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BB&T Corporation (NYSE: BBT) is a bank holding company with operations in 11 Southern states and Washington D.C. ^[1]. The company has $136.5 billion in assets under management, making it the 14th largest bank in the U.S.^[2] The bank mainly serves consumers and small, regional businesses. In the midst of the 2008 financial crisis, BB&T posted a 3rd quarter net income of $358M, a 19% decline from the previous year.^[3] Thus, while it has fared better than many other banks, BB&T has not escaped the effects of the credit crunch. It has suffered $364M in credit-related losses, and 9% of its gross loan portfolio was given to homebuilders, many of whom could not repay BB&T.^[4] In addition, BB&T faces deteriorating economic conditions in many Southern states, which curtail consumers' and businesses' willingness to take out loans with higher interest rates. These factors drag down the company's ability to maintain a high net interest margin, and therefore its profitability. However, in comparison to many other banks, BB&T has managed to retain a healthy margin at 3.7%.^[3]

Business Overview

BB&T is organized as a group of community banks.^[1] The company has more than 1,500 branches in North Carolina, South Carolina, Maryland, Virginia, West Virginia, Kentucky, Tennessee, Georgia, Florida, Alabama, Indiana and Washington, DC.^[2]

BB&T's strategy involves diversifying the company's revenues through mergers and acquisitions. This strategy has led to 5-year growth in average total assets, loans and deposits of 10.8%, 11.6%, and 11.2% respectively.^[2]

Business and Financial Metrics

Source: BBT 10-Q, pg 64 ^[6]

2007 was the 26th consecutive year that BB&T netted record earnings. 2007 net income was $1.73 billion, a 13.5% increase from 2006, and operating income totaled $1.75 billion, a 2.5% increase from 2006. BB&T increased its market share in every state while maintaining the lead in West Virginia. ^[7]

Additionally, BB&T increased the number of online banking clients by 21% and opened 35 new offices. By acquiring Coastal Financial of South Carolina and the mortgage banking firm, Collateral Real Estate Capital, BB&T was able to create a commercial mortgage servicing portfolio of $20 billion. ^[7]

Business Segments

Source: BBT 10-Q^[6]

BB&T is broken down into five major segments that have seen both loss and growth from FY 2006 to FY 2007.

• Banking Network (73% of net revenue) - This business segment serves both individual and business clients by providing loans and deposits. The number of banking offices increased from 1459 banking offices in 2006 to 1,492 banking offices at the end of 2007.^[2][8]
• Residential Mortgage Banking (8% of net revenue) - This business segment holds the mortgage-related loans provided by the Banking Network and other partner originators.There was a $32 million increase in net income for the Residential Mortgage Banking segment due to the use of fair value accounting for loans held for sale and from the growth in mortgage loans held for investment.^{[6] [8]}
• Insurance Services (4% of net revenue) - This business segment serves both businesses and individuals by providing casualty, life, property, and heath insurances. There was a decline of $19 million in this segment as a result of a pre-tax gain of $19 million earned on an insurance operation sale.^{[6] [8]}
• Financial Services (5% of net revenue) - The business segment provides advice in the areas of senior debt, loan syndication, structured finance, and interest rate derivatives. There was a $20 million increase of net income in this segment due to a strong performing corporate banking division. ^[6]
• Treasury (7% of net revenue) - This business segment manages a client's securities portfolio, interest rate risk, and overall balance sheets.^[8] There was an increase of $120 million in net income in the Treasury segment due to the $53 million of securities gains and the decline in short term rates.^[6]

Trends and Forces

Subprime Loans

BB&T has been hard hit by the 2008 Financial Crisis. The bank reported a 19% decline in net income in Q3 FY08, to $358M.^[3] In addition to problems related to the housing market, the bank has invested in construction projects that cannot now be completed because demand has fallen (9% of the company's gross loan book is allocated to residential homebuilder loans^[9]). Consequently, BB&T has lost money on the residential development loans given to these developers. The bank has set aside $330M to deal with bad loans, tripling the $88M that was set aside in 2007.^[10]

In comparison to other banks, however, BB&T has weathered the financial crisis well. Even taking into account the poor performance in the third quarter, the bank produced a return on equity of 11%, compared to 14% in FY07.^[3]

Difficulty in Raising Capital

Regional banks generally have high exposure to regional housing markets, creating the belief among large investors that the risk in regional bank investment is unacceptably high.^[11] BB&T is heavily exposed to the housing markets of the Southern states, which have suffered immensely from the downturn. For example, housing prices in Washington, DC have declined by 24%, and prices in Florida have declined by as much as 34%.^[12]

In order to raise adequate capital, regional banks must sell more and more stocks at diluted prices. This in turn drives down prices even further, and make major investors even more hesitant about placing money into the banks. This is reflected in BB&T's historically low price/earnings ratio, suggesting that the stock is undervalued by investors. While BB&T has received approval to participate in the US Treasury's capital purchase program, the program enables the federal government to take a substantial stock stake in the company, and requires the bank to pay the government a hefty dividend.^[13] Despite these difficulties, however, BB&T has fared better than other banks in capital raising, mainly because it is less exposed to subprime loans (see above).

Deteriorating Economic Conditions

While the downturn in the financial markets has decreased the supply of credit, the downturn in the U.S. economy causes a decrease in the demand for credit. A key driver of BB&T's profits is the willingness of consumers to borrow money at a high interest rate. The company's interest rate margin was 3.66% in Q3 FY08.^[14]. However, deteriorating economic conditions force consumers to curtail their spending, and therefore their willingness to borrow money. The unemployment rate has reached 6.8%, and GDP growth for Q3 FY08 shrunk to 0.8%. ^[15]. Consumer spending dropped by 6% in October, 2008 ^[16], and industrial production declined by 0.4%.^[17] States in the region served by by BT&T are suffering from recession.^[18]. A decrease in national consumption means a decrease in the demand for credit; though the company may try to keep its interest rates up because of the credit crunch, it's likely it will make fewer loans, and thus make less money overall.

Competition

• Wilmington Trust - Wilmington Trust Corporation is a bank that operates mainly in Delaware but holds operations in Georgia and Florida, the same regions as BB&T. It is one of the largest trust businesses in the nation and had a revenue of $1112.90 million in 2007.^[19]
• SunTrust Banks - SunTrust Banks is a bank holding company with $171.5 billion in assets. It operates about 1,700 branches across the Southern states. It offers investment banking services and loans for construction and commercial real estate.^[20]
• First Bancorp - First Bancorp is a holding company for First Bank with operating centers in North Carolina, South Carolina, and Virginia. Three quarters of the company's lending portfolio is made up of mortgage loans and it had a revenue of $167.40 million in 2007.^[21]

References

1. ↑ ^{1.0 1.1} About BB&T
2. ↑ ^{2.0 2.1 2.2 2.3} 2007 BBT 10-K, pg 12
3. ↑ ^{3.0 3.1 3.2 3.3} "BB&T reports net income of $358 million" 10/16/08
4. ↑ Morningstar Stock Analyst Notes, "BB&T Reports 2Q Earnings," 7/17/08
5. ↑ Yahoo Finance
6. ↑ ^{6.0 6.1 6.2 6.3 6.4 6.5} BBT 10-Q Q2 FY08
7. ↑ ^{7.0 7.1 7.2} BBT Annual Review, pg 15
8. ↑ ^{8.0 8.1 8.2 8.3} S&P 500, "2006 Guide," 11/5/05
9. ↑ Morningstar Stock Analyst Notes, "BB&T Reports 2Q Earnings," 7/17/08
10. ↑ Business First, "BB&T Blames Housing Market for Lower Earnings," 7/17/08
11. ↑ Wall Street Journal "Regional Banks Continue to Slide"
12. ↑ "S&P/Case-Shiller Home Price Indices" September 2008
13. ↑ "BB&T to participate in U.S. Treasury program"
14. ↑ "BB&T reports net income of $358 million"
15. ↑ "Output, prices and jobs"
16. ↑ "Consumer spending, credit card offers decline in tandem"
17. ↑ "Output, prices and jobs"
18. ↑ "Snowbirds, meet the repo men"
19. ↑ Yahoo Finance, "Wilmington Trust Corporation Company Profile," 10/21/08
20. ↑ SunTrust in Brief, pg 1
21. ↑ Yahoo Finance, "First Bancorp Company Profile," 10/21/08
22. ↑ BBT Competitors