to analyze capital sufficiency and risk exposure; and coordinated international efforts to address illiquidity and other weaknesses in the banking sector. The purpose of these legislative and regulatory actions is to help stabilize the U.S. banking system. However, the EESA, the ARRA and any current or future legislative or regulatory initiatives may not have their desired effect, or may have an adverse effect when applied to BB&T.

 

BB&T may experience significant competition in its market area, which may reduce the Company’s customer base.

 

There is intense competition among commercial banks in BB&T’s market area. In addition, BB&T competes with other providers of financial services, such as savings and loan associations, credit unions, consumer finance companies, securities firms, insurance companies, commercial finance and leasing companies, the mutual funds industry, full-service brokerage firms and discount brokerage firms, some of which are subject to less extensive regulations than BB&T is with respect to the products and services they provide. Some of BB&T’s larger

 

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competitors, including certain national banks that have a significant presence in BB&T’s market area, may have greater resources than BB&T, may have higher lending limits and may offer products and services not offered by BB&T.

 

BB&T also experiences competition from a variety of institutions outside of the Company’s market area. Some of these institutions conduct business primarily over the Internet and may thus be able to realize certain cost savings and offer products and services at more favorable rates and with greater convenience to the customer who can pay bills and transfer funds directly without going through a bank. This “disintermediation” could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits. In addition, changes in consumer spending and saving habits could adversely affect BB&T’s operations, and the Company may be unable to timely develop competitive new products and services in response to these changes.

 

Maintaining or increasing BB&T’s market share may depend on lowering prices and market acceptance of new products and services.

 

BB&T’s success depends, in part, on its ability to adapt its products and services to evolving industry standards. There is increasing pressure to provide products and services at lower prices. Lower prices can reduce BB&T’s net interest margin and revenues from its fee-based products and services. In addition, the widespread adoption of new technologies, including internet services, could require the Company to make substantial expenditures to modify or adapt its existing products and services. Also, these and other capital investments in BB&T’s business may not produce expected growth in earnings anticipated at the time of the expenditure. The Company may not be successful in introducing new products and services, achieving market acceptance of its products and services, or developing and maintaining loyal customers.

 

Acts or threats of terrorism and political or military actions taken by the United States or other governments could adversely affect general economic or industry conditions.

 

Geopolitical conditions may affect BB&T’s earnings. Acts or threats of terrorism and political or military actions taken by the United States or other governments in response to terrorism, or similar activity, could adversely affect general economic or industry conditions.

 

Unpredictable catastrophic events could have a material adverse effect on BB&T.

 

The occurrence of catastrophic events such as hurricanes, tropical storms, earthquakes, pandemic disease, windstorms, floods, severe winter weather (including snow, freezing water, ice storms and blizzards), fires and other catastrophes could adversely affect BB&T’s consolidated financial condition or results of operations. Unpredictable natural and other disasters could have an adverse effect on the Company 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. The Company’s property and casualty insurance operations also expose it to claims arising out of catastrophes. The incidence and severity of catastrophes are inherently unpredictable. Although the Company carries insurance to mitigate its exposure to certain catastrophic events, catastrophic events could nevertheless reduce BB&T’s earnings and cause volatility in its financial results for any fiscal quarter or year and have a material adverse effect on BB&T’s financial condition or results of operations.

 

BB&T faces significant operational risk.

 

BB&T is exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Negative public opinion can result from BB&T’s actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect BB&T’s ability to attract and keep customers and can expose it to litigation and regulatory action.

 

Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. BB&T’s necessary

 

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dependence upon automated systems to record and process its transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. BB&T also may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. BB&T is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as is BB&T) and to the risk that BB&T’s (or its vendors’) business continuity and data security systems prove to be inadequate.

 

The Treasury Department’s investment in BB&T imposes restrictions and obligations limiting BB&T’s ability to increase dividends, repurchase common stock or preferred stock and access the equity capital markets.

 

In November 2008, BB&T issued preferred stock and a warrant to purchase common stock to the Treasury Department under the CPP. Prior to November 14, 2011, unless BB&T has redeemed all of the preferred stock, or the Treasury Department has transferred all of the preferred stock to a third party, the consent of the Treasury Department will be required for BB&T to, among other things, increase common stock dividends or effect repurchases of common stock or other preferred stock (with certain exceptions, including the repurchase of BB&T common stock to offset share dilution from equity-based employee compensation awards). BB&T has also granted registration rights to the Treasury Department pursuant to which BB&T has agreed to lock-up periods prior to and following the effective date of an underwritten offering of the preferred stock, the warrant or the underlying common stock held by the Treasury Department, during such time when BB&T would be unable to issue equity securities.

 

BB&T’s liquidity could be impaired by an inability to access the capital markets or an unforeseen outflow of cash.

 

Liquidity is essential to BB&T’s businesses. Due to circumstances that BB&T may be unable to control, such as a general market disruption or an operational problem that affects third parties or BB&T, BB&T’s liquidity could be impaired by an inability to access the capital markets or an unforeseen outflow of cash. BB&T’s credit ratings are important to its liquidity. A reduction in BB&T’s credit ratings could adversely affect its liquidity and competitive position, increase its borrowing costs, limit its access to the capital markets or trigger unfavorable contractual obligations.

 

BB&T’s reported financial results depend on management’s selection of accounting methods and certain assumptions and estimates.

 

BB&T’s accounting policies and methods are fundamental to the methods by which the Company records and reports its financial condition and results of operations. The Company’s management must exercise judgment in selecting and applying many of these accounting policies and methods so they comply with generally accepted accounting principles and reflect management’s judgment of the most appropriate manner to report BB&T’s financial condition and results. In some cases, management must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in the Company reporting materially different results than would have been reported under a different alternative.

 

Certain accounting policies are critical to presenting BB&T’s financial condition and results. They require management to make difficult, subjective or complex judgments about matters that are uncertain. Materially different amounts could be reported under different conditions or using different assumptions or estimates. These critical accounting policies include: the allowance for credit losses; the determination of fair value for financial instruments; the valuation of goodwill and other intangible assets; the accounting for pension and postretirement benefits and the accounting for income taxes. Because of the uncertainty of estimates involved in these matters, the Company may be required to do one or more of the following: significantly increase the allowance for credit losses and/or sustain credit losses that are significantly higher than the reserve provided; recognize significant impairment on its goodwill and other intangible asset balances; or significantly increase its accrued taxes liability.

 

BB&T’s business could suffer if it fails to attract and retain skilled people.

 

BB&T’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities in which the Company engages can be intense. As a result of BB&T’s participation

 

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in the CPP, BB&T is required to meet certain standards for executive compensation as set forth under the EESA, and related interim regulations. The recently enacted ARRA requires the Treasury Department to adopt additional standards with respect to executive compensation and governance that may impact certain of BB&T’s executive officers and employees. Such restrictions imposed as a result of the Treasury Department’s investment in BB&T, in addition to other competitive pressures, may have an adverse effect on the ability of BB&T to attract and retain skilled personnel, resulting in BB&T not being able to hire the best people or to retain them.

 

BB&T relies on other companies to provide key components of its business infrastructure.

 

Third party vendors provide key components of BB&T’s business infrastructure such as internet connections, network access and mutual fund distribution. While BB&T has selected these third party vendors carefully, its does not control their actions. Any problems caused by these third parties, including those which result from their failure to provide services for any reason or their poor performance of services, could adversely affect BB&T’s ability to deliver products and services to its customers and otherwise to conduct its business. Replacing these third party vendors could also entail significant delay and expense.

 

Significant litigation could have a material adverse effect on BB&T.

 

BB&T faces legal risks in its business, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high. Substantial legal liability or significant regulatory action against BB&T may have material adverse financial effects or cause significant reputational harm to BB&T, which in turn could seriously harm BB&T’s business prospects.

 

BB&T faces systems failure risks as well as security risks, including “hacking” and “identity theft.”

 

The computer systems and network infrastructure BB&T and others use could be vulnerable to unforeseen problems. These problems may arise in both the Company’s internally developed systems and the systems of its third-party service providers. The Company’s operations are dependent upon its ability to protect computer equipment against damage from fire, power loss or telecommunication failure. Any damage or failure that causes an interruption in the Company’s operations could adversely affect BB&T’s business and financial results. In addition, the Company’s computer systems and network infrastructure present security risks, and could be susceptible to hacking or identity theft.

 

Differences in interpretation of tax laws and regulations may adversely impact BB&T’s financial statements.

 

Local, state or federal tax authorities may interpret tax laws and regulations differently than BB&T and challenge tax positions that BB&T has taken on its tax returns. This may result in the disallowance of deductions or credits, and/or differences in the timing of deductions and result in the payment of additional taxes, interest or penalties that could materially affect BB&T’s performance.

 

Changes in accounting standards could materially impact BB&T’s financial statements.

 

From time to time the Financial Accounting Standards Board (“FASB”) changes the financial accounting and reporting standards that govern the preparation of BB&T’s financial statements. These changes can be hard to predict and can materially impact how the Company records and reports its financial condition and results of operations. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in changes to previously reported financial results, or a cumulative charge to retained earnings.

 

BB&T may not be able to successfully integrate bank or nonbank mergers and acquisitions.

 

Difficulties may arise in the integration of the business and operations of bank holding companies, banks and other nonbank entities BB&T acquires and, as a result, the Company may not be able to achieve the cost savings and synergies that it expects will result from such transactions. Achieving cost savings is dependent on consolidating certain operational and functional areas, eliminating duplicative positions and terminating certain agreements for outside services. Additional operational savings are dependent upon the integration of the acquired or merged entity’s businesses with BB&T or one of BB&T’s subsidiaries, the conversion of core operating systems, data systems and products and the standardization of business practices. Complications or difficulties in the conversion of the core operating systems, data systems and products may result in the loss of

 

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customers, damage to BB&T’s reputation within the financial services industry, operational problems, one-time costs currently not anticipated or reduced cost savings resulting from such mergers or acquisitions. Annual cost savings in each such transaction may be materially less than anticipated if the holding company, bank merger or nonbank merger or acquisition is delayed unexpectedly, the integration of operations is delayed beyond what is anticipated or the conversion to a single data system is not accomplished on a timely basis.

 

Difficulty in integrating an acquired company may cause the Company not to realize expected revenue increases, cost savings, increases in geographic or product presence and/or other projected benefits from the acquisition. The integration could result in higher than expected deposit attrition, loss of key employees, disruption of BB&T’s businesses or the businesses of the acquired company, or otherwise adversely affect the Company’s ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition. Also, the negative effect of any divestitures required by regulatory authorities in acquisitions or business combinations may be greater than expected.

 

BB&T may not receive the regulatory approvals required to complete a bank merger.

 

BB&T must generally receive federal and/or state regulatory approvals before it can acquire a bank or bank holding company. In determining whether to approve a proposed bank acquisition, bank regulators will consider, among other factors, the effect of the acquisition on competition, financial condition and future prospects including current and projected capital ratios and levels, the competence, experience and integrity of management and record of compliance with laws and regulations, the convenience and needs of the communities to be served, including the acquiring institution’s record of compliance under the Community Reinvestment Act and the effectiveness of the acquiring institution in combating money laundering activities. In addition, BB&T cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted. In specific cases the Company may be required to sell banks or branches, or take other actions as a condition to receiving regulatory approval.

 

BB&T’s stock price can be volatile.

 

BB&T’s stock price can fluctuate widely in response to a variety of factors including:

 

  ·  

actual or anticipated variations in quarterly operating results;

 

  ·  

recommendations by securities analysts;

 

  ·  

new technology used, or services offered, by competitors;

 

  ·  

significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving the Company or the Company’s competitors;

 

  ·  

failure to integrate acquisitions or realize anticipated benefits from acquisitions;

 

  ·  

operating and stock price performance of other companies that investors deem comparable to BB&T;

 

  ·  

news reports relating to trends, concerns and other issues in the financial services industry;

 

  ·  

changes in government regulations; and

 

  ·  

geopolitical conditions such as acts or threats of terrorism or military conflicts.

 

General market fluctuations, industry factors and general economic and political conditions and events, such as economic slowdowns or recessions, interest rate changes, credit loss trends, or currency fluctuations could also cause BB&T’s stock price to decrease regardless of the Company’s operating results.

 

Operating Subsidiaries

 

At December 31, 2008, the principal operating subsidiaries of BB&T included the following:

 

  ·  

Branch Banking and Trust Company, Winston-Salem, North Carolina

 

  ·  

BB&T Financial, FSB, Columbus, Georgia

 

  ·  

Scott & Stringfellow, LLC, Richmond, Virginia

 

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  ·  

Regional Acceptance Corporation, Greenville, North Carolina

 

  ·  

BB&T Asset Management, Inc., Raleigh, North Carolina

 

Branch Bank, BB&T’s largest subsidiary, was chartered in 1872 and is the oldest bank headquartered in North Carolina. Branch Bank provides a wide range of banking and trust services for retail and commercial clients in its geographic markets, including small and mid-size businesses, public agencies, local governments and individuals through 1,511 offices (as of December 31, 2008) located in North Carolina, South Carolina, Virginia, Maryland, Georgia, Kentucky, Florida, West Virginia, Tennessee, Washington D.C., Alabama and Indiana. Branch Bank’s principal operating subsidiaries include:

 

  ·  

BB&T Equipment Finance Corporation, based in Charlotte, North Carolina, which provides loan and lease financing to commercial and small businesses;

 

  ·  

BB&T Investment Services, Inc., a registered broker-dealer located in Charlotte, North Carolina, which offers clients non-deposit investment alternatives, including discount brokerage services, equities, fixed-rate and variable-rate annuities, mutual funds and government and municipal bonds;

 

  ·  

BB&T Insurance Services, Inc., headquartered in Raleigh, North Carolina, which offers property and casualty, life, health, employee benefits, commercial general liability, surety, title and other insurance products through its agency network;

 

  ·  

Stanley, Hunt, DuPree & Rhine, Inc., with dual headquarters in Greensboro, North Carolina, and Greenville, South Carolina, which offers flexible benefit plans, and investment advisory, actuarial and benefit consulting services;

 

  ·  

Prime Rate Premium Finance Corporation, Inc., located in Florence, South Carolina, and its subsidiary AFCO Credit Corporation, headquartered in Pittsburgh, Pennsylvania which provide insurance premium financing to clients in the United States and Canada;

 

  ·  

Grandbridge Real Estate Capital, LLC, based in Charlotte, North Carolina, which specializes in arranging and servicing commercial mortgage loans;

 

  ·  

Lendmark Financial Services, Inc., located in Covington, Georgia, which offers alternative consumer loans to clients unable to meet Branch Bank’s normal credit and mortgage loan underwriting guidelines;

 

  ·  

CRC Insurance Services, Inc., based in Birmingham, Alabama, which is a wholesale insurance broker authorized to do business nationwide; and

 

  ·  

McGriff, Seibels & Williams, Inc., based in Birmingham, Alabama, which is authorized to do business nationwide and specializes in providing insurance products on an agency basis to large commercial and energy clients, including many Fortune 500 companies.

 

BB&T FSB is a federal savings bank. BB&T FSB provides services to clients throughout the United States and was formed to help improve the operating efficiency of certain business activities for subsidiaries which are national in scope. In addition to credit card lending, the following businesses operate as either subsidiaries or divisions of BB&T FSB:

 

  ·  

Sheffield Financial (a division of BB&T FSB), which specializes in loans to individuals and small commercial lawn care businesses across the country for the purchase of outdoor power equipment and power sport equipment;

 

  ·  

Liberty Mortgage Corporation, which originates mortgage loans through a network of mortgage originators (including mortgage brokers, community banks and mortgage banks), in a multi-state area; and

 

  ·  

MidAmerica Gift Certificate Company, which specializes in the issuance and sale of retail gift certificates and giftcards through a nationwide network of authorized agents.

 

Major Nonbank Subsidiaries

 

BB&T also has a number of nonbank subsidiaries, including:

 

  ·  

Scott & Stringfellow, LLC, which is a registered investment banking and full-service brokerage firm that provides services in retail brokerage, equity and debt underwriting, investment advice, corporate finance

 

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and equity research; and facilitates the origination, trading and distribution of fixed-income securities and equity products in both the public and private capital markets. It also has a public finance department that provides investment banking, financial advisory services and debt underwriting services to a variety of regional taxable and tax-exempt issuers. Scott & Stringfellow’s investment banking and corporate and public finance areas do business as BB&T Capital Markets;

 

  ·  

Regional Acceptance Corporation, which specializes in indirect financing for consumer purchases of primarily mid-model and late-model used automobiles; and

 

  ·  

BB&T Asset Management, Inc., a registered investment advisor and the advisor to the BB&T Funds, provides tailored investment management solutions to meet the specific needs and objectives of individual and institutional clients through a full range of investment strategies, including domestic and international equity, alternative investment products and strategies, and fixed income investing.

 

Services

 

The primary services offered by BB&T’s subsidiaries include:

 

  ·  

small business lending

 

  ·  

commercial middle market lending

 

  ·  

real estate lending

 

  ·  

retail lending

 

  ·  

home equity lending

 

  ·  

sales finance

 

  ·  

home mortgage lending

 

  ·  

commercial mortgage lending

 

  ·  

equipment finance

 

  ·  

asset management

 

  ·  

retail and wholesale agency insurance

 

  ·  

institutional trust services

 

  ·  

wealth management / private banking

 

  ·  

investment brokerage services

 

  ·  

capital markets services

 

  ·  

commercial finance

 

  ·  

consumer finance

 

  ·  

international banking services

 

  ·  

payment solutions

 

  ·  

treasury services

 

  ·  

venture capital

 

  ·  

bankcard and merchant services

 

  ·  

insurance premium finance

 

  ·  

supply chain management

 

  ·  

payroll processing

 

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The following table reflects BB&T’s deposit market share and branch locations by state at December 31, 2008.

 

Table 1

BB&T Deposit Market Share and Branch Locations by State

December 31, 2008

 

     % of
BB&T's
Deposits (2)
    Deposit
Market
Share
Rank (2)
   Number of
Branches

Virginia (1)

   25 %   2nd    392

North Carolina (1)

   26     2nd    360

Georgia

   11     5th    162

Maryland

   8     6th    129

South Carolina

   8     3rd    117

Florida

   5     11th    107

Kentucky

   5     4th    91

West Virginia

   6     1st    78

Tennessee

   3     6th    58

Washington, D.C.

   1     7th    12

 

  (1)   Excludes home office deposits.
  (2)   Source: FDIC.gov—data as of June 30, 2008.

 

In addition to the markets described in the table above, BB&T operates three branches in Alabama and two branches in Indiana. Please refer to Note 21 “Operating Segments” in the “Notes to Consolidated Financial Statements” for additional disclosures.

 

Executive Overview

 

Significant accomplishments in 2008

 

In the opinion of BB&T’s management, the Corporation’s most significant accomplishments during 2008 were as follows (amounts include the impact of acquisitions where applicable):

 

  ·  

Superior performance relative to the industry

 

  ·  

Average loans increased 8.2%

 

  ·  

Average deposits increased 6.4%

 

  ·  

Fee income increased 10.3%

 

  ·  

Effective expense control

 

  ·  

Asset quality remained healthier than peers

 

  ·  

94,000 net new transaction deposit accounts were added

 

  ·  

Households utilizing 5 or more BB&T services grew to 34%

 

  ·  

The number of clients utilizing online banking services increased 21% to approximately three million

 

  ·  

30 de novo branch locations were opened

 

  ·  

Maintained superior service quality as measured by an independent survey company

 

  ·  

Launched successful advertising campaign – Best Bank in Town Since 1872

 

  ·  

Acquisitions of several nonbank financial services companies were completed

 

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Challenges

 

BB&T’s business has become more dynamic and complex in recent years. Consequently, management has annually evaluated and, as necessary, adjusted the Corporation’s business strategy in the context of the current operating environment. During this process, management considers the current financial condition and performance of the Company and its expectations for future economic activity, both on a national and local market scale. The achievement of BB&T’s key strategic objectives and established long-term financial goals is subject to many uncertainties and challenges. In the opinion of management, the challenges that are most relevant and likely to have a near term impact on performance are presented below:

 

  ·  

Downturn in the residential real estate market

 

  ·  

Effectively managing through the credit cycle

 

  ·  

Unprecedented disruption and significantly increased risk in financial markets

 

  ·  

Cost and risk associated with the current heightened regulatory environment

 

  ·  

Intense competition within the financial services industry

 

Competition

 

The financial services industry is highly competitive and dramatic change continues to occur in all aspects of the Company’s business. The ability of nonbank financial entities to provide services previously reserved for commercial banks has intensified competition. BB&T’s subsidiaries compete actively with national, regional and local financial services providers, including banks, thrifts, securities dealers, mortgage bankers, finance companies and insurance companies. Competition among providers of financial products and services continues to increase, with consumers having the opportunity to select from a growing variety of traditional and nontraditional alternatives. The industry continues to consolidate, which affects competition by eliminating some regional and local institutions, while strengthening the franchises of acquirers. In addition, many financial services are experiencing significant challenges as a result of the economic crisis, resulting in bank and thrift failures and significant intervention from the U.S. Government. For additional information concerning markets, BB&T’s competitive position and business strategies, and recent government interventions see “Market Area”, “General Business Development” and “Regulatory Considerations” below.

 

Market Area

 

BB&T’s primary market area consists of North and South Carolina, Virginia, Maryland, Georgia, eastern Tennessee, West Virginia, Kentucky, Florida and Washington, D.C. This area’s employment base is diverse and primarily consists of manufacturing, general services, agricultural, wholesale/retail trade, technology and financial services. BB&T believes its current market area will support growth in assets and deposits in the future. Management strongly believes that BB&T’s community bank approach to providing client service is a competitive advantage that strengthens the Corporation’s ability to effectively provide financial products and services to businesses and individuals in its markets.

 

General Business Development

 

BB&T is a regional financial holding company. BB&T has maintained a long-term focus on a strategy that includes expanding and diversifying the BB&T franchise in terms of revenues, profitability and asset size. During the 1990’s and the first part of this decade, BB&T’s growth resulted largely from mergers and acquisitions as the economics of business combinations were compelling. Recently, BB&T has focused more on organic growth. Tangible evidence of this focus is the growth in average total assets, loans and deposits, which have increased over the last five years at compound annual rates of 9.9%, 10.5%, and 9.3%, respectively.

 

Merger Strategy

 

BB&T’s growth in business, profitability and market share has historically been enhanced by strategic mergers and acquisitions. Management intends to remain disciplined and focused with regard to future merger

 

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and acquisition opportunities. BB&T will continue to assess bank and thrift acquisitions subject to market conditions and suitable candidates, primarily within BB&T’s existing footprint, and will pursue economically advantageous acquisitions of insurance agencies, specialized lending businesses, and fee income generating financial services businesses. BB&T’s acquisition strategy is focused on three primary objectives:

 

  ·  

to pursue acquisitions of banks and thrifts with compatible cultures that will enhance BB&T’s banking network and customer delivery system;

 

  ·  

to acquire companies in niche markets that provide products or services that can be offered through the existing distribution system to BB&T’s current customer base; and

 

  ·  

to consider strategic nonbank acquisitions in markets that are economically feasible and provide positive long-term benefits.

 

BB&T completed acquisitions of 40 community banks and thrifts, 85 insurance agencies and 33 nonbank financial services providers over the last fifteen years. In the long-term, BB&T expects to continue to take advantage of the consolidation in the financial services industry and expand and enhance its franchise through mergers and acquisitions. The consideration paid for these acquisitions may be in the form of cash, debt or BB&T common stock. The amount of consideration paid to complete these transactions may be in excess of the book value of the underlying net assets acquired, which could have a dilutive effect on BB&T’s earnings. In addition, acquisitions often result in significant front-end charges against earnings; however, cost savings and revenue enhancements, especially incident to in-market bank and thrift acquisitions, are also typically anticipated.

 

Lending Activities

 

The primary goal of the BB&T lending function is to help clients achieve their financial goals by providing quality loan products that are fair to the client and profitable to the Corporation. Management believes that this purpose can best be accomplished by building strong, profitable client relationships over time, with BB&T becoming an important contributor to the prosperity and well-being of its clients. In addition to the importance placed on client knowledge and continuous involvement with clients, BB&T’s lending process incorporates the standards of a consistent company-wide credit culture and an in-depth local market knowledge. Furthermore, the Corporation employs strict underwriting criteria governing the degree of assumed risk and the diversity of the loan portfolio in terms of type, industry and geographical concentration. In this context, BB&T strives to meet the credit needs of businesses and consumers in its markets while pursuing a balanced strategy of loan profitability, loan growth and loan quality.

 

BB&T conducts the majority of its lending activities within the framework of the Corporation’s community bank operating model, with lending decisions made as close to the client as practicable.

 

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The following table summarizes BB&T’s loan portfolio based on the regulatory classification of the portfolio, which focuses on the underlying loan collateral, and differs from internal classifications presented herein that focus on the primary purpose of the loan.

 

Table 2

Composition of Loan and Lease Portfolio

 

     December 31,  
     2008     2007     2006     2005     2004  
     (Dollars in millions)  

Commercial, financial and agricultural loans

   $ 17,131     $ 14,037     $ 10,848     $ 9,532     $ 8,824  

Lease receivables

     2,007       3,899       4,358       4,250       4,170  

Real estate—construction and land development loans

     20,065       19,474       17,553       11,942       8,601  

Real estate—mortgage loans

     46,772       44,687       42,219       41,539       39,257  

Consumer loans

     12,018       11,107       10,389       9,604       9,238  
                                        

Total loans and leases held for investment

     97,993       93,204       85,367       76,867       70,090  

Less: unearned income

     (748 )     (2,297 )     (2,456 )     (2,473 )     (2,540 )
                                        

Net loans and leases held for investment

     97,245       90,907       82,911       74,394       67,550  

Loans held for sale

     1,424       779       680       629       613  
                                        

Total loans and leases

   $ 98,669     $ 91,686     $ 83,591     $ 75,023     $ 68,163  
                                        

 

BB&T’s loan portfolio is approximately 50% commercial and 50% retail by design, and is divided into six major categories—commercial, sales finance, revolving credit, direct retail, mortgage and specialized lending. BB&T lends to a diverse customer base that is substantially located within the Corporation’s primary market area. At the same time, the loan portfolio is geographically dispersed throughout BB&T’s branch network to mitigate concentration risk arising from local and regional economic downturns.

 

The following discussion presents the principal types of lending conducted by BB&T and describes the underwriting procedures and overall risk management of BB&T’s lending function. The relative risk of each loan portfolio is presented in the “Asset Quality” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein.

 

Underwriting Approach

 

Recognizing that the loan portfolio is a primary source of profitability, proper loan underwriting is critical to BB&T’s long-term financial success. BB&T’s underwriting approach is designed to define acceptable combinations of specific risk-mitigating features that ensure credit relationships conform to BB&T’s risk philosophy. Provided below is a summary of the most significant underwriting criteria used to evaluate new loans and loan renewals:

 

  ·  

Cash flow and debt service coverage—cash flow adequacy is a necessary condition of creditworthiness, meaning that loans not clearly supported by a borrower’s cash flow must be justified by secondary repayment sources.

 

  ·  

Secondary sources of repayment—alternative repayment funds are a significant risk-mitigating factor as long as they are liquid, can be easily accessed and provide adequate resources to supplement the primary cash flow source.

 

  ·  

Value of any underlying collateral—loans are generally secured by the asset being financed. Because an analysis of the primary and secondary sources of repayment is the most important factor, collateral, unless it is liquid, does not justify loans that cannot be serviced by the borrower’s normal cash flows.

 

  ·  

Overall creditworthiness of the customer, taking into account the customer’s relationships, both past and current, with other lenders—our success depends on building lasting and mutually beneficial relationships with clients, which involves assessing their financial position and background.

 

  ·  

Level of equity invested in the transaction—in general, borrowers are required to contribute or invest a portion of their own funds prior to any loan advances.

 

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Commercial Loan and Lease Portfolio

 

The commercial loan and lease portfolio represents the largest category of the Corporation’s total loan portfolio. BB&T’s commercial lending program is generally targeted to serve small-to-middle market businesses with sales of $200 million or less. In addition, BB&T’s Corporate Banking Group provides lending solutions to large corporate clients. Traditionally, lending to small and mid-sized businesses has been among BB&T’s strongest market segments.

 

Commercial and small business loans are primarily originated through BB&T’s banking network. In accordance with the Corporation’s lending policy, each loan undergoes a detailed underwriting process, which incorporates BB&T’s underwriting approach, procedures and evaluations described above. In addition, Branch Bank has adopted an internal maximum credit exposure lending limit of $245 million for a “best grade” credit, which is considerably below Branch Bank’s maximum legal lending limit. Commercial loans are typically priced with an interest rate tied to market indices, such as the prime rate and the London Interbank Offered Rate (“LIBOR”), or a fixed-rate. Commercial loans are individually monitored and reviewed for any possible deterioration in the ability of the client to repay the loan. Approximately 92% of BB&T’s commercial loans are secured by real estate, business equipment, inventories and other types of collateral. BB&T’s commercial leases consist of investments in various types of leveraged lease transactions.

 

Sales Finance Loan Portfolio

 

The sales finance category primarily includes secured indirect installment loans to consumers for the purchase of new and used automobiles, boats and recreational vehicles. Such loans are originated through approved franchised and independent dealers throughout the BB&T market area. These loans are relatively homogenous and no single loan is individually significant in terms of its size and potential risk of loss. Sales finance loans are subject to the same rigorous lending policies and procedures as described above for commercial loans and are underwritten with note amounts and credit limits that ensure consistency with the Corporation’s risk philosophy. In addition to its normal underwriting due diligence, BB&T uses application systems and “scoring systems” to help underwrite and manage the credit risk in its sales finance portfolio. Also included in the sales finance category are commercial lines, serviced by the Sales Finance Department, to finance dealer wholesale inventory (“Floor Plan Lines”) for resale to consumers. Floor Plan Lines are underwritten by commercial loan officers in compliance with the same rigorous lending policies described above for commercial loans. In addition, Floor Plan Lines are subject to intensive monitoring and oversight to ensure quality and mitigate risk from fraud.

 

Revolving Credit Loan Portfolio

 

The revolving credit portfolio is comprised of the outstanding balances on credit cards and BB&T’s checking account overdraft protection product, Constant Credit. BB&T markets credit cards to its existing banking client base and does not solicit cardholders through nationwide programs or other forms of mass marketing. Such balances are generally unsecured and actively managed by BB&T FSB.

 

Direct Retail Loan Portfolio

 

The direct retail loan portfolio consists of a wide variety of loan products offered through BB&T’s banking network. Various types of secured and unsecured loans are marketed to qualifying existing clients and to other creditworthy candidates in BB&T’s market area. The vast majority of direct retail loans are secured by first or second liens on residential real estate, and include both closed-end home equity loans and revolving home equity lines of credit. Direct retail loans are subject to the same rigorous lending policies and procedures as described above for commercial loans and are underwritten with note amounts and credit limits that ensure consistency with the Corporation’s risk philosophy

 

Mortgage Loan Portfolio

 

BB&T is a large originator of residential mortgage loans, with originations in 2008 totaling $16.4 billion. Branch Bank offers various types of fixed- and adjustable-rate loans for the purpose of constructing, purchasing or refinancing residential properties. BB&T primarily originates conforming mortgage loans and higher quality

 

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jumbo and construction-to-permanent loans for owner-occupied properties. Conforming loans are loans that are underwritten in accordance with the underwriting standards set forth by the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”). They are generally collateralized by one-to-four-family residential real estate, have loan-to-collateral value ratios of 80% or less, and are made to borrowers in good credit standing.

 

Risks associated with the mortgage lending function include interest rate risk, which is mitigated through the sale of substantially all conforming fixed-rate loans in the secondary mortgage market and an effective mortgage servicing rights hedge process. Borrower risk is lessened through rigorous underwriting procedures and mortgage insurance. The right to service the loans and receive servicing income is generally retained when conforming loans are sold. Management believes that the retention of mortgage servicing is a primary relationship driver in retail banking and a vital part of management’s strategy to establish profitable long-term customer relationships and offer high quality client service. BB&T also purchases residential mortgage loans from correspondent originators. The loans purchased from third-party originators are subject to the same underwriting and risk-management criteria as loans originated internally.

 

Specialized Lending Portfolio

 

BB&T’s specialized lending portfolio consists of loans originated through six business units that provide specialty finance alternatives to consumers and businesses including: dealer-based financing of equipment for small businesses and consumers, commercial equipment leasing and finance, direct and indirect consumer finance, insurance premium finance, indirect subprime automobile finance, and full-service commercial mortgage banking. BB&T offers these services to bank clients as well as nonbank clients within and outside BB&T’s primary geographic market area.

 

BB&T’s specialized lending subsidiaries adhere to the same overall underwriting approach as the commercial and consumer lending portfolio and also utilize automated credit scoring to assist with underwriting the credit risk. The majority of these loans are relatively homogenous and no single loan is individually significant in terms of its size and potential risk of loss. The majority of the loans are secured by real estate, automobiles, equipment or unearned insurance premiums. As of December 31, 2008, included in the specialized lending portfolio are loans to subprime borrowers of approximately $2.7 billion, or 2.8% of the total BB&T loan and lease portfolio. Of these, approximately $380 million are residential real estate loans and included in the disclosures in Table 6 herein.

 

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The following table presents BB&T’s total loan portfolio based upon the primary purpose of the loan, as discussed herein, rather than upon regulatory reporting classifications:

 

Table 3

Composition of Loan and Lease Portfolio Based on Loan Purpose

 

     December 31,
     2008    2007    2006    2005    2004
     (Dollars in millions)

Loans and leases, net of unearned income:

              

Commercial loans

   $ 49,727    $ 43,685    $ 39,580    $ 34,965    $ 31,968

Leveraged leases

     753      1,185      1,720      1,650      1,576
                                  

Total commercial loans and leases

     50,480      44,870      41,300      36,615      33,544
                                  

Sales finance

     6,354      6,021      5,683      5,264      5,176

Revolving credit

     1,777      1,618      1,414      1,347      1,277

Direct retail

     15,454      15,691      15,312      14,453      13,585

Residential mortgage loans

     17,091      17,467      15,596      13,971      11,715

Specialized lending

     6,089      5,240      3,606      2,744      2,253
                                  

Total loans held for investment

     97,245      90,907      82,911      74,394      67,550
                                  

Total loans held for sale

     1,424      779      680      629      613
                                  

Total loans and leases

   $ 98,669    $ 91,686    $ 83,591    $ 75,023    $ 68,163
                                  

 

The following table reflects the scheduled maturities of commercial, financial and agricultural loans, as well as real estate construction loans:

 

Table 4

Selected Loan Maturities and Interest Sensitivity (1)

 

     December 31, 2008
     Commercial,
Financial
and
Agricultural
   Real Estate:
Construction
   Total
     (Dollars in millions)

Fixed rate:

        

1 year or less (2)

   $ 1,858    $ 931    $ 2,789

1-5 years

     1,892      1,878      3,770

After 5 years

     2,535      3,079      5,614
                    

Total

     6,285      5,888      12,173
                    

Variable rate:

        

1 year or less (2)

     6,665      8,452      15,117

1-5 years

     3,301      4,462      7,763

After 5 years

     880      1,263      2,143
                    

Total

     10,846      14,177      25,023
                    

Total loans and leases (3)

   $ 17,131    $ 20,065    $ 37,196
                    

 

(1)   Balances include unearned income.
(2)   Includes loans due on demand.

 

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     (Dollars
in millions)

(3)    The above table excludes:

  

(i)     consumer loans

   $ 12,018

(ii)    real estate mortgage loans

     46,772

(iii)   loans held for sale

     1,424

(iv)   lease receivables

     2,007
      

Total

   $ 62,221
      

 

Scheduled repayments are reported in the maturity category in which the payment is due. Determinations of maturities are based upon contract terms. BB&T’s credit policy typically does not permit automatic renewal of loans. At the scheduled maturity date (including balloon payment date), the customer generally must request a new loan to replace the matured loan and execute either a new note or note modification with rate, terms and conditions negotiated at that time.

 

Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments

 

The allowance for loan and lease losses is determined based on management’s best estimate of probable losses that are inherent in the portfolio at the balance sheet date. BB&T’s allowance is driven by existing conditions and observations, and reflects losses already incurred, even if not yet identifiable.

 

The Corporation determines the allowance based on an ongoing evaluation of the loan and lease portfolios. This evaluation is inherently subjective because it requires material estimates, including the amounts and timing of cash flows expected to be received on impaired loans. Those estimates may be susceptible to significant change. Increases to the allowance are made by charges to the provision for credit losses, which is reflected in the Consolidated Statements of Income. Loans or leases deemed to be uncollectible are charged against the allowance. Recoveries of previously charged-off amounts are credited to the allowance.

 

In addition to the allowance for loan and lease losses, BB&T also estimates probable losses related to binding unfunded lending commitments. The methodology to determine such losses is inherently similar to the methodology used in calculating the allowance for commercial loans, adjusted for factors specific to binding commitments, including the probability of funding and exposure at funding. The reserve for unfunded lending commitments is included in accounts payable and other liabilities on the Consolidated Balance Sheets. Changes to the reserve for unfunded lending commitments are made by charges or credits to the provision for credit losses.

 

Reserve Policy and Methodology

 

The allowance for loan and lease losses consists of (1) a component for individual loan impairment recognized and measured pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 114, “Accounting by Creditors for Impairment of a Loan,” and (2) components of collective loan impairment recognized pursuant to SFAS No. 5, “Accounting for Contingencies,” including a component that is unallocated. BB&T maintains specific reserves for individually impaired loans pursuant to SFAS No. 114. A loan is impaired when, based on current information and events, it is probable that BB&T will be unable to collect all amounts due (interest as well as principal) according to the contractual terms of the loan agreement. On a quarterly basis, BB&T reviews all commercial lending relationships with outstanding debt of $2 million or more that have been classified as substandard or doubtful. Loans are considered impaired when the borrower does not have the cash flow capacity or willingness to service the debt according to contractual terms, or it does not appear reasonable to assume that the borrower will continue to pay according to the contractual agreement. The amount of impairment is based on the present value of expected cash flows discounted at the loan’s effective interest rate, and/or the value of collateral adjusted for any origination costs and nonrefundable fees that existed at the time of origination.

 

Reserves established pursuant to the provisions of SFAS No. 5 for collective impairment reflect an estimate of losses inherent in the loan and lease portfolios as of the balance sheet reporting date. Embedded loss estimates are based on current migration rates and current risk mix. Embedded loss estimates may be adjusted to reflect current economic conditions and current portfolio trends including credit quality, concentrations, aging of the portfolio, and significant policy and underwriting changes. In the commercial lending portfolio, each loan is

 

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assigned a “risk grade” at origination by the account officer and the assigned risk grade is subsequently reviewed and finalized through BB&T’s established loan review committee process. Loans are assigned risk grades based on an assessment of conditions that affect the borrower’s ability to meet contractual obligations under the loan agreement. This process includes reviewing borrowers’ financial information, historical payment experience, credit documentation, public information, and other information specific to each borrower. The established risk management regimen includes a review of all credit relationships with total credit exposure of $1 million or more on an annual basis or at any point management becomes aware of information affecting the borrower’s ability to fulfill their obligations. For small business and commercial clients where total credit exposure is less than $1 million, BB&T has developed an automated loan review system to identify and proactively manage accounts with a higher risk of loss. The “score” produced by this automated system is updated monthly. All of the loan portfolios grouped in the retail lending and specialized lending categories typically employ scoring models to segment credits into groups with homogenous risk characteristics. Scoring models are validated on a periodic basis in order to ensure reliable default rate information. This information is employed to evaluate the levels of risk associated with new production as well as to assess any risk migration in the existing portfolio.

 

A small portion of the Corporation’s allowance for loan and lease losses is not allocated to any specific category of loans. This unallocated portion of the allowance reflects management’s best estimate of the elements of imprecision and estimation risk inherent in the calculation of the overall allowance. Due to the subjectivity involved in determining the overall allowance, including the unallocated portion, the portion considered unallocated may fluctuate from period to period based on management’s evaluation of the factors affecting the assumptions used in calculating the allowance, including historical loss experience, current economic conditions, industry or borrower concentrations and the status of merged institutions. The allocated and unallocated portions of the allowance are available to absorb losses in any loan or lease category. Management evaluates the adequacy of the allowance for loan and lease losses based on the combined total of the allocated and unallocated components.

 

While management uses the best information available to establish the allowance for loan and lease losses, future adjustments to the allowance or to the reserving methodology may be necessary if economic conditions differ substantially from the assumptions used in making the valuations.

 

The following table presents an estimated allocation of the allowance for loan and lease losses at the end of each of the past five years. This allocation of the allowance for loan and lease losses is calculated on an approximate basis and is not necessarily indicative of future losses or allocations. The entire amount of the allowance is available to absorb losses occurring in any category of loans and leases.

 

Table 5

Allocation of Allowance for Loan and Lease Losses by Category

 

    December 31,  
    2008     2007     2006     2005     2004  
    Amount   % Loans
in each
category
    Amount   % Loans
in each
category
    Amount   % Loans
in each
category
    Amount   % Loans
in each
category
    Amount   % Loans
in each
category
 
    (Dollars in millions)  

Balances at end of period applicable to:

                   

Commercial loans and leases

  $ 912   51.9 %   $ 548   49.3 %   $ 475   49.8 %   $ 422   49.2 %   $ 393   49.7 %

Sales finance

    55   6.5       58   6.6       58   6.9       65   7.1       87   7.7  

Revolving credit

    94   1.8       70   1.8       67   1.7       65   1.8       63   1.9  

Direct retail

    124   15.9       79   17.3       75   18.5       94   19.4       112   20.1  

Residential mortgage loans

    91   17.6       25   19.2       21   18.8       19   18.8       26   17.3  

Specialized lending

    238   6.3       171   5.8       139   4.3       110   3.7       81   3.3  

Unallocated

    60   —         53   —         53   —         50   —         43   —    
                                                           

Total

  $ 1,574   100.0 %   $ 1,004   100.0 %   $ 888   100.0 %   $ 825   100.0 %   $ 805   100.0 %
                                                           

 

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The following tables provide further details regarding BB&T’s commercial real estate lending, residential mortgage and consumer home equity portfolios as of December 31, 2008.

 

Table 6

Real Estate Lending Portfolio Credit Quality and Geographic Distribution

 

Commercial Real Estate Loan Portfolio (1)

 

     As of / For the Period Ended December 31, 2008  
Residential Acquisition, Development, and Construction Loans
(ADC)
   Builder /
Construction
    Land / Land
Development
    Condos /
Townhomes
    Total
ADC
 
     (Dollars in millions, except average loan and average client size)  

Total loans outstanding

   $ 2,905     $ 4,533     $ 543     $ 7,981  

Average loan size (in thousands)

     296       602       1,280       449  

Average client size (in thousands)

     851       1,357       3,262       1,149  

Percentage of total loans

     2.9 %     4.6 %     .6 %     8.1 %

Nonaccrual loans and leases as a percentage of category

     7.87       5.48       4.24       6.27  

Gross charge-offs as a percentage of category

     1.20       2.07       3.22       1.83  

 

    As of / For the Period Ended December 31, 2008  
Residential Acquisition, Development, and
Construction Loans (ADC) by State of Origination
  Total
Outstandings
   Percentage
of Total
    Nonaccrual
Loans and
Leases
   Nonaccrual as
a Percentage
of Outstandings
    Gross Charge-Offs
as a Percentage
of Outstandings
 
    (Dollars in millions)  

North Carolina

  $ 2,926    36.7 %   $ 127    4.35 %   .19 %

Georgia

    1,364    17.1       133    9.77     5.49  

Virginia

    1,232    15.4       35    2.82     1.60  

Florida

    846    10.6       139    16.40     3.17  

South Carolina

    664    8.3       13    1.96     .25  

Tennessee

    258    3.2       13    4.94     1.73  

Kentucky

    224    2.8       28    12.56     .27  

Washington, D.C.

    219    2.7       6    2.87     3.15  

West Virginia

    140    1.8       6    4.29     1.01  

Maryland

    108    1.4       —      —       3.81  
                       

Total

  $ 7,981    100.0 %   $ 500    6.27     1.83  
                       

 

     As of / For the Period Ended December 31, 2008  
Other Commercial Real Estate Loans (2)    Commercial
Construction
    Commercial
Land /

Development
    Permanent
Income
Producing

Properties
    Total Other
Commercial

Real Estate
 
     (Dollars in millions, except average loan and average client size)  

Total loans outstanding

   $ 2,784     $ 2,607     $ 6,146     $ 11,537  

Average loan size (in thousands)

     1,370       794       360       515  

Average client size (in thousands)

     1,793       970       538       733  

Percentage of total loans

     2.8 %     2.6 %     6.2 %     11.7 %

Nonaccrual loans and leases as a percentage of category

     .36       1.99       .80       .97  

Gross charge-offs as a percentage of category

     .15       .64       .13       .25  

 

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Table of Contents
     As of / For the Period Ended December 31, 2008  
Other Commercial Real Estate Loans
by State of Origination
   Total
Outstandings
   Percentage
of Total
    Nonaccrual
Loans and
Leases
   Nonaccrual as
a Percentage
of Outstandings
    Gross Charge-Offs
as a Percentage
of Outstandings
 
     (Dollars in millions)  

North Carolina

   $ 3,457    30.1 %   $ 15    .44 %   .09 %

Georgia

     2,068    17.9       28    1.35     .36  

Virginia

     1,777    15.4       8    .46     .06  

South Carolina

     900    7.8       9    .94     .13  

Florida

     830    7.2       35    4.20     1.61  

Washington, D.C.

     674    5.8       —      .04     .04  

Maryland

     511    4.4       1    .15     —    

West Virginia

     452    3.9       2    .52     .03  

Kentucky

     426    3.7       9    2.12     .04  

Tennessee

     334    2.9       4    1.25     .70  

Other

     108    .9       —      —       —    
                        

Total

   $ 11,537    100.0 %   $ 111    .97     .25  
                        

 

NOTES:  (1)   Commercial real estate loans (CRE) are defined as loans to finance non-owner occupied real property where the primary repayment source is the sale or rental/lease of the real property. Definition is based on internal classification.
                    (2)   Other CRE loans consist primarily of non-residential income producing CRE loans. C&I loans secured by real property are excluded.

 

Residential Mortgage Portfolio

 

     As of / For the Period Ended December 31, 2008  
Mortgage Loans    Prime     ALT-A     Construction/
Permanent
    Subprime (1)  
     (Dollars in millions, except average loan size)  

Total loans outstanding

   $ 12,103     $ 3,193     $ 1,538     $ 637  

Average loan size (in thousands)

     195       329       335       69  

Average credit score

     721       735       735       590  

Percentage of total loans

     12.3 %     3.2 %     1.6 %     .6 %

Percentage that are first mortgages

     99.7       99.7       98.9       83.1  

Average loan to value

     74.6       67.5       77.8       75.3  

Nonaccrual loans and leases as a percentage of category

     1.51       3.08       4.99       4.70  

Gross charge-offs as a percentage of category

     .41       .70       .87       2.19  

 

     As of / For the Period Ended December 31, 2008  
Residential Mortgage Loans by State    Total Mortgages
Outstanding (1)
   Percentage
of Total
    Nonaccrual as
a Percentage
of Outstandings
    Gross Charge-Offs
as a Percentage
of Outstandings
 
     (Dollars in millions)  

North Carolina

   $ 4,315    24.7 %   .99 %   .09 %

Virginia

     3,534    20.2     1.81     .41  

Florida

     2,589    14.8     5.78     1.97  

Maryland

     1,833    10.5     1.24     .42  

Georgia

     1,613    9.2     3.21     .71  

South Carolina

     1,609    9.2     1.76     .23  

West Virginia

     380    2.2     .89     .17  

Kentucky

     362    2.1     .67     .33  

Tennessee

     257    1.5     1.16     .21  

Washington, D.C.

     195    1.1     1.13     .02  

Other

     784    4.5     2.26     .60  
                 

Total

   $ 17,471    100.0 %   2.22     .57  
                 

 

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Table of Contents

Home Equity Portfolio (2)

 

     As of / For the Period
Ended December 31, 2008
 
Home Equity Loans & Lines    Home Equity
Loans
    Home Equity
Lines
 
     (Dollars in millions)  

Total loans outstanding

   $ 8,878     $ 5,497  

Average loan size (in thousands) (3)

     48       36  

Average credit score

     725       759  

Percentage of total loans

     9.0 %     5.6 %

Percentage that are first mortgages

     77.2       24.3  

Average loan to value

     67.4       66.7  

Nonaccrual loans and leases as a percentage of category

     .79       .28  

Gross charge-offs as a percentage of category

     .61       .88  

 

     As of / For the Period Ended December 31, 2008  
Home Equity Loans and Lines by State    Total Home
Equity
Loans and
Lines
Outstanding
   Percentage
of Total
    Nonaccrual as
a Percentage
of Outstandings
    Gross Charge-Offs
as a Percentage
of Outstandings
 
     (Dollars in millions)  

North Carolina

   $ 4,992    34.7 %   .54 %   .29 %

Virginia

     3,232    22.5     .30     .83  

South Carolina

     1,407    9.8     1.03     .50  

Georgia

     1,158    8.1     .66     1.19  

West Virginia

     863    6.0     .34     .31  

Maryland

     861    6.0     .27     .68  

Florida

     721    5.0     1.69     3.51  

Kentucky

     605    4.2     .73     .35  

Tennessee

     425    3.0     .96     .21  

Washington, D.C.

     90    .6     1.13     3.89  

Other

     21    .1     .35     .27  
                 

Total

   $ 14,375    100.0 %   .60     .71  
                 

 

 

NOTES:  (1)   Includes $380 million in loans originated by Lendmark Financial Services, which are disclosed as a part of the specialized lending category, and excludes mortgage loans guaranteed by GNMA that BB&T does not have the obligation to repurchase.
                    (2)   Home Equity portfolio is a component of direct retail loans and originated through the BB&T branching network.
                    (3)   Home equity lines without an outstanding balance are excluded from this calculation.

 

Investment Activities

 

Investment securities represent a significant portion of BB&T’s assets. Branch Bank invests in securities as allowable under bank regulations. These securities include obligations of the U.S. Treasury, U.S. government agencies, U.S. government sponsored entities, including mortgage-backed securities, bank eligible obligations of any state or political subdivision, privately-issued mortgage-backed securities, structured notes, bank eligible corporate obligations, including corporate debentures, commercial paper, negotiable certificates of deposit, bankers acceptances, mutual funds and limited types of equity securities. Branch Bank also may deal in securities subject to the provisions of the Gramm-Leach-Bliley Act. Scott & Stringfellow, LLC, BB&T’s full-service brokerage and investment banking subsidiary, engages in the underwriting, trading and sales of equity and debt securities subject to the risk management policies of the Corporation.

 

BB&T’s investment activities are governed internally by a written, board-approved policy. The investment policy is carried out by the Corporation’s Market Risk and Liquidity Committee (“MRLC”), which meets regularly to review the economic environment and establish investment strategies. The MRLC also has much

 

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broader responsibilities, which are discussed in the “Market Risk Management” section in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein.

 

Investment strategies are established by the MRLC based on the interest rate environment, balance sheet mix, actual and anticipated loan demand, funding opportunities and the overall interest rate sensitivity of the Corporation. In general, the investment portfolio is managed in a manner appropriate to the attainment of the following goals: (i) to provide a sufficient margin of liquid assets to meet unanticipated deposit and loan fluctuations and overall funds management objectives; (ii) to provide eligible securities to secure public funds, trust deposits as prescribed by law and other borrowings; and (iii) to earn the maximum return on funds invested that is commensurate with meeting the requirements of (i) and (ii).

 

Funding Activities

 

Deposits are the primary source of funds for lending and investing activities, and their cost is the largest category of interest expense. Scheduled payments, as well as prepayments, and maturities from portfolios of loans and investment securities also provide a stable source of funds. Federal Home Loan Bank (“FHLB”) advances, other secured borrowings, Federal funds purchased and other short-term borrowed funds, as well as longer-term debt issued through the capital markets, all provide supplemental liquidity sources. BB&T’s funding activities are monitored and governed through BB&T’s overall asset/liability management process, which is further discussed in the “Market Risk Management” section in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein. BB&T conducts its funding activities in compliance with all applicable laws and regulations. Following is a brief description of the various sources of funds used by BB&T. For further discussion relating to outstanding balances and balance fluctuations, refer to the “Deposits and Other Borrowings” section in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein.

 

Deposits

 

Deposits are attracted principally from clients within BB&T’s branch network through the offering of a broad selection of deposit instruments to individuals and businesses, including noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money rate savings accounts, investor deposit accounts, certificates of deposit and individual retirement accounts. Deposit account terms vary with respect to the minimum balance required, the time period the funds must remain on deposit and service charge schedules. Interest rates paid on specific deposit types are determined based on (i) the interest rates offered by competitors, (ii) the anticipated amount and timing of funding needs, (iii) the availability and cost of alternative sources of funding, and (iv) the anticipated future economic conditions and interest rates. Client deposits are attractive sources of funding because of their stability and relative cost. Deposits are regarded as an important part of the overall client relationship and provide opportunities to cross-sell other BB&T services. In addition, BB&T gathers a portion of its deposit base through wholesale funding products, which include negotiable certificates of deposit and Eurodollar deposits through the use of a Cayman branch facility. At December 31, 2008, these sources of deposits represented approximately 15% of BB&T’s total deposits.

 

The following table provides information regarding the scheduled maturities of time deposits that are $100,000 and greater at December 31, 2008:

 

Table 7

Scheduled Maturities of Time Deposits $100,000 and Greater

December 31, 2008

(Dollars in millions)

 

Maturity Schedule   

Three months or less

   $ 4,992

Over three through six months

     2,486

Over six through twelve months

     4,366

Over twelve months

     4,429
      

Total

   $ 16,273
      

 

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Table of Contents

Borrowed Funds

 

BB&T’s ability to borrow funds from nondeposit sources provides additional flexibility in meeting the liquidity needs of the Company. Short-term borrowings include Federal funds purchased, securities sold under repurchase agreements, master notes, short-term FHLB advances, U.S. Treasury tax and loan depository note accounts and other short-term borrowings. See Note 9 “Federal Funds Purchased, Securities Sold Under Agreements to Repurchase, and Short-Term Borrowed Funds” in the “Notes to Consolidated Financial Statements” herein for additional disclosures related to these types of borrowings.

 

BB&T also utilizes longer-term borrowings when management determines that the pricing and maturity options available through these sources create cost-effective options for funding asset growth and satisfying capital needs. BB&T’s long-term borrowings include long-term FHLB advances to Branch Bank, senior and subordinated debt issued by BB&T Corporation and Branch Bank, junior subordinated debt underlying trust preferred securities and capital leases. See Note 10 “Long-Term Debt” in the “Notes to Consolidated Financial Statements” herein for additional disclosures related to long-term borrowings.

 

Employees

 

At December 31, 2008, BB&T had approximately 29,600 full-time equivalent employees compared to approximately 29,400 full-time equivalent employees at December 31, 2007.

 

Properties

 

BB&T and its significant subsidiaries occupy headquarter offices that are either owned or operated under long-term leases. BB&T also owns free-standing operations centers, with its primary operations and information technology center located in Wilson, North Carolina. BB&T also owns or leases significant office space used as the Corporation’s headquarters in Winston-Salem, North Carolina. At December 31, 2008, Branch Bank operated 1,511 branch offices in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky, Alabama, Florida, Indiana and Washington, D.C. BB&T also operates numerous insurance agencies and other businesses that occupy facilities. Office locations are either owned or leased. Management believes that the premises occupied by BB&T and its subsidiaries are well-located and suitably equipped to serve as financial services facilities. See Note 6 “Premises and Equipment” in the “Notes to Consolidated Financial Statements” in this report for additional disclosures related to BB&T’s properties and other fixed assets.

 

Web Site Access to BB&T’s Filings with the Securities and Exchange Commission

 

All of BB&T’s electronic filings with the Securities and Exchange Commission (“SEC”), including the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available at no cost on the Corporation’s web site, www.BBT.com, through the Investor Relations link as soon as reasonably practicable after BB&T files such material with, or furnishes it to, the SEC. BB&T’s SEC filings are also available through the SEC’s web site at www.sec.gov.

 

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Table of Contents

Executive Officers of BB&T

 

The following table lists the members of BB&T’s executive management team:

 

Executive Officer

  

Recent Work Experience

   Years of
Service
   Age

Kelly S. King

President and Chief Executive Officer

   President and Chief Executive Officer since January 2009. Chief Operating Officer between June 2004 and December 2008.    37    60

Christopher L. Henson

Chief Operating Officer

   Chief Operating Officer since January 2009. Chief Financial Officer between July 2005 and December 2008. Assistant Chief Financial Officer between July 2004 and June 2005.    24    47

Daryl N. Bible

Senior Executive Vice President and Chief Financial Officer

   Chief Financial Officer since January 2009. Assistant Chief Financial Officer between January 2008 and December 2008. Employed by U.S Bancorp for 24 years, serving as Treasurer for the last 10 years.    1    47

Ricky K. Brown

Senior Executive Vice President and Banking Network Manager

   Banking Network Manager since July 2004.    32    53

Barbara F. Duck

Senior Executive Vice President and Electronic Delivery Channels Manager

   Electronic Delivery Channels Manager since July 2006. Risk Manager between June 2004 and June 2006.    21    42

Donna C. Goodrich

Senior Executive Vice President and Deposit Services Manager

   Deposit Services Manager since February 2005.    23    46

Robert E. Greene

Senior Executive Vice President and Risk Management and Administrative Group Manager

   Risk Management and Administrative Group Manager since July 2006. Administrative Group Manager between August 2001 and June 2006.    36    58

Clarke R. Starnes III

Senior Executive Vice President and Chief Credit Officer

   Chief Credit Officer since September 2008. Specialized Lending Manager between January 2000 and August 2008.    27    49

Steven B. Wiggs

Senior Executive Vice President and Chief Marketing Officer

   Chief Marketing Officer since February 2005. Director of Wealth Management between August 2003 and January 2005.    30    51

C. Leon Wilson

Senior Executive Vice President and Operations Division Manager

   Operations Division Manager since February 2000.    32    53

 

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Table of Contents

PERFORMANCE GRAPH

 

Set forth below is a graph comparing the total returns (assuming reinvestment of dividends) of BB&T Common Stock, the S&P 500 Index, and an Industry Peer Group Index. The graph assumes $100 invested on December 31, 2003 in BB&T Common Stock and in each of the indices. In 2008, the financial holding companies in the Industry Peer Group Index (the “Peer Group”) were Comerica Incorporated, Fifth-Third Bancorp, Huntington Bancshares, Incorporated, KeyCorp, M&T Bank Corporation, Marshall & Ilsley Corporation, PNC Financial Services Group, Inc., Popular, Incorporated, Regions Financial Corporation, SunTrust Banks, Inc., U.S. Bancorp and Zions Bancorporation. The Peer Group consists of bank holding companies with assets between approximately $38.9 billion and $291.1 billion.

 

LOGO

 

*   $ 100 invested on 12/31/03 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.
     Cumulative Total Return
       12/03        12/04        12/05        12/06        12/07        12/08  
BB&T CORPORATION    $ 100.00    $ 112.86    $ 116.70    $ 127.11    $ 92.62    $ 88.63
S&P 500      100.00      110.88      116.32      134.69      142.09      89.68
BB&T’s PEER GROUP      100.00      107.39      105.63      124.53      96.06      60.28

 

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REGULATORY CONSIDERATIONS

 

The following discussion describes elements of an extensive regulatory framework applicable to bank holding companies, financial holding companies and banks and specific information about BB&T and its subsidiaries. Regulation of banks, bank holding companies and financial holding companies is intended primarily for the protection of depositors and the Deposit Insurance Fund (the “DIF”) rather than for the protection of shareholders and creditors. In addition to banking laws, regulations and regulatory agencies, BB&T and its subsidiaries and affiliates are subject to various other laws and regulations and supervision and examination by other regulatory agencies, all of which directly or indirectly affect the operations and management of BB&T and its ability to make distributions to shareholders.

 

General

 

As a bank holding company and a financial holding company under federal law, BB&T is subject to regulation under the Bank Holding Company Act of 1956, as amended, (the “BHCA”) and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). Branch Bank and BB&T FSB are collectively referred to herein as the “Banks.” Branch Bank, a state-chartered commercial bank, is subject to regulation, supervision and examination by the North Carolina Commissioner of Banks. BB&T FSB, a federally chartered thrift institution, is subject to regulation, supervision and examination by the Office of Thrift Supervision (“OTS”). Each of the Banks also is subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation (the “FDIC”).

 

State and federal law govern the activities in which the Banks engage, the investments they make and the aggregate amount of loans that may be granted to one borrower, although BB&T FSB is entitled to federal preemption of various state laws. Various consumer and compliance laws and regulations also affect the Banks’ operations. The Banks also are affected by the actions of the Federal Reserve Board as it attempts to control the monetary supply and credit availability in order to influence the economy.

 

In addition to federal and state banking laws and regulations, BB&T and certain of its subsidiaries and affiliates, including those that engage in securities underwriting, dealing, brokerage, investment advisory and insurance activities, are subject to other federal and state laws and regulations, and supervision and examination by other state and federal regulatory agencies and other regulatory authorities, including the SEC, the Financial Industry Regulatory Authority (the “FINRA”), the NYSE Euronext, Inc. (the “NYSE”), and various state insurance and securities regulators.

 

The earnings of BB&T’s subsidiaries, and therefore the earnings of BB&T, are affected by general economic conditions, management policies, changes in state and federal laws and regulations and actions of various regulatory authorities, including those referred to above. Proposals to change the laws and regulations to which BB&T and its subsidiaries are subject are frequently introduced at both the federal and state levels. The likelihood and timing of any such changes and the impact such changes may have on BB&T and its subsidiaries are impossible to determine with any certainty. The description herein summarizes the significant state and federal laws to which BB&T and the Banks currently are subject. To the extent statutory or regulatory provisions are described, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions.

 

Financial Holding Company Regulation

 

Under current federal law, a bank holding company, such as BB&T, may elect to become a financial holding company, which allows the holding company to offer customers virtually any type of service that is financial in nature or incidental thereto, including banking and activities closely related thereto, securities underwriting, insurance (both underwriting and agency) and merchant banking. In order to become and maintain its status as a financial holding company, a financial holding company and all of its affiliated depository institutions must be well-capitalized, well-managed, and have at least a satisfactory Community Reinvestment Act of 1977 (“CRA”) rating. If the Federal Reserve Board determines that a financial holding company is not well-capitalized or well-managed, the company has a period of time to come into compliance, but during the period of noncompliance, the

 

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Federal Reserve Board can place any limitations on the financial holding company that it believes to be appropriate. Furthermore, if the Federal Reserve Board determines that a financial holding company has not maintained a satisfactory CRA rating, the company will not be able to commence any new financial activities or acquire a company that engages in such activities, although the company will still be allowed to engage in activities closely related to banking and make investments in the ordinary course of conducting merchant banking activities. BB&T became a financial holding company on June 14, 2000, and currently satisfies the requirements to maintain its status as a financial holding company.

 

Most of the financial activities that are permissible for financial holding companies also are permissible for a “financial subsidiary” of one or more of the Banks, except for insurance underwriting, insurance company portfolio investments, real estate investments and development, and merchant banking, which must be conducted in a financial holding company. In order for these financial activities to be engaged in by a financial subsidiary of a bank, federal law requires the parent bank (and its sister-bank affiliates) to be well-capitalized and well-managed; the aggregate consolidated assets of all of that bank’s financial subsidiaries may not exceed the lesser of 45% of its consolidated total assets or $50 billion; the bank must have at least a satisfactory CRA rating; and, if that bank is one of the 100 largest national banks, it must meet certain financial rating or other comparable requirements.

 

Current federal law also establishes a system of functional regulation under which the Federal Reserve Board is the umbrella regulator for bank holding companies, but bank holding company affiliates are to be principally regulated by functional regulators such as the FDIC for state nonmember bank affiliates, the OTS for thrifts, the SEC for securities affiliates and state insurance regulators for insurance affiliates. Certain specific activities, including traditional bank trust and fiduciary activities, may be conducted in the bank without the bank being deemed a “broker” or a “dealer” in securities for purposes of functional regulation. Although the states generally must regulate bank insurance activities in a nondiscriminatory manner, the states may continue to adopt and enforce rules that specifically regulate bank insurance activities in certain identifiable areas.

 

Office of Thrift Supervision Regulation

 

As a federally chartered thrift, BB&T FSB is subject to regulation, supervision and examination by the OTS. 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 BB&T, 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.

 

Acquisitions

 

BB&T complies with numerous laws related to its acquisition activity. Under the BHCA, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank holding company or bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve Board. Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Furthermore, a bank headquartered in one state is authorized to merge with a bank headquartered in another state, subject to any state requirement that the target bank shall have been in existence and operating for a minimum period of time, not to exceed five years; and subject to certain deposit market-share limitations. After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable federal or state law.

 

Other Safety and Soundness Regulations

 

The Federal Reserve Board has enforcement powers over bank holding companies and their nonbanking subsidiaries. The Federal Reserve Board has authority to prohibit activities that represent unsafe or unsound practices or constitute violations of law, rule, regulation, administrative order or written agreement with a federal regulator. These powers may be exercised through the issuance of cease and desist orders, civil money penalties or other actions.

 

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There also are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance fund in the event the depository institution is insolvent or is in danger of becoming insolvent. For example, under requirements of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit financial resources to support such institutions in circumstances where it might not do so otherwise. In addition, the “cross-guarantee” provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the DIF as a result of the insolvency of commonly controlled insured depository institutions or for any assistance provided by the FDIC to commonly controlled insured depository institutions in danger of failure. The FDIC may decline to enforce the cross-guarantee provision if it determines that a waiver is in the best interests of the DIF. The FDIC’s claim for reimbursement under the cross guarantee provisions is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and nonaffiliated holders of subordinated debt of the commonly controlled insured depository institution.

 

Federal and state banking regulators also have broad enforcement powers over the Banks, including the power to impose fines and other civil and criminal penalties, and to appoint a conservator (with the approval of the Governor in the case of a North Carolina state bank) in order to conserve the assets of any such institution for the benefit of depositors and other creditors. The North Carolina Commissioner of Banks also has the authority to take possession of a North Carolina state bank in certain circumstances, including, among other things, when it appears that such bank has violated its charter or any applicable laws, is conducting its business in an unauthorized or unsafe manner, is in an unsafe or unsound condition to transact its business or has an impairment of its capital stock.

 

Payment of Dividends

 

BB&T is a legal entity separate and distinct from its subsidiaries. The majority of BB&T’s revenue is from dividends paid to BB&T by Branch Bank. The Banks are subject to laws and regulations that limit the amount of dividends they can pay. In addition, BB&T and the Banks are subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above regulatory minimums, and to remain “well-capitalized” under the prompt corrective action regulations summarized elsewhere in this section. Federal banking regulators have indicated that banking organizations should generally pay dividends only if (1) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (2) the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. North Carolina law states that, subject to certain capital requirements, the board of directors of a bank chartered under the laws of North Carolina may declare a dividend of as much of that bank’s undivided profits as the directors deem expedient. BB&T does not expect that these laws, regulations or policies will materially affect the ability of Branch Bank to pay dividends.

 

Capital

 

Each of the federal banking agencies, including the Federal Reserve Board, the FDIC and the OTS, has issued substantially similar risk-based and leverage capital guidelines applicable to banking organizations they supervise, including bank holding companies and banks. Under the risk-based capital requirements, BB&T and the Banks are each generally required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital must be composed of common shareholders’ equity excluding the over- or underfunded status of postretirement benefit obligations, unrealized gains or losses on debt securities available for sale, unrealized gains on equity securities available for sale and unrealized gains or losses on cash flow hedges, net of deferred income taxes; plus certain mandatorily redeemable capital securities; less nonqualifying intangible assets net of applicable deferred income taxes and certain nonfinancial equity investments. This is called “Tier 1 capital.” The remainder may consist of qualifying subordinated debt, certain hybrid capital instruments, qualifying preferred stock and a limited amount of the allowance for credit losses. This is called “Tier 2 capital.” Tier 1 capital and Tier 2 capital combined are referred to as total regulatory capital.

 

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The Federal Reserve Board requires bank holding companies that engage in trading activities to adjust their risk-based capital ratios to take into consideration market risks that may result from movements in market prices of covered trading positions in trading accounts, or from foreign exchange or commodity positions, whether or not in trading accounts, including changes in interest rates, equity prices, foreign exchange rates or commodity prices. Any capital required to be maintained under these provisions may consist of a new “Tier 3 capital” consisting of forms of short-term subordinated debt.

 

Each of the federal bank regulatory agencies, including the Federal Reserve Board, the FDIC and the OTS, also has established minimum leverage capital requirements for banking organizations. These requirements provide that banking organizations that meet certain criteria, including excellent asset quality, high liquidity, low interest rate exposure and good earnings, and that have received the highest regulatory rating must maintain a ratio of Tier 1 capital to total adjusted average assets of at least 3%. Institutions not meeting these criteria, as well as institutions with supervisory, financial or operational weaknesses, are expected to maintain a minimum Tier 1 capital to total adjusted average assets ratio at least 100 basis points above that stated minimum. Holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. The Federal Reserve Board also continues to consider a “tangible Tier 1 capital leverage ratio” (deducting all intangibles) and other indicators of capital strength in evaluating proposals for expansion or new activity.

 

In addition, the Federal Reserve Board, the FDIC and the OTS all have adopted risk-based capital standards that explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution’s ability to manage these risks, as important factors to be taken into account by each agency in assessing an institution’s overall capital adequacy. The capital guidelines also provide that an institution’s exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a banking organization’s capital adequacy. The agencies also require banks and bank holding companies to adjust their regulatory capital to take into consideration the risk associated with certain recourse obligations, direct credit subsidies, residual interest and other positions in securitized transactions that expose banking organizations to credit risk.

 

The ratios of Tier 1 capital, total capital to risk-adjusted assets, and leverage capital of BB&T, Branch Bank and BB&T FSB as of December 31, 2008, are shown in the following table.

 

Table 8

Capital Adequacy Ratios of BB&T Corporation and Banks

December 31, 2008

 

     Regulatory
Minimums
    Regulatory
Minimums
to be Well-
Capitalized
    BB&T     Branch
Bank
    BB&T
FSB
 

Risk-based capital ratios:

          

Tier 1 capital

   4.0 %   6.0 %   12.3 %   10.8 %   14.4 %

Total risk-based capital

   8.0     10.0     17.4     13.6     15.7  

Tier 1 leverage ratio

   3.0     5.0     9.9     8.7     13.8  

 

The federal banking agencies, including the Federal Reserve Board, the FDIC and the OTS, are required to take “prompt corrective action” in respect of depository institutions and their bank holding companies that do not meet minimum capital requirements. The law establishes five capital categories for insured depository institutions for this purpose: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” To be considered “well-capitalized” under these standards, an institution must maintain a total risk-based capital ratio of 10% or greater; a Tier 1 risk-based capital ratio of 6% or greater; a leverage capital ratio of 5% or greater; and must not be subject to any order or written directive to meet and maintain a specific capital level for any capital measure. BB&T, Branch Bank and BB&T FSB are all classified as “well-capitalized.” Federal law also requires the bank regulatory agencies to implement systems for “prompt corrective action” for institutions that fail to meet minimum capital requirements within the five capital categories, with progressively more severe restrictions on operations, management and capital distributions

 

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according to the category in which an institution is placed. Failure to meet capital requirements also may cause an institution to be directed to raise additional capital. Federal law also mandates that the agencies adopt safety and soundness standards relating generally to operations and management, asset quality and executive compensation, and authorizes administrative action against an institution that fails to meet such standards.

 

In addition to the “prompt corrective action” directives, failure to meet capital guidelines may subject a banking organization to a variety of other enforcement remedies, including additional substantial restrictions on its operations and activities, termination of deposit insurance by the FDIC and, under certain conditions, the appointment of a conservator or receiver.

 

Deposit Insurance Assessments

 

The deposits of the Banks are insured by the DIF of the FDIC up to the limits set forth under applicable law and are subject to the deposit insurance premium assessments of the DIF. The FDIC imposes a risk-based deposit premium assessment system, which was amended pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, its long-term debt ratings. On December 16, 2008, the FDIC adopted a final rule increasing risk-based assessment rates uniformly by 7 basis points, on an annual basis, for the first quarter of 2009. Currently, banks pay between 5 and 43 basis points of their domestic deposits for FDIC insurance. Under the final rule, risk-based rates would range between 12 and 50 basis points (annualized) for the first quarter 2009 assessment, depending on the insured institution’s risk category as described above. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. The FDIC has published guidelines under the Reform Act on the adjustment of assessment rates for certain institutions. Under the current system, premiums are assessed quarterly. The Reform Act also provides for a one-time premium assessment credit for eligible insured depository institutions, including those institutions in existence and paying deposit insurance premiums on December 31, 1996, or certain successors to any such institution. The assessment credit is determined based on the eligible institution’s deposits at December 31, 1996 and is applied automatically to reduce the institution’s quarterly premium assessments to the maximum extent allowed, until the credit is exhausted. In addition, insured deposits have been required to pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation (“FICO”) to fund the closing and disposal of failed thrift institutions by the Resolution Trust Corporation.

 

On February 27, 2009, the FDIC adopted an interim rule, with request for comment, which would institute a one-time special assessment of 20 cents per $100 of domestic deposits on FDIC insured institutions. If approved, BB&T estimates that the assessment would total approximately $175 million. The assessment would be payable on September 30, 2009.

 

Consumer Protection Laws

 

In connection with their lending and leasing activities, each of the Banks is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and their respective state law counterparts. BB&T FSB is entitled to federal preemption under the Home Owners Loan Act and OTS regulations of certain state laws.

 

Federal law currently contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. These provisions also provide that, except for certain limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. Federal law makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.

 

 

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The CRA requires the Banks’ primary federal bank regulatory agency, the FDIC for Branch Bank and the OTS for BB&T FSB, to assess the bank’s record in meeting the credit needs of the communities served by each Bank, including low- and moderate-income neighborhoods and persons. Institutions are assigned one of four ratings: “Outstanding,” “Satisfactory,” “Needs to Improve” or “Substantial Noncompliance.” This assessment is reviewed for any bank that applies to merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution, or to open or relocate a branch office. The CRA record of each subsidiary bank of a financial holding company, such as BB&T, also is assessed by the Federal Reserve Board in connection with any acquisition or merger application.

 

USA Patriot Act

 

The USA Patriot Act of 2001 (the “Patriot Act”) contains anti-money laundering measures affecting insured depository institutions, broker-dealers and certain other financial institutions. The Patriot Act includes the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “IMLAFA”). The IMLAFA requires such financial institutions to implement policies and procedures to combat money laundering and the financing of terrorism and grants the Secretary of the Treasury Department (the “Secretary”) broad authority to establish regulations and to impose requirements and restrictions on financial institutions’ operations. In addition, the Patriot Act requires the federal bank regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and bank holding company acquisitions. The Treasury Department has issued a number of regulations implementing the Patriot Act, which impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. The obligations of financial institutions under the Patriot Act have increased, and may continue to increase. The increase in obligations of financial institutions has resulted in increased costs for BB&T, which may continue to rise, and also may subject BB&T to additional liability. As noted above, enforcement and compliance-related activities by government agencies has increased. Compliance with the Patriot Act, and in particular the IMLAFA, are among the areas receiving focus from bank regulators conducting examinations and this can be expected to continue.

 

Sarbanes-Oxley Act of 2002

 

The Sarbanes-Oxley Act of 2002 comprehensively revised the laws affecting corporate governance, accounting obligations and corporate reporting for companies, such as BB&T, with equity or debt securities registered under the Securities Exchange Act of 1934, as amended. In particular, the Sarbanes-Oxley Act established: (1) new requirements for audit committees, including independence, expertise, and responsibilities; (2) new certification responsibilities for the Chief Executive Officer and Chief Financial Officer with respect to the Company’s financial statements; (3) new standards for auditors and regulation of audits; (4) increased disclosure and reporting obligations for reporting companies and their directors and executive officers; and (5) new and increased civil and criminal penalties for violation of the federal securities laws.

 

Emergency Economic Stabilization Act of 2008

 

In response to recent unprecedented market turmoil, the EESA was enacted on October 3, 2008. EESA authorizes the Secretary to purchase or guarantee up to $700 billion in troubled assets from financial institutions under the TARP. Pursuant to authority granted under EESA, the Secretary has created the TARP CPP under which the Treasury Department will invest up to $250 billion in senior preferred stock of U.S. banks and savings associations or their holding companies. Qualifying financial institutions may issue senior preferred stock with a value equal to not less than 1% of risk-weighted assets and not more than the lesser of $25 billion or 3% of risk-weighted assets.

 

Institutions participating in the TARP or CPP are required to issue warrants for common or preferred stock or senior debt to the Secretary. If an institution participates in the CPP or if the Secretary acquires a meaningful equity or debt position in the institution as a result of TARP participation, the institution is required to meet certain standards for executive compensation and corporate governance, including a prohibition against incentives to take unnecessary and excessive risks, recovery of bonuses paid to senior executives based on materially inaccurate earnings or other statements and a prohibition against agreements for the payment of golden parachutes. Institutions that sell more than $300 million in assets under TARP auctions or participate in the CPP will not be entitled to a tax deduction for compensation in excess of $500,000 paid to its chief executive or

 

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chief financial official or any of its other three most highly compensated officers. In addition, any severance paid to such officers for involuntary termination or termination in connection with a bankruptcy or receivership will be subject to the golden parachute rules under the Internal Revenue Code. Additional standards with respect to executive compensation and corporate governance for institutions that have participated or will participate in the TARP (including the CPP) were enacted as part of the ARRA, described below.

 

CPP Participation

 

On November 14, 2008, BB&T entered into a Letter Agreement (the “Purchase Agreement”) with the Treasury Department under the CPP, pursuant to which BB&T agreed to issue 3,133.64 shares of BB&T’s Fixed Rate Cumulative Perpetual Preferred Stock, Series C (the “Series C Preferred Stock”), having a liquidation amount per share equal to $1 million, for a total price of $3.1 billion. The Series C Preferred Stock is to pay cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. BB&T may not redeem the Series C Preferred Stock during the first three years except with the proceeds from a “qualified equity offering” (as defined in BB&T’s articles of incorporation). However, under the ARRA, BB&T may redeem the Series C Preferred Stock without a “qualified equity offering”, subject to the approval of its primary federal regulator. After three years, BB&T may, at its option, redeem the Series C Preferred Stock at par value plus accrued and unpaid dividends. The Series C Preferred Stock is generally non-voting, but does have the right to vote as a class on the issuance of any preferred stock ranking senior, any change in its terms or any merger, exchange or similar transaction that would adversely affect its rights. The holder(s) of Series C Preferred Stock also have the right to elect two directors if dividends have not been paid for six periods.

 

As part of its purchase of the Series C Preferred Stock, the Treasury Department received a warrant (the “Warrant”) to purchase 13.9 million shares of BB&T’s common stock at an initial per share exercise price of $33.81. The Warrant provides for the adjustment of the exercise price and the number of shares of BB&T’s common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of BB&T’s common stock, and upon certain issuances of BB&T’s common stock at or below a specified price relative to the initial exercise price. The Warrant expires ten years from the issuance date. If, on or prior to December 31, 2009, BB&T receives aggregate gross cash proceeds of not less than $3.1 billion from “qualified equity offerings” announced after October 13, 2008, the number of shares of common stock issuable pursuant to the Treasury Department’s exercise of the Warrant will be reduced by one-half of the original number of shares, taking into account all adjustments, underlying the Warrant. Pursuant to the Purchase Agreement, the Treasury Department has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the Warrant. Under the ARRA, the Warrant would be liquidated upon the redemption by BB&T of the Series C Preferred Stock.

 

Both the Series C Preferred Stock and the Warrant will be accounted for as components of Tier 1 capital.

 

Prior to November 14, 2011, unless BB&T has redeemed the Series C Preferred Stock or the Treasury Department has transferred the Series C Preferred Stock to a third party, the consent of the Treasury Department will be required for BB&T to (1) declare or pay any dividend or make any distribution on its common stock (other than regular quarterly cash dividends of not more than $0.47 per share of common stock) or (2) redeem, purchase or acquire any shares of its common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practice and certain other circumstances specified in the Purchase Agreement.

 

American Recovery and Reinvestment Act of 2009

 

The ARRA was enacted on February 17, 2009. The ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, the ARRA imposes certain new executive compensation and corporate governance obligations on all current and future TARP recipients, including BB&T, until the institution has redeemed the preferred stock, which TARP recipients are now permitted to do under the ARRA without regard to the three year holding period and without the need to raise new capital, subject to approval of its primary federal regulator. The executive compensation restrictions under the ARRA (described below) are more stringent than those currently in effect under the CPP,

 

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but it is yet unclear how these executive compensation standards will relate to the similar standards recently announced by the Treasury Department, or whether the standards will be considered effective immediately or only after implementing regulations are issued by the Treasury Department.

 

The ARRA amends Section 111 of the EESA to require the Secretary to adopt additional standards with respect to executive compensation and corporate governance for TARP recipients (including BB&T). The standards required to be established by the Secretary include, in part, (1) prohibitions on making golden parachute payments to senior executive officers and the next 5 most highly-compensated employees during such time as any obligation arising from financial assistance provided under the TARP remains outstanding (the “Restricted Period”), (2) prohibitions on paying or accruing bonuses or other incentive awards for certain senior executive officers and employees, except for awards of long-term restricted stock with a value equal to no greater than 1/3 of the subject employee’s annual compensation that do not fully vest during the Restricted Period or unless such compensation is pursuant to a valid written employment contract prior to February 11, 2009, (3) requirements that TARP CPP participants provide for the recovery of any bonus or incentive compensation paid to senior executive officers and the next 20 most highly-compensated employees based on statements of earnings, revenues, gains or other criteria later found to be materially inaccurate, with the Secretary having authority to negotiate for reimbursement, and (4) a review by the Secretary of all bonuses and other compensation paid by TARP participants to senior executive employees and the next 20 most highly-compensated employees before the date of enactment of the ARRA to determine whether such payments were inconsistent with the purposes of the Act.

 

The ARRA also sets forth additional corporate governance obligations for TARP recipients, including requirements for the Secretary to establish standards that provide for semi-annual meetings of compensation committees of the board of directors to discuss and evaluate employee compensation plans in light of an assessment of any risk posed from such compensation plans. TARP recipients are further required by the ARRA to have in place company-wide policies regarding excessive or luxury expenditures, permit non-binding shareholder “say-on-pay” proposals to be included in proxy materials, as well as require written certifications by the chief executive officer and chief financial officer with respect to compliance. The Secretary is required to promulgate regulations to implement the executive compensation and certain corporate governance provisions detailed in the ARRA.

 

Federal Deposit Insurance Corporation

 

Pursuant to the EESA, the maximum deposit insurance amount per depositor has been increased from $100,000 to $250,000 until December 31, 2009. Additionally, on October 14, 2008, after receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, the Secretary of the Treasury signed the systemic risk exception to the FDIC Act, enabling the FDIC to establish its Temporary Liquidity Guarantee Program (“TLGP”). Under the transaction account guarantee program of the TLGP, the FDIC will fully guarantee, until the end of 2009, all non-interest-bearing transaction accounts, including NOW accounts with interest rates of 0.5 percent or less and IOLTAs (lawyer trust accounts). The TLGP also guarantees all senior unsecured debt of insured depository institutions or their qualified holding companies issued between October 14, 2008 and June 30, 2009 with a stated maturity greater than 30 days. All eligible institutions were permitted to participate in both of the components of the TLGP without cost for the first 30 days of the program. Following the initial 30 day grace period, institutions were assessed at the rate of ten basis points for transaction account balances in excess of $250,000 for the transaction account guarantee program and at the rate of either 50, 75, or 100 basis points of the amount of debt issued, depending on the maturity date of the guaranteed debt, for the debt guarantee program. Institutions were required to opt-out of the TLGP if they did not wish to participate. BB&T did not choose to opt out of either the transaction account guarantee program or debt guarantee program components of the TGLP.

 

Future Laws, Regulations and Governmental Programs

 

Various laws, regulations and governmental programs affecting financial institutions and the financial industry are from time to time introduced in Congress or otherwise promulgated by regulatory agencies. Such measures may change the operating environment of BB&T and its subsidiaries in substantial and unpredictable

 

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ways. With the recent enactments of the EESA and the ARRA, the nature and extent of future legislative, regulatory or other changes affecting financial institutions is very unpredictable at this time.

 

Specifically, on February 10, 2009, the Treasury Department announced the Financial Stability Plan (the “Plan”), representing a set of measures intended to restore confidence in the strength of U.S. financial institutions and restart the flow of credit to households and businesses. Core elements of the Plan include, in part (1) a mandatory “stress test” requirement for banking institutions, such as BB&T, with assets in excess of $100 billion, which would require a comprehensive assessment of whether the institution has sufficient capital to continue lending and absorb potential losses and increased disclosure of risk exposure on the balance sheet of such banking institutions, (2) additional required disclosures from participants in the Plan related to the impact of assistance received under the Plan on the institution’s lending practices, and (3) more robust limitations on dividend, stock repurchase, acquisition, and executive compensation activities. On February 18, 2009 the Treasury Department outlined the Homeowner Affordability and Stability Plan, which includes measures that could impact BB&T, including measures to (1) implement a comprehensive homeowner stability initiative that incentivizes financial institutions to reduce homeowners’ monthly mortgage payments, (2) develop clear and consistent guidelines for loan modifications that participants will be obligated to use, and (3) authorize judicial modifications of home mortgages in personal bankruptcy cases, which modifications must be accepted by the loan servicer or lender. The foregoing programs and actions remain subject to further clarification, and full implementation, and their full impact upon BB&T remains unpredictable at this time.

 

Other Regulatory Matters

 

BB&T and its subsidiaries and affiliates are subject to numerous examinations by federal and state banking regulators, as well as the SEC, the FINRA, the NYSE 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.

 

Corporate Governance

 

Information with respect to BB&T’s corporate governance policies and principles is presented on BB&T’s web site, www.BBT.com, and includes:

 

  ·  

BB&T’s Corporate Governance Guidelines

 

  ·  

BB&T’s Corporate Board of Directors

 

  ·  

Committees of the Corporate Board of Directors and Committee Charters

 

  ·  

BB&T’s Codes of Ethics for Directors, Senior Financial Officers and Employees

 

  ·  

Chief Executive Officer and Chief Financial Officer Certifications

 

  ·  

BB&T’s Executive Officers

 

  ·  

BB&T’s Policy and Procedures for Accounting and Legal Complaints

 

BB&T intends to disclose any substantive amendments or waivers to the Code of Ethics for Directors or Senior Financial Officers on our web site at www.BBT.com/Investor.

 

NYSE Certification

 

The annual certification of BB&T’s Chief Executive Officer required to be furnished to the NYSE pursuant to Section 303A.12(a) of the NYSE Listed Company Manual was previously filed with the NYSE on May 19, 2008.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

The following discussion and analysis of the consolidated financial condition and consolidated results of operations of BB&T Corporation and its subsidiaries for each of the three years in the period ended December 31, 2008, and related financial information, are presented in conjunction with the consolidated financial statements and related notes to assist in the evaluation of BB&T’s 2008 performance.

 

Reclassifications

 

In certain circumstances, reclassifications have been made to prior period information to conform to the 2008 presentation. Such reclassifications had no effect on previously reported shareholders’ equity or net income.

 

Mergers and Acquisitions Completed During 2008

 

On December 12, 2008, BB&T announced the acquisition of all the deposits of Haven Trust Bank (“Haven Trust”) of Duluth, Georgia through an agreement with the FDIC. Haven Trust operated four branches with approximately $506 million in deposits. In addition to the acquisition noted above, BB&T acquired eleven insurance agencies and one nonbank financial services company during 2008. All of the acquisitions during 2008 were immaterial in relation to the consolidated results of BB&T. See Note 2 “Business Combinations” in the “Notes to Consolidated Financial Statements” for further information regarding mergers and acquisitions.

 

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 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 changes in accounting principles and effects of new accounting pronouncements are discussed in detail in Note 1 in the “Notes to Consolidated Financial Statements.”

 

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 equal 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, 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

 

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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 detailed discussion of the methodology used in determining the allowance for loan and lease losses and the reserve for unfunded lending commitments is included in the “Overview and Description of Business—Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments.”

 

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 December 31, 2008, the percentage of total assets and total liabilities measured at fair value was 24.3% 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 December 31, 2008, 4.6% of assets measured at fair value were based on significant unobservable inputs. This is less than 1% of BB&T’s total assets. See Note 18 “Disclosures about Fair Value of Financial Instruments” in the “Notes to Consolidated Financial Statements” herein for additional disclosures regarding the fair value of financial instruments.

 

Securities

 

The fair values for 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 trading securities, the valuation of the security is subjective and may involve substantial judgment. As of December 31, 2008, BB&T had approximately $1.1 billion 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.

 

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

 

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results and updated projections. Please refer to Note 8 “Loan Servicing” in the “Notes to Consolidated Financial Statements” for quantitative disclosures reflecting the effect that changes in management’s assumptions would have on the fair value of MSRs.

 

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 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.

 

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 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 December 31, 2008, BB&T had $183 million of venture capital investments, which is less than 1% of total assets.

 

Intangible Assets

 

BB&T’s growth in business, profitability and market share over the past several years has been enhanced significantly by mergers and acquisitions. 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, 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. Please refer to Note 1 “Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” for a description of BB&T’s impairment testing process. 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. Management has evaluated the effect of lowering the estimated future cash flows or increasing the discount rate for each business unit by 10% and determined that no impairment of goodwill would have been recognized under this evaluation. However, as a result of the market disruption and the decline in market capitalization, the excess of the fair value over the carrying value of several reporting units continues to narrow. A continuing period of market disruption, or further market deterioration, may result in impairment of goodwill in the future.

 

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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 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 discount rate assumption used to measure the postretirement benefit obligations is set by reference to published high-quality bond indices, as well as certain hypothetical spot-rate yield curves. These yield curves were constructed from the underlying bond price and yield data collected as of the plan’s measurement date and are represented by a series of annualized, individual discount rates with durations ranging from six months to thirty years. Each discount rate in the curve was derived from an equal weighting of the double A or higher bond universe, apportioned into distinct maturity groups. For durations where no bond maturities were available, the discount rates for these maturities were extrapolated based on historical relationships from observable data in similar markets. These indices and hypothetical curves give only an indication of the appropriate discount rate because the cash flows of the bonds comprising the indices and curves do not match the projected benefit payment stream of the plan precisely. For this reason, we also consider the individual characteristics of the plan, such as projected cash flow patterns and payment durations, when setting the discount rate. Please refer to Note 14 “Benefit Plans” in the “Notes to Consolidated Financial Statements” for disclosures related to BB&T’s benefit plans, including quantitative disclosures reflecting the impact that changes in certain assumptions would have on service and interest costs and benefit obligations.

 

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.

 

Analysis of Financial Condition

 

A summary of the more significant fluctuations in balance sheet accounts is presented below.

 

For the year ended December 31, 2008, BB&T’s average assets totaled $136.9 billion, an increase of $10.5 billion, or 8.3%, compared to the 2007 average of $126.4 billion, primarily reflecting growth in average loans and leases and investment securities. Average loans and leases for 2008 were up $7.2 billion, or 8.2%, from 2007 and average investment securities increased $1.2 billion, or 5.1%, compared to 2007. The growth in average loans and leases was led by growth in average commercial loans and leases, which increased $5.1 billion, or 12.0%; average mortgage loans, which increased $1.1 billion, or 6.2%; and growth in average loans originated by BB&T’s specialized lending subsidiaries, which increased $445 million, or 8.6%. Total earning assets averaged $120.9 billion in 2008, an increase of $8.5 billion, or 7.6%, compared to 2007. These averages and growth rates include the effects of acquisitions.

 

BB&T’s average deposits totaled $88.8 billion, reflecting growth of $5.3 billion, or 6.4%, compared to 2007. The categories of deposits with the highest growth rates were other interest-bearing deposits, which increased $2.1 billion, or 26.7%, and other client deposits, which increased $2.4 billion, or 7.0%.

 

Short-term borrowings include Federal funds purchased, securities sold under repurchase agreements, master notes, short-term bank notes, treasury tax and loan deposit notes payable and other short-term borrowings. Average short-term borrowings totaled $10.6 billion for the year ended December 31, 2008, an increase of $1.3 billion, or 13.5%, from the 2007 average. BB&T also has used long-term debt for a significant portion of its funding needs. Long-term debt includes Federal Home Loan Bank (“FHLB”) advances, other secured borrowings by Branch Bank, capital securities issued by unconsolidated trusts and senior and subordinated debt issued by the Corporation and Branch Bank. Average long-term debt totaled $19.8 billion for the year ended December 31, 2008, up $1.8 billion, or 9.9%, compared to 2007.

 

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The compound annual rate of growth in average total assets for the five-year period ended December 31, 2008, was 9.9%. Over the same five-year period, average loans and leases increased at a compound annual rate of 10.5%, average securities increased at a compound annual rate of 7.5%, and average deposits grew at a compound annual rate of 9.3%. These balance sheet growth rates include the effect of acquisitions, as well as internal growth.

 

For more detailed discussions concerning the causes of these fluctuations, please refer to the sections that follow.

 

Securities

 

The securities portfolio provides earnings and liquidity, and is managed as part of the overall asset and liability management process to optimize net interest income and reduce exposure to interest rate risk. Management has historically emphasized investments with duration of five years or less to provide flexibility in managing the balance sheet in changing interest rate environments. Total securities increased 41.8% from year-end 2007 to year-end 2008, to a total of $33.2 billion at December 31, 2008. The growth in the securities portfolio reflects the initial deployment of the capital invested by the Treasury Department in connection with the CPP. The purchase of additional securities at year-end 2008 was the most efficient and effective means of deploying the capital investment by the Treasury Department. It is anticipated that cash flows from pay downs and maturities from the securities portfolio will be reinvested into loans during 2009, and the overall size of the securities portfolio will eventually decline to a more traditional level.

 

As of December 31, 2008, the total securities portfolio included $376 million in trading securities and $32.8 billion of available-for-sale securities. The available-for-sale portfolio comprised 98.9% of total securities at December 31, 2008. Management believes that the high concentration of securities in the available-for-sale portfolio allows flexibility in the management of the overall investment portfolio, consistent with the objectives of optimizing profitability, mitigating interest rate risk, supporting capital and providing liquidity.

 

The following table provides information regarding the composition of BB&T’s securities portfolio for the years presented:

 

Table 9

Composition of Securities Portfolio

 

     December 31,
     2008    2007    2006
     (Dollars in millions)

Trading securities:

   $ 376    $ 1,009    $ 2,147
                    

Securities available for sale:

        

U.S. government-sponsored entities (GSE)

     1,333      9,807      9,119

Mortgage-backed securities issued by GSE

     27,430      8,221      8,297

States and political subdivisions

     2,077      1,392      571

Non-agency mortgage-backed securities

     1,098      1,720      1,571

Equity and other securities

     905      1,279      1,163
                    

Total securities available for sale

     32,843      22,419      20,721
                    

Total securities

   $ 33,219    $ 23,428    $ 22,868
                    

 

At December 31, 2008, trading securities reflected on BB&T’s consolidated balance sheet totaled $376 million compared to $1.0 billion at December 31, 2007. The decline in the trading portfolio was largely the result of a reduction in Scott & Stringfellow’s trading inventory primarily due to management’s decision to reduce risk associated with trading activities.

 

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The available-for-sale securities portfolio is primarily composed of mortgage-backed securities issued by U.S. government-sponsored entities. Mortgage-backed securities comprised 83.5% of the total available-for-sale securities portfolio at year-end 2008. The duration of the mortgage-backed securities was 1.60 years at December 31, 2008 compared to 2.91 years at December 31, 2007. The duration of the entire available-for-sale portfolio at December 31, 2008 was 2.77 years compared to 2.43 years at December 31, 2007.

 

The market value of the available-for-sale portfolio at year-end 2008 was $517 million lower than the amortized cost of these securities. At December 31, 2008, BB&T’s available-for-sale portfolio had net unrealized losses, net of deferred income taxes, of $324 million, which are reported as a component of shareholders’ equity. At December 31, 2007, the available-for-sale portfolio had net unrealized losses of $28 million, net of deferred income taxes. The decline in the fair value of the securities available-for-sale portfolio during 2008 was largely a result of declines in the value of non-agency mortgage-backed securities and municipal securities, as demand for securities in these asset classes has waned due to investor concerns about real estate related assets and the overall state of the economy. Declines in the values of these portfolios were partially offset by increases in the value of government sponsored entity securities.

 

During the year ended December 31, 2008, BB&T sold approximately $21.0 billion of available-for-sale securities and realized net gains totaling $211 million. In addition, BB&T periodically evaluates available-for-sale securities for other-than-temporary impairment. Based on its evaluations during 2008, BB&T recorded $104 million of other-than-temporary impairments related to certain debt and equity securities. No other-than-temporary impairments were recorded during 2007 and 2006.

 

On December 31, 2008, BB&T also held certain investment securities having continuous unrealized loss positions for more than 12 months. As of December 31, 2008, the unrealized losses on these securities totaled $412 million. Substantially all of these losses were in non-agency mortgage-backed and municipal securities. At December 31, 2008, all of the available-for-sale debt securities with the exception of four non-agency mortgage-backed securities were investment grade. During the fourth quarter of 2008, four non-agency mortgage-backed securities, with a book value of approximately $293 million, were downgraded below investment grade. BB&T evaluated all of its non-agency mortgage-backed securities based on the underlying collateral as well as capital structure. BB&T holds the senior position on all of the non-agency mortgage-backed securities. The unrealized losses for all of the securities having continuous unrealized loss positions for more than 12 months are the result of changes in market interest rates and liquidity. Based on the evaluation on December 31, 2008, there were no credit losses evident from these securities. At December 31, 2008, BB&T had the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses.

 

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The following table presents BB&T’s securities portfolio at December 31, 2008, segregated by major category with ranges of maturities and average yields disclosed.

 

Table 10

Securities

 

     December 31, 2008  
     Fair Value    Weighted
Average Yield (1)
 
     (Dollars in millions)  
U.S. government-sponsored entities (GSE):      

Within one year

   $ 258    4.12 %

One to five years

     998    4.12  

Five to ten years

     56    5.18  

After ten years

     21    5.87  
         

Total

     1,333    4.19  
         
Mortgage-backed securities issued by GSE (2):      

One to five years

     126    3.80  

Five to ten years

     1,053    4.38  

After ten years

     26,251    4.85  
         

Total

     27,430    4.83  
         
Obligations of states and political subdivisions:      

Within one year

     106    6.84  

One to five years

     114    6.88  

Five to ten years

     72    7.15  

After ten years

     1,785    6.65  
         

Total

     2,077    6.68  
         
Non-agency mortgage-backed securities (2):      

Five to ten years

     70    5.33  

After ten years

     1,028    5.75  
         

Total

     1,098    5.73  
         
Other securities:      

Within one year

     3    3.63  

One to five years

     101    5.03  

Five to ten years

     111    7.89  

After ten years

     8    2.61  
         

Total

     223    6.29  
         
Trading securities and securities with no stated maturity (3)      1,058    1.82  
         

Total securities (4)

   $ 33,219    4.89  
         

 

(1)   Yields on tax-exempt securities are calculated on a taxable-equivalent basis using the statutory
  federal   income tax rate of 35%. Yields for available-for-sale securities are calculated based on the
  amortized   cost of the securities.
(2)   For purposes of the maturity table, mortgage-backed securities, which are not due at a single
  maturity   date, have been allocated over maturity groupings based on the weighted average
  contractual   maturities of underlying collateral.
(3)   Trading securities and securities with no stated maturity include equity investments that totaled
  $682   million and trading securities that totaled $376 million.
(4)   Includes securities available-for-sale and trading securities of $32.8 billion and $376 million, respectively.

 

The fully taxable equivalent (“FTE”) yield on the total securities portfolio was 5.05% for the years ended December 31, 2008 and 2007. The FTE yield remained stable despite general declines in interest rates due to

 

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changes in the overall composition of the securities portfolio with a larger concentration of higher-yielding mortgage-backed and municipal securities. The yield on mortgage-backed securities issued by government-sponsored entities decreased from 5.15% to 4.94% and the FTE yield on state and municipal securities decreased from 6.65% last year to 6.33% in the current year, while the yield on U.S. government-sponsored entity securities increased from 4.53% in 2007 to 4.86% in 2008. The yield on non-agency mortgage-backed securities increased from 5.78% during 2007 to 5.81% in 2008.

 

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 while maintaining strong asset quality. The various categories of loan products offered by BB&T are discussed under “Lending Activities” in the “Overview and Description of Business” section herein. BB&T is a full-service lender with approximately one-half of its loan portfolio to businesses and one-half to individual consumers. Average commercial loans, including lease receivables, comprised 50.0% of the loan portfolio during 2008, compared to 48.3% in 2007. Average direct retail loans comprised 16.4% of average loans in 2008, compared to 17.6% in 2007. Average sales finance loans comprised 6.5% of average loans in 2008, compared to 6.7% in 2007. Average revolving credit loans comprised 1.7% of average loans in 2008 and 2007. Average mortgage loans comprised 19.5% of average total loans for 2008, compared to 19.9% a year ago. Average loans originated by BB&T’s specialized lending subsidiaries represented 5.9% of average total loans in 2008 compared to 5.8% in the prior year.

 

BB&T’s loan portfolio, excluding loans held for sale, increased $6.3 billion, or 7.0%, compared to year-end 2007. Average total loans and leases for 2008 increased $7.2 billion, or 8.2%, compared to 2007. The growth in the loan portfolio was primarily a result of strong internal growth in the commercial and industrial lending portfolio, as well as growth in the mortgage and specialized lending portfolios. The growth in average loans during 2008, includes the impact of the acquisition of Coastal Financial Corporation (“Coastal”), which was acquired during 2007.

 

Average commercial loans and leases increased $5.1 billion, or 12.0%, in 2008 as compared to 2007. Overall, the commercial loan and lease portfolio showed strong growth during 2008. The mix of the commercial loan portfolio has shifted somewhat, as commercial real estate lending has slowed due to a slower real estate market and management’s efforts to reduce exposure to the real estate market. This has been offset by an increased focus on commercial and industrial loans. BB&T experienced stronger trends in the fourth quarter of 2008 both in commercial and industrial lending and income producing commercial real estate lending primarily due to challenges facing many in-market competitors that has allowed BB&T to attract new clients.

 

The pace of growth in the direct retail loan portfolio slowed further in 2008, due to a difficult residential real estate market, which decreased demand for home equity loan products. Sales finance loans and revolving credit reflected solid growth rates of 5.3% and 14.0%, respectively, during 2008. BB&T concentrates its efforts on the highest quality borrowers in both of these product markets. Sales finance loans were negatively affected by weak auto sales; however BB&T has been gaining market share in this portfolio as many competitors have withdrawn from indirect automobile lending in our footprint.

 

Average mortgage loans increased $1.1 billion, or 6.2%, compared to 2007. Management views mortgage loans as an integral part of BB&T’s relationship-based credit culture. BB&T is a large originator of residential mortgage loans, with 2008 originations of $16.4 billion. The vast majority of mortgage loans originated during 2008 were conforming mortgage loans that were either sold in the secondary market or held in the loans held for sale portfolio at year-end. Loans held for sale, which is almost entirely comprised of government-conforming mortgage loans increased 82.8% compared to year-end 2007 as refinance activity significantly increased late in the fourth quarter due to the historically low loan rates for mortgages. At December 31, 2008, BB&T was servicing $40.7 billion in residential mortgages owned by third parties and $19.0 billion of mortgage loans owned by BB&T, including $18.4 billion classified as mortgage loans and $573 million classified as securities available for sale.

 

Average loans originated by BB&T’s specialized lending subsidiaries increased $445 million, or 8.6%, compared to 2007. The growth in the specialized lending portfolio was driven by strong internal loan growth in

 

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automobile lending, as many competitors exited this business during 2008. Additionally, healthy growth trends were evident in premium finance and equipment finance during the fourth quarter.

 

The average annualized FTE yield for 2008 for the total loan portfolio was 6.35% compared to 7.67% for the prior year. The 132 basis point decrease in the average yield on loans resulted primarily from the repricing of variable rate loans and maturing loans with higher yields that were replaced with lower-yielding loans and leases. The prime rate, which is the basis for pricing many commercial and consumer loans, declined 400 basis points during 2008 to 3.25% at year-end as the Federal Reserve Board lowered rates seven times during 2008 in response to the economic recession, challenges in the residential real estate markets, and disruptions in other financial markets. The average prime rate in effect during 2008 and 2007 was 5.09% and 8.05%, respectively.

 

Asset Quality and Credit Risk Management

 

BB&T has established the following general practices to manage credit risk:

 

  ·  

limiting the amount of credit that individual lenders may extend;

 

  ·  

establishing a process for credit approval accountability;

 

  ·  

careful initial underwriting and analysis of borrower, transaction, market and collateral risks;

 

  ·  

ongoing servicing of individual loans and lending relationships;

 

  ·  

continuous monitoring of the portfolio, market dynamics and the economy; and

 

  ·  

periodically reevaluating the bank’s strategy and overall exposure as economic, market and other relevant conditions change.

 

BB&T’s lending strategy, which focuses on relationship-based lending within our markets and smaller individual loan balances, continues to produce credit quality that is better than its peer group of financial institutions. As measured by relative levels of nonperforming assets and net charge-offs, BB&T’s asset quality has remained significantly better than published industry averages.

 

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The following table summarizes asset quality information for the past five years.

 

Table 11

Asset Quality

 

     December 31,  
     2008     2007     2006     2005     2004  
     (Dollars in millions)  

Nonaccrual loans and leases

   $ 1,413     $ 502     $ 260     $ 229     $ 269  

Foreclosed property

     617       194       89       71       89  
                                        

Nonperforming assets

   $ 2,030     $ 696     $ 349     $ 300     $ 358  
                                        
          

Loans 90 days or more past due and still accruing (2)

   $ 431     $ 223     $ 102     $ 103     $ 100  
                                        
          

Loans 30—89 days past due (2)

   $ 2,047     $ 1,354     $ 952     $ 695     $ 619  
                                        

Asset Quality Ratios: (1)

          

Nonaccrual loans and leases as a percentage of loans and leases

     1.43 %     .55 %     .31 %     .31 %     .39 %

Nonperforming assets as a percentage of:

          

Total assets

     1.34       .52       .29       .27       .36  

Loans and leases plus foreclosed property

     2.04       .76       .42       .40       .52  

Loans 90 days or more past due and still accruing as a percentage of loans and leases (2)

     .44       .24       .12       .14       .15  

Loans 30-89 days past due as a percentage of loans and leases (2)

     2.07       1.48       1.14       .93       .91  

Net charge-offs as a percentage of average loans and leases

     .89       .38       .27       .30       .36  

Allowance for loan and lease losses as a percentage of loans and leases

     1.60       1.10       1.06       1.10       1.18  

Allowance for loan and lease losses as a percentage of loans and leases held for investment

     1.62       1.10       1.07       1.11       1.19  

Ratio of allowance for loan and leases to:

          

Net charge-offs

     1.85 x     2.97 x     4.12 x     3.84 x     3.42 x

Nonaccrual loans and leases

     1.11       2.00       3.41       3.60       2.99  

 

NOTE:   (1)   Items referring to loans and leases are net of unearned income and, except for loans and leases held for investment, include loans held for sale.
  (2)   Excludes mortgage loans guaranteed by GNMA that BB&T does not have the obligation to repurchase.

 

During 2008, BB&T’s credit quality declined as a result of a very challenging economic environment. Nonperforming assets and credit losses increased further during the year as a result of the distressed residential real estate market and economic recession. Nonperforming assets increased from .52% of total assets at December 31, 2007 to 1.34% at year-end 2008. Net charge-offs for 2008 were .89% of average loans and leases and reflected an increase of 51 basis points from the .38% level recorded during 2007. The increases in nonperforming assets and net charge-offs were driven by continued deterioration in residential real estate markets and the overall economy with the largest concentration of credit issues occurring in Georgia, Florida and metro Washington, D.C. If the economy continues to deteriorate as is currently forecasted, management anticipates that net charge-offs and nonperforming assets will continue to increase into 2009.

 

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The following table summarizes nonperforming assets and past due loans by loan type for the past three years.

 

Table 12

Summary of Nonperforming Assets and Past Due Loans

 

     December 31,  
     2008     2007     2006  
     (Dollars in millions)  

Nonaccrual loans and leases

      

Commercial loans and leases

   $ 845     $ 273     $ 129  

Direct retail

     89       43       39  

Sales finance

     7       5       2  

Mortgage

     375       119       53  

Specialized lending

     97       62       37  
                        

Total nonaccrual loans and leases

     1,413       502       260  
                        

Foreclosed real estate

     538       143       54  

Other foreclosed property

     79       51       35  
                        

Total nonperforming assets

   $ 2,030     $ 696     $ 349  
                        

Nonaccrual loans and leases as a percentage of total loans and leases

      

Commercial loans and leases

     .85 %     .30 %     .16 %

Direct retail

     .09       .05       .05  

Sales finance

     .01       —         —    

Mortgage

     .38       .13       .06  

Specialized lending

     .10       .07       .04  
                        

Total nonaccrual loans and leases as a percentage of loans and leases

     1.43 %     .55 %     .31 %
                        

Loans 90 days or more past due and still accruing interest (1)

      

Commercial loans and leases

   $ 86     $ 40     $ 14  

Direct retail

     117       58       20  

Sales finance

     26       17       17  

Revolving credit

     23       15       6  

Mortgage

     165       85       37  

Specialized lending

     14       8       8  
                        

Total loans 90 days or more past due and still accruing interest

   $ 431     $ 223     $ 102  
                        

Total loans 90 days or more past due and still accruing interest as a percentage of total loans and leases

      

Commercial loans and leases

     .09 %     .04 %     .02 %

Direct retail

     .12       .06       .02  

Sales finance

     .03       .02       .02  

Revolving credit

     .02       .02       .01  

Mortgage

     .17       .09       .04  

Specialized lending

     .01       .01       .01  
                        

Total loans 90 days or more past due and still accruing interest as a percentage of total loans and leases

     .44 %     .24 %     .12 %
                        

Loans 30—89 days past due (1)

      

Commercial loans and leases

   $ 594     $ 284     $ 154  

Direct retail

     270       192       156  

Sales finance

     146       105       69  

Revolving credit

     34       24       18  

Mortgage

     690       506       402  

Specialized lending

     313       243       153  
                        

Total loans 30—89 days past due

   $ 2,047     $ 1,354     $ 952  
                        

Total loans 30—89 days past due as a percentage of total loans and leases

      

Commercial loans and leases

     .60 %     .31 %     .19 %

Direct retail

     .27       .21       .19  

Sales finance

     .15       .11       .08  

Revolving credit

     .03       .03       .02  

Mortgage

     .70       .55       .48  

Specialized lending

     .32       .27       .18  
                        

Total loans 30—89 days past due as a percentage of total loans and leases

     2.07 %     1.48 %     1.14 %
                        

 

(1)   Excludes mortgage loans guaranteed by GNMA that BB&T does not have the obligation to repurchase.

 

 

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Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments

 

The allowance for loan and lease losses and the reserve for unfunded lending commitments compose BB&T’s allowance for credit losses. The allowance for credit losses totaled $1.6 billion at December 31, 2008, an increase of 58.3% compared to $1.0 billion at the end of 2007. The allowance for loan and lease losses, as a percentage of loans and leases held for investment, was 1.62% at December 31, 2008, compared to 1.10% at year-end 2007. The allowance for credit losses increased by $592 million during 2008, primarily as a result of higher loss rates for residential real estate related lending, and their effect on the overall allowance model. The increase of $592 million included an increase of $570 million in the allowance for loan and lease losses and $22 million in the reserve for unfunded lending commitments. These increases resulted from increased migration of loans and lending commitments to higher risk grades, with the most significant increases occurring in the single family residential real estate acquisition, development and construction loan portfolio. Please refer to Note 5 “Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments” in the “Notes to Consolidated Financial Statements” for additional disclosures.

 

Information relevant to BB&T’s allowance for loan and lease losses for the last five years is presented in the following table. The table is presented using regulatory classifications.

 

Table 13

Analysis of Allowance for Credit Losses

 

     December 31,  
     2008     2007     2006     2005     2004  
     (Dollars in millions)  

Balance, beginning of period

   $ 1,015     $ 888     $ 830     $ 828     $ 793  
                                        

Charge-offs:

          

Commercial, financial and agricultural

     (94 )     (40 )     (32 )     (52 )     (60 )

Real estate

     (427 )     (93 )     (46 )     (45 )     (61 )

Consumer

     (383 )     (264 )     (194 )     (174 )     (165 )

Lease receivables

     (13 )     (8 )     (5 )     (6 )     (11 )
                                        

Total charge-offs

     (917 )     (405 )     (277 )     (277 )     (297 )
                                        

Recoveries:

          

Commercial, financial and agricultural

     10       11       12       14       17  

Real estate

     8       8       7       8       10  

Consumer

     47       47       41       39       34  

Lease receivables

     1       1       1       2       1  
                                        

Total recoveries

     66       67       61       63       62  
                                        

Net charge-offs

     (851 )     (338 )     (216 )     (214 )     (235 )
                                        

Provision charged to expense

     1,445       448       240       217       249  
                                        

Allowance for loans (sold) acquired, net

     (2 )     17       34       (1 )     21  
                                        

Balance, end of period

   $ 1,607     $ 1,015     $ 888     $ 830     $ 828  
                                        

Average loans and leases (1)

   $ 95,195     $ 87,952     $ 79,313     $ 71,517     $ 66,107  
                                        

Net charge-offs as a percentage of average loans and leases (1)

     .89 %     .38 %     .27 %     .30 %     .36 %
                                        

 

(1)   Loans and leases are net of unearned income and include loans held for sale.

 

Deposits and Other Borrowings

 

Client deposits generated through the BB&T banking network are the largest source of funds used to support asset growth. Total deposits at December 31, 2008, were $98.6 billion, an increase of $11.8 billion, or 13.7%, compared to year-end 2007. The increase in deposits during 2008 was driven by a $5.0 billion, or 49.9%, increase in other interest-bearing deposits and a $3.9 billion, or 11.0%, increase in other client deposits, which

 

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include money rate savings accounts, investor deposit accounts, savings accounts, individual retirement accounts and other time deposits. Interest checking accounts also increased by $1.4 billion from the prior year and client certificates of deposit (“CDs”) increased by $965 million. For the year ended December 31, 2008, total deposits averaged $88.8 billion, an increase of $5.3 billion, or 6.4%, compared to 2007. The increase in average deposits was primarily the result of a $2.4 billion, or 7.0%, increase in average other client deposits, and a $2.1 billion, or 26.7%, increase in average other interest-bearing deposits. The overall increase in year-end deposits included the impact of the acquisition of $506 million in deposits from Haven Trust, which was completed late in the fourth quarter of 2008. The increase in average deposits also included the impact of the acquisition of Coastal which was completed during 2007.

 

Average other client deposits represent the largest component of BB&T’s deposits and composed 41.3% of total average deposits for 2008, compared to 41.0% during 2007. CDs are the second largest source and composed 30.3% of total average deposits for 2008 compared to 31.2% for 2007. The remainder of client deposits consists of noninterest-bearing deposits and interest-checking accounts, which comprised 17.4% of total average deposits in the current year, compared to 18.5%, for last year. BB&T also gathers other interest-bearing deposits through wholesale funding products, which include negotiable certificates of deposit and Eurodollar deposits. Average other interest-bearing deposits represented 11.0% of total average deposits for 2008, as compared to 9.3% for 2007.

 

BB&T experienced solid deposit growth during 2008, which accelerated during the second half of the year, as BB&T gained many new client relationships from competitors. The growth in deposits during 2008 included strong increases in corporate banking relationships and investor deposit accounts, as BB&T focused its efforts on these segments. In addition, BB&T was able to achieve growth in client CDs, even as rates declined to historical lows throughout the year. Average noninterest-bearing deposits declined slightly in 2008, as business clients continued to minimize their balances in noninterest-bearing accounts. The decline in business noninterest-bearing balances was offset by growth in balances from consumer clients. The growth in other interest-bearing deposits is largely driven by the relative cost of these funding sources compared to other short-term and long-term borrowings.

 

The average rate paid on interest-bearing deposits dropped to 2.50% during 2008, from 3.73% in 2007. The average cost for interest-bearing deposits declined during 2008 as management was able to lower rates in response to the Federal Reserve cutting interest rates. The average rates paid on the various categories of interest-bearing deposits also decreased as follows: CDs decreased to 3.66% in the current year from 4.61% in 2007; other client deposits decreased to 1.67% in the current year from 2.82% in 2007; interest checking decreased to 1.19% in 2008 from 2.31% in 2007; and other interest-bearing deposits decreased to 2.71% in 2008 from 5.15% in 2007.

 

BB&T also uses various types of short-term borrowings in meeting funding needs. While client deposits remain the primary source for funding loan originations, management uses short-term borrowings as a supplementary funding source for loan growth and other balance sheet management purposes. Short-term borrowings comprised 7.7% of total funding needs on average in 2008 as compared to 7.4% in 2007. See Note 9 “Federal Funds Purchased, Securities Sold Under Agreements to Repurchase and Short-Term Borrowed Funds” in the “Notes to Consolidated Financial Statements” herein for further disclosure. The types of short-term borrowings used by the Corporation include Federal funds purchased, which comprised 5.4% of total short-term borrowings, and securities sold under repurchase agreements, which comprised 27.2% of short-term borrowings at year-end 2008. Master notes, which are short-term borrowings issued to BB&T’s clients, represented 15.8% of total short-term borrowings at December 31, 2008. U.S. Treasury tax and loan deposit notes, borrowings under the treasury auction facility and short-term bank notes are also used to meet short-term funding needs and comprised the remaining 51.6% of these types of funding sources as of December 31, 2008. Short-term borrowings at the end of 2008 were $10.8 billion, an increase of $154 million, or 1.4% compared to year-end 2007. Average short-term borrowings totaled $10.6 billion during 2008 compared to $9.3 billion last year, an increase of 13.5%. The rates paid on average short-term borrowings declined from 4.55% in 2007 to 2.44% during 2008. The decrease in the cost of short-term borrowings primarily resulted from a lower average Federal funds rate in effect during 2008 compared to 2007. At December 31, 2008, the targeted Federal funds rate was a range of zero percent to

 

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.25%. The following table summarizes certain pertinent information for the past three years with respect to BB&T’s short-term borrowings:

 

Table 14

Federal Funds Purchased, Securities Sold Under

Agreements to Repurchase and Short-Term Borrowed Funds

 

     As of /For the Year Ended
December 31,
 
     2008     2007     2006  
     (Dollars in millions)  
Securities Sold Under Agreements to Repurchase       

Maximum outstanding at any month-end during the year

   $ 2,929     $ 2,776     $ 3,080  

Balance outstanding at end of year

     2,929       2,530       2,090  

Average outstanding during the year

     2,314       2,160       2,608  

Average interest rate during the year

     2.40 %     4.39 %     4.35 %

Average interest rate at end of year

     1.41       3.18       4.24  
Federal Funds Purchased and Short-term Borrowed Funds       

Maximum outstanding at any month-end during the year

   $ 13,346     $ 9,148     $ 6,036  

Balance outstanding at end of year

     7,859       8,104       5,997  

Average outstanding during the year

     8,266       7,165       4,398  

Average interest rate during the year

     2.17 %     4.39 %     4.27 %

Average interest rate at end of year

     .67       3.79       4.83  

 

BB&T also uses long-term debt to provide both funding and, to a lesser extent, regulatory capital. Long-term debt comprised 14.5% of total funding needs on average during 2008 and 14.3% in 2007. See Note 10 “Long-Term Debt” in the “Notes to Consolidated Financial Statements” herein for further disclosure. Long-term debt at December 31, 2008, totaled $18.0 billion, a decrease of $661 million, or 3.5%, from year-end 2007. For the year ended December 31, 2008, average long-term debt increased $1.8 billion, or 9.9%, compared to the average for 2007. BB&T’s long-term debt consists primarily of FHLB advances, which composed 54.6% of total outstanding long-term debt at December 31, 2008, subordinated notes of BB&T Corporation, which composed 17.2% of the year-end balance, and junior subordinated debt to unconsolidated trusts issued by the Corporation, which composed 13.0% of total outstanding long-term debt at December 31, 2008. The remaining long-term debt primarily consists of both unsecured senior and subordinated borrowings by Branch Bank. FHLB advances are cost-effective long-term funding sources that provide BB&T with the flexibility to structure the debt in a manner that aids in the management of interest rate risk and liquidity. The average rate paid on long-term debt decreased from 5.46% during 2007 to 4.25% during 2008 primarily because BB&T has issued floating rate instruments or elected to swap a portion of its fixed-rate long-term debt to floating rates.

 

During the fourth quarter of 2008, BB&T received notice that its $4 billion privately financed debt scheduled to mature in 2010 would be called effective October 14, 2008. The financing was called by BB&T’s counterparty because it was no longer profitable to the counterparty due to changes in interest rates. This decline was partially offset by increases in FHLB advances, which were used due to the more competitive rates obtained compared to other financing options. In addition, BB&T and Branch Bank issued new long-term debt during the third quarter of 2008 that provides additional regulatory capital. In September 2008, BB&T Capital Trust V (“BBTCT V”) issued $450 million of Capital Securities, with a fixed interest rate of 8.95% through September 15, 2063 and a floating rate, if extended, through September 15, 2068. BBTCT V, a statutory business trust created under the laws of the State of Delaware, was formed by BB&T for the sole purpose of issuing the Capital Securities and investing the proceeds thereof in Junior Subordinated Debentures issued by BB&T. BB&T has made guarantees which, taken collectively, fully, irrevocably, and unconditionally guarantee, on a subordinated basis, all of BBTCT V’s obligations under the Trust and Capital Securities. BBTCT V’s sole asset is the Junior Subordinated Debentures issued by BB&T which have an initial maturity on September 15, 2063 and a final maturity date on September 15, 2068. The Junior Subordinated Debentures are subject to early redemption (i) in whole, but not in part, at any time under certain prescribed limited circumstances or (ii) in whole, or in part, pursuant to the call provisions after September 15, 2013. The Capital Securities of BBTCT V are subject to mandatory redemption in whole, or in part, upon repayment of the Junior Subordinated Debentures at maturity or their earlier redemption.

 

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Liquidity needs are a primary consideration in evaluating funding sources. BB&T’s strategy is to maintain funding flexibility in order that the Corporation may react rapidly to opportunities that may become available in the marketplace. BB&T will continue to focus on traditional core funding strategies, supplemented as needed by the types of borrowings discussed above. See “Liquidity” herein for additional discussion.

 

Shareholders’ Equity

 

Shareholders’ equity totaled $16.0 billion at December 31, 2008, an increase of $3.4 billion, or 27.0%, from year-end 2007. This increase reflects the $3.1 billion of capital invested by the U.S. Treasury in the fourth quarter of 2008. In addition, during 2008, BB&T issued 13.3 million common shares of stock in connection with business combinations, equity-based incentive plans, the Company’s dividend reinvestment plan and a private placement of shares sold to the Company’s pension plan. These transactions increased shareholders’ equity by $357 million. Additionally, growth of $491 million in shareholders’ equity resulted from BB&T’s earnings retained after dividends to common shareholders. This growth was partially offset by a decrease to shareholders’ equity of $628 million from other comprehensive income, which principally relates to decreases in the fair values of available-for-sale securities and pension assets.

 

Analysis of Results of Operations

 

Consolidated net income for 2008 totaled $1.52 billion. Net income available to common shareholders totaled $1.50 billion, which generated basic earnings per common share of $2.73 and diluted earnings per common share of $2.71. Net income for 2007 was $1.73 billion and net income for 2006 totaled $1.53 billion. Basic earnings per common share were $3.17 in 2007 and $2.84 in 2006, while diluted earnings per common share were $3.14 and $2.81 for 2007 and 2006, respectively.

 

Two important and commonly used measures of bank profitability are return on average assets (net income as a percentage of average total assets) and return on average common shareholders’ equity (net income available to common shareholders as a percentage of average common shareholders’ equity). BB&T’s returns on average assets were 1.11%, 1.37%, and 1.34% for the years ended December 31, 2008, 2007 and 2006, respectively. The returns on average common shareholders’ equity were 11.44%, 14.25%, and 13.35% for the last three years.

 

Net Interest Income

 

Net interest income is BB&T’s primary source of revenue. Net interest income is influenced by a number of factors, including the volume, mix and maturity of interest-earning assets and interest-bearing liabilities and the interest rates earned and paid thereon. The difference between rates earned on interest-earning assets and the cost of the supporting funds (with an adjustment made to tax-exempt items to provide comparability with taxable items, i.e. the “FTE” adjustment) is measured by the net interest margin. The accompanying table presents the dollar amount of changes in interest income and interest expense, and distinguishes between the changes related to increases or decreases in average outstanding balances of interest-earning assets and interest-bearing liabilities (volume), and the changes related to increases or decreases in average interest rates on such assets and liabilities (rate). Changes attributable to both volume and rate have been allocated proportionately.

 

For 2008, net interest income on an FTE-adjusted basis totaled $4.3 billion, compared with $3.9 billion in 2007 and $3.8 billion in 2006. Net interest income increased 9.4% in 2008 compared to 2007. The increase in net interest income during 2008 resulted primarily from liability costs repricing more quickly as short-term rates declined throughout the year. Net interest income increased 4.0% in 2007 compared to 2006, as the benefit from strong average earning asset growth of 10.6% was partially offset by the adverse impact from higher short-term rates in 2007 compared to 2006, which caused funding costs to increase at a faster pace than interest on earning assets.

 

The FTE-adjusted net interest margin is the primary measure used in evaluating the gross profit margin from the portfolios of earning assets. The FTE-adjusted net interest margin was 3.58% in 2008, 3.52% in 2007 and 3.74% in 2006. The average yield on interest earning assets decreased 105 basis points compared to the average yield during 2007, while the average cost of funds over the same time period decreased 130 basis points. The Federal Reserve Board began lowering rates in September 2007 and lowered short-term rates by 100 basis points in the last four months of 2007 and an additional 400 basis points during 2008. While many of BB&T’s liabilities

 

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reprice in a short period of time after a change in rates, there is typically a delay of between three and eighteen months before BB&T’s assets will be repriced. The improvement in the net interest margin during 2008 was caused by a combination of factors. BB&T entered 2008 in a liability sensitive position, which means that interest-bearing liabilities generally reprice more frequently than interest-earning assets. This resulted in lower funding costs throughout 2008, as interest-rates declined. Additionally, BB&T experienced some improvement in loan pricing in 2008. The net interest margin was negatively impacted five basis points by an adjustment of $67 million, as a result of a change in the income recognition on leveraged lease transactions in connection with BB&T’s settlement with the Internal Revenue Service (“IRS”). In addition, the net interest margin has been negatively affected by the higher level of non-performing assets in 2008. The net interest margin contracted in 2007 for four primary reasons. First, the mix of asset growth shifted from higher-yielding commercial real estate and direct retail loans to lower-yielding mortgage loans and commercial and industrial loans. Second, higher levels of nonaccruals have negatively affected net interest income and the net interest margin. Third, increased liability costs, specifically a shift to higher-cost deposits from lower-cost transaction accounts and additional funding costs associated with a payment to the IRS that was made in January 2007 as described in the “Provision for Income Taxes” section below, contributed to the margin compression.

 

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Table 15

FTE Net Interest Income and Rate / Volume Analysis

For the Years Ended December 31, 2008, 2007 and 2006

 

                                              2008 vs. 2007     2007 vs. 2006  
    Average Balances   Yield / Rate     Income / Expense   Increase
(Decrease)
    Change due to     Increase
(Decrease)
    Change due to  
    2008   2007   2006   2008     2007     2006     2008   2007   2006     Rate     Volume       Rate     Volume  
    (Dollars in millions)  
Assets                              

Securities, at amortized cost (1):

                             

U.S. government sponsored-entities (GSE)

  $ 4,539   $ 10,099   $ 11,354   4.86 %   4.53 %   3.96 %   $ 221   $ 458   $ 449   $ (237 )   $ 31     $ (268 )   $ 9     $ 62     $ (53 )

Mortgage-backed securities issued by GSE

    14,708     8,265     6,990   4.94     5.15     4.97       727     425     347     302       (18 )     320       78       13       65  

States and political subdivisions

    1,841     873     607   6.33     6.65     6.89       116     58     42     58       (3 )     61       16       (1 )     17  

Non-agency mortgage-backed securities

    1,642     1,669     706   5.81     5.78     5.45       95     96     38     (1 )     1       (2 )     58       2       56  

Other securities

    1,138     1,182     829   4.72     7.04     6.11       54     83     51     (29 )     (25 )     (4 )     32       9       23  

Trading securities

    629     1,223     862   3.80     4.62     3.34       24     57     29     (33 )     (9 )     (24 )     28       13       15  
                                                                                                     

Total securities (5)

    24,497     23,311     21,348   5.05     5.05     4.48       1,237     1,177     956     60       (23 )     83       221       98       123  

Other earning assets (2)

    1,160     1,042     911   2.43     4.88     5.69       28     51     52     (23 )     (29 )     6       (1 )     (9 )     8  

Loans and leases, net of unearned income (1)(3)(4)

                             

Commercial loans and leases

    47,559     42,475     38,966   5.50     7.76     7.78       2,617     3,296     3,033     (679 )     (1,040 )     361       263       (9 )     272  

Direct retail loans

    15,580     15,471     14,904   6.47     7.36     7.19       1,008     1,139     1,072     (131 )     (139 )     8       67       26       41  

Sales finance loans

    6,216     5,903     5,385   6.62     6.66     6.01       412     393     323     19       (2 )     21       70       37       33  

Revolving credit loans

    1,664     1,460     1,331   10.95     12.97     12.60       182     189     168     (7 )     (32 )     25       21       5       16  

Mortgage loans

    18,577     17,489     15,482   6.00     5.99     5.70       1,114     1,048     883     66       1       65       165       47       118  

Specialized lending

    5,599     5,154     3,245   12.78     13.27     15.22       715     684     494     31       (27 )     58       190       (70 )     260  
                                                                                                     

Total loans and leases

    95,195     87,952     79,313   6.35     7.67     7.53       6,048     6,749     5,973     (701 )     (1,239 )     538       776       36       740  

Total earning assets

    120,852     112,305     101,572   6.05     7.10     6.87       7,313     7,977     6,981     (664 )     (1,291 )     627       996       125       871  
                                                                                                     

Non-earning assets

    16,029     14,115     12,756                        
                                         

Total assets

  $ 136,881   $ 126,420   $ 114,328                        
                                         
Liabilities and Shareholders’ Equity                              

Interest-bearing deposits:

                             

Interest-checking

  $ 2,376   $ 2,297   $ 2,164   1.19     2.31     1.87       28     53     40     (25 )     (27 )     2       13       10       3  

Other client deposits

    36,676     34,273     31,462   1.67     2.82     2.43       612     968     764     (356 )     (420 )     64       204       132       72  

Client certificates of deposits

    26,908     26,039     22,564   3.66     4.61     4.16       985     1,201     939     (216 )     (255 )     39       262       108       154  

Other interest-bearing deposits

    9,810     7,741     7,822   2.71     5.15     5.04       266     398     394     (132 )     (220 )     88       4       8       (4 )
                                                                                                     

Total interest-bearing deposits

    75,770     70,350     64,012   2.50     3.73     3.34       1,891     2,620     2,137     (729 )     (922 )     193       483       258       225  

Federal funds purchased, securities sold under repurchase agreements and short-term borrowed funds (1)

    10,580     9,325     7,006   2.44     4.55     4.30       258     424     301     (166 )     (217 )     51       123       18       105  

Long-term debt

    19,839     18,045     14,628   4.25     5.46     5.10       843     985     747     (142 )     (233 )     91       238       56       182  
                                                                                                     

Total interest-bearing liabilities

    106,189     97,720     85,646   2.82     4.12     3.72       2,992     4,029     3,185     (1,037 )     (1,372 )     335       844       332       512  
                                                                                                     

Noninterest-bearing deposits

    13,061     13,151     13,218                        

Other liabilities

    4,136     3,383     4,012                        

Shareholders’ equity

    13,495     12,166     11,452                        
                                         

Total liabilities and shareholders’ equity

  $ 136,881   $ 126,420   $ 114,328                        
                                         

Average interest rate spread

        3.23 %   2.98 %   3.15 %                  
                                         

Net interest margin

        3.58 %   3.52 %   3.74 %   $ 4,321   $ 3,948   $ 3,796   $ 373     $ 81     $ 292     $ 152     $ (207 )   $ 359  
                                                                                         

Taxable equivalent adjustment

              $ 83   $ 68   $ 88            
                                         

 

(1)   Yields are stated on a taxable equivalent basis assuming tax rates in effect for the periods presented.
(2)   Includes Federal funds sold, securities purchased under resale agreements or similar arrangements, interest-bearing deposits with banks, and other earning assets.
(3)   Loan fees, which are not material for any of the periods shown, have been included for rate calculation purposes.
(4)   Nonaccrual loans have been included in the average balances. Only the interest collected on such loans has been included as income.
(5)   Includes securties available for sale at amortized cost and trading securities at fair value.

 

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Provision for Credit Losses

 

A provision for credit losses is charged against earnings in order to maintain an allowance for loan and lease losses and a reserve for unfunded lending commitments that reflects management’s best estimate of probable losses inherent in the credit portfolios at the balance sheet date. The amount of the provision is based on continuing assessments of nonperforming and “watch list” loans and associated unfunded credit commitments, analytical reviews of loss experience in relation to outstanding loans and funded credit commitments, loan charge-offs, nonperforming asset trends and management’s judgment with respect to current and expected economic conditions and their impact on the loan portfolio and outstanding unfunded credit commitments. The methodology used is described in the “Overview and Description of Business” section under the heading “Allowance for Loan and Lease Losses and Reserve for Unfunded Credit Commitments.” The provision for credit losses recorded by BB&T in 2008 was $1.4 billion, compared with $448 million in 2007 and $240 million in 2006.

 

The provision for credit losses increased 222.5% during 2008 while total loans and leases held for investment increased 7.0% compared to the balance outstanding at the end of 2007. Net charge-offs were .89% of average loans and leases for 2008 compared to .38% of average loans and leases during 2007. The allowance for loan and lease losses was 1.62% of loans and leases held for investment and was 1.11x total nonaccrual loans and leases at year-end 2008, compared to 1.10% and 2.00x, respectively, at December 31, 2007. The increase in the provision for credit losses during 2008 compared to 2007 was largely driven by challenges in residential real estate markets and the overall economy with the largest concentration of credit issues occurring in Georgia, Florida, and metro Washington D.C. Additional disclosures related to BB&T’s real estate lending by product type and geographic distribution can be found in Table 6 herein. The 86.7% increase in the provision for credit losses during 2007 compared to 2006 was primarily the result of these same issues.

 

Noninterest Income

 

Noninterest income has become, and will continue to be, a significant contributor to BB&T’s financial success. Noninterest income includes insurance income, service charges on deposit accounts, mortgage banking income, investment banking and brokerage fees and commissions, trust and investment advisory revenues, gains and losses on securities transactions, and commissions and fees derived from other activities. Noninterest income as a percentage of total revenues has steadily increased in recent years, totaling 41.4% for 2008. Exceeding 40% on this measure has been a management objective for several years. Management has established a goal for noninterest income to exceed 45% of total revenues in the next few years to further reduce BB&T’s reliance on traditional spread-based interest income, as fee-based activities are a relatively stable revenue source during periods of changing interest rates.

 

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The following table provides a breakdown of BB&T’s noninterest income:

 

Table 16

Noninterest Income

 

     Years Ended December 31,     % Change  
       2008
v.
2007
    2007
v.
2006
 
     2008    2007     2006      
     (Dollars in millions)              

Insurance income

   $ 928    $ 853     $ 813     8.8 %   4.9 %

Service charges on deposits

     673      611       548     10.1     11.5  

Investment banking and brokerage fees and commissions

     354      343       317     3.2     8.2  

Mortgage banking income

     275      115       108     139.1     6.5  

Checkcard fees

     201      180       155     11.7     16.1  

Other nondeposit fees and commissions

     189      184       167     2.7     10.2  

Bankcard fees and merchant discounts

     151      139       122     8.6     13.9  

Trust and investment advisory revenues

     147      162       154     (9.3 )   5.2  

Securities gains (losses), net

     107      (3 )     (73 )   NM     NM  

Income from bank-owned life insurance

     84      101       93     (16.8 )   8.6  

Other income

     88      89       117     (1.1 )   (23.9 )
                           

Total noninterest income

   $ 3,197    $ 2,774     $ 2,521     15.2     10.0  
                           

 

NM—not meaningful

 

The 15.2% growth in noninterest income was the result of increased revenues from almost all of BB&T’s fee-based businesses during 2008. These increases were partially offset by declines in income from bank-owned life insurance and trust and investment advisory revenues. The 10.0% growth in noninterest income for 2007 was the result of increased revenues from all of BB&T’s major fee-based businesses. These increases were partially offset by trading losses at Scott & Stringfellow. The major categories of noninterest income and fluctuations in these amounts are discussed in the following paragraphs. These fluctuations reflect the impact of acquisitions.

 

Income from BB&T’s insurance agency/brokerage operations were the largest source of noninterest income. Internal growth, combined with the expansion of BB&T’s insurance agency network through acquisitions during the last two years, resulted in growth of 8.8% in 2008 and 4.9% in 2007. The increase in insurance income in 2008 compared to 2007 was primarily related to revenues from a new product initiative that was introduced in the second half of 2007. Additionally, commissions for property and casualty and employee benefit insurance each increased $19 million. The increase in insurance commissions in 2008 compared to 2007 was largely a result of acquisitions completed during the year as soft market conditions affected the existing book of business. The increase in commission income during 2007 was primarily related to the sale of property and casualty, and employee benefit insurance, which increased $17 million and $9 million, respectively, compared to 2006.

 

Service charges on deposit accounts represent BB&T’s second largest category of noninterest revenue. Service charge revenue grew $62 million, or 10.1%. Service charge revenue increased $63 million, or 11.5%, during 2007. The increases in service charge revenue were primarily due to higher revenues from overdraft items and strong transaction account growth during 2007 and 2008.

 

Investment banking and brokerage fees and commissions increased $11 million, or 3.2%, compared to 2007 primarily as a result of increased revenues of $19 million from BB&T Capital Markets, a division of Scott & Stringfellow. This increase was partially offset by a decline of $13 million related to commissions from retail accounts at Scott & Stringfellow. The 8.2% increase in 2007 compared to 2006 resulted primarily from increased revenues of $20 million at Scott & Stringfellow. The remainder of the increase was generated by BB&T Investment Services, Inc.

 

Other nondeposit fees and commissions, including bankcard fees and merchant discounts and checkcard fees increased $38 million, or 7.6%, during 2008 compared to 2007. During 2007, these categories increased $59 million,

 

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or 13.3%, compared to 2006. The increases in 2008 and 2007 included additional checkcard fees of $21 million and $25 million, respectively, as clients continued to show a preference for utilizing electronic forms of payment rather than traditional paper checks. Bankcard fees also grew $12 million in 2008 compared to 2007 and $17 million in 2007 compared to 2006, as a result of strong sales of merchant services.

 

Trust and investment advisory revenues are based on the types of services provided as well as the overall value of the assets managed, which is affected by stock market conditions. During 2008, trust and investment advisory revenues decreased by $15 million, or 9.3%, compared to 2007. During 2007, trust and investment advisory revenues increased by $8 million, or 5.2%, compared to 2006. The value of trust assets under management, including custodial accounts, has varied accordingly and was $33.4 billion, $36.9 billion and $33.7 billion at December 31, 2008, 2007 and 2006, respectively.

 

Income from mortgage banking activities includes gains and losses from the sale of mortgage loans, revenue from servicing mortgage loans, valuation adjustments for mortgage servicing rights, mortgage servicing rights-related derivative gains/losses and the amortization or realization of expected mortgage servicing rights cash flows. Mortgage banking income totaled $275 million, $115 million and $108 million during 2008, 2007 and 2006, respectively. The following table provides a breakdown of the various components of mortgage banking income and related statistical information:

 

Table 17

Mortgage Banking Income and Related Statistical Information

 

     As of/ For the Years
Ended December 31,
    % Change  
       2008
v.
2007
    2007
v.
2006
 

Mortgage Banking Income

   2008     2007     2006      
     (Dollars in millions)              

Residential Mortgage Banking:

          

Residential mortgage production income

   $ 127     $ 47     $ 46     170.2 %   2.2 %

Residential Mortgage Servicing:

          

Residential mortgage servicing fees

     145       114       102     27.2     11.8  

Residential mortgage servicing rights (decrease) increase in fair value due to change in valuation inputs or assumptions

     (220 )     (60 )     21      

Mortgage servicing rights hedging gains (losses)

     262       64       (17 )    
                            

Net

     42       4       4     NM     —    

Realization of expected residential mortgage servicing rights cash flows

     (94 )     (90 )     (80 )   4.4     12.5  
                            

Total residential mortgage servicing income

     93       28       26     232.1     7.7  
                            

Total residential mortgage banking income

     220       75       72     193.3     4.2  
                            

Commercial Mortgage Banking:

          

Commercial mortgage banking revenues

     69       46       40     50.0     15.0  

Amortization of commercial mortgage servicing rights

     (14 )     (6 )     (4 )   133.3     50.0  
                            

Total commercial mortgage banking income

     55       40       36     37.5     11.1  
                            

Total mortgage banking income

   $ 275     $ 115     $ 108     139.1     6.5  
                            

 

     As of/ For the Years
Ended December 31,
   % Change  
        2008
v.
2007
    2007
v.
2006
 

Mortgage Banking Statistical Information

   2008    2007    2006     
     (Dollars in millions)             

Residential mortgage originations

   $ 16,438    $ 11,940    $ 9,889    37.7 %   20.7 %

Residential mortgage loans serviced for others

     40,677      32,093      28,232    26.7     13.7  

Residential mortgage loan sales

     13,405      7,547      5,282    77.6     42.9  

Commercial mortgage originations

     3,717      3,012      2,906    23.4     3.6  

Commercial mortgage loans serviced for others

     23,902      20,752      9,206    15.2     125.4  

 

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Mortgage banking income increased $160 million, or 139.1% during 2008. BB&T adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115,” (“SFAS No. 159” or the “Fair Value Option”) for the majority of loans originated for sale after January 1, 2008, and implemented the provisions of Staff Accounting Bulletin No. 109 “Written Loan Commitments Recorded at Fair Value through Earnings” (“SAB 109’). As a result of the adoption of both standards, mortgage banking income increased approximately $74 million compared to 2007. Of the $74 million increase relating to the adoption of these accounting standards, approximately $55 million relates to the elimination of the provisions of SFAS No. 91 “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases—an amendment of FASB Statements No. 13, 60, and 65 and a rescission of FASB Statement No. 17,” (“SFAS No. 91”) on loans accounted for at fair value and resulted in a corresponding increase in personnel expense. The net change in the valuation of mortgage servicing rights resulted in a $38 million increase compared to 2007. The $38 million increase was the result of the mortgage servicing rights hedge outperforming the decline in the value of the asset. The positive hedge performance was attributable to (i) the strong appreciation of option-based hedge instruments, which occurs during periods of extreme interest rate volatility, and (ii) the favorable hedge effectiveness against the interest rate basis movements between mortgages and swap-based hedge instruments. Excluding the impact of these items, mortgage banking income increased $48 million, or 43.2%, compared to the prior year. The growth in mortgage banking income includes strong production revenues from both residential and commercial mortgage banking operations. The growth in commercial mortgage banking revenues was the result of the acquisition of Collateral Real Estate Capital, LLC (“Collateral”) in the fourth quarter of 2007. BB&T combined the operations of Collateral with its existing mortgage banking operations and renamed the subsidiary Grandbridge Real Estate Capital LLC (“Grandbridge”). The acquisition of Collateral significantly expanded the size and product offerings of BB&T’s commercial mortgage banking activities. Mortgage banking income increased $7 million, or 6.5%, during 2007. The growth in 2007 included an increase of $4 million, or 11.1%, in commercial mortgage banking income primarily generated by Grandbridge. The acquisition of Collateral in the fourth quarter of 2007 was the primary reason for the 125.4% increase in commercial mortgage loans serviced for others at year-end 2007 compared to the prior year-end. BB&T’s residential mortgage banking income also increased $3 million during 2007 compared to 2006. While residential mortgage loan sales increased 42.9% during 2007, gains and other revenues associated with those sales only increased 2.2% due to increased competition in the marketplace.

 

BB&T recognized $107 million in net securities gains during 2008 compared to net losses of $3 million and $73 million during 2007 and 2006, respectively. The net securities gains recognized in 2008 included $211 million of gains from securities sales and $104 million of losses as a result of other-than-temporary impairments. The losses recognized in 2006 were primarily in connection with an announced restructuring of a portion of the securities portfolio that was undertaken in the fourth quarter of 2006.

 

Income from bank owned life insurance (“BOLI”) decreased $17 million, or 16.8%, in 2008 compared to 2007, primarily due to a valuation adjustment that resulted from a decline in the underlying assets of certain insurance policies. BOLI income increased $8 million, or 8.6%, in 2007 compared to 2006.

 

Other income decreased slightly in 2008 compared to 2007. The current year included gains related to BB&T’s ownership interest and sale of Visa, Inc. stock that amounted to $80 million. In addition, revenues from client derivative activities were $22 million higher in 2008 compared to 2007. These increases were offset by a number of factors, including a $50 million decline in the value of various financial assets isolated for the purpose of providing post-employment benefits. The decline in the value of these assets is neutral to net income as these losses relate to participant’s accounts and reduce the amount of benefits that will be paid in the future. Earnings from investments in low income housing partnerships that generate tax benefits declined $39 million and net revenues from BB&T’s venture capital investments declined $26 million. In addition, the current year’s results were affected by certain items that were recorded in 2007, including the sale of an insurance operation and losses from capital markets activities as mentioned below. The 23.9%, or $28 million, decrease in 2007 compared to 2006, was primarily due to approximately $33 million in losses from capital markets activities during the last half of 2007. These losses were primarily caused by disruptions in the financial markets that decreased the value of certain trading securities and derivative contracts. In addition, BB&T sold an insurance operation during 2007, which produced a gain of $19 million. BB&T also generated $17 million in additional revenues from client derivative activities. Other income for 2007 also reflects lower revenues from venture capital investments, which decreased

 

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$15 million compared to 2006, and decreased revenues of $11 million related to various financial assets isolated for the purpose of providing post-employment benefits.

 

The ability to generate significant amounts of noninterest revenue in the future will be very important to the continued financial success of BB&T. Through its subsidiaries, BB&T will continue to focus on asset management, mortgage banking, trust, insurance, investment banking and brokerage services, as well as other fee-producing products and services. BB&T plans to continue to pursue acquisitions of additional financial services companies, including insurance agencies and other fee income producing businesses as a means of expanding fee-based revenues. Also, among BB&T’s principal strategies following the acquisition of a financial institution is the cross-sell of noninterest income generating products and services to the acquired institution’s client base. As previously mentioned, management has set a goal to increase the contribution of noninterest revenue sources to 45% over the next few years.

 

Noninterest Expense

 

Noninterest expense totaled $3.9 billion in 2008, $3.6 billion in 2007 and $3.5 billion in 2006. Noninterest expense includes certain merger-related and restructuring charges recorded during the years 2008, 2007 and 2006 as noted in Table 18 below. These amounts totaled $15 million in 2008, $21 million in 2007 and $18 million in 2006. Additional disclosures related to these merger-related and restructuring charges are presented in “Merger-Related and Restructuring Charges.” The table below shows the components of noninterest expense and the discussion that follows explains the composition of certain categories and the factors that caused them to change in 2008 and 2007.

 

Table 18

Noninterest Expense

 

     Years Ended December 31, &nbs