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, 2009

 

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 whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    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.    þ

 

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, 2010, the Corporation had 690,679,160 shares of its Common Stock, $5 par value, outstanding. The aggregate market value of voting stock held by nonaffiliates of the Corporation is approximately $15.1 billion (based on the closing price of such stock as of June 30, 2009).

 

 

 


Table of Contents

CROSS REFERENCE INDEX

 

               Page

PART I

  

Item 1

   Overview and Description of Business    4
  

Item 1A

   Risk Factors Related to BB&T’s Business    4
  

Item 1B

  

Unresolved Staff Comments

None.

  
  

Item 2

   Properties    26
  

Item 3

   Legal Proceedings    138
  

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   

28,78

  

Item 6

   Selected Financial Data    86
  

Item 7

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

37

  

Item 7A

   Market Risk Management    68
  

Item 8

   Financial Statements and Supplementary Data   
      Consolidated Balance Sheets at December 31, 2009 and 2008    89
      Consolidated Statements of Income for each of the years in the three-year period ended December 31, 2009   

90

      Consolidated Statements of Changes in Shareholders’ Equity for each of the years in the three-year period ended December 31, 2009   

91

      Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2009   

93

      Notes to Consolidated Financial Statements    94
      Report of Independent Registered Public Accounting Firm    88
      Quarterly Financial Summary for 2009 and 2008    85
  

Item 9

  

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

None.

  
  

Item 9A

   Controls and Procedures    87
  

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 2010 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 2010 Annual Meeting of Shareholders.

 

    For information regarding the registrant’s securities authorized for issuance under equity compensation plans, refer to “Equity Compensation Plan Information” in Part II hereof.

 

    The other information required by Item 12 is incorporated herein by reference to the information that appears under the headings “Security Ownership” and “Compensation of Executive Officers” in the Registrant’s Proxy Statement for the 2010 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 2010 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 2010 Annual Meeting of Shareholders.

 

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OVERVIEW AND DESCRIPTION OF BUSINESS

 

General

 

BB&T Corporation (“BB&T”, “the Company”, “the Corporation” or “the Parent Company”), 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, Virginia, Florida, Georgia, Maryland, South Carolina, Alabama, Kentucky, West Virginia, Tennessee, Nevada, Texas, Washington D.C and Indiana. Branch Bank exited the Nevada markets in January 2010. 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 made 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;

 

  ·  

unpredictable natural and other disasters could have an adverse effect on BB&T in that such events could materially disrupt its operations or the ability or willingness of its customers to access the financial services offered by BB&T;

 

  ·  

costs or difficulties related to the integration of the businesses of BB&T and its merger partners may be greater than expected;

 

  ·  

expected cost savings associated with completed mergers or acquisitions may not be fully realized or realized within the expected time frames; and

 

  ·  

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

 

Risk Factors Related to BB&T’s Business

 

Changes in national, regional 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, regional 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

 

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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 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 or willing 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 2007 and continuing through 2009, 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.

 

In connection with the agreement between the Federal Deposit Insurance Corporation (“FDIC”) and the Company to acquire certain assets and assume substantially all of the deposits and certain liabilities of Colonial Bank, an Alabama state-chartered bank headquartered in Montgomery, Alabama (“Colonial”), Branch Bank acquired a significant portfolio of loans. Although Branch Bank marked down the acquired loan portfolio to estimated fair value, there is no assurance that the loans acquired will not suffer further deterioration in value resulting in additional charge-offs to this loan portfolio. Fluctuations in national, regional and local economic conditions, including those related to local residential real estate, commercial real estate and construction markets may increase the level of charge-offs on the loan portfolio that was acquired in the acquisition of Colonial and correspondingly reduce BB&T’s net income. These fluctuations are not predictable, cannot be controlled and may have a material adverse impact on BB&T’s operations and financial condition even if other favorable events occur. Although Branch Bank entered into loss sharing agreements with the FDIC, which provide that a significant portion of losses related to specified loan portfolios that were acquired in connection with the acquisition of Colonial will be borne by the FDIC, Branch Bank is not protected for all losses resulting from charge-offs with respect to those specified loan portfolios. Additionally, the loss sharing agreements have limited terms; therefore, any charge-off of related losses that Branch Bank experiences after the term of the loss sharing agreements will not be reimbursed by the FDIC and will negatively impact BB&T’s net income. In connection with the acquisition of Colonial, Branch Bank also acquired certain loan portfolios that are not subject to the loss sharing agreements. Any charge-offs related to these loan portfolios will be borne by Branch Bank in full and would also negatively impact BB&T’s net income.

 

BB&T will be expanding operations into new geographic areas.

 

Portions of the market areas served by Colonial, including market areas in Alabama, Florida and Texas, are areas in which BB&T historically conducted limited or no banking activities. In particular, Colonial had significant operations in Alabama, where BB&T previously had a very limited presence. BB&T must effectively integrate these new markets to retain and expand the business previously conducted by Colonial. The ability to compete effectively in the new markets will be dependent on BB&T’s ability to understand the local market and competitive dynamics and identify and retain certain employees from Colonial who know their markets better than BB&T does.

 

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 negatively impacting the mortgage industry. BB&T’s financial results have been adversely affected by changes in real estate values, primarily in Georgia, Florida and metro Washington, D.C., with some deterioration in the coastal areas of the Carolinas. 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 through 2009 resulted in decreased demand for real estate loans, and BB&T’s net income and profits have suffered as a result.

 

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The declines in home prices in many markets across the U.S., including a number of markets in BB&T’s banking footprint (primarily in Georgia, Florida, and metro Washington, D.C., with some deterioration in the coastal areas of the Carolinas), along with the reduced availability of mortgage credit, also has 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 the continued impact of the economic recession and high unemployment levels could drive losses beyond the levels provided for in BB&T’s allowance for loan losses. In that event, BB&T’s future 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.

 

The Colonial acquisition has increased Branch Bank’s commercial real estate and construction loan portfolio, which have a greater credit risk than residential mortgage loans.

 

With the acquisition of the Colonial loan portfolio, the commercial real estate loan and construction loan portfolios have become a larger portion of Branch Bank’s total loan portfolio than it was prior to the Colonial acquisition. This type of lending is generally considered to have more complex credit risks than traditional single-family residential lending, because the principal is concentrated in a limited number of loans with repayment dependent on the successful operation of the related real estate or construction project. Consequently, these loans are more sensitive to the current adverse conditions in the real estate market and the general economy. These loans are generally less predictable, more difficult to evaluate and monitor, and collateral may be more difficult to dispose of in a market decline. However, the negative economic aspects of these risks are substantially reduced as a result of the FDIC loss sharing agreements.

 

Increases in FDIC insurance premiums may adversely affect BB&T’s net income and profitability.

 

During 2008 and continuing in 2009, higher levels of bank failures have dramatically increased resolution costs of the FDIC and depleted the deposit insurance fund. In addition, the FDIC instituted two temporary programs to further insure customer deposits at FDIC insured banks: deposit accounts are now insured up to $250,000 per customer (up from $100,000) and noninterest-bearing transactional accounts are currently fully insured (unlimited coverage). These programs have placed additional stress on the deposit insurance fund. In order to maintain a strong funding position and restore reserve ratios of the deposit insurance fund, the FDIC has increased assessment rates of insured institutions. In addition, on November 12, 2009, the FDIC adopted a rule requiring banks to prepay three years’ worth of estimated deposit insurance premiums by December 31, 2009. BB&T is generally unable to control the amount of premiums that the Company is required to pay for FDIC insurance. If there are additional bank or financial institution failures, or the cost of resolving prior failures exceeds expectations, the Company may be required to pay even higher FDIC premiums than the recently increased levels. These announced increases and any future increases or required prepayments of FDIC insurance premiums may adversely impact BB&T’s earnings and financial condition.

 

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

 

Significant declines in the housing market, 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. BB&T has produced quarterly earnings during 2008 and 2009; however, during this time BB&T has

 

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experienced significant challenges, its credit quality has deteriorated and its net income and results of operations have been adversely 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/or reduced business activity could materially adversely affect BB&T’s business, financial condition and results of operations.

 

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

 

During the economic downturn, the capital and credit markets experienced extended volatility and disruption. 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.

 

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 collateral 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 financial condition.

 

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 control or predict with certainty changes in interest rates. Regional and local economic conditions, competitive pressures 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.

 

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, President Obama’s administration recently announced a proposal that would impose a tax on the 50 largest banks in the nation (which includes BB&T). The tax would be an annual fee based on the bank’s liabilities, excluding domestic deposits, and would be imposed over a 10 year period. If adopted, this tax and other future restrictions could have a material adverse effect on BB&T.

 

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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.

 

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 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, these events could nevertheless reduce

 

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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 and/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 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.

 

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 financial instruments, goodwill and other intangible asset balances; or significantly increase its liabilities for taxes or pension and post retirement benefits.

 

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Prior to the acquisition, Colonial was the subject of several regulatory investigations and a criminal investigation in connection with accounting irregularities and these investigations may require significant resources and management attention.

 

Prior to the acquisition, Colonial was the subject of a federal criminal investigation relating to the bank’s mortgage warehouse lending division and related accounting irregularities. Colonial also received subpoenas from the Special Inspector General for the Troubled Asset Relief Program and the SEC. Although the assets and liabilities that the FDIC determines are related to alleged fraudulent or criminal activities were excluded from the acquisition of Colonial, during the process of integrating Colonial with Branch Bank, BB&T may discover other inconsistencies in standards, controls, procedures and policies that adversely affect BB&T’s ability to achieve the anticipated benefits of the acquisition of Colonial. Additionally, BB&T will need to ensure that the banking operations of Colonial that were acquired maintain effective disclosure controls as well as internal controls and procedures for financial reporting, and such compliance efforts may be costly and may divert the attention of management.

 

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. The federal government has proposed significant additional standards with respect to executive compensation and governance at United States financial institutions that may impact certain of BB&T’s executive officers and employees. If adopted, such restrictions, 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 have a material adverse effect on BB&T’s performance.

 

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

 

From time to time accounting standards setters change 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 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.

 

In August 2009, Branch Bank acquired from the FDIC certain assets of Colonial, including a substantial majority of its loan portfolio, and assumed certain of its liabilities. The success of the Colonial acquisition will depend, in part, on BB&T’s ability to successfully combine the acquired business and assets with BB&T’s business and BB&T’s ability to successfully manage the significant loan portfolio and FDIC loss share agreements. As with any acquisition involving a financial institution, particularly one like Colonial with a large number of bank branches, there may be business and service changes and disruptions that result in the loss of customers or cause customers to close their accounts and move their business to competing financial institutions. It is possible that the integration process could result in the loss of key employees, the disruption of ongoing business, or inconsistencies in standards, controls, procedures and policies that adversely affect BB&T’s ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the acquisition. Successful integration may also be hampered by differences between the two organizations. Although BB&T had significant operations in most of the regional markets in which Colonial operated, other than Alabama and Texas, the loss of key employees of Colonial could adversely affect BB&T’s ability to successfully conduct business in certain local markets in which Colonial operated, which could have an adverse effect on BB&T’s financial results. Integration efforts will also divert attention and resources from BB&T’s management. Additionally, general market and economic conditions or governmental actions affecting the financial industry generally may inhibit the ability to successfully integrate Colonial. If BB&T experiences difficulties with the integration process, the anticipated benefits of the acquisition may not be realized fully, or at all, or may take longer to realize than expected. Finally, any cost savings that are realized may be offset by losses in revenues or other charges to earnings.

 

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,

 

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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, 2009, 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

 

  ·  

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 1,857 offices (as of December 31, 2009) located in North Carolina, Virginia, Florida, Georgia, Maryland, South Carolina, Alabama, Kentucky, West Virginia, Tennessee, Nevada, Texas, Washington D.C and Indiana. Branch Bank exited its 22 Nevada branches in January 2010. 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;

 

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  ·  

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 (merged into Branch Bank on January 1, 2010);

 

  ·  

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), based in Clemmons, North Carolina, which specializes in loans to small commercial lawn care businesses across the country for the purchase of outdoor power equipment and loans to individuals for power sport and leisure equipment;

 

  ·  

Liberty Mortgage Corporation, based in Norcross, Georgia, 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 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.

 

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Services

 

BB&T’s subsidiaries offer a variety of services targeted to retail and commercial clients. BB&T’s objective is to offer clients a full array of products to meet all their financial needs.

 

Retail:

  

Commercial:

Bankcard lending

   Asset management

Consumer finance

   Association services

Home equity lending

   Capital markets services

Home mortgage lending

   Commercial finance

Insurance

   Commercial middle market lending

Investment brokerage services

   Commercial mortgage lending

Payment solutions

   Institutional trust services

Sales finance

   Insurance

Small business lending

   Insurance premium finance

Wealth management / private banking

   International banking services
   Leasing
   Merchant services
   Mortgage warehouse lending
   Payment solutions
   Real estate lending
   Supply chain management
   Venture capital

 

The following table reflects BB&T’s deposit market share and branch locations by state.

 

Table 1

BB&T Deposit Market Share and Branch Locations by State

 

      % of
BB&T’s
Deposits (2)
    Deposit
Market
Share
Rank (2)
   Number of
Branches (3)

North Carolina (1)

   21   2nd    360

Virginia

   19      3rd    392

Florida

   16      5th    307

Georgia

   11      5th    178

Maryland

   6      6th    130

South Carolina

   6      3rd    116

Alabama

   6      4th    91

West Virginia

   5      1st    78

Kentucky

   4      3rd    90

Tennessee

   3      6th    57

Texas

   1      48th    22

Washington, D.C.

   1      7th    12

 

  (1)   Excludes home office deposits.
  (2)   Source: FDIC.gov—data as of June 30, 2009, includes the effect of the FDIC-assisted acquisition of Colonial Bank.
  (3)   As of December 31, 2009. Excludes 22 branches in Nevada, which were exited on January 15, 2010, and 2 branches in Indiana.

 

Executive Overview

 

Significant accomplishments in 2009

 

In the opinion of BB&T’s management, the Corporation’s most significant accomplishments during 2009 were as follows (amounts include the impact of acquisitions where applicable):

 

  ·  

Achieved outstanding client service and client loyalty scores based on independent survey

 

  ·  

Exited Troubled Asset Relief Program (TARP)

 

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  ·  

Exceeded capital requirements as measured in the Supervisory Capital Assessment Process (SCAP)

 

  ·  

Successfully executed the FDIC-assisted acquisition of certain assets and liabilities of Colonial—largest acquisition in BB&T’s history

 

  ·  

Maintained safety, soundness and profitability through the recession

 

  ·  

Successfully executed Executive Management leadership succession plan

 

  ·  

Enhanced risk management structure

 

  ·  

Achieved strong revenue growth—record performance in retail mortgage and insurance

 

  ·  

Enhanced quality of capital with two common stock offerings for a total of $2.6 billion

 

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:

 

  ·  

Economic impact from deepest recession in decades

 

  ·  

Unprecedented disruption and significantly increased risk in financial markets

 

  ·  

Effectively managing through the credit cycle

 

  ·  

Residential real estate risk / risk of downturn spreading to other asset classes

 

  ·  

Intense competition for best credits within the financial services industry

 

  ·  

Cost and risk associated with the current heightened regulatory environment

 

  ·  

Over-capacity in financial services industry

 

Overview of Significant Events and Financial Results

 

The Board of Governors of the Federal Reserve System, the Federal Reserve Banks, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency commenced a review of the capital needs of the largest U.S. banking institutions. This review was called the Supervisory Capital Assessment Program (the “SCAP”). The SCAP review process involved a forward-looking capital assessment, or “stress test”, of all domestic bank holding companies with assets of more than $100 billion at December 31, 2008, which included BB&T. The stress test was intended to estimate credit losses, revenues and reserve needs for each of these bank holding companies in 2009 and 2010 under a macroeconomic scenario that reflected a consensus expectation for the depth and duration of the recession and a more adverse scenario that was designed to reflect a recession that was longer and more severe than consensus expectations.

 

On May 7, 2009, the Board of Governors of the Federal Reserve System announced the results of the final SCAP assessments for the 19 largest U.S. bank holding companies, including BB&T. The SCAP assessment for BB&T indicated that BB&T did not need to raise additional capital.

 

Following the successful results from the stress test, BB&T raised $1.7 billion of common stock, as part of its plans to repay the preferred stock invested by the U. S. Treasury. In addition, as part of this plan, BB&T’s Board of Directors reduced the quarterly dividends on common stock from $.47 to $.15 beginning with the payout for the third quarter of 2009. The reduction in the dividend will preserve approximately $725 million annually based on the shares outstanding at the time of the decision.

 

On June 17, 2009, BB&T repurchased all 3,133.64 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series C, $1,000,000 liquidation preference per share (the “Series C Preferred Stock”) issued to the U.S. Treasury on November 14, 2008, as part of the Troubled Asset Relief Program: Capital Purchase Program (the “Capital Purchase Program”). The aggregate purchase price paid to the U.S. Treasury for the Series C Preferred

 

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Stock was approximately $3.1 billion, including approximately $14 million of accrued and unpaid dividends. On July 22, 2009, BB&T repurchased the warrant to purchase up to 13,902,573 shares of its common stock for $67 million, which also was issued to the U.S. Treasury on November 14, 2008, as part of the Capital Purchase Program.

 

On August 14, 2009, BB&T acquired certain assets and assumed substantially all of the deposits and certain other liabilities of Colonial Bank (“Colonial”), headquartered in Montgomery, Alabama, from the Federal Deposit Insurance Corporation (“FDIC”), as receiver for Colonial. Colonial operated 357 banking offices in Alabama, Florida, Georgia, Texas and Nevada. The acquisition significantly strengthened BB&T’s banking franchise, moving BB&T to fifth in deposit market share in Florida and fourth in Alabama. BB&T issued 38.5 million shares of common stock to the investing public at $26 per share in connection with the Colonial acquisition to further strengthen BB&T’s capital levels. Early in 2010, BB&T exited the Nevada branches and divested approximately $850 million in deposits acquired in the Colonial acquisition. Please refer to Note 2 “Business Combinations” in the “Notes to Consolidated Financial Statements” for additional disclosures about the Colonial acquisition.

 

In addition to the Colonial acquisition, BB&T continued to expand its noninterest revenue producing business through the acquisitions of Dallas, Texas-based Quantum First Capital, LTD and Louisville, Kentucky-based BFG Realty Advisors, LLC. Both firms were acquired by BB&T’s wholly-owned subsidiary Grandbridge Real Estate Capital LLC. BB&T also acquired Florida-based insurance agency Oswald Trippe and Company Inc.

 

Consolidated net income for 2009 totaled $877 million, a decrease of $652 million, or 42.6%, compared to $1.5 billion earned during 2008. Consolidated net income available to common shareholders for 2009 totaled $729 million, a decrease of $769 million, or 51.3%, compared to $1.5 billion earned during 2008. On a diluted per common share basis, earnings for 2009 were $1.15, compared to $2.71 for 2008, a decrease of 57.6%. BB&T’s results of operations for 2009 produced a return on average assets of .56% and a return on average common shareholders’ equity of 4.93% compared to prior year ratios of 1.12% and 11.44%, respectively.

 

BB&T generated strong revenue growth during 2009, which was up 18.3% compared to 2008. This included growth of 14.9% in fully taxable equivalent net interest income and 23.1% growth from noninterest income sources. The growth in net interest income was the result of growth in earning assets, as well as expansion in the net interest margin from 3.58% in 2008 to 3.66% in 2009. Noninterest income benefitted from record performance from BB&T’s residential mortgage banking and insurance operations. BB&T generated $658 million in revenues from mortgage banking operations, which was up 139.3% from the 2008 results. Insurance income increased 12.8% in 2009 and exceeded $1 billion annually.

 

Nonperforming assets and credit costs continued to increase during 2009. BB&T recorded a $2.8 billion provision for credit losses in 2009, which exceeded net charge-offs by $1.0 billion. This compared to a $1.4 billion provision for credit losses recorded during 2008. Net charge-offs for 2009 totaled $1.8 billion compared to $851 million for 2008. The increases in nonperforming assets and the provision for credit losses were primarily driven by continued deterioration in housing-related credits. The largest concentration of housing-related credit issues continues to be in Georgia, Florida and metropolitan Washington, D.C., including the surrounding suburbs. In addition, there has been deterioration in the coastal areas of the Carolinas.

 

BB&T’s total assets at December 31, 2009 were $165.8 billion, an increase of $13.7 billion, or 9.0%, compared to December 31, 2008. Total loans and leases at December 31, 2009 were $106.2 billion, an increase of $7.5 billion, or 7.6%, compared to the balance at year-end 2008. The increase in total loans and leases included increases of $1.1 billion in loans held for sale and $8.0 billion in covered loans acquired in the Colonial transaction. Securities available for sale increased $1.1 billion compared to the balances at December 31, 2008. In addition, BB&T recorded a $3.1 billion receivable from the FDIC in connection with the Colonial acquisition. The FDIC receivable represents the fair value of amounts expected to be received under the agreement with the FDIC, whereby the FDIC will reimburse BB&T for the significant majority of losses on the assets acquired.

 

Total client deposits at December 31, 2009 were $106.8 billion, an increase of $23.2 billion, or 27.7%, from December 31, 2008. Total deposits, which include wholesale deposits sources, totaled $115.0 billion at December 31, 2009, an increase of $16.4 billion, or 16.6%, compared to December 31, 2008. The increase in client deposits was a result of the Colonial acquisition, which added approximately $16 billion in client deposits, as well

 

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as BB&T’s success in attracting new accounts. BB&T also has seen an improvement in the deposit mix with noninterest-bearing accounts representing 16.5% of total deposits at December 31, 2009, compared with 13.8% at December 31, 2008.

 

Total shareholders’ equity increased slightly compared to December 31, 2008. BB&T’s common equity increased as a result of the issuance of $2.6 billion in common stock during the second and third quarters of 2009, retained earnings and an increase in accumulated other comprehensive income, which were partially offset by the repayment of the $3.1 billion of preferred stock issued to the U.S. Treasury. The Tier 1 common ratio was 8.5% at December 31, 2009. In addition, the Tier 1 risk-based capital and total risk-based capital ratios were 11.5% and 15.8% at December 31, 2009, respectively. BB&T’s risk-based and tangible capital ratios remain well above regulatory standards for well-capitalized banks. As of December 31, 2009, measures of tangible capital were not required by the regulators and, therefore, were considered non-GAAP measures. Please refer to the section titled “Capital” herein for a discussion of how BB&T calculates and uses these measures in the evaluation of the Company.

 

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 entities 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 for its banking operations consists of North and South Carolina, Virginia, Maryland, Georgia, eastern Tennessee, West Virginia, Kentucky, Florida, Alabama and Washington, D.C. In addition, BB&T has a smaller banking presence in Texas and Indiana. The Texas market represents a new market for BB&T to expand its banking operations and was entered in connection with the Colonial acquisition. The markets that BB&T operates have a diverse employment base and primarily consists of manufacturing, general services, agricultural, wholesale/retail trade, technology, government 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. This strategy has encompassed both organic growth and acquisitions of complementary banks and financial businesses. During the 1990’s and through 2003, BB&T’s growth resulted largely from mergers and acquisitions as the economics of business combinations were compelling. Since that time, BB&T has focused more on organic growth and strategic acquisitions, including the FDIC-assisted acquisition of Colonial.

 

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 and acquisition opportunities. BB&T will continue to assess bank and thrift acquisitions subject to market

 

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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 assisted and unassisted 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 35 community banks and thrifts, 85 insurance agencies and 30 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 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.

 

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,  
     2009     2008     2007     2006     2005  
     (Dollars in millions)  

Commercial, financial and agricultural loans

   $ 17,768      $ 17,131      $ 14,037      $ 10,848      $ 9,532   

Lease receivables

     1,558        2,007        3,899        4,358        4,250   

Real estate—construction and land development loans

     15,353        20,065        19,474        17,553        11,942   

Real estate—mortgage loans

     55,647        46,772        44,687        42,219        41,539   

Consumer loans

     13,910        12,018        11,107        10,389        9,604   
                                        

Total loans and leases held for investment

     104,236        97,993        93,204        85,367        76,867   

Less: unearned income

     (580     (748     (2,297     (2,456     (2,473
                                        

Net loans and leases held for investment

     103,656        97,245        90,907        82,911        74,394   

Loans held for sale

     2,551        1,424        779        680        629   
                                        

Total loans and leases

   $ 106,207      $ 98,669      $ 91,686      $ 83,591      $ 75,023   
                                        

 

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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. In addition, BB&T has a portfolio of loans that were acquired in the Colonial acquisition that are covered by FDIC loss sharing agreements. 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.

 

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.

 

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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 to mitigate risk from fraud.

 

Revolving Credit Loan Portfolio

 

The revolving credit portfolio comprises 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 primarily 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 2009 totaling $28.2 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 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.

 

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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, 2009, included in the specialized lending portfolio are loans to subprime borrowers of approximately $2.9 billion, or 2.7% of the total BB&T loan and lease portfolio. Of these, approximately $365 million are residential real estate loans and included in the disclosures in Table 14-2 herein.

 

Covered Loan Portfolio

 

In connection with the FDIC-assisted acquisition of Colonial, BB&T acquired approximately $14.1 billion of loans that are covered by loss sharing agreements. BB&T recorded these loans at $9.6 billion, which represented their fair value on the acquisition date. The loans covered by loss sharing agreements are primarily commercial real estate loans and residential mortgage loans. See Note 2 “Business Combinations” and Note 4 “Loans and Leases” in the “Notes to Consolidated Financial Statements” in this report for additional disclosures related to BB&T’s covered loans.

 

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

 

Table 3

Composition of Loan and Lease Portfolio Based on Lines of Business

 

     December 31,
     2009    2008    2007    2006    2005
     (Dollars in millions)

Loans and leases, net of unearned income:

              

Commercial loans

   $ 49,445    $ 49,727    $ 43,685    $ 39,580    $ 34,965

Leveraged leases

     375      753      1,185      1,720      1,650
                                  

Total commercial loans and leases

     49,820      50,480      44,870      41,300      36,615
                                  

Sales finance

     6,290      6,354      6,021      5,683      5,264

Revolving credit

     2,016      1,777      1,618      1,414      1,347

Direct retail

     14,283      15,454      15,691      15,312      14,453

Residential mortgage loans

     15,435      17,091      17,467      15,596      13,971

Specialized lending

     7,670      6,089      5,240      3,606      2,744

Other acquired loans

     123      —        —        —        —  
                                  

Total loans and leases held for investment (excluding covered loans)

     95,637      97,245      90,907      82,911      74,394

Covered loans

     8,019      —        —        —        —  
                                  

Total loans and leases held for investment

     103,656      97,245      90,907      82,911      74,394

Total loans held for sale

     2,551      1,424      779      680      629
                                  

Total loans and leases

   $ 106,207    $ 98,669    $ 91,686    $ 83,591    $ 75,023
                                  

 

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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, 2009
     Commercial,
Financial
and
Agricultural
   Real Estate:
Construction
   Total
     (Dollars in millions)

Fixed rate:

        

1 year or less (2)

   $ 5,355    $ 5,284    $ 10,639

1-5 years

     2,903      2,508      5,411

After 5 years

     3,334      2,195      5,529
                    

Total

     11,592      9,987      21,579
                    

Variable rate:

        

1 year or less (2)

     3,444      3,398      6,842

1-5 years

     2,156      1,422      3,578

After 5 years

     576      546      1,122
                    

Total

     6,176      5,366      11,542
                    

Total loans and leases (3)

   $ 17,768    $ 15,353    $ 33,121
                    

 

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

 

     (Dollars in
millions)

(3)    The above table excludes:

  

(i)     consumer loans

   $ 13,910

(ii)    real estate mortgage loans

     55,647

(iii)   loans held for sale

     2,551

(iv)   lease receivables

     1,558
      

Total

   $ 73,666
      

 

Scheduled repayments are reported in the maturity category in which the payment is due. Determinations of maturities are based upon contract terms. In accordance with regulatory reporting standards, variable rate loans that have reached a floor are reported as fixed-rate loans. 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.

 

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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 and (2) components of collective loan impairment, including a component that is unallocated. BB&T maintains specific reserves for individually impaired loans. 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 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 assigned a “risk grade” at origination by the account officer and the assigned risk grade is subsequently reviewed and finalized by a credit officer. Further, Credit Risk Review, a department that is independent of the loan administration functions, validates the risk grades of selected relationships through their loan review system. 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. For loans acquired in a business combination after December 31, 2008, BB&T has generally aggregated the purchased loans into pools of loans with common risk characteristics. In determining the allowance for loan and lease losses, BB&T performs analysis each period to estimate the expected cash flows for each of the loan pools. To the extent that the expected cash flows of a loan pool have decreased since the acquisition date, BB&T establishes an allowance for loan loss.

 

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.

 

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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 Lines of Business

 

    December 31,  
    2009     2008     2007     2006     2005  
    Amount   % Loans
in each
category (1)
    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

  $ 1,574   52.1   $ 912   51.9   $ 548   49.3   $ 475   49.8   $ 422   49.2

Sales finance

    77   6.6        55   6.5        58   6.6        58   6.9        65   7.1   

Revolving credit

    127   2.1        94   1.8        70   1.8        67   1.7        65   1.8   

Direct retail

    297   15.0        124   15.9        79   17.3        75   18.5        94   19.4   

Residential mortgage loans

    131   16.2        91   17.6        25   19.2        21   18.8        19   18.8   

Specialized lending

    264   8.0        238   6.3        171   5.8        139   4.3        110   3.7   

Unallocated

    130   —          60   —          53   —          53   —          50   —     
                                                           

Total

  $ 2,600   100.0   $ 1,574   100.0   $ 1,004   100.0   $ 888   100.0   $ 825   100.0
                                                           

 

(1)   Excludes loans covered by FDIC loss sharing agreements.

 

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 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 reviewed 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).

 

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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 market 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, 2009, these sources of deposits represented approximately 7% of BB&T’s total deposits, compared to 15% at December 31, 2008.

 

The following table provides information regarding the scheduled maturities of time deposits that are $100,000 and greater at December 31, 2009:

 

Table 6

Scheduled Maturities of Time Deposits $100,000 and Greater

December 31, 2009

(Dollars in millions)

 

Maturity Schedule   

Three months or less

   $ 4,298

Over three through six months

     2,174

Over six through twelve months

     5,750

Over twelve months

     4,937
      

Total

   $ 17,159
      

 

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.

 

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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, 2009, BB&T had approximately 32,400 full-time equivalent employees compared to approximately 29,600 full-time equivalent employees at December 31, 2008.

 

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, 2009, Branch Bank operated 1,857 branch offices in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky, Alabama, Florida, Texas, Nevada, Indiana and Washington, D.C. BB&T exited its offices in Nevada in January 2010. 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

Chairman and Chief Executive Officer

   Chairman since January 2010. Chief Executive Officer since January 2009. Chief Operating Officer between June 2004 and December 2008.    38    61

Christopher L. Henson

Chief Operating Officer

   Chief Operating Officer since January 2009. Chief Financial Officer between July 2005 and December 2008.    25    48

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 final 10 years.    2    48

Ricky K. Brown

Senior Executive Vice President and

Banking Network Manager

   Banking Network Manager since July 2004.    33    54

Barbara F. Duck

Senior Executive Vice President and

Enterprise Risk Manager

   Enterprise Risk Manager since July 2009. Electronic Delivery Channels Manager between July 2006 and June 2009. Risk Manager between June 2004 and June 2006.    22    43

Donna C. Goodrich

Senior Executive Vice President and

Deposit Services Manager

   Deposit Services Manager since April 2004.    24    47

Robert E. Greene

Senior Executive Vice President and Administrative Group Manager

   Administrative Group Manager since August 2001. Risk Management Group Manager between July 2006 and June 2009.    37    59

Clarke R. Starnes III

Senior Executive Vice President and

Chief Risk Officer

   Chief Risk Officer since July 2009. Chief Credit Officer between September 2008 and June 2009. Specialized Lending Manager between January 2000 and August 2008.    28    50

Steven B. Wiggs

Senior Executive Vice President and

Chief Marketing Officer and Lending Group Manager

   Chief Marketing Officer since February 2005. Lending Group Manager since July 2009.    31    52

C. Leon Wilson III

Senior Executive Vice President and

Operations Division Manager

   Operations Division Manager since July 1988.    33    54

 

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Table of Contents

Equity Compensation Plan Information

 

The following table provides information concerning securities to be issued upon the exercise of outstanding equity-based awards, the weighted average price of such awards and the securities remaining available for future issuance as of December 31, 2009.

 

Plan Category

  (a)(1)
Number of securities
to be issued upon
exercise of outstanding
options, warrants and rights
  (b)(1)
Weighted-average
exercise price of
outstanding options,
warrants and rights
  (c)(1)(2)
Number of securities
remaining available
for future issuance
under equity compensation
plans (excluding securities reflected in (a))

Equity compensation plans approved by security holders

  53,249,422   $ 28.20   27,664,449

Equity compensation plans not approved by security holders

  —       —     —  
         

Total

  53,249,422   $ 28.20   27,664,449
         

 

(1)   The table above does not include 147,830 options outstanding at December 31, 2009, at a weighted-average exercise price of $27.76, which are administered under First Virginia option plans that were assumed by BB&T in its acquisition by merger of First Virginia. No future options will be issued under the First Virginia plans.
(2)   All awards remaining available for future issuance will be issued under the terms of the BB&T Corporation 2004 Stock Incentive Plan, as amended by the Corporation’s shareholders at the 2009 Annual Meeting of Shareholders.

 

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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, 2004 in BB&T Common Stock and in each of the indices. In 2009, the financial holding companies in the Industry Peer Group Index (the “Peer Group”) were Capital One Financial Corporation, Comerica Incorporated, Fifth-Third Bancorp, Huntington Bancshares, Incorporated, KeyCorp, M&T Bank Corporation, Marshall & Ilsley Corporation, PNC Financial Services Group, Inc., Regions Financial Corporation, SunTrust Banks, Inc., U.S. Bancorp and Zions Bancorporation. The Peer Group consists of bank holding companies with assets between approximately $51 billion and $281 billion.

 

LOGO

 

*   $ 100 invested on 12/31/04 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

 

     Cumulative Total Return
       12/04        12/05        12/06        12/07        12/08        12/09  
BB&T CORPORATION    $ 100.00    $ 103.40    $ 112.63    $ 82.07    $ 78.53    $ 77.03
S&P 500      100.00      104.91      121.48      128.15      80.88      102.29
BB&T’s PEER GROUP      100.00      99.60      114.78      86.72      55.15      52.35

 

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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 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

 

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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. These regulatory considerations are applicable to privately negotiated acquisition transactions.

 

In August 2009, Branch Bank acquired certain assets of Colonial, including a substantial majority of its loan portfolio, and assumed certain liabilities of Colonial from the FDIC, as receiver of Colonial. In connection with such FDIC-assisted transactions, acquirers will generally enter into purchase and assumption, loss-sharing and other agreements which may contain additional regulatory covenants or limitations. BB&T presently intends to explore other assisted acquisitions in the future.

 

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

 

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federal regulator. These powers may be exercised through the issuance of cease and desist orders, civil money penalties or other actions.

 

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

 

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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.

 

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 and total capital to risk-weighted assets, and Tier 1 capital to adjusted average assets of BB&T, Branch Bank and BB&T FSB as of December 31, 2009, are shown in the following table.

 

Table 7

Capital Adequacy Ratios of BB&T Corporation and Banks

December 31, 2009

 

     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   11.5   12.1   14.2

Total risk-based capital

   8.0      10.0      15.8      14.6      15.5   

Tier 1 leverage ratio

   3.0      5.0      8.5      8.9      13.6   

 

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

 

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“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 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. The assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. On November 12, 2009, the FDIC adopted a rule requiring banks to prepay three years’ worth of premiums to replenish the depleted insurance fund. 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. 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.

 

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.

 

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.

 

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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.

 

Sarbanes-Oxley Act of 2002

 

The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) 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 the 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.

 

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 ways. The nature and extent of future legislative, regulatory or other changes affecting financial institutions is very 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 Board of Directors, Executive Officers and 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

 

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  ·  

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 Codes of Ethics for Directors or Senior Financial Officers on BB&T’s 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, 2009.

 

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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, 2009, 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 2009 performance.

 

Reclassifications

 

In certain circumstances, reclassifications have been made to prior period information to conform to the 2009 presentation. Such reclassifications had no effect on previously reported shareholders’ equity or net income.

 

Mergers and Acquisitions Completed During 2009

 

On August 14, 2009, BB&T acquired certain assets and assumed all of the deposits and certain other liabilities of Colonial, headquartered in Montgomery, Ala., from the FDIC. Colonial operated 357 banking offices in Alabama, Florida, Georgia, Texas and Nevada with approximately $19 billion in deposits at the date of acquisition. In addition to the acquisition noted above, BB&T acquired one insurance agency and three nonbank financial services companies during 2009. All of the nonbank acquisitions during 2009 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 represent management’s best estimate of probable credit losses that are inherent in the portfolio at the balance sheet date. Estimates for loan and lease losses are determined by analyzing historical loan and lease losses, historical loan and lease migration to charge-off experience, current trends in delinquencies and charge-offs, expected cash flows on purchased loans, current assessment of problem loan and lease administration, the results of regulatory examinations, and changes in the size, composition and risk assessment of the loan and lease portfolio. Also included in management’s estimates for loan and lease losses are considerations with respect to the impact of current economic events, the outcomes of which are uncertain. These events may include, but are not limited to, fluctuations in overall interest rates, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting specific geographical

 

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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, 2009, the percentage of total assets and total liabilities measured at fair value was 23.6% 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, 2009, 5.4% of assets measured at fair value were based on significant unobservable inputs. This is approximately 1% of BB&T’s total assets. See Note 18 “Fair Value Disclosures” in the “Notes to Consolidated Financial Statements” herein for additional disclosures regarding the fair value of financial instruments.

 

Securities

 

The fair values 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 securities, the valuation of the security is subjective and may involve substantial judgment. As of December 31, 2009, BB&T had approximately $1.0 billion of available-for-sale and trading securities, which is less than 1% of total assets, valued using unobservable inputs. This total includes $668 million of non-agency mortgage backed securities that are covered by a loss sharing agreement with the FDIC and $219 million of auction-rate securities. BB&T conducts periodic reviews to identify and evaluate each available-for-sale security that has an unrealized loss for other-than-temporary impairment. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. The primary factors BB&T considers in determining whether an impairment is other-than-temporary are the financial condition and near–term prospects of the issuer, including any specific events which may influence the operations of the issuer and BB&T’s intent to sell and whether it is more likely than not that the Company will be required to sell these debt securities before the anticipated recovery of the amortized cost basis.

 

Mortgage Servicing Rights

 

BB&T has a significant mortgage loan servicing portfolio and related mortgage servicing rights (“MSRs”). BB&T has two classes of MSRs for which it separately manages the economic risk: residential and commercial. Residential MSRs are carried at fair value with changes in fair value recorded as a component of mortgage banking income each period. BB&T uses various derivative instruments to mitigate the income statement effect of changes in fair value, due to changes in valuation inputs and assumptions, of its residential MSRs. MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs do occur, the precise terms and conditions typically are not readily available. Accordingly, BB&T estimates the fair value of residential MSRs using an option adjusted spread (“OAS”) valuation model to project MSR cash flows over multiple interest rate scenarios, which are then discounted at risk-adjusted rates. The OAS model considers portfolio characteristics, contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. BB&T reassesses and periodically adjusts the underlying inputs and assumptions in the OAS model to reflect market conditions and assumptions that a market participant would consider in valuing the MSR asset. When available, fair value estimates and assumptions are compared to observable market data and to recent market activity and actual portfolio experience. Due to the nature of the valuation inputs, MSRs are classified within Level 3 of the valuation hierarchy. The value of MSRs is significantly affected by mortgage interest rates available in the marketplace, which influence mortgage loan prepayment speeds. In general, during periods of declining interest rates, the

 

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value of MSRs declines due to increasing prepayments attributable to increased mortgage-refinance activity. Conversely, during periods of rising interest rates, the value of MSRs generally increases due to reduced refinance activity. Commercial MSRs are carried at lower of cost or market and amortized over the estimated period that servicing income is expected to be received based on projections of the amount and timing of estimated future cash flows. The amount and timing of servicing asset amortization is updated based on actual results and updated projections. 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 upon the election of the Fair Value Option. For these loans, the fair value is primarily based on quoted market prices for securities backed by similar types of loans. Changes in the fair value are recorded as a component of mortgage banking income while mortgage loan origination costs for loans held for sale for which the Corporation elected the Fair Value Option are recognized in noninterest expense when incurred. The changes in fair value of these assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage loan held for sale. BB&T uses various derivative instruments to mitigate the income statement effect of changes in fair value of the underlying loans.

 

Derivatives

 

BB&T uses derivatives to manage various financial risks. The fair values of derivative financial instruments are determined based on quoted market prices, dealer quotes and internal pricing models that are primarily sensitive to market observable data. BB&T mitigates the credit risk by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. In addition, certain 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, 2009, BB&T had $281 million of venture capital investments, which is less than 1% of total assets.

 

Intangible Assets

 

BB&T’s mergers and acquisitions are accounted for using the acquisition method of accounting. Under the acquisition method, BB&T is required to record the assets acquired, including identified intangible assets, and liabilities assumed at their fair value, which often involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective. The amortization of identified intangible assets is based upon the estimated economic benefits to be received, which is also subjective. Acquisitions typically result in goodwill, which is subject to ongoing periodic impairment tests based on the fair value of net assets acquired compared to their carrying value. 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 evaluated the sensitivity of the significant assumptions in its impairment analysis including consideration of a 10% change in estimated future cash flows or the discount rate for each reporting unit. After giving appropriate consideration to all available information, management determined that no impairment of goodwill would have been incurred. However, as a result of the

 

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challenging economic environment, the excess of the fair value over the carrying value of several reporting units has narrowed. A continuing period of depressed market conditions, or further market deterioration, may result in impairment of goodwill in the future.

 

Pension and Postretirement Benefit Obligations

 

BB&T offers various pension plans and postretirement benefit plans to employees. The calculation of the obligations and related expenses under these plans requires the use of actuarial valuation methods and assumptions. Actuarial assumptions used in the determination of future values of plan assets and liabilities are subject to management judgment and 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. Management evaluated the sensitivity changes in the expected return on plan assets and the discount rate would have on pension expense for 2010. A decrease of 25 basis points in the discount rate would result in an additional pension expense of approximately $9 million for 2010. Based on the balance of plan assets on December 31, 2009, a decrease of one percent in the expected return on plan assets would result in an increase of approximately $22 million in pension expense for 2010. Please refer to Note 14 “Benefit Plans” in the “Notes to Consolidated Financial Statements” for disclosures related to BB&T’s benefit plans.

 

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, 2009, BB&T’s average assets totaled $155.2 billion, an increase of $18.3 billion, or 13.4%, compared to the 2008 average of $136.9 billion, primarily reflecting growth in average loans and leases and investment securities. Average loans and leases for 2009 were up $7.0 billion, or 7.3%, from 2008 and average investment securities increased $7.8 billion, or 31.8%, compared to 2008. The growth in average loans and leases was led by growth in average commercial loans and leases, which increased $2.5 billion, or 5.3%, and growth in average loans originated by BB&T’s specialized lending subsidiaries, which increased $1.6 billion, or 29.6%. BB&T also added $3.1 billion in average covered loans in the Colonial acquisition. Total earning assets averaged $135.7 billion in 2009, an increase of $14.8 billion, or 12.3%, compared to 2008. These averages and growth rates include the effects of acquisitions.

 

BB&T’s average deposits totaled $102.4 billion, reflecting growth of $13.6 billion, or 15.3%, compared to 2008. The growth in average deposits includes growth of 17.7% from client sources and a decline of 4.6% in wholesale deposit products. The favorable change was due to the additional deposits assumed in the Colonial acquisition, which contributed approximately $6.5 billion of the growth in average client deposits, as well as strong internal growth.

 

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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 $12.5 billion for the year ended December 31, 2009, an increase of $1.9 billion, or 18.1%, from 2008. 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 $19.1 billion for the year ended December 31, 2009, a decrease of $754 million, or 3.8%, compared to 2008.

 

The compound annual rate of growth in average total assets for the five-year period ended December 31, 2009, was 10.0%. Over the same five-year period, average loans and leases increased at a compound annual rate of 9.1%, average securities increased at a compound annual rate of 12.1%, and average deposits grew at a compound annual rate of 9.6%. 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 4.0% from year-end 2008 to year-end 2009, to a total of $34.5 billion at December 31, 2009.

 

As of December 31, 2009, the total securities portfolio included $636 million in trading securities and $33.9 billion of available-for-sale securities. The available-for-sale portfolio comprised 98.2% of total securities at December 31, 2009. 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 8

Composition of Securities Portfolio

 

     December 31,
     2009    2008    2007
     (Dollars in millions)

Trading securities:

   $ 636    $ 376    $ 1,009
                    

Securities available for sale:

        

U.S. government-sponsored entities (GSE)

     2,035      1,333      9,807

Mortgage-backed securities issued by GSE

     26,670      27,430      8,221

States and political subdivisions

     2,107      2,077      1,392

Non-agency mortgage-backed securities

     1,022      1,098      1,720

Equity and other securities

     874      905      1,279

Covered securities

     1,201      —        —  
                    

Total securities available for sale

     33,909      32,843      22,419
                    

Total securities

   $ 34,545    $ 33,219    $ 23,428
                    

 

Total securities available for sale increased $10.4 billion in 2008 compared to 2007, primarily as a result of deploying the additional capital invested by the U.S Treasury in the fourth quarter of 2008 as part of the Capital Purchase Program. While BB&T repaid the capital invested by the U.S. Treasury in the second quarter of 2009,

 

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the Company issued other forms of capital and has retained a higher level of securities. Currently, as a result of the low interest-rate environment, management is not reinvesting all cash flows from the securities portfolio and expects the size of the portfolio as a percentage of total assets to decline in the future.

 

Mortgage-backed securities issued by government-sponsored entities comprised 78.7% of the total available-for-sale securities portfolio at year-end 2009. The duration of the mortgage-backed securities was 3.37 years at December 31, 2009 compared to 1.60 years at December 31, 2008. As of December 31, 2009, the available-for-sale securities portfolio also includes $1.2 billion of securities that were acquired from the FDIC as part of the Colonial transaction. These securities are covered by FDIC loss sharing agreements and include $896 million of non-agency mortgage-backed securities and $305 million of municipal securities. The duration of the entire available-for-sale portfolio at December 31, 2009 was 4.40 years compared to 2.77 years at December 31, 2008. The duration of the securities portfolio excludes equity securities, auction rate securities, and re-remic non-agency mortgage-backed securities that were acquired in the Colonial acquisition.

 

BB&T sold a total of $17.1 billion in available-for-sale securities during 2009, including $2.4 billion of securities acquired in the Colonial acquisition, which produced net securities gains of $240 million, none of which related to the sales from the Colonial acquisition. In addition, BB&T recognized in net income $41 million in charges for other-than-temporary impairment related to certain debt and equity securities. During the first quarter of 2009, BB&T took advantage of an opportunity to shorten the duration of its securities portfolio and realize gains in certain mortgage-backed securities issued by U.S. government-sponsored entities. While these mortgage-backed securities had higher yields, they had a longer duration and government efforts to drive down mortgage rates increased the risk of early prepayment. The majority of the proceeds from these sales were reinvested in similar securities with shorter durations early in the second quarter of 2009. During 2008, BB&T sold approximately $21.0 billion of available-for-sale securities and realized net gains totaling $211 million. In addition, 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.

 

The fair value of the available-for-sale portfolio at year-end 2009 was $363 million lower than the amortized cost of these securities. At December 31, 2009, BB&T’s available-for-sale portfolio had net unrealized losses, net of deferred income taxes, of $225 million, which are reported as a component of shareholders’ equity. At December 31, 2008, the available-for-sale portfolio had net unrealized losses of $517 million, or $324 million, net of deferred income taxes. The increase in the fair value of the securities available-for-sale portfolio during 2009 was largely a result of recoveries in the value of non-agency mortgage-backed securities and municipal securities, as investor concerns about real estate related assets and the overall state of the economy abated to some degree. Increases in the values of these portfolios were partially offset by declines in the value of government-sponsored entity securities and mortgage-backed securities issued by government-sponsored entities due to movements in interest rates and the realization of $240 million of net gains on sales of securities.

 

On December 31, 2009, BB&T held certain investment securities having continuous unrealized losses for more than 12 months. As of December 31, 2009, the unrealized losses on these securities totaled $311 million. All of these losses were in non-agency mortgage-backed and municipal securities. At December 31, 2009, all of the available-for-sale debt securities in an unrealized loss position, excluding those covered by FDIC loss sharing agreements, were investment grade with the exception of (a) one auction rate security with a book value of $2 million; (b) two municipal bonds with a book value of $8 million; (c) eleven non-agency mortgage-backed securities with a book value of $859 million and (d) one non-agency commercial mortgage-backed security with a book value of $25 million. All of the non-investment grade securities referenced above were initially investment grade and have been downgraded since purchase. BB&T evaluated all of its debt securities for credit impairment. Based on its evaluation at December 31, 2009, BB&T determined that certain of the non-investment grade non-agency mortgage-backed securities had credit losses evident and recognized other-than-temporary impairments related to these securities. Approximately $1 million of the decline in fair value related to credit losses and was recognized in net income. BB&T’s evaluation of the other debt securities with continuous unrealized losses indicated that there were no credit losses evident. Furthermore, BB&T does not intend to sell and determined that it is more likely than not that the Company will not be required to sell these debt securities before the anticipated recovery of the amortized cost basis. See the “Summary Analysis Supporting Conclusions” section included in Note 3 “Securities” in the “Notes to Consolidated Financial Statements” herein for additional disclosures related to BB&T’s evaluation of securities for other-than-temporary impairment.

 

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The following table presents BB&T’s securities portfolio at December 31, 2009, segregated by major category with ranges of maturities and average yields disclosed.

 

Table 9

Securities

 

     December 31, 2009  
     Fair Value    Weighted
Average Yield (1)
 
     (Dollars in millions)  
U.S. government-sponsored entities (GSE):      

Within one year

   $ 51    3.38

One to five years

     138    3.74   

Five to ten years

     1,844    3.43   

After ten years

     2    4.02   
         

Total

     2,035    3.45   
         
Mortgage-backed securities issued by GSE (2):      

Within one year

     72    3.51   

One to five years

     6    5.53   

Five to ten years

     1,614    4.28   

After ten years

     24,978    3.83   
         

Total

     26,670    3.85   
         
     
Obligations of states and political subdivisions (3):      

Within one year

     33    6.94   

One to five years

     22    7.15   

Five to ten years

     60    7.04   

After ten years

     1,976    6.29   
         

Total

     2,091    6.33   
         
Non-agency mortgage-backed securities (2):      

Five to ten years

     34    4.80   

After ten years

     988    5.77   
         

Total

     1,022    5.75   
         
Other securities:      

Within one year

     1    3.13   

One to five years

     2    5.22   

After ten years

     7    2.55   
         

Total

     10    3.12   
         
Covered securities (2):      

Five to ten years

     109    5.32   

After ten years

     1,092    12.90   
         

Total

     1,201    12.19   
         

Trading securities and securities with no stated maturity (4)

     1,516    1.02   
         

Total securities (5)

   $ 34,545    4.21   
         

 

(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 included in maturity groupings based on the contractual maturity. The expected life of mortgage- backed securities will differ from contractual maturities because borrowers may have the right to call or prepay the underlying mortgage loans with or without call or prepayment penalties.

 

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(3)   Excludes the effect of pay-fixed swaps hedging municipal securities.
(4)   Trading securities and securities with no stated maturity include equity investments that totaled $864 million, certain municipal investments that totaled $16 million and trading securities that totaled $636 million.
(5)   Includes securities available-for-sale and trading securities of $33.9 billion and $636 million, respectively.

 

The fully taxable equivalent (“FTE”) yield on the total securities portfolio was 4.30% for the year ended December 31, 2009 compared to 5.05% for the prior year. The yield on mortgage-backed securities issued by government-sponsored entities decreased from 4.94% to 4.14%, the FTE yield on state and municipal securities decreased from 6.33% last year to 5.67% in the current year and the yield on U.S. government-sponsored entity securities decreased from 4.86% in 2008 to 3.86% in 2009. The decrease in the annualized FTE yield on the average securities portfolio was primarily the result of reinvesting the sales from the first quarter of 2009 into shorter duration securities. Partially offsetting these declines, the FTE yield benefited from the addition of the securities acquired in the Colonial transaction.

 

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. BB&T’s loan portfolio, excluding loans held for sale, increased $6.4 billion, or 6.6%, compared to year-end 2008. This increase includes $8.0 billion in covered loans acquired as part of the Colonial transaction. All covered loans are covered by one of the FDIC loss share agreements as further discussed in Note 2 to the consolidated financial statements. Average total loans and leases for 2009 increased $7.0 billion, or 7.3%, compared to 2008. The growth in the average loan portfolio included $3.2 billion of average loans as a result of the Colonial acquisition during 2009.

 

The following table presents BB&T’s average loans for the years ended December 31, 2009 and 2008, segregated by major category:

 

Table 10

Composition of Average Loans and Leases

 

     For The Year Ended December 31,  
     2009     2008  
     Balance    % of total     Balance    % of total  
     (Dollars in millions)  

Commercial loans and leases

   $ 50,074    48.9   $ 47,557    50.0

Direct retail loans

     14,730    14.4        15,580    16.4   

Sales finance loans

     6,392    6.3        6,216    6.5   

Revolving credit loans

     1,855    1.8        1,664    1.7   

Mortgage loans

     15,927    15.6        17,327    18.2   

Specialized lending loans

     7,141    7.0        5,509    5.8   

Other acquired loans

     52    0.1        —      —     
                          

Total average loans and leases held for investment (excluding covered loans)

     96,171    94.1        93,853    98.6   

Covered loans

     3,144    3.1        —      —     
                          

Total average loans and leases held for investment

     99,315    97.2        93,853    98.6   

Loans held for sale

     2,831    2.8        1,342    1.4   
                          

Total average loans and leases

   $ 102,146    100.0   $ 95,195    100.0
                          

 

Average commercial loans and leases increased $2.5 billion, or 5.3%, in 2009 as compared to 2008. Overall, the commercial loan and lease portfolio showed moderate growth during 2009. The mix of the commercial loan portfolio has shifted somewhat, as commercial real estate lending has slowed due to a slower real estate market.

 

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In addition, management has intentionally lowered its exposure to real estate lending over the past several years, which has resulted in lower balances of commercial real estate loans. This has been offset by an increased focus on commercial and industrial loans. BB&T experienced stronger trends in commercial and industrial lending in 2009 primarily in lending relationships with healthcare and governmental entities, due to BB&T’s strong capital position, credit ratings and willingness to extend credit.

 

Average direct retail loans declined 5.5% in 2009 due to continuing difficulties in the residential real estate market, which decreased demand for home equity loan products. Average sales finance loans and average revolving credit reflected growth rates of 2.8% and 11.5% during 2009, respectively. BB&T concentrates its efforts on the highest quality borrowers in both of these product markets.

 

Average mortgage loans held for investment decreased $1.4 billion, or 8.1%, compared to 2008. 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 2009 originations of $28.2 billion. The vast majority of mortgage loans originated during 2009 were conforming mortgage loans that were either sold in the secondary market or held in the loans held for sale portfolio at year-end, which is the primary reason for the decline in mortgage loans held for investment. Average loans held for sale, which primarily consists of government-conforming mortgage loans, increased $1.5 billion, or 111.0% compared to 2008 as refinance activity significantly increased due to the historically low loan rates for mortgages.

 

Average loans held by BB&T’s specialized lending subsidiaries increased $1.6 billion, or 29.6%, compared to 2008. The growth in the specialized lending portfolio was primarily in insurance premium finance lending, equipment finance leases and automobile loans. This increase includes the acquisition of assets of an insurance premium finance business on February 2, 2009, which added approximately $715 million in loans.

 

The average annualized FTE yield for 2009 for the total loan portfolio was 5.49% compared to 6.35% for the prior year. The 86 basis point decline in the FTE yield on the loan portfolio was primarily the result of the repricing of loans in response to the decreases in the prime lending rate and other indices, as well as a higher level of nonperforming loans in 2009 as compared to 2008. These declines were partially offset by wider loan spreads on new originations and the Colonial acquisition. The average prime rate in effect during 2009 and 2008 was 3.25% and 5.09%, 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 to a borrower;

 

  ·  

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.

 

BB&T’s asset quality continued to deteriorate in 2009 as a result of challenges in the residential real estate markets and the economic recession. The largest concentration of credit issues continues to be in Georgia, Florida and metro Washington, D.C., which includes the surrounding suburbs. In addition, BB&T has experienced some deterioration in the coastal areas of the Carolinas.

 

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

 

Table 11

Asset Quality

 

     December 31,  
     2009     2008     2007     2006     2005  
     (Dollars in millions)  

Nonaccrual loans and leases

   $ 2,718      $ 1,413      $ 502      $ 260      $ 229   

Foreclosed property

     1,509        617        194        89        71   
                                        

Nonperforming assets (excluding covered assets) (1)(2)

   $ 4,227      $ 2,030      $ 696      $ 349      $ 300   
                                        

Loans 90 days or more past due and still accruing (excluding covered loans) (3)(4)

   $ 319      $ 431      $ 223      $ 102      $ 103   
                                        

Loans 30-89 days past due (excluding covered loans) (3)(5)

   $ 1,686      $ 2,047      $ 1,354      $ 952      $ 695   
                                        

Asset Quality Ratios (including covered loans and foreclosed property)

          

Loans 30-89 days past due and still accruing as a percentage of total loans and leases (3)

     1.96     2.07     1.48     1.14     .93

Loans 90 days or more past due and still accruing as a percentage of total loans and leases (3)

     1.61        .44        .24        .12        .14   

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

     2.56        1.43        .55        .31        .31   

Total nonperforming assets as a percentage of:

          

Total assets

     2.65        1.34        .52        .29        .27   

Loans and leases plus foreclosed property

     4.07        2.04        .76        .42        .40   

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

     1.74        .89        .38        .27        .30   

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

     2.51        1.62        1.10        1.07        1.11   

Ratio of allowance for loan and lease losses to:

          

Net charge-offs

     1.47     1.85     2.97     4.12     3.84

Nonperforming loans and leases

     .96        1.11        2.00        3.41        3.60   

Asset Quality Ratios (excluding covered loans and foreclosed property)

          

Loans 30-89 days past due and still accruing as a percentage of total loans and leases (3)

     1.72     2.07     1.48     1.14     .93

Loans 90 days or more past due and still accruing as a percentage of total loans and leases (3)

     .32        .44        .24        .12        .14   

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

     2.77        1.43        .55        .31        .31   

Total nonperforming assets as a percentage of:

          

Total assets

     2.68        1.34        .52        .29        .27   

Loans and leases plus foreclosed property

     4.24        2.04        .76        .42        .40   

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

     1.79        .89        .38        .27        .30   

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

     2.72        1.62        1.10        1.07        1.11   

 

(1)   Covered and other acquired loans are considered to be performing due to the application of the accretion method. Covered loans that are contractually past due are noted in the footnotes below.
(2)   Excludes foreclosed real estate totaling $160 million as of December 31, 2009 that is covered by FDIC loss sharing agreements.
(3)   Excludes mortgage loans guaranteed by GNMA that BB&T does not have the obligation to repurchase.
(4)   Excludes loans totaling $1.4 billion past due 90 days or more at December 31, 2009 that are covered by FDIC loss sharing agreements.
(5)   Excludes loans totaling $391 million past due 30-89 days at December 31, 2009 that are covered by FDIC loss sharing agreements.

 

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Substantially all of the loans acquired in the Colonial acquisition are covered by loss sharing agreements with the FDIC, whereby the FDIC reimburses BB&T for the majority of the losses incurred. In addition, all of the loans acquired were recorded at fair value as of the acquisition date without regard to the loss sharing agreements. Loans were evaluated and assigned to loan pools based on common risk characteristics. The determination of the fair value of the loans resulted in a significant write-down in the carrying amount of the loans, which was assigned to an accretable or nonaccretable balance, with the accretable balance being recognized as interest income over the remaining term of the loan. In accordance with the acquisition method of accounting, there was no allowance brought forward on any of the acquired loans, as the credit losses evident in the loans were included in the determination of the fair value of the loans at the acquisition date and are represented by the nonaccretable balance. The majority of the nonaccretable balance is expected to be received from the FDIC in connection with the loss share agreements and is recorded as a separate asset from the covered loans and reflected on the Consolidated Balance Sheets. As a result, all of the loans acquired in the Colonial acquisition were considered to be accruing loans as of the acquisition date. In accordance with regulatory reporting standards, covered loans that are contractually past due will continue to be reported as past due and still accruing based on the number of days past due. Because of the significant difference in the accounting for the covered loans and the loss share agreements with the FDIC, management believes that asset quality measures excluding the covered loans are generally more meaningful. Therefore, management has presented asset quality measures in Table 11 that both include and exclude the covered loans and foreclosed property.

 

Nonperforming assets consist of foreclosed real estate, repossessions, nonaccrual loans and certain restructured loans, which totaled $4.4 billion at December 31, 2009 (or $4.2 billion excluding covered foreclosed property), compared to $2.0 billion at December 31, 2008. The increase in nonperforming assets included an increase of $1.3 billion in nonperforming loans and $1.1 billion in foreclosed assets, including $160 million in foreclosed property from the Colonial acquisition that is covered by the FDIC loss share agreements. Housing related projects accounted for 84% (52% for land/lots and 32% for 1-4 family homes) of total foreclosed property at December 31, 2009. The increase in foreclosed properties was dispersed throughout BB&T’s markets, with the largest increases occurring in Georgia, North Carolina, and Florida. As a percentage of loans and leases plus foreclosed property, nonperforming assets were 4.07% at December 31, 2009 (or 4.24% excluding covered loans and foreclosed property) compared with 2.04% at December 31, 2008.

 

Troubled debt restructurings generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term. As a result, BB&T will work with the borrower to prevent further difficulties, and ultimately to improve the likelihood of recovery on the loan. To facilitate this process, a concessionary modification that would not otherwise be considered may be granted resulting in classification as a troubled debt restructuring. Troubled debt restructurings can involve loans remaining on non-accrual, moving to non-accrual, or continuing on accruing status, depending on the individual facts and circumstances of the borrower. Generally, a nonaccrual loan that is restructured remains on nonaccrual for a period of six months to demonstrate the borrower can meet the restructured terms. However, performance prior to the restructuring, or significant events that coincide with the restructuring, are considered in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is not reasonably assured, the loan remains classified as a nonaccrual loan.

 

The majority of BB&T’s loan modifications relate to commercial lending and involve extending the term of the loan. In these cases, BB&T does not typically lower the interest rate or forgive principal or interest as part of the loan modification. In addition, it is common for BB&T to obtain additional collateral or guarantor support when modifying a loan. At December 31, 2009, BB&T had $471 million in loans that were accruing interest under the terms of troubled debt restructurings. This amount consists of $308 million in commercial loans, $103 million in residential mortgage loans, $54 million in revolving credit loans and $6 million in direct retail loans. Nonaccrual restructured loans and leases are included in nonaccrual loans and leases in the accompanying tables. The amount of loan restructurings has increased during 2009, as BB&T continues to work with borrowers who are experiencing financial difficulties. As a result of continued economic stress, BB&T anticipates that it will have further increases in loan restructurings during 2010.

 

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Early indicators of problem loans were relatively stable over the last several quarters of 2009 and have decreased significantly compared to the level at year-end 2008. Loans 90 days or more past due and still accruing interest, excluding Colonial loans covered by FDIC loss share agreements, totaled $319 million at December 31, 2009, compared with $431 million at year-end 2008. Loans 30-89 days past due, excluding Colonial loans covered by FDIC loss share agreements totaled $1.7 billion at December 31, 2009, which was also a decline compared with $2.0 billion at year-end 2008.

 

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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,  
    2009     2008     2007  
    (Dollars in millions)  

Nonaccrual loans and leases (1)

     

Commercial loans and leases

  $ 1,651      $ 845      $ 273   

Direct retail

    197        89        43   

Sales finance

    7        7        5   

Mortgage

    767        375        119   

Specialized lending

    96        97        62   
                       

Total nonaccrual loans and leases

    2,718        1,413        502   
                       

Foreclosed real estate

    1,451        538        143   

Other foreclosed property

    58        79        51   
                       

Total nonperforming assets (excluding covered assets) (2)

  $ 4,227      $ 2,030      $ 696   
                       

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

     

Commercial loans and leases

    1.68     .85     .30

Direct retail

    .20        .09        .05   

Sales finance

    .01        .01        —     

Mortgage

    .78        .38        .13   

Specialized lending

    .10        .10        .07   
                       

Total nonaccrual loans and leases as a percentage of loans and leases (excluding covered loans) (3)

    2.77     1.43     .55
                       

Loans 90 days or more past due and still accruing interest (4)

     

Commercial loans and leases

  $ 7      $ 86      $ 40   

Direct retail

    82        117        58   

Sales finance

    30        26        17   

Revolving credit

    25        23        15   

Mortgage

    158        165        85   

Specialized lending

    12        14        8   

Other acquired loans

    5        —          —     
                       

Total loans 90 days or more past due and still accruing interest (excluding covered loans) (5)

  $ 319      $ 431      $ 223   
                       

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

     

Commercial loans and leases

    .01     .09     .04

Direct retail

    .08        .12        .06   

Sales finance

    .03        .03        .02   

Revolving credit

    .03        .02        .02   

Mortgage

    .16        .17        .09   

Specialized lending

    .01        .01        .01   

Other acquired loans

    —          —          —     
                       

Total loans 90 days or more past due and still accruing interest as a percentage of total loans and leases (excluding covered loans) (6)

    .32     .44     .24
                       

Loans 30-89 days past due (4)

     

Commercial loans and leases

  $ 377      $ 594      $ 284   

Direct retail

    216        270        192   

Sales finance

    126        146        105   

Revolving credit

    32        34        24   

Mortgage

    623        690        506   

Specialized lending

    306        313        243   

Other acquired loans

    6        —          —     
                       

Total loans 30-89 days past due (excluding covered loans) (7)

  $ 1,686      $ 2,047      $ 1,354   
                       

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

     

Commercial loans and leases

    .39     .60     .31

Direct retail

    .22        .27        .21   

Sales finance

    .13        .15        .11   

Revolving credit

    .03        .03        .03   

Mortgage

    .63        .70        .55   

Specialized lending

    .31        .32        .27   

Other acquired loans

    .01        —          —     
                       

Total loans 30-89 days past due as a percentage of total loans and leases (excluding covered loans) (8)

    1.72     2.07     1.48
                       

 

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(1)   Covered and other acquired loans are considered to be performing due to the application of the accretion method. Covered loans that are contractually past due are noted in the footnotes below.
(2)   Excludes foreclosed real estate totaling $160 million at December 31, 2009 that is covered by FDIC loss sharing agreements.
(3)   Including loans covered by FDIC loss sharing agreements, nonaccrual loans and leases as a percentage of total loans and leases was 2.56% as of December 31, 2009.
(4)   Excludes mortgage loans guaranteed by GNMA that BB&T does not have the obligation to repurchase.
(5)   Excludes loans totaling $1.4 billion past due 90 days or more at December 31, 2009 that are covered by FDIC loss sharing agreements.
(6)   Including loans covered by FDIC loss sharing agreements, loans past due 90 days or more and still accruing as a percentage of total loans and leases was 1.61% as of December 31, 2009.
(7)   Excludes loans totaling $391 million past due 30-89 days at December 31, 2009 that are covered by FDIC loss sharing agreements.
(8)   Including loans covered by FDIC loss sharing agreements, loans past due 30-89 days as a percentage of total loans and leases was 1.96% as of December 31, 2009.

 

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 $2.7 billion at December 31, 2009, an increase of 66.3% compared to $1.6 billion at the end of 2008. The allowance for loan and lease losses, as a percentage of loans and leases held for investment, was 2.51% at December 31, 2009 (or 2.72% excluding covered loans), compared to 1.62% at year-end 2008. The allowance for credit losses increased by $1.1 billion during 2009, primarily as a result of higher loss rates for residential real estate related lending, and their effect on the overall allowance model. The growth of $1.1 billion in the allowance for credit losses reflects migrations of loans to higher risk grades, with the most significant increases occurring in the single family residential, acquisition, development, and construction loan portfolio and the consumer real estate 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 tables. Table 13-1 is presented using regulatory classifications, which focuses on the underlying loan collateral, and differs from internal classifications presented herein that focus on the lines of business that generate the loans. Table 13-2 is presented based upon the lines of business, as discussed herein.

 

Table 13-1

Analysis of Allowance for Credit Losses

 

     December 31,  
     2009     2008     2007     2006     2005  
     (Dollars in millions)  

Balance, beginning of period

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

Charge-offs:

          

Commercial, financial and agricultural

     (214     (94     (40     (32     (52

Real estate

     (1,157     (427     (93     (46     (45

Consumer

     (477     (383     (264     (194     (174

Lease receivables

     (14     (13     (8     (5     (6
                                        

Total charge-offs

     (1,862     (917     (405     (277     (277
                                        

Recoveries:

          

Commercial, financial and agricultural

     16        10        11        12        14   

Real estate

     24        8        8        7        8   

Consumer

     48        47        47        41        39   

Lease receivables

     1        1        1        1        2   
                                        

Total recoveries

     89        66        67        61        63   
                                        

Net charge-offs

     (1,773     (851     (338     (216     (214
                                        

Provision charged to expense

     2,811        1,445        448        240        217   
                                        

Other changes

     27        (2     17        34        (1
                                        

Balance, end of period

   $ 2,672      $ 1,607      $ 1,015      $ 888      $ 830   
                                        

Average loans and leases (1)

   $ 102,146      $ 95,195      $ 87,952      $ 79,313      $ 71,517   
                                        

Net charge-offs as a percentage of average loans and leases (1) (2)

     1.74     .89     .38     .27     .30
                                        

 

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(1)   Loans and leases are net of unearned income and include loans held for sale.
(2)   The net charge-off rate for 2009 was 1.79% excluding the effect of average loans covered by the FDIC loss sharing agreements.

 

Table 13—2

Analysis of Allowance for Credit Losses by Lines of Business

 

      December 31,  
     2009     2008     2007     2006     2005  
     (Dollars in millions)  
Allowance For Credit Losses           

Beginning balance

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

Other changes

     27        (2     17        34        (1

Provision for credit losses

     2,811        1,445        448        240        217   

Charge-offs

          

Commercial loans and leases

     (720     (276     (65     (37     (49

Direct retail loans

     (349     (156     (72     (48     (46

Sales finance loans

     (72     (59     (31     (21     (27

Revolving credit loans

     (127     (79     (47     (45     (54

Mortgage loans

     (280     (96     (10     (6     (6

Specialized lending

     (314     (251     (180     (120     (95
                                        

Total charge-offs

     (1,862     (917     (405     (277     (277
                                        

Recoveries

          

Commercial loans and leases

     21        16        17        15        17   

Direct retail loans

     19        12        13        12        12   

Sales finance loans

     9        7        8        8        9   

Revolving credit loans

     12        11        12        11        11   

Mortgage loans

     5        1        —          1        1   

Specialized lending

     23        19        17        14        13   
                                        

Total recoveries

     89        66        67        61        63   
                                        

Net charge-offs

     (1,773     (851     (338     (216     (214
                                        

Ending balance

   $ 2,672      $ 1,607      $ 1,015      $ 888      $ 830   
                                        

 

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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, 2009.

 

Table 14-1

Real Estate Lending Portfolio Credit Quality and Geographic Distribution

Commercial Real Estate Loan Portfolio (1)

 

     As of / For the Period Ended December 31, 2009  

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

   $ 1,663      $ 3,741      $ 357      $ 5,761   

Average loan size (in thousands)

     260        584        1,433        442   

Average client size (in thousands)

     603        1,035        2,587        884   

Nonaccrual loans and leases as a percentage of category

     14.93     12.83     15.92     13.63

Gross charge-offs as a percentage of category—YTD

     4.85        6.33        4.42        5.71   

Gross charge-offs as a percentage of category—QTD

     5.46        7.83        11.96        7.40   

 

     As of / For the Period Ended December 31, 2009  

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
- YTD
    Gross
Charge-Offs
as a
Percentage of
Outstandings
-QTD
 
     (Dollars in millions)  

North Carolina

   $ 2,313    40.2   $ 186    8.04   1.99   2.64

Virginia

     898    15.6        69    7.73      3.74      3.13   

Georgia

     747    13.0        183    24.53      14.20      20.24   

South Carolina

     554    9.6        110    19.85      6.22      9.60   

Florida

     490    8.5        124    25.18      12.44      16.91   

Washington, D.C.

     209    3.6        39    18.78      1.13      .12   

Tennessee

     174    3.0        32    18.54      4.98      9.47   

Kentucky

     166    2.9        16    9.59      4.79      7.94   

West Virginia

     129    2.2        23    17.61      6.52      9.06   

Maryland

     81    1.4        3    3.75      1.06      1.56   
                          

Total

   $ 5,761    100.0   $ 785    13.63      5.71      7.40   
                          

 

    As of / For the Period Ended December 31, 2009  

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

  $ 1,213      $ 2,043      $ 9,221      $ 12,477   

Average loan size (in thousands)

    1,142        729        490        550   

Average client size (in thousands)

    1,705        868        738        801   

Nonaccrual loans and leases as a percentage of category

    2.04     5.09     2.26     2.70

Gross charge-offs as a percentage of category—YTD

    .17        1.83        .58        .76   

Gross charge-offs as a percentage of category—QTD

    .35        3.42        .81        1.21   

 

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     As of / For the Period Ended December 31, 2009  

Other Commercial Real Estate Loans
by State of Origination (2)

   Total
Outstandings
   Percentage
of Total
    Nonaccrual
Loans and
Leases
   Nonaccrual
as a
Percentage of
Outstandings
    Gross
Charge-Offs
as a
Percentage of
Outstandings
- YTD
    Gross
Charge-Offs
as a
Percentage of
Outstandings
-QTD
 
     (Dollars in millions)  

North Carolina

   $ 3,801    30.4   $ 75    1.96   .49   1.08

Georgia

     2,207    17.7        84    3.79      1.29      1.83   

Virginia

     1,914    15.3        25    1.30      .06      .10   

South Carolina

     970    7.8        33    3.45      .70      1.26   

Florida

     943    7.6        73    7.80      2.81      4.36   

Washington, D.C.

     705    5.6        16    2.33      .40      .28   

Maryland

     535    4.3        1    .12      .15      .39   

West Virginia

     470    3.8        8    1.73      .27      .49   

Kentucky

     421    3.4        8    1.91      1.14      .41   

Tennessee

     399    3.2        14    3.49      .93      1.35   

Other

     112    .9        —      —        —        —     
                          

Total

   $ 12,477    100.0   $ 337    2.70      .76      1.21   
                          

 

Applicable ratios are annualized.

 

(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. Excludes covered loans and in process items.
(2)   C&I loans secured by real property are excluded.

 

The residential acquisition, development and construction (“ADC”) loan portfolio totaled $5.8 billion at December 31, 2009, a decrease of $2.2 billion from December 31, 2008. This portfolio remained under stress throughout 2009. The decline in the portfolio reflects management’s efforts to work through the problem credits in this portfolio. Nonaccrual ADC loans were $785 million at December 31, 2009, an increase of $285 million, compared to $500 million at December 31, 2008. As a percentage of loans, ADC nonaccruals were 13.63% at year-end 2009, compared to 6.27% at year-end 2008. The allowance for loan and lease losses that is assigned to the ADC portfolio was 14.1% as of December 31, 2009, compared to 7.7% as of year-end 2008. The gross charge-off rate for the ADC portfolio was 5.71% for 2009 compared to 1.83% for 2008. For the fourth quarter of 2009, the annualized gross charge-off rate was 7.40% compared to 6.35% for the third quarter of 2009.

 

The other commercial real estate portfolio, which is largely office buildings, hotels, warehouses, apartments, rental houses, and shopping centers, totaled $12.5 billion at December 31, 2009. While this portfolio has experienced some deterioration, BB&T has not seen a dramatic increase in problem credits in this portfolio. The components of the portfolio that are experiencing the most stress relate to land development and hotel properties. As a percentage of loans, other commercial real estate nonaccruals were 2.70% at December 31, 2009, compared with .97% at December 31, 2008. The gross charge-off rate for the other commercial real estate portfolio was .76% in 2009 compared to .25% for 2008. For the fourth quarter of 2009, the annualized gross charge-off rate was 1.21% compared to 1.00% for the third quarter of 2009.

 

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Table 14-2

Real Estate Lending Portfolio Credit Quality and Geographic Distribution

Residential Mortgage Portfolio (1)

 

     As of / For the Period Ended December 31, 2009  

Residential Mortgage Loans

   Prime     ALT-A     Construction/
Permanent
    Subprime (2)     Total  
     (Dollars in millions, except average loan size)  

Total loans outstanding

   $ 11,684      $ 2,684      $ 778      $ 584      $ 15,730   

Average loan size (in thousands)

     197        326        337        67        200   

Average refreshed credit score (3)

     713        694        707        566        704   

Percentage that are first mortgages

     100     100     99     83     99

Average loan to value at origination

     76        67        75        73        75   

Nonaccrual loans and leases as a percentage of category

     3.31        8.98        10.43        11.69        4.94   

Gross charge-offs as a percentage of category—YTD

     1.17        2.94        3.76        4.11        1.79   

Gross charge-offs as a percentage of category—QTD

     1.50        3.61        2.04        4.19        2.00   

 

     As of / For the Period Ended December 31, 2009  

Residential Mortgage Loans by State

   Total
Residential
Mortgages
Outstanding
   Percentage
of Total
    Nonaccrual
as a
Percentage of
Outstandings
    Gross
Charge-Offs
as a
Percentage of
Outstandings
- YTD
    Gross
Charge-Offs
as a
Percentage of
Outstandings
- QTD
 
     (Dollars in millions)  

North Carolina

   $ 3,850    24.5   2.87   .62   .72

Virginia

     3,039    19.3      3.21      1.30      1.11   

Florida

     2,341    14.9      11.08      5.69      6.56   

Maryland

     1,622    10.3      3.66      .81      1.14   

Georgia

     1,502    9.5      5.89      2.11      2.27   

South Carolina

     1,459    9.3      5.55      1.44      1.86   

Kentucky

     360    2.3      1.42      .33      .33   

West Virginia

     332    2.1      1.82      .45      .40   

Tennessee

     250    1.6      3.73      1.30      2.83   

Washington, D.C.

     190    1.2      2.56      .22      —     

Alabama

     147    .9      4.38      1.95      .70   

Other

     638    4.1      7.67      1.17      1.22   
                   

Total

   $ 15,730    100.0   4.94      1.79      2.00   
                   

 

Applicable ratios are annualized.

 

(1)   Excludes mortgage loans held for sale, covered loans, mortgage loans guaranteed by GNMA that BB&T does not have the obligation to repurchase and in process items.
(2)   Includes $365 million in loans originated by Lendmark Financial Services, which are disclosed as a part of the specialized lending category.
(3)   Weighted based on outstanding balance.

 

The residential mortgage loan portfolio, as presented in Table 14-2, totaled $15.7 billion as of December 31, 2009, a decrease of $1.7 billion from December 31, 2008. As a percentage of loans, residential mortgage loan nonaccruals were 4.94% at December 31, 2009, compared with 2.22% at December 31, 2008. The gross charge-off rate for the residential mortgage loan portfolio was 1.79% in 2009 compared to .57% for 2008. For the fourth quarter of 2009, the annualized gross charge-off rate was 2.00% compared to 2.00% for the third quarter of 2009. The residential mortgage problem credits began to stabilize somewhat in the fourth quarter of 2009, as delinquencies came down and loss rates remained stable.

 

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Table 14-3

Real Estate Lending Portfolio Credit Quality and Geographic Distribution

Direct Retail 1-4 Family and Lot/Land Real Estate Portfolio (1)

 

    As of / For the Period Ended December 31, 2009  

Direct Retail 1-4 Family and Lot/Land
Real Estate Loans and Lines

  Residential
Lot/Land
Loans
    Home Equity
Loans
    Home Equity
Lines
    Total  
    (Dollars in millions, except average loan size)  

Total loans outstanding

  $ 1,723      $ 5,984      $ 5,656      $ 13,363   

Average loan size (in thousands) (2)

    65        43        36        41   

Average refreshed credit score (3)

    721        720        760        743   

Percentage that are first mortgages

    100     73     26     57

Average loan to value at origination

    80        64        65        66   

Nonaccrual loans and leases as a percentage of category

    5.78        1.11        .46        1.44   

Gross charge-offs as a percentage of category—YTD

    6.98        1.36        1.45        2.19   

Gross charge-offs as a percentage of category—QTD

    5.72        1.47        1.43        2.01   

 

     As of / For the Period Ended December 31, 2009  

Direct Retail 1-4 Family and Lot/Land Real
Estate Loans and Lines By State of Origination

   Total Direct Retail
1-4 Family and
Lot/Land Real
Estate Loans and
Lines
Outstanding
   Percentage
of Total
    Nonaccrual
as a
Percentage of
Outstandings
    Gross
Charge-Offs
as a
Percentage of
Outstandings
- YTD
    Gross
Charge-Offs
as a
Percentage of
Outstandings
- QTD
 
     (Dollars in millions)  

North Carolina

   $ 4,607    34.5   1.61   1.87   1.63

Virginia

     3,003    22.5      .69      1.46      1.47   

South Carolina

     1,293    9.7      2.19      2.31      2.11   

Georgia

     1,088    8.1      2.02      3.95      4.67   

Maryland

     832    6.2      .67      1.50      1.24   

West Virginia

     813    6.1      1.14      .89      .74   

Florida

     666    5.0      2.51      7.18      5.60   

Kentucky

     574    4.3      1.11      .50      .38   

Tennessee

     379    2.8      1.96      4.26      3.42   

Washington, D.C.

     85    .6      1.22      3.17      2.76   

Other

     23    .2      1.13      1.13      3.23   
                   

Total

   $ 13,363    100.0   1.44      2.19      2.01   
                   

 

Applicable ratios are annualized.

 

(1)   Direct retail 1-4 family and lot/land real estate loans are originated through the BB&T branching network. Excludes covered loans and in process items.
(2)   Home equity lines without an outstanding balance are excluded from this calculation.
(3)   Based on number of accounts.

 

The direct retail consumer real estate loan portfolio, as presented in Table 14-3, totaled $13.4 billion as of December 31, 2009, a decrease of $1.0 billion from December 31, 2008. This portfolio comprises of residential lot/land loans, home equity loans and home equity lines, which are primarily originated through the branch network. As a percentage of loans, direct retail consumer real estate nonaccruals were 1.44% at December 31, 2009, compared to .60% at December 31, 2008. The gross charge-off rate for the direct retail consumer real estate loan portfolio was 2.19% in 2009 compared to .71% for 2008. For the fourth quarter of 2009, the annualized gross charge-off rate was 2.01% compared to 1.63% for the third quarter of 2009. The increase in the gross charge-off rate for the fourth quarter of 2009 compared to the third quarter of 2009 was largely a result of a $12 million reversal that was recorded in the third quarter. The $12 million reversal resulted from receiving higher collateral valuations for certain properties where the estimated losses were recorded in the second quarter of 2009. The residential lot/land loan component of this portfolio experienced the highest loss rates during 2009. The amount of the allowance allocated for the residential lot/land portfolio was 8.1% as of December 31, 2009.

 

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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, 2009, were $115.0 billion, an increase of $16.4 billion, or 16.6%, compared to year-end 2008. The increase in deposits during 2009 was driven by a $12.7 billion, or 32.2%, increase in other client deposits, which include money market deposit accounts, savings accounts, individual retirement accounts and other time deposits. Noninterest-bearing deposits also increased by $5.3 billion from the prior year and client certificates of deposit (“CDs”) increased by $4.4 billion. These increases were partially offset by a decline of $6.8 billion in other interest-bearing deposits, which includes negotiable certificates of deposit and Eurodollar deposits. The increases in these categories of deposits included the impact of the acquisition of Colonial, which added approximately $16 billion of client deposits in 2009. For the year ended December 31, 2009, total deposits averaged $102.4 billion, an increase of $13.6 billion, or 15.3%, compared to 2008. The increase in average deposits was primarily the result of an $8.4 billion, or 23.0%, increase in average other client deposits, and a $3.3 billion, or 25.5%, increase in average noninterest-bearing deposits. The increase in average deposits included the impact of Colonial, which was acquired in August 2009, and Haven Trust Bank, which added approximately $500 million of client deposits in December 2008. In early 2010, BB&T sold approximately $850 million in Nevada deposits obtained in the Colonial acquisition which will affect growth rates going forward.

 

The following table presents BB&T’s average deposits for the years ended December 31, 2009 and 2008, segregated by major category:

 

Table 15

Composition of Average Deposits

 

     For The Year Ended December 31,  
     2009     2008  
     Balance    % of
total
    Balance    % of
total
 
     (Dollars in millions)  

Noninterest-bearing deposits

   $ 16,387    16.0   $ 13,061    14.7

Interest checking

     2,831    2.8        2,376    2.7   

Other client deposits

     45,107    44.1        36,676    41.3   

Client certificates of deposit

     28,702    28.0        26,908    30.3   
                          

Total client deposits

     93,027    90.9        79,021    89.0   
                          

Other interest-bearing deposits

     9,354    9.1        9,810    11.0   
                          

Total average deposits

   $ 102,381    100.0   $ 88,831    100.0
                          

 

BB&T experienced strong deposit growth during 2009. In addition, the overall mix of deposits continues to improve, as average client deposits grew 17.7% in 2009, while reliance on other interest-bearing deposits declined, due to strong growth in noninterest-bearing and other client deposits, which was aided by the Colonial acquisition. BB&T has been successful in attracting new business and individual accounts by emphasizing the strength of BB&T’s franchise. In addition, the new locations that were acquired in the Colonial transaction have seen growth of $1.5 billion in client deposits since the acquisition date of August 14, 2009. Growth in noninterest-bearing deposits also has benefited from participation in the Transaction Account Guarantee program and an increase in escrow deposits due to significant mortgage lending activity. In addition, BB&T was able to achieve growth in deposits, even as rates declined to historical lows throughout the year. Excluding acquisitions, average noninterest-bearing deposits increased 14.8% in 2009 and total client deposits increased 7.9% as BB&T improved its deposit mix through organic growth.

 

The average rate paid on interest-bearing deposits dropped to 1.48% during 2009, from 2.50% in 2008. The average cost for interest-bearing deposits declined during 2009 as management was able to lower rates to help the overall margin. The average rates paid on the various categories of interest-bearing deposits also decreased as follows: CDs decreased to 2.60% in the current year from 3.66% in 2008; other client deposits decreased to .88% in the current year from 1.67% in 2008; interest checking decreased to .39% in 2009 from 1.19% in 2008; and other interest-bearing deposits decreased to 1.23% in 2009 from 2.71% in 2008.

 

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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 were 8.0% of total funding on average in 2009 as compared to 7.7% in 2008. 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 was 17.5% of total short-term borrowings, and securities sold under repurchase agreements, which was 27.1% of short-term borrowings at year-end 2009. Master notes, which are short-term borrowings issued to BB&T’s clients, represented 12.4% of total short-term borrowings at December 31, 2009. Unsecured bank notes, bank obligations collateralized by municipal securities, U.S. Treasury tax and loan deposit notes and borrowings under the treasury auction facility are also used to meet short-term funding needs and represented the remaining 43.0% of these types of funding sources as of December 31, 2009. Short-term borrowings at the end of 2009 were $8.1 billion, a decrease of $2.7 billion, or 24.9% compared to year-end 2008. Average short-term borrowings totaled $12.5 billion during 2009 compared to $10.6 billion last year, an increase of 18.1%. The rates paid on average short-term borrowings declined from 2.44% in 2008 to .50% during 2009. The decrease in the cost of short-term borrowings primarily resulted from a lower average Federal funds rate in effect during 2009 compared to 2008. At December 31, 2009, the targeted Federal funds rate was a range of zero percent to .25%. The following table summarizes certain pertinent information for the past three years with respect to BB&T’s short-term borrowings:

 

Table 16

Federal Funds Purchased, Securities Sold Under

Agreements to Repurchase and Short-Term Borrowed Funds

 

     As of / For the Year Ended
December 31,
 
     2009     2008     2007  
     (Dollars in millions)  
Securities Sold Under Agreements to Repurchase       

Maximum outstanding at any month-end during the year

   $ 2,635      $ 2,929      $ 2,776   

Balance outstanding at end of year

     2,197        2,929        2,530   

Average outstanding during the year

     2,259        2,314        2,160   

Average interest rate during the year

     .96     2.40     4.39

Average interest rate at end of year

     .69        1.41        3.18   
Federal Funds Purchased and Short-term Borrowed Funds       

Maximum outstanding at any month-end during the year

   $ 17,436      $ 13,346      $ 9,148   

Balance outstanding at end of year

     5,909        7,859        8,104   

Average outstanding during the year

     10,232        8,266        7,165   

Average interest rate during the year

     .35     2.17     4.39

Average interest rate at end of year

     .21        .67        3.79   

 

BB&T also uses long-term debt to provide both funding and, to a lesser extent, regulatory capital. Long-term debt was 12.3% of total funding on average during 2009 and 14.5% in 2008. See Note 10 “Long-Term Debt” in the “Notes to Consolidated Financial Statements” herein for further disclosure. Long-term debt at December 31, 2009, totaled $21.4 billion, an increase of $3.3 billion, or 18.5%, from year-end 2008. For the year ended December 31, 2009, average long-term debt decreased $754 million, or 3.8%, compared to the average for 2008. BB&T’s long-term debt consists primarily of FHLB advances, which composed 49.3% of total outstanding long-term debt at December 31, 2009; senior notes of BB&T Corporation, which composed 13.1% of the year-end balance; subordinated notes of BB&T Corporation, which composed 13.8% of the year-end balance; and junior subordinated debt to unconsolidated trusts issued by the Corporation, which composed 15.3% of total outstanding long-term debt at December 31, 2009. 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 4.25% during 2008 to 3.73% during 2009 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.

 

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During the second quarter of 2009, BB&T issued $1.1 billion of senior unsecured notes. The notes were issued in two tranches, $510 million 5.70% fixed-rate notes due in 2014 and $541 million 6.85% fixed-rate notes due in 2019. The proceeds from the offering, combined with the common stock offering completed during the second quarter of 2009, and other funds, were used to fund the repurchase of the preferred stock issued to the U.S. Treasury as part of the Capital Purchase Program. Also during the second quarter, BB&T recognized $36 million in gains related to the repurchase of $218 million of subordinated debt.

 

During the third quarter of 2009, BB&T Capital Trust VI issued $575 million of capital securities. The securities have a fixed interest rate of 9.60% and an initial maturity date of August 2064. These securities are fully guaranteed by BB&T and qualify as Tier 1 capital, subject to certain limitations. In addition, BB&T completed three separate issuances of senior debt during the third quarter for a total of $1.75 billion. BB&T issued $1.0 billion of senior notes, with a fixed interest rate of 3.85% that mature in 2012, $500 million of senior notes, with a fixed interest rate of 3.38%, that mature in 2013, and $250 million of senior notes, with a fixed interest rate of 3.10%, that mature in 2011. The proceeds from all of these offerings are being used for general corporate purposes. BB&T assumed $3.7 billion of FHLB advances in the Colonial acquisition, of which $2.8 billion were prepaid shortly after the acquisition.

 

During the fourth quarter of 2009, BB&T Capital Trust VII issued $350 million of capital securities. The securities have a fixed interest rate of 8.10% and an initial maturity date of November 2064. These securities are fully guaranteed by BB&T and qualify as Tier 1 capital, subject to certain limitations.

 

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 $16.2 billion at December 31, 2009, an increase of $160 million, or 1.0%, from year-end 2008. BB&T’s book value per common share at December 31, 2009 was $23.47, compared to $23.16 at December 31, 2008.

 

On June 17, 2009, BB&T repurchased all 3,133.64 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series C, $1,000,000 liquidation preference per share (the “Series C Preferred Stock”) issued to the U.S. Treasury on November 14, 2008, as part of the Capital Purchase Program. The aggregate purchase price paid to the U.S. Treasury for the Series C Preferred Stock was approximately $3.1 billion, including approximately $14 million of accrued and unpaid dividends. On July 22, 2009, BB&T repurchased the warrant to purchase up to 13,902,573 shares of its common stock for $67 million, which was also issued to the U.S. Treasury on November 14, 2008, as part of the Capital Purchase Program.

 

On May 13, 2009, BB&T issued 86.25 million shares of common stock at $20 per share for net proceeds of $1.7 billion, and on August 21, 2009, BB&T issued 38.5 million shares of common stock at $26 per share, leading to net proceeds of $963 million. The May issuance was primarily to fund a portion of the repurchase of the Series C Preferred Stock. The August issuance was made in connection with the Colonial acquisition to further strengthen BB&T’s capital levels.

 

In addition, growth of $159 million in shareholders’ equity resulted from BB&T’s earnings available to common shareholders retained after dividends along with growth of $315 million from other comprehensive income, which principally relates to increases in the fair values of available-for-sale securities and pension assets.

 

BB&T’s tangible shareholders’ equity available to common shareholders was $10.0 billion at December 31, 2009, an increase of $2.2 billion, or 28.4%, compared to December 31, 2008. BB&T’s tangible book value per common share at December 31, 2009 was $14.44 compared to $13.87 at December 31, 2008. As of December 31, 2009, measures of tangible capital were not required by the regulators and, therefore, were considered non-GAAP measures. Please refer to the section titled “Capital” herein for a discussion of how BB&T calculates and uses these measures in the evaluation of the Company.

 

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Analysis of Results of Operations

 

Consolidated net income for 2009 totaled $877 million. Net income available to common shareholders totaled $729 million, which generated basic earnings per common share of $1.16 and diluted earnings per common share of $1.15. Net income for 2008 was $1.53 billion and net income available to common shareholders totaled $1.50 billion. Net income for 2007 totaled $1.75 billion. Basic earnings per common share were $2.73 in 2008 and $3.17 in 2007, while diluted earnings per common share were $2.71 and $3.14 for 2008 and 2007, 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 ..56%, 1.12%, and 1.38% for the years ended December 31, 2009, 2008 and 2007, respectively. The returns on average common shareholders’ equity were 4.93%, 11.44%, and 14.25% 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 2009, net interest income on an FTE-adjusted basis totaled $5.0 billion, compared with $4.3 billion in 2008 and $3.9 billion in 2007. Net interest income increased 14.9% in 2009 compared to 2008. The increase in net interest income during 2009 resulted primarily from a combination of factors. First, earning asset growth has helped offset the declines in yields due to the rate environment, as well as higher yields from the covered loan portfolio. Second, management has been successful in controlling liability costs by engineering a favorable mix change in both deposit and funding costs. These positives were partially offset by higher levels of nonaccruals that have negatively affected net interest income and the net interest margin. Net interest income increased 9.4% in 2008 compared to 2007 due primarily to liability costs repricing more quickly as short-term rates declined throughout the year.

 

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 3.66% in 2009, 3.58% in 2008 and 3.52% in 2007. During 2009, the average yield on interest earning assets decreased 88 basis points compared to the average yield during 2008, while the average cost of funds over the same time period decreased 108 basis points. The improvement in the net interest margin during 2009 was primarily due to successfully managing liability costs and wider spreads on assets. The net interest margin in 2008 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 2009 and 2008. 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 the Federal Reserve Board lowered short-term rates by 100 basis points in the last four months of 2007 and an additional 400 basis points during 2008. Additionally, BB&T experienced some improvement in loan pricing in 2008.

 

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Table 17

FTE Net Interest Income and Rate / Volume Analysis

For the Years Ended December 31, 2009, 2008 and 2007

 

                                              2009 vs. 2008     2008 vs. 2007  
    Average Balances   Yield / Rate     Income / Expense   Increase
(Decrease)
    Change due to     Increase
(Decrease)
    Change due to  
    2009   2008   2007   2009     2008     2007     2009   2008   2007     Rate     Volume       Rate     Volume  
    (Dollars in millions)  
Assets                              

Securities, at amortized cost (1):

                             

U.S. government-sponsored entities (GSE)

  $ 1,400   $ 4,539   $ 10,099   3.86   4.86   4.53   $ 54   $ 221   $ 458   $ (167   $ (39     (128   $ (237     $31      $ (268

Mortgage-backed securities issued by GSE

    25,419     14,708     8,265   4.14      4.94      5.15        1,052     727     425     325        (133     458        302        (18     320   

States and political subdivisions

    2,218     1,841     873   5.67      6.33      6.65        126     116     58     10        (13     23        58        (3