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

DBRS has today commented on the Q4 2008 earnings performance of BB&T Corporation (BB&T or the Company) in light of the rapidly deteriorating economy and turbulent conditions in the financial markets. DBRS rates BB&T’s Issuer & Senior Debt at AA (low) with a Stable trend.

BB&T reported net income available to common shareholders of $284 million for the quarter, down from $358 million in the second quarter and $411 million a year ago. On a sequential quarter basis, net income available to common shareholders was pressured by a 45% increase in provisions for loan loss reserves partially offset by a slight widening in adjusted net interest margin (NIM) to 3.68%, higher insurance-related income and investment banking and brokerage fees, and a decrease in the effective tax rate due to the settlement of its leveraged lease transaction. The decrease in annual quarterly results was due to a 1.9x increase in provisions for loan loss reserves and a 7.6% increase in non-interest expense, which were somewhat offset by a 22 basis point (bp) widening of the net interest margin (NIM) and a 12% increase in non-interest income.

The deepening recession continues to place pressure on BB&T’s asset quality, in particular its residential acquisition development and construction (ADC) portfolio. At December 31, 2008, non-performing assets increased to 2.04% of total loans, up from 1.69% at September 30, 2008 and 0.76% at December 31, 2007. During Q4 2008, net charge-offs increased to 1.29% of average loans, from 1.00% for the prior quarter and 0.48% for Q4 2007. BB&T’s challenges remain in residential real estate markets, particularly in the Georgia, Florida and metro Washington, D.C. areas. The Company’s $7.9 billion ADC portfolio remains the most problematic with 6.3% of the portfolio currently on non-accrual, up from 5% at September 30, 2008. Overall, management expects net loan losses in the 1.4% to 1.5% range for full year 2009 and the Company will continue to build its loan loss reserve. For 2008, loan loss provisions of $1.4 billion exceeded net charge-offs (NCOs) by 1.69 times and BB&T’s allowance for loan loss reserves to non-accruals and restructured loans was 1.11x. While loan losses and corresponding credit costs are likely to increase over the intermediate term due to the deepening recession, DBRS notes that BB&T has substantial earnings generation, with roughly $3.4 billion in annual operating income before provisions and taxes, to absorb likely further credit losses without impairing its capital.

Positively, loans, deposits, NIM and capital all increased during the quarter. On a sequential quarter basis, loan growth was predominantly commercial and deposit growth evidenced increased levels of interest checking, client deposits and certificates of deposit (CDs), as BB&T benefited from a flight to quality. BB&T’s slight expansion in sequential quarterly NIM, excluding the non-recurrent adjustment for leveraged lease transaction, reflected wider credit spreads on loans and lower rates on deposits, partially offset by the Company’s asset-sensitive position. DBRS noted that the Company’s settlement with the Internal Revenue Service (IRS) in regards to historic, leveraged lease accounting resulted in a $67 million reduction in interest income and an $84 million reduction in income tax expense.

The Company issued $3.1 billion of preferred stock to the U.S. Department of the Treasury (the Treasury), as part of the Treasury’s Capital Purchase Program, which helped augment regulatory capital ratios and provide more of a cushion to absorb credit losses. At December 31, 2008, BB&T’s Tier 1 and Total risk-based capital ratios were 12.0% and 17.1%, respectively.

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

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

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.