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BB&T 10-Q 2007
q2_10q.htm -- Converted by SEC Publisher, created by BCL Technologies Inc., for SEC Filing
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended:

June 30, 2007

Commission file number: 1-10853


BB&T CORPORATION
(Exact name of registrant as specified in its charter)

North Carolina (State of Incorporation)
200 West Second Street
Winston-Salem, North Carolina (Address of Principal Executive Offices)

56-0939887 (I.R.S. Employer Identification No.)
27101 (Zip Code)


(336) 733-2000
(Registrant's Telephone Number, Including Area Code)

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer  þ             Accelerated filer  ¨              Non-accelerated filer  ¨  

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

At July 31, 2007, 551,369,066 shares of the registrant's common stock, $5 par value, were outstanding.

 

 

  BB&T CORPORATION  
  FORM 10-Q  
  June 30, 2007  
  INDEX  
 

 

  Page No.
Part I. FINANCIAL INFORMATION  
           Item 1. Financial Statements (Unaudited) 2
  Notes to Consolidated Financial Statements (Unaudited) 6
           Item 2. Management’s Discussion and Analysis of  
      Financial Condition and Results of Operations 25
  Executive Summary 28
  Analysis of Financial Condition 29
  Analysis of Results of Operations 38
  Market Risk Management 48
  Capital Adequacy and Resources 54
  Segment Results 56
           Item 3. Quantitative and Qualitative Disclosures About  
       Market Risk 57
           Item 4. Controls and Procedures 57
Part II. OTHER INFORMATION  
           Item 1. Legal Proceedings 57
           Item 1A. Risk Factors 57
           Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 58
           Item 4. Submission of Matters to a Vote of Security Holders 58
           Item 6. Exhibits 59
SIGNATURES 59
EXHIBIT INDEX 60
CERTIFICATIONS 61

BB&T Corporation       Page 1       Second Quarter 2007 10-Q

 

 

Item 1. Financial Statements              
 
BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions, except per share data, shares in thousands)
 
  June 30, December 31,
  2007 2006
 
Assets              
     Cash and due from banks $   1,721   $ 2,024  
     Interest-bearing deposits with banks     605     435  
     Federal funds sold and securities purchased under resale agreements              
           or similar arrangements     389     253  
     Segregated cash due from banks     188     153  
     Trading securities at fair value     1,067     2,147  
     Securities available for sale at fair value     22,254     20,721  
     Loans held for sale     1,152     680  
     Loans and leases, net of unearned income     87,390     82,911  
     Allowance for loan and lease losses     (920 )   (888 )
           Loans and leases, net     86,470     82,023  
 
     Premises and equipment, net of accumulated depreciation     1,485     1,410  
     Goodwill     5,114     4,827  
     Core deposit and other intangible assets     504     454  
     Residential mortgage servicing rights at fair value     577     484  
     Other assets     6,051     5,740  
                           Total assets $   127,577   $ 121,351  
 
Liabilities and Shareholders' Equity              
     Deposits:              
           Noninterest-bearing deposits $   13,641   $ 13,393  
           Interest checking     1,384     1,333  
           Other client deposits     35,741     34,062  
           Client certificates of deposit     27,445     24,987  
           Other interest-bearing deposits     5,868     7,196  
                           Total deposits     84,079     80,971  
     Federal funds purchased, securities sold under repurchase agreements              
                   and short-term borrowed funds     9,410     8,087  
     Long-term debt     18,313     15,904  
     Accounts payable and other liabilities     3,650     4,644  
                           Total liabilities     115,452     109,606  
     Commitments and contingencies (Note 6)              
     Shareholders' equity:              
           Preferred stock, $5 par, 5,000 shares authorized, none issued or              
                   outstanding at June 30, 2007, or at December 31, 2006      -      -  
           Common stock, $5 par, 1,000,000 shares authorized;              
                   551,948 issued and outstanding at June 30, 2007, and              
                   541,475 issued and outstanding at December 31, 2006     2,760     2,707  
           Additional paid-in capital     3,249     2,801  
           Retained earnings     6,568     6,596  
           Accumulated other comprehensive loss, net of deferred income              
                   taxes of $(281) at June 30, 2007, and $(212) at December 31, 2006     (452 )   (359 )
                           Total shareholders' equity     12,125     11,745  
                           Total liabilities and shareholders' equity $   127,577   $ 121,351  

The accompanying notes are an integral part of these consolidated financial statements.

BB&T Corporation       Page 2       Second Quarter 2007 10-Q

 

 

BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)
(Dollars in millions, except per share data, shares in thousands)

  For the Three Months Ended For the Six Months Ended
  June 30, June 30,
  2007 2006 2007 2006
Interest Income                    
         Interest and fees on loans and leases $ 1,675 $ 1,445 $ 3,288   $ 2,778  
         Interest and dividends on securities   273   213   541     429  
         Interest on short-term investments   13   10   23     17  
                 Total interest income   1,961   1,668   3,852     3,224  
 
Interest Expense                    
         Interest on deposits   639   496   1,286     935  
         Interest on federal funds purchased, securities sold under                    
                 repurchase agreements and short-term borrowed funds   102   81   189     146  
         Interest on long-term debt   254   174   466     329  
                 Total interest expense   995   751   1,941     1,410  
 
Net Interest Income   966   917   1,911     1,814  
         Provision for credit losses   88   58   159     105  
 
Net Interest Income After Provision for Credit Losses   878   859   1,752     1,709  
Noninterest Income                    
         Insurance commissions   229   214   426     390  
         Service charges on deposits   151   138   289     269  
         Investment banking and brokerage fees and commissions   89   79   171     160  
         Other nondeposit fees and commissions   48   42   91     80  
         Checkcard fees   44   38   85     73  
         Trust income   40   38   80     75  
         Mortgage banking income   31   29   61     61  
         Bankcard fees and merchant discounts   35   31   65     60  
         Securities gains (losses), net   1   -   (10 )   -  
         Income from bank-owned life insurance   25   23   53     45  
         Other income   36   19   70     46  
                 Total noninterest income   729   651   1,381     1,259  
Noninterest Expense                    
         Personnel expense   540   506   1,064     1,020  
         Occupancy and equipment expense   117   109   233     217  
         Amortization of intangibles   26   25   51     50  
         Professional services   32   29   63     55  
         Merger-related and restructuring charges (gains), net   5   2   11     (1 )
         Loan processing expenses   29   27   55     50  
         Other expenses   174   162   329     288  
                 Total noninterest expense   923   860   1,806     1,679  
Earnings                    
         Income before income taxes   684   650   1,327     1,289  
         Provision for income taxes   226   221   448     429  
         Net income $ 458 $ 429 $ 879   $ 860  
 
Per Common Share                    
         Net income:                    
                 Basic $ .84 $ .80 $ 1.61   $ 1.60  
                 Diluted $ .83 $ .79 $ 1.60   $ 1.59  
         Cash dividends paid $ .42 $ .38 $ .84   $ .76  
 
Weighted Average Shares Outstanding                    
                 Basic   548,385   536,882   545,136     538,409  
                 Diluted   553,935   541,608   550,556     542,297  

The accompanying notes are an integral part of these consolidated financial statements.

BB&T Corporation       Page 3       Second Quarter 2007 10-Q

 

 

 

BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Six Months Ended June 30, 2007 and 2006
(Unaudited)
(Dollars in millions, except per share data, shares in thousands)

                              Accumulated        
    Shares of           Additional         Other     Total
    Common     Common     Paid -In   Retained Comprehensive     Shareholders'
    Stock     Stock     Capital   Earnings Income (Loss)     Equity
Balance, January 1, 2006   543,102   $ 2,715   $   2,819   $  5,951   $   (356 ) $  11,129  
Add (Deduct):                                            
   Comprehensive income (loss):                                            
         Net income    -     -       -       860       -       860  
               Unrealized holding gains (losses) arising during the period                                            
                   on securities available for sale, net of tax of $(113)    -     -       -       -       (197 )     (197 )
               Reclassification adjustment for losses (gains)                                            
                   on securities available for sale included in net                                            
                   income, net of tax    -     -       -       -       -       -  
         Change in unrealized gains (losses) on securities, net of tax    -     -       -       -       (197 )     (197 )
         Change in unrecognized gains (losses) on cash flow hedges,                                            
               net of tax of $1    -     -       -       -       1       1  
         Change in minimum pension liability, net of tax    -     -       -       -       1       1  
   Total comprehensive income (loss)    -     -       -       860       (195 )     665  
 
   Common stock issued:                                            
         In purchase acquisitions (1)   14,444     72       557       -        -       629  
         In connection with stock option exercises                                            
               and other employee benefits, net of cancellations   1,657     8       38       -       -       46  
   Redemption of common stock   (22,307 )   (111 )     (806 )     -       -       (917 )
   Cash dividends declared on common stock, $.80 per share    -     -       -       (429 )     -       (429 )
   Other, net    -     -       41       -       -       41  
Balance, June 30, 2006   536,896   $ 2,684   $   2,649      $  6,382   $   (551 )   $  11,164  
 
 
Balance, January 1, 2007   541,475   $ 2,707   $   2,801     6,596   $   (359 ) $  11,745  
Add (Deduct):                                            
   Comprehensive income (loss):                                            
         Net income   -     -       -       879       -       879  
               Unrealized holding gains (losses) arising during the period                                            
                   on securities available for sale, net of tax of $(71)   -     -       -       -       (96 )     (96 )
               Reclassification adjustment for losses (gains)                                            
                   on securities available for sale included in net                                            
                   income, net of tax of $4    -     -       -       -       6       6  
         Change in unrealized gains (losses) on securities, net of tax   -     -       -       -       (90 )     (90 )
         Change in unrecognized gains (losses) on cash flow hedges,                                            
               net of tax of $(2)   -     -       -       -       (4 )     (4 )
         Change in pension liability, net of tax    -     -       -       -       (1 )     (1 )
         Foreign currency translation adjustment    -     -       -       -       2       2  
   Total comprehensive income (loss)   -     -       -       879       (93 )     786  
 
   Common stock issued:                                            
         In purchase acquisitions (1)   8,807     44       356       -       -       400  
         In connection with stock option exercises                                            
               and other employee benefits, net of cancellations   1,666     9       37       -       -       46  
   Cash dividends declared on common stock, $.88 per share    -      -       -       (482 )     -       (482 )
   Cumulative effect of adoption of FIN 48    -      -       -       (119 )     -       (119 )
   Cumulative effect of adoption of FSP FAS 13-2    -      -       -       (306 )     -       (306 )
   Other, net   -      -       55       -       -       55  
Balance, June 30, 2007   551,948   $ 2,760   $   3,249     $  6,568   $   (452 )   $  12,125  

(1)  Includes the value of replacement stock options issued.

The accompanying notes are an integral part of these consolidated financial statements.

BB&T Corporation       Page 4       Second Quarter 2007 10-Q

 

BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
 
  For the Six Months Ended
  June 30,
  2007 2006
Cash Flows From Operating Activities:            
     Net income $ 879   $ 860  
     Adjustments to reconcile net income to net cash provided            
           by operating activities:            
                 Provision for credit losses   159     105  
                 Depreciation   88     87  
                 Amortization of intangibles   51     50  
                 Equity-based compensation   42     37  
                 Discount accretion and premium amortization on long-term debt, net   61     61  
                 Discount accretion and premium amortization on securities, net   (2 )   17  
                 Net decrease (increase) in trading account securities   1,080     (206 )
                 Loss on sales of securities, net   10              -  
                 Gain on sales of loans and mortgage loan servicing rights, net   (40 )   (31 )
                 Gain on disposals of premises and equipment, net   (4 )   (32 )
                 Proceeds from sales of loans held for sale   3,015     2,383  
                 Originations and purchases of loans held for sale, net of principal collected   (3,573 )   (2,438 )
                 Increase in other assets, net   (356 )   (366 )
                 (Decrease) increase in accounts payable and other liabilities, net   (1,062 )   414  
                 (Increase) decrease in segregated cash due from banks   (35 )   15  
                 Other, net   6     2  
                              Net cash provided by operating activities   319     958  
 
Cash Flows From Investing Activities:            
     Proceeds from sales of securities available for sale   1,552     20  
     Proceeds from maturities, calls and paydowns of securities available for sale   4,425     806  
     Purchases of securities available for sale   (7,244 )   (1,430 )
     Leases made to customers   (81 )   (132 )
     Principal collected on leases   108     95  
     Originations and purchases of loans, net of principal collected   (2,681 )   (3,413 )
     Net cash acquired in business combinations   18     17  
     Proceeds from disposals of premises and equipment   15     82  
     Purchases of premises and equipment   (126 )   (118 )
     Proceeds from sales of foreclosed property or other real estate held for sale   46     54  
                    Net cash used in investing activities   (3,968 )   (4,019 )
 
Cash Flows From Financing Activities:            
     Net increase in deposits   2,137     2,568  
     Net (decrease) increase in federal funds purchased, securities sold under repurchase agreements            
           and short-term borrowed funds   (308 )   56  
     Proceeds from issuance of long-term debt   4,902     2,102  
     Repayment of long-term debt   (2,683 )   (168 )
     Net proceeds from common stock issued   46     46  
     Redemption of common stock   -     (917 )
     Cash dividends paid on common stock   (455 )   (410 )
     Excess tax benefit from equity-based awards   13     4  
                    Net cash provided by financing activities   3,652     3,281  
 
Net Increase in Cash and Cash Equivalents   3     220  
Cash and Cash Equivalents at Beginning of Period   2,712     2,797  
Cash and Cash Equivalents at End of Period $ 2,715   $ 3,017  
 
 
Supplemental Disclosure of Cash Flow Information:            
 
     Cash paid during the period for:            
           Interest $ 1,896   $ 1,367  
           Income taxes   1,725     373  
     Noncash investing and financing activities:            
           Transfers of loans to foreclosed property   44     40  
           Transfers of fixed assets to other real estate owned   6     3  
           Common stock issued in business combinations   400     629  
 
 
The accompanying notes are an integral part of these consolidated financial statements.

BB&T Corporation       Page 5       Second Quarter 2007 10-Q

Back to Index 

 

     BB&T CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)

NOTE 1. Basis of Presentation

     General

          In the opinion of management, the accompanying unaudited consolidated balance sheets, consolidated statements of income, consolidated statements of changes in shareholders’ equity, and consolidated statements of cash flows of BB&T Corporation and subsidiaries (referred to herein as “BB&T”, “the Corporation” or “the Company”), present fairly, in all material respects, BB&T’s financial position at June 30, 2007 and December 31, 2006; BB&T’s results of operations for the three and six month periods ended June 30, 2007 and 2006; and BB&T’s cash flows for the six months ended June 30, 2007 and 2006. In the opinion of management, all adjustments necessary to fairly present the consolidated financial position and consolidated results of operations have been made. All adjustments during the first six months of 2007 and 2006 were of a normal recurring nature.

          These consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q. The information contained in the footnotes included in BB&T’s Annual Report on Form 10-K for the year ended December 31, 2006, should be referred to in connection with these unaudited interim consolidated financial statements.

     Nature of Operations

          BB&T is a financial holding company headquartered in Winston-Salem, North Carolina. BB&T conducts its operations primarily through its subsidiary bank, which has branches in North Carolina, South Carolina, Virginia, Maryland, Georgia, West Virginia, Tennessee, Kentucky, Florida, Alabama, Indiana and Washington, D.C. BB&T’s subsidiary bank provides a wide range of banking services to individuals and businesses, and offers a variety of loans to businesses and consumers. Such loans are made primarily to individuals residing in the market areas described above or to businesses located within BB&T’s geographic footprint. BB&T’s subsidiary bank also markets a wide range of deposit services to individuals and businesses. BB&T’s subsidiary bank offers, either directly, or through its subsidiaries, lease financing to businesses and municipal governments; factoring; discount brokerage services, annuities and mutual funds; life insurance, property and casualty insurance, health insurance and commercial general liability insurance on an agency basis and through a wholesale insurance brokerage operation; insurance premium financing; permanent financing arrangements for commercial real estate; loan servicing for third-party investors; direct consumer finance loans to individuals; and trust services. The direct nonbank subsidiaries of BB&T provide a variety of financial services including automobile lending, equipment financing, full-service securities brokerage, payroll processing, asset management and capital markets services.

BB&T Corporation       Page 6       Second Quarter 2007 10-Q

 

     Principles of Consolidation

          The consolidated financial statements of BB&T include the accounts of BB&T Corporation and those subsidiaries that are majority-owned by BB&T and over which BB&T exercises control. In consolidation, all significant intercompany accounts and transactions are eliminated. The results of operations of companies acquired are included only from the dates of acquisition. All material wholly owned and majority-owned subsidiaries are consolidated unless accounting principles generally accepted in the United States of America require otherwise.

          BB&T evaluates variable interests in entities for which voting interests are not an effective means of identifying controlling financial interests. Variable interests are those in which the value of the interest changes with the fair value of the net assets of the entity exclusive of variable interests. If the results of the evaluation indicate the existence of a primary beneficiary and the entity does not effectively disperse risks among the parties involved, that primary beneficiary is required to consolidate the entity. Likewise, if the evaluation indicates that the requirements for consolidation are not met and the entity has previously been consolidated, then the entity would be deconsolidated.

          BB&T is involved in creating a series of secondary marketing trusts, which are qualified special purpose entities, for the purpose of selling interests in municipal securities to third parties at short-term tax-exempt rates. The trusts purchase fixed-rate, longer-term highly rated municipal bonds with proceeds from issuing puttable floating-rate certificates and inverse floating-rate certificates. BB&T purchases the inverse floating-rate certificates, which are categorized as trading securities on the Consolidated Balance Sheet. BB&T also provides liquidity support to the trusts in order to facilitate the remarketing of the floating-rate certificates.

          BB&T has variable interests in certain entities that were not required to be consolidated, including affordable housing partnership interests, historic tax credit partnerships, other partnership interests and trusts that have issued capital securities.

          BB&T accounts for unconsolidated partnership investments using the equity method of accounting. In addition to affordable housing partnerships, which represent the majority of unconsolidated investments in variable interest entities, BB&T also has investments and future funding commitments to venture capital and other entities. The maximum potential exposure to losses relative to investments in variable interest entities is generally limited to the sum of the outstanding balances, future funding commitments and any related loans to the entity. Loans to these entities are underwritten in substantially the same manner as are other loans and are generally secured.

          BB&T has investments in certain entities for which BB&T does not have controlling interest. For these investments, the Company records its interest using the equity method with its portion of income or loss being recorded in other noninterest income in the Consolidated Statements of Income. BB&T periodically evaluates these investments for impairment.

BB&T Corporation       Page 7       Second Quarter 2007 10-Q

 

     Reclassifications

          In certain instances, amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation. Such reclassifications had no effect on previously reported shareholders’ equity or net income.

     Use of Estimates in the Preparation of Financial Statements

          The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan and lease losses and the reserve for unfunded lending commitments, valuation of mortgage servicing rights, valuation of goodwill, intangible assets and other purchase accounting related adjustments, benefit plan obligations and expenses, and tax assets, liabilities and expenses.

     Changes in Accounting Principles and Effects of New Accounting Pronouncements

          In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position FAS 13-2 “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction” (“FSP FAS 13-2”), which amends Statement of Financial Accounting Standards (“SFAS”) No. 13, “Accounting for Leases.” FSP FAS 13-2 requires an entity to recalculate the allocation of income for a leveraged lease transaction from the inception of the lease if, during the lease term, the projected timing of the income tax cash flows generated by the transaction is revised, even if the total amount of income tax cash flows is not affected. BB&T adopted FSP FAS 13-2 effective January 1, 2007. Upon adoption, BB&T recorded a charge to retained earnings of $306 million as a cumulative effect of a change in accounting principle. This charge to retained earnings only pertains to the timing of income recognition and will be recognized as a component of net income over the remaining lives of the respective leases.

          In July 2006, the FASB issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of SFAS No. 109 “Accounting for Income Taxes.” FIN 48 provides guidance for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. FIN 48 also requires additional disclosures related to an entity’s accounting for uncertain tax positions. BB&T adopted FIN 48 effective January 1, 2007. Upon adoption, BB&T recorded a charge to retained earnings of $119 million as a cumulative effect of a change in accounting principle. Additional disclosures required by FIN 48 are included in Note 12 to the consolidated financial statements.

          In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 does not require assets or liabilities to be measured at fair value, but will apply to other accounting pronouncements that require or permit the use of fair value for recognition or disclosure. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the effect that SFAS No. 157 may have on BB&T’s consolidated financial statements. 

BB&T Corporation       Page 8       Second Quarter 2007 10-Q

 

 

          In September 2006, the FASB reached a consensus on Emerging Issues Task Force (“EITF”) Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” (“EITF Issue 06-4”). In March 2007, the FASB reached a consensus on EITF Issue 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements,” (“EITF Issue 06-10”). Both of these standards require a company to recognize an obligation over an employee’s service period based upon the substantive agreement with an employee such as the promise to maintain a life insurance policy or provide a death benefit. These standards are effective for fiscal years beginning after December 15, 2007. Management is currently evaluating the effect that EITF Issue 06-4 and EITF Issue 06-10 may have on BB&T’s consolidated financial statements.

          In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115,” (“SFAS No. 159”), which permits companies to choose to measure many financial instruments and certain other items at fair value, on an instrument-by-instrument basis. Once a company has elected to record eligible items at fair value, the decision is irrevocable. The objective of SFAS No. 159 is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the effect that SFAS No. 159 may have on BB&T’s consolidated financial statements.






 

BB&T Corporation       Page 9       Second Quarter 2007 10-Q

 

 

NOTE 2. Business Combinations and Intangible Assets

     Acquisitions

          On January 2, 2007, BB&T completed the acquisition of AFCO Credit Corporation and its Canadian affiliate, CAFO, Inc (collectively, “AFCO”). In conjunction with this transaction, BB&T recorded $10 million in goodwill and $50 million in amortizing intangibles, which are primarily related to broker relationships.

          On May 1, 2007, BB&T completed the acquisition of Coastal Financial Corporation (“Coastal”), a $1.7 billion bank holding company headquartered in Myrtle Beach, South Carolina. In conjunction with this transaction, BB&T issued approximately 8.8 million shares of common stock and 574 thousand stock options valued in the aggregate at $400 million and recorded $248 million in goodwill and $47 million in amortizing intangibles, which are primarily comprised of core deposit intangibles.

     Goodwill and Other Intangible Assets

          The changes in the carrying amount of goodwill attributable to each of BB&T’s operating segments for the six months ended June 30, 2007, are as follows:

  Goodwill Activity by Operating Segment
      Residential                            
  Banking Mortgage Sales Specialized   Insurance   Financial   All      
  Network Banking Finance Lending   Services   Services   Other   Total  
  (Dollars in millions)
 
Balance, January 1, 2007 $ 3,785 $ 7 $ 93 $ 52 $ 690   $ 174 $ 26 $ 4,827  
     Acquisitions   248    -   -   10   3     -   -   261  
     Contingent consideration   -    -        -   1   21        6   -   28  
     Divestiture   -    -      -   -   (8 )   -   -   (8 )
     Other adjustments   6    -      -   -   -     -   -   6  
Balance, June 30, 2007 $ 4,039 $ 7 $ 93 $ 63 $ 706   $ 180 $ 26 $ 5,114  

           The following table presents the gross carrying amounts and accumulated amortization for BB&T’s identifiable intangible assets subject to amortization at the dates presented:

  Identifiable Intangible Assets
  As of June 30, 2007 As of December 31, 2006
  Gross      

Net

  Gross       Net
  Carrying   Accumulated  Carrying   Carrying   Accumulated Carrying
  Amount   Amortization  Amount    Amount    Amortization Amount
  (Dollars in millions)
Identifiable intangible assets                            
   Core deposit intangibles $ 456 $ (259 ) $ 197 $ 413 $ (235 ) $ 178
   Other (1)   529   (222 )   307   471   (195 )   276
 
Totals $ 985 $ (481 ) $ 504 $ 884 $ (430 ) $ 454
(1) Other identifiable intangibles are primarily comprised of customer relationship intangibles.              

BB&T Corporation       Page 10       Second Quarter 2007 10-Q


 

 

NOTE 3. Securities

The amortized cost and approximate fair values of securities available for sale were as follows:

  June 30, 2007
  Amortized Gross Unrealized Fair
  Cost Gains Losses Value
  (Dollars in millions)
Securities available for sale:                
     U.S. Treasury securities $ 85 $ - $ 1 $ 84
     U.S. government-sponsored entity securities   10,512   -   310   10,202
     Mortgage-backed securities   8,523   6   215   8,314
     States and political subdivisions   792   7   5   794
     Equity and other securities   2,890   9   39   2,860
         Total securities available for sale $ 22,802 $ 22 $ 570 $ 22,254
 
 
  December 31, 2006
  Amortized Gross Unrealized Fair
  Cost Gains Losses Value
   (Dollars in millions)
Securities available for sale:                
     U.S. Treasury securities $ 84 $ - $ 1 $ 83
     U.S. government-sponsored entity securities   9,324   2   290   9,036
     Mortgage-backed securities   8,418   27   148   8,297
     States and political subdivisions   563   9   1   571
     Equity and other securities   2,723   26   15   2,734
         Total securities available for sale $ 21,112 $ 64 $ 455 $ 20,721

          On June 30, 2007, BB&T held certain investment securities having continuous unrealized loss positions for more than 12 months. As of June 30, 2007, the unrealized losses on these securities totaled $474 million. Substantially all of these investments were in U.S. government-sponsored entity securities and mortgage-backed securities, which primarily consist of securities issued by the Federal Farm Credit Bureau, the Federal Home Loan Bank System, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. These agencies are rated AAA and the unrealized losses are the result of increases in market interest rates rather than changes in the underlying credit quality of the issuers. At June 30, 2007, BB&T had the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses. Accordingly, BB&T has not recognized any other-than-temporary impairment in connection with these securities during 2007.

BB&T Corporation       Page 11       Second Quarter 2007 10-Q


 

          The following tables reflect the gross unrealized losses and fair values of BB&T’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the dates presented.

  June 30, 2007
  Less than 12 months 12 months or more Total
 
  Fair Unrealized Fair Unrealized Fair Unrealized
  Value Losses Value Losses Value Losses
  (Dollars in millions)
Securities:                        
   U.S. Treasury securities $ 6 $ - $ 45 $ 1 $ 51 $ 1
   U.S. government-sponsored entity securities   2,421   26   7,423   284   9,844   310
   Mortgage-backed securities   3,010   43   4,755   172   7,765   215
   States and political subdivisions   196   5   20   -   216   5
   Equity and other securities   1,577   22   537   17   2,114   39  
Total temporarily impaired securities $ 7,210 $ 96 $ 12,780 $ 474 $ 19,990 $ 570  
 
 
  December 31, 2006
  Less than 12 months 12 months or more Total
 
  Fair Unrealized Fair Unrealized Fair Unrealized
  Value Losses Value Losses Value Losses
     (Dollars in millions)
Securities:                        
   U.S. Treasury securities $ 9 $ - $ 42 $ 1 $ 51 $ 1
   U.S. government-sponsored entity securities   475   3   8,324   287   8,799   290
   Mortgage-backed securities   1,153   5   5,241   143   6,394   148
   States and political subdivisions   1   -   39   1   40   1
   Equity and other securities   651   2   601   13   1,252   15  
Total temporarily impaired securities $ 2,289 $ 10 $ 14,247 $ 445 $ 16,536 $ 455  

     NOTE 4. Merger-Related and Restructuring Activities

          BB&T has incurred certain merger-related and restructuring expenses, primarily in connection with business combinations. The following table presents the components of merger-related and restructuring charges included in noninterest expenses. This table includes increases to previously recorded accruals and period expenses for items that must be expensed as incurred. Items that are required to be expensed as incurred include certain expenses associated with systems conversions, data processing, training, and other costs.

Summary of Merger-Related and Restructuring Charges (Gains)

For the Six Months Ended
  June 30,
 
  2007 2006
  (Dollars in millions)
Severance and personnel-related items $   6 $ -  
Occupancy and equipment     1   (3 )
Other merger-related items     4   2  
           Total $   11 $ (1 )

BB&T Corporation       Page 12       Second Quarter 2007 10-Q

 

 

 

          In conjunction with the consummation of an acquisition or restructuring activity and completion of other requirements, BB&T typically accrues certain merger-related and restructuring expenses related to estimated severance and other personnel-related costs, costs to terminate lease contracts, costs related to the disposal of duplicate facilities and equipment, costs to terminate data processing contracts and other costs associated with the acquisition. The costs related to the acquired entity are accrued in accordance with the guidance in EITF Issue 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,” and generally are recorded as adjustments to the purchase price unless they are required to be expensed as incurred. The costs related to existing BB&T facilities and personnel are recorded in accordance with the guidance in SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” and SFAS No. 112, “Employers’ Accounting for Postemployment Benefits,” as appropriate, and reflected as merger-related and restructuring charges in the Consolidated Statements of Income. The following table presents a summary of BB&T’s merger-related and restructuring accrual activity for 2007:

   Merger-Related and Restructuring Accrual Activity
 
          Merger-related              
  Balance     and       Purchase   Balance
  January 1, Accrued at restructuring       price   June 30,
  2007 acquisition charges   Utilized   adjustments   2007  
  (Dollars in millions)
 
Severance and personnel-related items $ 12 $ 4 $ 6 $ (8 ) $ - $ 14
Occupancy and equipment   4   1   1   (2 )   1   5
Other merger-related items   2   3   4   (6 )   -   3  
   Total $ 18 $ 8 $ 11 $ (16 ) $ 1 $ 22  

BB&T Corporation       Page 13       Second Quarter 2007 10-Q

 

 

NOTE 5. Long-Term Debt            
 
                   Long-term debt is summarized as follows:            
  June 30, December 31,
  2007 2006
  (Dollars in millions)
       Parent Company            
               7.25% Subordinated Notes Due 2007 $ -   $ 250  
               6.50% Subordinated Notes Due 2011 (1,3)   647     647  
               4.75% Subordinated Notes Due 2012 (1,3)   496     496  
               5.20% Subordinated Notes Due 2015 (1,3)   997     997  
               4.90% Subordinated Notes Due 2017 (1,3)   364     362  
               5.25% Subordinated Notes Due 2019 (1,3)   600     600  
 
       Branch Bank            
               Floating Rate Secured Borrowings Due 2007 (5)   -     1,500  
               Fixed Rate Secured Borrowings Due 2010 (6)   4,000     -  
               Floating Rate Senior Notes Due 2007   500     1,250  
               Floating Rate Senior Notes Due 2008   500     500  
               Floating Rate Senior Notes Due 2009   500     500  
               Floating Rate Subordinated Notes Due 2016 (1)   350     350  
               Floating Rate Subordinated Notes Due 2017 (1)   300     -  
               4.875% Subordinated Notes Due 2013 (1,3)   249     249  
               5.625% Subordinated Notes Due 2016 (1,3)   399     399  
 
       Federal Home Loan Bank Advances to Branch Bank (4)            
               Varying maturities to 2027   6,686     6,564  
 
       Junior Subordinated Debt to Unconsolidated Trusts (2)            
               5.85% BB&T Capital Trust I Securities Due 2035 (3)   514     514  
               6.75% BB&T Capital Trust II Securities Due 2036   598     598  
               6.82% BB&T Capital Trust IV Securities Due 2077 (7)   600     -  
               Other Securities (8)   183     168  
 
       Other Long-Term Debt   5     5  
 
       Hedging Losses   (175 )   (45 )
 
                       Total Long-Term Debt $ 18,313   $ 15,904  

(1)      Subordinated notes that qualify under the risk-based capital guidelines as Tier 2 supplementary capital, subject to certain limitations.
 
(2)      Securities that qualify under the risk-based capital guidelines as Tier 1 capital, subject to certain limitations.
 
(3)      These fixed rate notes were swapped to floating rates based on LIBOR. At June 30, 2007, the effective rates paid on these borrowings ranged from 5.48% to 6.09%.
 
(4)      At June 30, 2007, the weighted average cost of these advances was 5.33% and the weighted average maturity was 9.5 years.
 
(5)      This borrowing was secured primarily by automobile loans and had a variable rate based on LIBOR.
 
(6)      This borrowing is secured by automobile and mortgage loans. The fixed rate was swapped to a floating rate based on LIBOR.
 
(7)      These securities are fixed rate through June 12, 2037 and then switch to a floating rate based on LIBOR.
 
(8)      These securities were issued by companies acquired by BB&T. At June 30, 2007, the effective rate paid on these borrowings ranged from 7.09% to 10.07%. These securities have varying maturities through 2035.
 

BB&T Corporation       Page 14       Second Quarter 2007 10-Q

 

 

 

          In June 2007, BB&T Capital Trust IV (“BBTCT IV”) issued $600 million of Capital Securities. BBTCT IV, a statutory business trust created under the laws of the State of Delaware, was formed by BB&T for the sole purpose of issuing the Capital Securities and investing the proceeds thereof in Junior Subordinated Debentures issued by BB&T. BB&T has made guarantees which, taken collectively, fully, irrevocably, and unconditionally guarantee, on a subordinated basis, all of BBTCT IV’s obligations under the Trust and Capital Securities. BBTCT IV’s sole asset is the Junior Subordinated Debentures issued by BB&T which have a scheduled maturity on June 12, 2057 and a final repayment date on June 12, 2077. BB&T is required to use all commercially reasonable efforts, subject to certain market disruption events, to sell adequate qualifying capital securities to permit repayment of the debentures in full on the scheduled maturity date. The Junior Subordinated Debentures are subject to early redemption (i) in whole or in part at any time at the option of BB&T pursuant to the optional redemption provisions of such security, or (ii) in whole, but not in part, under certain prescribed limited circumstances. The Capital Securities of BBTCT IV are subject to mandatory redemption in whole or in part, upon repayment of the Junior Subordinated Debentures at maturity or their earlier redemption.

NOTE 6. Contractual Obligations, Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements

          BB&T utilizes a variety of financial instruments to meet the financing needs of clients and reduce exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, standby letters of credit and financial guarantees, and derivatives. BB&T also has commitments to fund certain affordable housing investments and contingent liabilities of certain sold loans.

          Standby letters of credit and financial guarantees written are unconditional commitments issued by BB&T to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper issuance, bond financing and similar transactions. The credit risk involved in the issuance of these guarantees is essentially the same as that involved in extending loans to clients and as such, the instruments are collateralized when necessary. As of June 30, 2007, BB&T had issued a total of $3.6 billion in standby letters of credit. The carrying amount of the liability for such guarantees was $4 million at June 30, 2007.

          A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or referenced interest rate. These instruments include interest-rate swaps, caps, floors, collars, financial forwards and futures contracts, swaptions, when-issued securities, foreign exchange contracts and options written and purchased. BB&T uses derivatives primarily to manage economic risk related to securities, business loans, mortgage servicing rights and mortgage banking operations, Federal funds purchased, other time deposits, long-term debt and institutional certificates of deposit. BB&T also uses derivatives to facilitate transactions on behalf of its clients. BB&T held a variety of derivative financial instruments with notional values of $36.1 billion and $23.1 billion at June 30, 2007 and December 31, 2006, respectively. These instruments were in a net loss position of $175 million and $45 million at June 30, 2007 and December 31, 2006, respectively.

BB&T Corporation       Page 15       Second Quarter 2007 10-Q

 

 

          BB&T invests in certain affordable housing and historic building rehabilitation projects throughout its market area as a means of supporting local communities and receives tax credits related to these investments. BB&T typically acts as a limited partner in these investments and does not exert control over the operating or financial policies of the partnerships. BB&T’s subsidiary bank typically provides financing during the construction and development of the properties; however, permanent financing is generally obtained from independent third parties upon completion of a project. BB&T’s outstanding commitments to fund affordable housing investments totaled $191 million and $183 million at June 30, 2007 and December 31, 2006, respectively. At June 30, 2007, BB&T’s maximum exposure to loss associated with these investments totaled $387 million.

          In the ordinary course of business, BB&T indemnifies its officers and directors to the fullest extent permitted by law against liabilities arising from pending litigation. BB&T also issues standard representations and warranties in underwriting agreements, merger and acquisition agreements, loan sales, brokerage activities and other similar arrangements. Counterparties in many of these indemnification arrangements provide similar indemnifications to BB&T. Although these agreements often do not specify limitations, BB&T has not been required to act on the guarantees and does not believe that any payments pursuant to them would materially change the financial condition or results of operations of the Company.

          Merger and acquisition agreements of businesses other than financial institutions occasionally include additional incentives to the acquired entities to offset the loss of future cash flows previously received through ownership positions. Typically, these incentives are based on the acquired entity’s contribution to BB&T’s earnings compared to agreed-upon amounts. When offered, these incentives are typically issued for terms of three to five years. Since certain provisions of these agreements do not specify dollar limitations, it is not possible to quantify the maximum exposure resulting from these agreements.

NOTE 7. Benefit Plans

          BB&T provides various benefit plans to substantially all employees, including employees of acquired entities. Employees of acquired entities generally participate in existing BB&T plans after consummation of the business combinations. The plans of acquired institutions are typically merged into the BB&T plans after consummation of the mergers, and, under these circumstances, credit is usually given to these employees for years of service at the acquired institution for vesting and eligibility purposes. Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2006 for descriptions and disclosures about the various benefit plans offered by BB&T.

BB&T Corporation       Page 16       Second Quarter 2007 10-Q

 

 

 

          The following tables summarize the components of net periodic benefit cost recognized for BB&T’s pension plans for the three and six month periods ended June 30, 2007 and 2006, respectively:

  Pension Plans  
  Qualified Nonqualified
  For the For the
  Three Months Ended Three Months Ended
  June 30, June 30,
  2007 2006 2007 2006
   (Dollars in millions)
Service cost $ 18   $ 15    $                      1 $                      1
Interest cost   17     15                          2                        1
Estimated return on plan assets   (28 )   (21 )                  -                  -
Amortization and other   1     1                    -                        1  
   Net periodic benefit cost $ 8   $ 10    $                      3 $                      3  
 
  Pension Plans
  Qualified Nonqualified
  For the For the
  Six Months Ended Six Months Ended
  June 30, June 30,
  2007 2006 2007 2006
   (Dollars in millions)
Service cost $ 37   $ 30   $                  2 $                  2
Interest cost   34     29                      4                    3
Estimated return on plan assets   (57 )   (43 )              -              -
Amortization and other   1     4                      1                    1  
   Net periodic benefit cost $ 15   $ 20   $                  7 $                  6  




BB&T Corporation       Page 17       Second Quarter 2007 10-Q

 

 

 

NOTE 8. Computation of Earnings per Share

          BB&T’s basic and diluted earnings per share amounts for the three and six month periods ended June 30, 2007 and 2006, respectively, were calculated as follows:

  For the Three Months For the Six Months
  Ended June 30, Ended June 30,
  2007 2006  2007 2006
  (Dollars in millions, except per share data,
   shares in thousands)
Basic Earnings Per Share:                
     Weighted average number of common shares   548,385   536,882   545,136   538,409  
             Net income  $ 458 $ 429 $ 879 $ 860  
     Basic earnings per share  $ .84 $ .80 $ 1.61 $ 1.60  
Diluted Earnings Per Share:                
     Weighted average number of common shares   548,385   536,882   545,136   538,409
     Add:                
             Effect of dilutive equity awards   5,550   4,726   5,420   3,888  
     Weighted average number of diluted common shares   553,935   541,608   550,556   542,297  
             Net income  $ 458 $ 429 $ 879 $ 860  
     Diluted earnings per share  $ .83 $ .79 $ 1.60 $ 1.59  

     For the three months ended June 30, 2007 and 2006 the number of antidilutive awards was 4.3 million and 11.2 million shares, respectively. For the six months ended June 30, 2007 and 2006 the number of antidilutive awards was 4.3 million and 8.4 million shares, respectively.

NOTE 9. Comprehensive Income (Loss)

     The balances in accumulated other comprehensive loss for the periods indicated are shown in the following tables:

  June 30, 2007
   Before-Tax Tax After-Tax
  Amount Benefit Amount
  (Dollars in millions)
 
Unrealized net losses on securities available for sale $ (548 )    $ (209 ) $ (339 )
Unrecognized net pension and postretirement costs   (181 )   (70 )   (111 )
Other   (4 )   (2 )   (2 )
       Total $ (733 )    $ (281 ) $ (452 )

BB&T Corporation       Page 18       Second Quarter 2007 10-Q

 

 

 

    December 31, 2006    
    Before-Tax     Tax   After-Tax
    Amount     Benefit   Amount
    (Dollars in millions)    
 
Unrealized net losses on securities available for sale $ (391 ) $ (142 ) $ (249 )
Unrecognized net pension and postretirement costs   (180 )   (70 )   (110 )
       Total $ (571 ) $ (212 ) $ (359 )

          The following table reflects the components of total comprehensive income for the three and six month periods ended June 30, 2007 and 2006, respectively.

  For the Three Months Ended For the Six Months Ended
  June 30,  June 30,
  2007 2006 2007 2006
   (Dollars in millions)
Comprehensive income:                        
     Net income $ 458   $ 429   $ 879   $ 860  
     Other comprehensive income:                        
           Net unrealized (losses) gains on securities   (161 )   (85 )   (90 )   (197 )
           Net unrealized (losses) gains on cash flow hedges   (5 )   (2 )   (4 )   1  
           Net change in pension liability    -     -     (1 )   1  
           Net foreign currency translation adjustment   2     -     2     -  
                   Total comprehensive income $ 294   $ 342   $ 786   $ 665  

BB&T Corporation       Page 19       Second Quarter 2007 10-Q

 

 

NOTE 10. Operating Segments

           BB&T’s operations are divided into seven reportable business segments: the Banking Network, Residential Mortgage Banking, Sales Finance, Specialized Lending, Insurance Services, Financial Services and Treasury. These operating segments have been identified based on BB&T’s organizational structure. The segments require unique technology and marketing strategies and offer different products and services. While BB&T is managed as an integrated organization, individual executive managers are held accountable for the operations of these business segments.

          BB&T emphasizes revenue growth by focusing on client service, sales effectiveness and relationship management. The segment results contained herein are presented based on internal management accounting policies that were designed to support these strategic objectives. Unlike financial accounting, there is no comprehensive authoritative body of guidance for management accounting equivalent to generally accepted accounting principles. The performance of the segments is not comparable with BB&T’s consolidated results or with similar information presented by any other financial institution. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities.

          Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2006, for a description of internal accounting policies and the basis of segmentation, including a description of the segments presented in the accompanying tables.

           The following tables disclose selected financial information with respect to BB&T’s reportable business segments for the periods indicated:

 

 

 

 

 

BB&T Corporation       Page 20       Second Quarter 2007 10-Q

 

 

 

 

BB&T Corporation
Reportable Segments
For the Three Months Ended June 30, 2007 and 2006
          Residential                                  
  Banking Network Mortgage Banking Sales Finance  Specialized Lending Insurance Services
  2007 2006 2007 2006 2007 2006 2007 2006 2007 2006
  (Dollars in millions)
 
Net interest income (expense) $ 571 $ 604 $ 253   $ 222   $ 91   $ 72   $ 168   $ 120   $ 4 $ 3  
 Net funds transfer pricing   281   221 (190 )   (158 )   (62 )   (45 )   (54 )   (28 )   -   (1 )
Net interest income (expense)   852   825   63     64     29     27     114     92     4   2  
Economic provision for loan and lease losses   37   35   2     2     5     5     44     30     -   -  
Noninterest income   268   245   31     29     1     1     23     18     219   207  
 Intersegment net referral fees (expense)   66   58   (25 )   (24 )   (4 )   (3 )   -     -     -   -  
Noninterest expense   366   350   15     13     6     5     50     40     158   152  
 Allocated corporate expenses   147   132   3     2     3     2     6     5     7   6  
Income (loss) before income taxes   636   611   49     52     12     13     37     35     58   51  
 Provision (benefit) for income taxes   230   221   18     19     4     5     14     13     22   19  
Segment net income (loss) $ 406 $ 390 $ 31   $ 33   $ 8   $ 8   $ 23   $ 22   $ 36 $ 32  
Identifiable segment assets (period end) $ 57,755 $ 54,676 $ 17,580   $ 15,913   $ 5,711   $ 5,176   $ 5,438    $ 3,425   $ 1,241 $ 1,257  
 
 
  Financial Services Treasury All Other Segments (1) Parent/Reconciling Items Total BB&T Corporation
  2007 2006 2007 2006 2007 2006 2007 2006   2007 2006
  (Dollars in millions)
 
Net interest income (expense) $ 7 $ 3 $ (21 ) $ (43 ) $ 41   $ 41   $ (148 ) $ (105 ) $ 966 $ 917  
 Net funds transfer pricing   2   4   (56 )   (5 )   (34 )   (28 )   113     40     -   -  
Net interest income (expense)   9   7   (77 )   (48 )   7     13     (35 )   (65 )   966   917  
Economic provision for loan and lease losses   -   -   -     -     -     -     -     (14 )   88   58  
Noninterest income   142   129   29     28     26     20     (10 )   (26 )   729   651  
 Intersegment net referral fees (expense)   3   1   -     (1 )   1     2     (41 )   (33 )   -   -  
Noninterest expense   123   115   2     2     22     20     181     163     923   860  
 Allocated corporate expenses   8   7   1     2     2     3   (177 )   (159 )   -   -  
Income (loss) before income taxes   23   15   (51 )   (25 )   10     12     (90 )   (114 )   684   650  
 Provision (benefit) for income taxes   8   5   (30 )   (19 )   1     -     (41 )   (42 )   226   221  
Segment net income (loss) $ 15 $ 10 $ (21 ) $ (6 ) $ 9   $ 12   $ (49 ) $ (72 ) $ 458 $ 429  
Identifiable segment assets (period end) $ 2,578 $ 1,808 $ 24,352   $ 22,817   $ 4,045   $ 3,950   $ 8,877   $ 7,262   $ 127,577 $ 116,284  


(1) Includes financial data from subsidiaries below the quantitative and qualitative thresholds requiring disclosure.

BB&T Corporation       Page 21       Second Quarter 2007 10-Q

 

 

 

BB&T Corporation
Reportable Segments
For the Six Months Ended June 30, 2007 and 2006
          Residential                                    
  Banking Network Mortgage Banking Sales Finance Specialized Lending Insurance Services
  2007 2006 2007 2006 2007 2006 2007 2006 2007 2006
  (Dollars in millions)
 
Net interest income (expense) $ 1,143 $ 1,196 $ 495   $ 428   $ 178   $ 140   $ 331   $ 226   $ 8   $ 5  
 Net funds transfer pricing   536   429   (373 )   (304 )   (120 )   (86 )   (106 )   (52 )   (1 )   (1 )
Net interest income (expense)   1,679   1,625   122     124     58     54     225     174     7     4  
Economic provision for loan and lease losses   73   70   4     4     10     9     87     61     -     -  
Noninterest income   509   468   63     62     1     1     41     34     427     377  
 Intersegment net referral fees (expense)   120   112   (47 )   (46 )   (7 )   (6 )   -     -     -     -  
Noninterest expense   723   685   30     26     12     11     99     76     312     306  
 Allocated corporate expenses   293   264   5     5     5     4     11     10     14     12  
Income (loss) before income taxes 1,219   1,186   99     105     25     25     69     61     108     63  
 Provision (benefit) for income taxes   441   429   36     38     9     9     26     23     41     24  
Segment net income (loss) $ 778 $ 757 $ 63   $ 67   $ 16   $ 16   $ 43   $ 38   $ 67   $ 39  
Identifiable segment assets (period end) $ 57,755 $ 54,676 $ 17,580   $ 15,913   $ 5,711   $ 5,176   $ 5,438   $ 3,425   $ 1,241   $ 1,257  
 
 
  Financial Services Treasury All Other Segments (1) Parent/Reconciling Items Total BB&T Corporation
  2007 2006 2007 2006 2007 2006 2007 2006 2007 2006
  (Dollars in millions)
 
Net interest income (expense) $ 14 $ 6 $ (76 ) $ (72 ) $ 72   $ 82   $ (254 ) $ (197 ) $ 1,911   $ 1,814  
 Net funds transfer pricing   4   8   (65 )   (17 )   (67 )   (55 )   192     78     -     -  
Net interest income (expense)   18   14   (141 )   (89 )   5     27     (62 )   (119 )   1,911     1,814  
Economic provision for loan and lease losses   -        -   -     1     -     -     (15 )   (40 )   159     105  
Noninterest income   267   258   41     49     47     48     (15 )   (38 )   1,381     1,259  
 Intersegment net referral fees (expense)   6   3   -     (1 )   1     4     (73 )   (66 )   -     -  
Noninterest expense   241   228   4     5     45     39     340     303     1,806     1,679  
 Allocated corporate expenses   16   15   2     3     5     5     (351 )   (318 )   -     -  
Income (loss) before income taxes   34   32   (106 )   (50 )   3     35     (124 )   (168 )   1,327     1,289  
 Provision (benefit) for income taxes   12   12   (62 )   (39 )   (6 )   5     (49 )   (72 )   448     429  
Segment net income (loss) $ 22 $ 20 $ (44 ) $ (11 ) $ 9   $ 30   $ (75 ) $ (96 ) $ 879   $ 860  
Identifiable segment assets (period end) $ 2,578 $ 1,808 $ 24,352   $ 22,817   $ 4,045   $ 3,950   $ 8,877   $ 7,262   $ 127,577   $ 116,284  

 


(1) Includes financial data from subsidiaries below the quantitative and qualitative thresholds requiring disclosure.

BB&T Corporation       Page 22       Second Quarter 2007 10-Q

 

 

NOTE 11. Equity-Based Compensation Plans

          BB&T has options, restricted shares of common stock and restricted share units outstanding from the following equity-based compensation plans: the 2004 Stock Incentive Plan (“2004 Plan”), the 1995 Omnibus Stock Incentive Plan, the Non-Employee Directors’ Stock Option Plan, and plans assumed from acquired entities. All plans generally allow for accelerated vesting of awards for holders who retire and have met all retirement eligibility requirements and in connection with certain other events. BB&T’s shareholders have approved all equity-based compensation plans with the exception of plans assumed from acquired companies. As of June 30, 2007, the 2004 Plan is the only plan that has awards available for future grants. Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2006, for further disclosures related to equity-based awards issued by BB&T.

          BB&T measures the fair value of each option award on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants awarded in the first six months of 2007.

Assumptions:      
               Risk-free interest rate   4.7  %
               Dividend yield   4.0  
               Volatility factor   14.0  
               Weighted average expected life   6.9  yrs
Fair value of options per share $ 5.35  

          BB&T measures the fair value of restricted shares based on the price of BB&T’s common stock on the grant date and the fair value of restricted share units based on the price of BB&T’s common stock on the grant date less the present value of expected dividends that are foregone during the vesting period.

          The following table details the activity during the first six months of 2007 related to stock options awarded by BB&T:

  For the Six Months Ended
  June 30, 2007
      Wtd. Avg.
       Exercise
  Shares   Price
 
Outstanding at beginning of period 35,680,477   $ 35.30
Issued in purchase transactions 573,506     23.06
Granted 4,782,605     44.15
Exercised (1,700,592 )   28.56
Forfeited or expired (339,731 )   38.67
Outstanding at end of period 38,996,265   $ 36.47
 
Exercisable at end of period 23,206,077   $ 34.15

BB&T Corporation       Page 23       Second Quarter 2007 10-Q

 

 

 

          The following table details the activity during the first six months of 2007 related to restricted shares and restricted share units awarded by BB&T:

  For the Six Months Ended
  June 30, 2007
      Wtd. Avg.
      Grant Date
  Shares   Fair Value
Nonvested at beginning of period 2,430,052   $ 32.15
Granted 1,873,874     34.45
Vested (33,699 )   32.92
Forfeited (101,155 )   31.66
Nonvested at end of period 4,169,072   $ 33.17

NOTE 12. FIN 48

          BB&T adopted FIN 48 on January 1, 2007. Upon adoption, BB&T recorded a charge to retained earnings of $119 million as a cumulative effect of a change in accounting principle. As of January 1, 2007, BB&T had recorded $181 million of unrecognized federal and state tax benefits, which would have reduced the effective tax rate if recognized. In addition, the Company had $209 million in liabilities for tax-related interest and penalties recorded on its Consolidated Balance Sheets. Of this amount, $191 million was utilized during the first six months of 2007. BB&T classifies interest and penalties related to income taxes as a component of the provision for income taxes in the Consolidated Statements of Income.

          As previously disclosed, BB&T paid $1.2 billion to the Internal Revenue Service (“IRS”) during the first quarter of 2007, including $284 million in pre-tax interest that had been previously accrued. The tax paid relates to differences in the timing of income recognition and deductions for income tax purposes for which deferred taxes had been previously provided.

          Also, during the first quarter of 2007, BB&T paid $50 million ($33 million, net of federal benefit), including tax of $40 million and interest and penalties of $10 million in conjunction with an agreement with a state taxing authority. The agreement covered tax years through 2005 and also established the future filing methodology for that state taxing authority. These amounts were previously accrued.

          BB&T does not anticipate any other significant changes to its total unrecognized tax benefits within the next 12 months.

          The IRS has completed its federal tax examinations through 2001 and is currently examining 2002-2005. The IRS has proposed no significant adjustments other than those related to leveraged lease transactions. Various years remain subject to examination by state taxing authorities.

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BB&T Corporation       Page 24       Second Quarter 2007 10-Q

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

          This report on Form 10-Q 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:

  • competitive pressures among depository and other financial institutions may increase significantly;
  • 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;
  • 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;
  • legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses in which BB&T is engaged;
  • local, state or federal taxing authorities may take tax positions that are adverse to BB&T;
  • adverse changes may occur in the securities markets;
  • competitors of BB&T may have greater financial resources and develop products that enable them to compete more successfully than BB&T;
  • costs or difficulties related to the integration of the businesses of BB&T and its merger partners may be greater than expected;
  • expected cost savings associated with completed mergers may not be fully realized or realized within the expected time frames; and
  • deposit attrition, customer loss and/or revenue loss following completed mergers may be greater than expected.

Regulatory Considerations

          BB&T and its subsidiaries and affiliates are subject to numerous examinations by federal and state banking regulators, as well as the Securities and Exchange Commission, the National Association of Securities Dealers, Inc., 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. Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2006 for additional disclosures with respect to laws and regulations affecting the Company’s businesses.

BB&T Corporation       Page 25       Second Quarter 2007 10-Q

 

 

 

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 general practices within the banking industry. 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, valuation of mortgage servicing rights, 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 are discussed in detail in Note 1 of the “Notes to Consolidated Financial Statements” in BB&T’s Annual Report on Form 10-K for the year ended December 31, 2006.

          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 BB&T’s Audit Committee 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 equals 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, current trends in delinquencies and charge-offs, plans for problem loan and lease administration, the results of regulatory examinations, and changes in the size, composition and risk assessment of the loan and lease portfolio. Also included in management’s estimates for loan and lease losses are considerations with respect to the impact of current economic events, the outcomes of which are uncertain. These events may include, but are not limited to, fluctuations in overall interest rates, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting specific geographical areas and industries in which BB&T conducts business. The methodology used to determine an estimate for the reserve for unfunded lending commitments is inherently similar to the methodology utilized 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.

     Valuation of Mortgage Servicing Rights

          BB&T has a significant mortgage loan servicing portfolio and related mortgage servicing rights. Mortgage servicing rights represent the present value of the future net servicing fees from servicing mortgage loans acquired or originated by BB&T. The methodology used to determine the fair value of mortgage servicing rights is subjective and requires the development of a number of assumptions, including anticipated prepayments of loan principal. The value of mortgage servicing rights is significantly affected by mortgage interest rates available in the marketplace, which influence mortgage loan prepayment speeds. In general, during periods of declining interest rates, the value of mortgage servicing assets declines due to increasing prepayments attributable to increased mortgage refinance activity. Conversely, during periods of rising interest rates, the value of servicing assets generally increases due to reduced refinance activity. BB&T has two classes of mortgage servicing rights for which it separately manages the economic risks: residential and commercial. Residential mortgage servicing rights are recorded on the Consolidated Balance Sheets at fair value with changes in fair value recorded as a component of mortgage banking income each period. Commercial mortgage servicing rights are recorded as other assets on the Consolidated Balance Sheets at lower of cost or market and amortized in proportion to, and over the estimated period that, net servicing income is expected to be received based on projections of the amount and timing of estimated future net cash flows. The amount and timing of estimated future net cash flows are updated based on actual results and updated projections.

 BB&T Corporation       Page 26       Second Quarter 2007 10-Q

 

 

 

     Intangible Assets

          BB&T’s mergers and acquisitions are accounted for using the purchase method of accounting. Under the purchase method, BB&T is required to record the assets acquired, including identified intangible assets and liabilities assumed at their fair value, which often involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques, 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. These estimates also include the establishment of various accruals and allowances based on planned facility dispositions and employee severance considerations, among other acquisition-related items. In addition, purchase acquisitions typically result in goodwill, which is subject to ongoing periodic impairment tests based on the fair value of net assets acquired compared to the carrying value of goodwill. 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.

     Pension and Postretirement Benefit Obligations

          BB&T offers various pension plans and postretirement benefit plans to employees. The calculation of the obligations and related expenses under these plans requires the use of actuarial valuation methods and assumptions. Actuarial valuations and assumptions used in the determination of future values of plan assets and liabilities are subject to management judgment and may differ significantly if different assumptions are used.

     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 must estimate 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 utilized in determining the income tax provision and records adjustments as necessary.

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BB&T Corporation       Page 27       Second Quarter 2007 10-Q

 

 

 


EXECUTIVE SUMMARY

          BB&T’s total assets at June 30, 2007 were $127.6 billion, an increase of $6.2 billion, or 5.1%, from December 31, 2006. The asset category that experienced the largest increase was loans and leases, including loans held for sale, which grew $5.0 billion, or 5.9%, during the first six months of 2007.

          Total deposits at June 30, 2007, were $84.1 billion, an increase of $3.1 billion, or 3.8%, from December 31, 2006. Long-term debt increased $2.4 billion, or 15.1%, and shorter-term borrowings increased $1.3 billion, or 16.4%, during the first six months of 2007. Total shareholders’ equity increased $380 million compared to December 31, 2006.

          Consolidated net income for the second quarter of 2007 totaled $458 million, an increase of 6.8% compared to $429 million earned during the second quarter of 2006. On a diluted per share basis, earnings for the three months ended June 30, 2007 were $.83, compared to $.79 for the same period in 2006, an increase of 5.1% . BB&T’s results of operations for the second quarter of 2007 produced an annualized return on average assets of 1.47% and an annualized return on average shareholders’ equity of 15.18% compared to prior year ratios of 1.53% and 15.34%, respectively.

          Consolidated net income for the first six months of 2007 totaled $879 million, an increase of 2.2% compared to $860 million earned during the first six months of 2006. On a diluted per share basis, earnings for the six months ended June 30, 2007 were $1.60, compared to $1.59 for the same period in 2006, an increase of .6%. BB&T’s results of operations for the first six months of 2007 produced an annualized return on average assets of 1.44% and an annualized return on average shareholders’ equity of 15.00% compared to prior year ratios of 1.57% and 15.53%, respectively.

          Results during the second quarter of 2007 reflect continued solid loan and deposit growth, record noninterest income, and healthy asset quality. BB&T’s net interest margin declined six basis points during the second quarter of 2007 compared to the first quarter primarily due to the replacement of lower-rate private long-term funding with higher-rate hybrid capital and yield pressures on the Corporation’s insurance premium finance businesses. BB&T produced positive operating leverage for the third consecutive quarter through a combination of higher revenues and improved expense control.

          On January 2, 2007, BB&T completed its acquisition of insurance premium finance company AFCO Credit Corporation and its Canadian affiliate, CAFO, Inc (collectively, “AFCO”). The acquisition has significantly strengthened BB&T’s insurance premium finance franchise in the United States, as well as provided entry into Canada.

BB&T Corporation       Page 28       Second Quarter 2007 10-Q

 

          On May 1, 2007, BB&T completed its merger with Coastal Financial Corporation (“Coastal”), a bank holding company headquartered in Myrtle Beach, South Carolina. Coastal had $1.7 billion in assets and operated 17 branches in the Myrtle Beach area of South Carolina and seven branches in the Wilmington area of North Carolina. Shareholders of Coastal received .385 of a share of BB&T common stock in exchange for each share of Coastal common stock.

          Please refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2006, for additional information with respect to BB&T’s recent accomplishments and significant challenges. The factors causing the fluctuations in the major balance sheet and income statement categories for the second quarter and first six months of 2007 are further discussed in the following sections.

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ANALYSIS OF FINANCIAL CONDITION

Securities

          Securities available for sale totaled $22.3 billion at June 30, 2007, an increase of $1.5 billion, or 7.4%, compared with December 31, 2006. Securities available for sale had net unrealized losses, net of deferred income taxes, of $339 million and $249 million at June 30, 2007 and December 31, 2006, respectively. Trading securities totaled $1.1 billion, down $1.1 billion, or 50.3%, compared to the balance at December 31, 2006. The decline in the trading portfolio was largely the result of a $1.1 billion purchase of municipal securities executed late in 2006, which matured early in 2007. BB&T’s trading portfolio may fluctuate significantly from period to period based on market conditions, which affect the timing of purchases and sales of securities classified as trading.

          Average total securities for the first six months of 2007 totaled $22.5 billion, an increase of $1.5 billion, or 7.1%, compared to the average balance during the first six months of 2006. Average total securities for the second quarter of 2007 amounted to $23.1 billion, an increase of $2.0 billion, or 9.7%, compared to the average balance during the second quarter of 2006. The increase in securities was the result of a combination of factors, including an increase in funds allocated to the securities portfolio as a result of the acquisitions of Main Street Banks, Inc. (“Main Street”), First Citizens Bancorp (“First Citizens”) and Coastal.

          The annualized fully taxable equivalent (“FTE”) yield on the average securities portfolio for the second quarter of 2007 was 4.94%, which represents an increase of 61 basis points compared to the annualized yield earned during the second quarter of 2006. For the first six months, the annualized FTE yield was 5.00%, which represents a 64 basis point increase compared to the annualized interest earned during the same period of 2006. The fluctuations in the annualized FTE yield on the average securities portfolio were primarily the result of changes in the overall composition of the securities portfolio with a higher percentage of higher-yielding mortgage-backed securities and other higher-yielding securities, which primarily consist of privately-issued mortgage-backed securities.

BB&T Corporation       Page 29       Second Quarter 2007 10-Q

 

 

 

          On June 30, 2007, BB&T held certain investment securities having continuous unrealized loss positions for more than 12 months. As of June 30, 2007, the unrealized losses on these securities totaled $474 million. Substantially all of these investments were in U.S. government-sponsored entity securities and mortgage-backed securities, which primarily consist of securities issued by the Federal Farm Credit Bureau, the Federal Home Loan Bank System, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. These agencies are rated AAA and the unrealized losses are the result of increases in market interest rates rather than changes in the underlying credit quality of the issuers. At June 30, 2007, BB&T had the ability and intent to retain these securities for a period of time sufficient to recover all unrealized losses. Accordingly, BB&T has not recognized any other-than-temporary impairment in connection with these securities.

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, maintaining strong asset quality and achieving an equal mix of consumer and commercial loans. For the second quarter of 2007, average total loans were $86.9 billion, an increase of $9.0 billion, or 11.5%, compared to the same period in 2006. For the first six months of 2007, average total loans were $85.9 billion, an increase of $9.2 billion, or 12.0%, compared to the same period in 2006.

          The following tables present the composition of average loans and leases for the second quarter and the six months ended June 30, 2007 and 2006, respectively:

 

 

 

 

 

BB&T Corporation       Page 30       Second Quarter 2007 10-Q

 

 

Table 1
Composition of Average Loans and Leases
 
   For the Three Months Ended
  June 30, 2007 June 30, 2006
  Balance % of total Balance % of total
  (Dollars in millions)
 
Commercial loans and leases $ 41,935 48.2  % $ 38,175 48.9  %
Direct retail loans   15,438 17.8     14,718 18.9  
Sales finance loans   5,823 6.7     5,242 6.7  
Revolving credit loans   1,417 1.6     1,308 1.7  
     Consumer loans   22,678 26.1     21,268 27.3  
Mortgage loans   17,231 19.8     15,351 19.7  
Specialized lending loans   5,095 5.9     3,184 4.1  
   Total average loans and leases $ 86,939 100.0  % $ 77,978 100.0  %
 
  For the Six Months Ended
  June 30, 2007 June 30, 2006
  Balance % of total Balance % of total
  (Dollars in millions)
 
Commercial loans and leases $ 41,531 48.4  % $ 37,538 49.0  %
Direct retail loans   15,355 17.9     14,609 19.0  
Sales finance loans   5,779 6.7     5,229 6.8  
Revolving credit loans   1,402 1.6     1,313 1.7  
     Consumer loans   22,536 26.2     21,151 27.5  
Mortgage loans   16,858 19.6     15,010 19.6  
Specialized lending loans   4,997 5.8     3,018 3.9  
   Total average loans and leases $ 85,922 100.0  % $ 76,717 100.0  %

          The slight fluctuation in the mix of the loan portfolio during the second quarter and the first six months of 2007 compared to the same period of 2006 was primarily due to increased growth in the specialized lending portfolio, which grew at a faster pace than the consumer portfolio. The slower growth in the consumer portfolio was the result of decreased demand for home equity loans. The growth in loans generated by the specialized lending group was aided by the acquisition of AFCO, which added approximately $1.2 billion in loans, and strong internal loan growth. In addition, growth in the commercial portfolio has slowed somewhat, primarily due to a slowdown in commercial real estate lending, which has been offset by stronger growth in the commercial and industrial loans.

BB&T Corporation       Page 31       Second Quarter 2007 10-Q

 

 

 

          The annualized FTE yields on commercial, consumer, mortgage and specialized lending subsidiary loans for the first six months of 2007 were 7.90%, 7.52%, 5.93%, and 13.49%, respectively, resulting in an annualized yield on the total loan portfolio of 7.74%. This reflects an increase of 41 basis points in the annualized yield on the total loan portfolio during the first six months of 2007 compared to the same period in 2006. The annualized FTE yield for the total loan portfolio for the second quarter of 2007 was 7.75% compared to 7.47% in the second quarter of 2006. These increases in the FTE yield on the loan portfolio were primarily the result of the repricing of maturing loans with lower yields that were replaced with higher-yielding loans and leases. The prime rate, which is the basis for pricing many commercial and consumer loans, averaged 8.25% for the three and six months ended June 30, 2007, compared to 7.90% and 7.66% for the three and six months ended June 30, 2006, respectively. The prime rate was last increased on June 28, 2006 to 8.25%, after the Federal Reserve increased the federal funds target rate to 5.25% . The rise in short-term interest rates, however, was not matched by a similar rise in long-term interest rates. Therefore, mortgage rates, which are influenced by long-term interest rates in the marketplace, increased at a slower pace than other categories of loans compared to last year. In addition, the FTE yield on the total loan portfolio was positively affected by a change in the mix of loans, with a higher percentage of higher-yielding loans originated in the specialized lending group in 2007 compared to 2006.

Other Interest-Earning Assets

          Federal funds sold and securities purchased under resale agreements or similar arrangements totaled $389 million at June 30, 2007, an increase of $136 million, or 53.8%, compared to December 31, 2006. Interest-bearing deposits with banks increased $170 million, or 39.1%, compared to year-end 2006. These categories of earning assets are subject to large daily fluctuations based on the availability of these types of funds. The average yield on other interest earning assets was 5.12% for the first six months of 2007, compared to 4.02% for the same period in 2006. The average yield on other interest-earning assets was 5.26% for the second quarter of 2007, compared to 4.23% for the same period in 2006. The higher yield was primarily the result of the increase in the federal funds target rate.

Goodwill and Other Assets

          BB&T’s other noninterest-earning assets, excluding premises and equipment and noninterest-bearing cash and due from banks, increased $741 million from December 31, 2006 to June 30, 2007. The growth in this category included an increase in goodwill of $287 million, which resulted primarily from the acquisition of Coastal and certain contingent payments related to prior acquisitions. In addition, residential mortgage servicing rights increased $93 million compared to the balance at December 31, 2006. The increase in residential mortgage servicing rights primarily resulted from changes in the value due to an increase in mortgage rates available in the marketplace at June 30, 2007, compared to December 31, 2006 and growth in the portfolio of loans serviced for others.

Deposits

          Client deposits generated through the BB&T banking network are the largest source of funds used to support asset growth. Deposits totaled $84.1 billion at June 30, 2007, an increase of $3.1 billion, or 3.8%, from December 31, 2006.

BB&T Corporation       Page 32       Second Quarter 2007 10-Q

 

 

          Average deposits for the first six months of 2007 increased $7.3 billion, or 9.8%, to $82.2 billion compared to the first six months of 2006. The categories of deposits with the highest average rates of growth for the first half of 2007 compared to the same period of 2006 were client certificates of deposit, which increased $4.7 billion, or 22.8%; interest checking, which increased $277 million, or 13.4%; and other client deposits, which includes money rate savings accounts, investor deposit accounts, savings accounts, individual retirement accounts and other time deposits, which increased $2.9 billion, or 9.4% . In addition, noninterest-bearing deposits increased $125 million, or 1.0%, while other interest-bearing deposits, which consist of negotiable certificates of deposit and Eurodollar deposits, decreased $691 million, or 8.3%, for the first six months of 2007 compared to the same period in 2006.

          Average deposits for the second quarter of 2007 increased $6.3 billion, or 8.4%, compared to the same period in 2006. The categories of deposits with the highest growth for the second quarter of 2007 compared to the second quarter of 2006 were client certificates of deposit, which increased $4.3 billion, or 19.8%; interest checking, which increased $253 million, or 11.3%; and other client deposits, which increased $3.1 billion, or 9.9% . In addition, noninterest-bearing deposits increased $154 million, or 1.2%, while other interest-bearing deposits decreased $1.4 billion, or 18.3%, for the second quarter of 2007 compared to the same period in 2006. The increases in client certificates of deposit were primarily due to a decision by management during 2006 to more aggressively pursue these types of funding sources to provide for strong loan growth and to fuel organic growth initiatives.

          The following table presents the composition of average deposits for the second quarter and the six months ended June 30, 2007 and 2006:

 

 

 

 

 

BB&T Corporation       Page 33       Second Quarter 2007 10-Q

 

 

Table 2
Composition of Average Deposits
 
  For the Three Months Ended
  June 30, 2007 June 30, 2006
  Balance % of total Balance % of total
  (Dollars in millions)
 
Noninterest-bearing deposits  $ 13,367 16.3  % $ 13,213 17.5  %
Interest checking   2,487 3.0     2,234 3.0  
Other client deposits   33,860 41.4     30,809 40.7  
Client certificates of deposit   25,919 31.6     21,627 28.6  
   Total client deposits   75,633 92.3     67,883 89.8  
Other interest-bearing deposits   6,326 7.7     7,743 10.2  
   Total average deposits  $ 81,959 100.0  % $ 75,626 100.0  %
 
  For the Six Months Ended
  June 30, 2007 June 30, 2006
  Balance % of total Balance % of total
  (Dollars in millions)
 
Noninterest-bearing deposits  $ 13,158 16.0  % $ 13,033 17.4  %
Interest checking   2,348 2.9     2,071 2.8  
Other client deposits   33,628 40.9     30,748 41.0  
Client certificates of deposit   25,498 31.0     20,766 27.7  
   Total client deposits   74,632 90.8     66,618 88.9  
Other interest-bearing deposits   7,607 9.2     8,298 11.1  
   Total average deposits  $ 82,239 100.0  % $ 74,916 100.0  %

          The change in deposit mix is primarily due to a shift from lower yielding products, such as noninterest-bearing accounts, to higher yielding certificates of deposit as clients continue to migrate towards these products due to the higher rate environment. This also reflects management’s decision last year to more aggressively pursue retail deposits through BB&T’s branch delivery network, which reduces the Corporation’s reliance on other interest-bearing deposits.

          For the first six months of 2007, the annualized average rate paid on total interest-bearing deposits was 3.75%, an increase of 70 basis points compared to the first six months of 2006. For the second quarter of 2007, the annualized average rate paid on total interest-bearing deposits was 3.73% compared to 3.20% in the same period last year. The increase in the average rate paid on interest-bearing deposits resulted primarily from the higher interest rate environment that existed during the first six months of 2007 compared to 2006, competition in the pricing of deposit products and a shift in the deposit mix to higher yield products.

BB&T Corporation       Page 34       Second Quarter 2007 10-Q

 

 

Borrowings

          While client deposits remain the primary source for funding loan originations and other balance sheet growth, management uses shorter-term borrowings as a supplementary funding source for loan growth. Shorter-term borrowings utilized by BB&T include federal funds purchased, securities sold under repurchase agreements, master notes, U.S. Treasury tax and loan deposit notes, and short-term bank notes. At June 30, 2007, shorter-term borrowings totaled $9.4 billion, an increase of $1.3 billion, or 16.4%, compared to December 31, 2006. The increase in these funds compared to December 31, 2006 was primarily due to a $1.1 billion increase in short-term bank notes, which were generated by a new funding program in BB&T’s Capital Markets Group. This new program provides attractive rates and an alternative source of funding.

          The average annualized rate paid on shorter-term borrowed funds was 4.58% for the first six months of 2007, an increase of 44 basis points from the average rate of 4.14% paid during the comparable period of 2006. For the second quarter of 2007, the average rate paid on shorter-term borrowings was 4.55% compared to 4.30% during the second quarter of 2006. The higher rates paid on shorter-term borrowed funds were primarily the result of the increases in the Federal funds rate over the same time periods.

          BB&T also utilizes long-term debt for a variety of funding needs, including the repurchase of common stock and to supplement levels of regulatory capital. Long-term debt consists of FHLB advances to BB&T’s banking subsidiary, corporate subordinated notes, senior and subordinated notes issued by Branch Bank, junior subordinated debentures issued by BB&T and certain private borrowings by Branch Bank. Long-term debt totaled $18.3 billion at June 30, 2007, an increase of $2.4 billion, or 15.1%, from the balance at December 31, 2006. The increase primarily resulted from a $4.0 billion fixed-rate private financing by BB&T’s banking subsidiary that matures in 2010, which was partially offset by the repayment of $1.5 billion in private financing that was scheduled to mature in the third quarter of 2007. The fixed interest rate on the new $4.0 billion borrowing was swapped to a floating rate during the first quarter of 2007.

           In addition, BB&T and Branch Bank issued new long-term debt during the second quarter of 2007 that provide additional regulatory capital. In June 2007, BB&T issued $600 million of capital securities, through a statutory business trust created under the laws of the State of Delaware, which was formed by BB&T for the sole purpose of issuing the capital securities and investing the proceeds thereof in junior subordinated debentures issued by BB&T. BB&T has made guarantees which, taken collectively, fully, irrevocably, and unconditionally guarantee, on a subordinated basis, all of obligations under the trust and capital securities. The capital securities qualify for Tier 1 regulatory capital treatment and have a scheduled maturity on June 12, 2057 and a final repayment date of June 12, 2077. BB&T is required to use all commercially reasonable efforts, subject to certain market disruption events, to sell adequate qualifying capital securities to permit repayment of the securities in full on the scheduled maturity date. In May 2007, Branch Bank issued $300 million of floating-rate subordinated notes due in 2017 that qualify for Tier II capital treatment. The proceeds from these issuances, along with other funding sources, were used to repay other long-term debt issuances of $2.5 billion during the second quarter of 2007.

BB&T Corporation       Page 35       Second Quarter 2007 10-Q

 

 

          The average annualized rate paid on long-term debt for the second quarter of 2007 was 5.51%, an increase of 47 basis points compared to the second quarter of 2006. For the first six months of 2007, the average rate paid on long-term debt was 5.42% compared to 4.91% during the same period in 2006. The increase in the cost of long-term funds resulted from replacing lower-rate private long-term funding, which was repaid in the second quarter of 2007, with a higher-rate hybrid capital issue, as well as increases in short-term rates in the current year compared to the prior year. The rise in short-term rates resulted in increases in the effective rates paid on the portion of BB&T’s long-term debt that was issued as a floating-rate instrument or swapped to a floating rate.

Asset Quality

          BB&T’s credit quality remains healthy. Nonperforming assets, which are composed of foreclosed real estate, repossessions, nonaccrual loans and restructured loans, totaled $423 million at June 30, 2007, compared to $349 million at December 31, 2006. As a percentage of loans and leases plus foreclosed property, nonperforming assets were .48% at June 30, 2007 and .42% at December 31, 2006. Loans 90 days or more past due and still accruing interest totaled $108 million at June 30, 2007, compared to $102 million at year-end 2006. The increase includes approximately $12 million in nonperforming assets from Coastal.

          BB&T’s net charge-offs totaled $76 million for the second quarter and amounted to .35% of average loans and leases, on an annualized basis, compared to $45 million, or .23%, of average loans and leases, on an annualized basis, in the corresponding period in 2006. For the six months ended June 30, 2007 and 2006, net charge-offs totaled $137 million and $93 million, respectively, and represented .32% and .24%, respectively, of average loans and leases on an annualized basis. The 2007 second quarter and year-to-date net charge-offs include a $9 million loss resulting from an external fraud. BB&T’s total exposure to this situation is approximately $21 million, which includes the amount already charged-off.

          The allowance for credit losses, which totaled $926 million and $888 million at June 30, 2007 and December 31, 2006, respectively, consists of the allowance for loan and lease losses, which is presented on the Consolidated Balance Sheets, and the reserve for unfunded lending commitments, which is included in other liabilities on the Consolidated Balance Sheets. The allowance for loan and lease losses totaled $920 million at June 30, 2007, compared to $888 million at December 31, 2006. This amounted to 1.04% of loans and leases outstanding at June 30, 2007, compared to 1.06% at year-end 2006.

          Asset quality statistics for the last five calendar quarters are presented in the accompanying tables.

BB&T Corporation       Page 36       Second Quarter 2007 10-Q

 

 

Table 3 - 1
Asset Quality Analysis
 
  For the Three Months Ended
  6/30/07 3/31/07 12/31/06 9/30/06 6/30/06
  (Dollars in millions)
Allowance For Credit Losses                              
   Beginning balance $ 901   $ 888   $ 884   $ 871   $ 833  
   Allowance for acquired (sold) loans, net   13     3     (1 )   6     25  
   Provision for credit losses   88     71     73     62     58  
       Charge-offs                              
             Commercial loans and leases   (11 )   (10 )   (15 )   (10 )   (7 )
             Direct retail loans   (22 )   (12 )   (13 )   (12 )   (12 )
             Sales finance loans   (6 )   (6 )   (5 )   (5 )   (5 )
             Revolving credit loans   (12 )   (12 )   (12 )   (11 )   (11 )
             Mortgage loans   (2 )   (1 )   (2 )   (1 )   (1 )
             Specialized lending   (40 )   (41 )   (36 )   (31 )   (26 )
       Total charge-offs   (93 )   (82 )   (83 )   (70 )   (62 )
       Recoveries                              
             Commercial loans and leases   4     8     3     4     5  
             Direct retail loans   3     4     3     3     3  
             Sales finance loans   2     2     2     2     2  
             Revolving credit loans   3     3     3     3     3  
             Mortgage loans   -     -     -     -     1  
             Specialized lending   5     4     4     3     3  
       Total recoveries   17     21     15     15     17  
   Net charge-offs   (76 )   (61 )   (68 )   (55 )   (45 )
       Ending balance $ 926   $ 901    $ 888   $ 884   $ 871  
Nonperforming Assets                              
   Nonaccrual loans and leases                              
             Commercial loans and leases $ 178   $ 148    $ 129   $ 124   $ 126  
             Direct retail loans   43     43     39     38     39  
             Sales finance loans   4     1     2     2     3  
             Revolving credit loans   -     -     -     -     -  
             Mortgage loans   63     51     53     50     47  
             Specialized lending   36     33     37     31     24  
   Total nonaccrual loans and leases   324     276     260     245     239  
   Foreclosed real estate   61     56     54     55     56  
   Other foreclosed property   37     35     35     30     24  
   Restructured loans   1     -     -     1     -  
       Total nonperforming assets $ 423   $ 367   $ 349   $ 331   $ 319  
   Loans 90 days or more past due                              
       and still accruing                              
             Commercial loans and leases $ 18   $ 18   $ 14   $ 8   $ 19  
             Direct retail loans   17     13     20     17     17  
             Sales finance loans   12     16     17     13     12  
             Revolving credit loans   6     7     6     6     5  
             Mortgage loans   48     39     37     36     32  
             Specialized lending   7     10     8     7     6  
       Total loans 90 days or more past due                              
             and still accruing $ 108   $ 103     $ 102   $ 87   $ 91  

 

BB&T Corporation       Page 37       Second Quarter 2007 10-Q

 

 

 

Table 3 - 2
Asset Quality Ratios
 
  For the Three Months Ended
  6/30/07    3/31/07    12/31/06    9/30/06   6/30/06   
 Loans 90 days or more past due and still                    
     accruing as a percentage of total loans                    
     and leases .12  % .12  % .12  % .11  % .11  %
 Nonaccrual and restructured loans and leases                    
     as a percentage of total loans and leases .37   .32   .31   .30   .30  
 Total nonperforming assets as a percentage of:                    
     Total assets .33   .30   .29   .28   .27  
     Loans and leases plus foreclosed property .48   .43   .42   .40   .40  
 Net charge-offs as a percentage of                    
     average loans and leases .35   .29   .33   .27   .23  
 Allowance for loan and lease losses as a                    
     percentage of loans and leases 1.04   1.05   1.06   1.08   1.08  
 Allowance for loan and lease losses as a                    
     percentage of loans and leases                    
     held for investment 1.05   1.06   1.07   1.09   1.09  
 Ratio of allowance for loan and lease losses to:                    
     Net charge-offs 3.04  x 3.58  x 3.29  x 4.07  x 4.78  x
     Nonaccrual and restructured loans and leases 2.83   3.24   3.41   3.59   3.63  
 
 Note: All items referring to loans and leases include loans held for sale and are net of unearned income. Applicable ratios are annualized.
 

Back to Index

 

ANALYSIS OF RESULTS OF OPERATIONS

          Consolidated net income for the second quarter of 2007 totaled $458 million, an increase of $29 million, or 6.8%, compared to $429 million earned during the second quarter of 2006. On a diluted per share basis, earnings for the three months ended June 30, 2007 were $.83, an increase of 5.1% compared to $.79 for the same period in 2006. BB&T’s results of operations for the second quarter of 2007 produced an annualized return on average assets of 1.47% and an annualized return on average shareholders’ equity of 15.18%, compared to prior year ratios of 1.53% and 15.34%, respectively.

          Consolidated net income for the first six months of 2007 totaled $879 million, an increase of 2.2% compared to $860 million earned during the same period of 2006. On a diluted per share basis, earnings for the first six months of 2007 and 2006 were $1.60 and $1.59, respectively, which represents an increase of .6%. BB&T’s results of operations for the first six months of 2007 produced an annualized return on average assets of 1.44% and an annualized return on average shareholders’ equity of 15.00% compared to prior year ratios of 1.57% and 15.53%, respectively.

          The following table sets forth selected financial ratios for the last five calendar quarters. BB&T’s fourth quarter 2006 results were negatively affected by an additional tax provision of $139 million, and securities losses of $47 million, after-tax, resulting from a securities portfolio restructuring. Please refer to the section titled “Fourth Quarter Results” in BB&T’s Annual Report on Form 10-K for the year ended December 31, 2006, for a more detailed discussion of these items.

BB&T Corporation       Page 38       Second Quarter 2007 10-Q

 

 

 

Table 4
Annualized
Profitability Measures
 
  2007     2006      
  Second   First   Fourth    Third   Second  
  Quarter   Quarter   Quarter   Quarter   Quarter  
Return on average assets 1.47  % 1.41  % .84  % 1.42  % 1.53  %
Return on average shareholders' equity 15.18   14.81   8.33   14.39   15.34  
Net interest margin (taxable equivalent) 3.55   3.61   3.70   3.68   3.76  

Net Interest Income and Net Interest Margin

          Net interest income on an FTE basis was $985 million for the second quarter of 2007 compared to $939 million for the same period in 2006, an increase of $46 million, or 4.9% . For the quarter ended June 30, 2007, average earning assets increased $11.0 billion, or 11.0%, compared to the same period of 2006, while average interest-bearing liabilities increased $12.3 billion, or 14.7%, and the net interest margin decreased from 3.76% in the second quarter of 2006 to 3.55% in the current quarter. For the first six months of 2007, net interest income on an FTE basis was $1.9 billion, an increase of 4.8% compared to the same period in 2006. Average earning assets for the first six months of 2007 were $109.3 billion, an increase of 10.9% compared to the prior year average of $98.6 billion, while average interest-bearing liabilities increased $12.2 billion, or 14.8%, compared to the first six months of 2006. The net interest margin for the first six months of 2007 was 3.58%, a decrease of 21 basis points compared to 3.79% during the first half of 2006. The decline in the net interest margin during 2007 compared to 2006 was negatively affected by additional funding costs associated with a payment to the IRS that was made in January 2007 as described in the “Provision for Income Taxes” section below. In addition, the net interest margin has been reduced in recent periods due to the shape of the yield curve, which has resulted in an increase in funding costs that has outpaced the rise in yields on earning assets.

          The following tables set forth the major components of net interest income and the related annualized yields and rates for the second quarter and the first six months of 2007 compared to the same periods in 2006, as well as the variances between the periods caused by changes in interest rates versus changes in volumes.

BB&T Corporation       Page 39       Second Quarter 2007 10-Q

 

 

Table 5-1
FTE Net Interest Income and Rate / Volume Analysis
For the Three Months Ended June 30, 2007 and 2006
 
  Average Balances Annualized Yield / Rate Income/Expense Increase Change due to
    2007 2006 2007   2006   2007 2006 (Decrease) Rate Volume
  (Dollars in millions)
Assets                                          
Securities, at amortized cost (1):                                          
   U.S. Treasury securities $ 84 $ 126 4.53 % 3.19  % $ 1 $ 1 $ -   $ -   $ -  
   U.S. government-sponsored entity securities (6)   10,475   11,928 4.60   3.96     121   118   3     18     (15 )
   Mortgage-backed securities   8,303   6,579 5.02   4.83     103   80   23     3     20  
   States and political subdivisions   598   616 6.87   6.84     11   11   -     -     -  
   Other securities   2,489   966 5.94   5.25     36   12   24     2     22  
   Trading securities   1,175   866 4.36   2.94     13     6     7     4     3  
         Total securities (5)   23,124   21,081 4.94   4.33     285   228   57     27     30  
Other earning assets (2)   967   969 5.26   4.23     13   10   3     3     -  
Loans and leases, net                                          
   of unearned income (1)(3)(4)(5)   86,939   77,978 7.75   7.47     1,682     1,452     230     56     174  
 
         Total earning assets   111,030   100,028 7.14   6.77     1,980     1,690     290     86     204  
 
         Non-earning assets   13,818   12,355                                  
 
Total assets $ 124,848 $ 112,383                                  
 
Liabilities and Shareholders' Equity                                          
Interest-bearing deposits:                                          
   Interest-checking $ 2,487 $ 2,234 2.30   1.78   $ 14 $ 9 $ 5   $ 4   $ 1  
   Other client deposits   33,860   30,809 2.85   2.29     241   176   65     46     19  
   Client certificates of deposit   25,919   21,627 4.63   3.99     300   215   85     38     47  
   Other interest-bearing deposits   6,326   7,743 5.34   5.00     84     96     (12 )   7     (19 )
 
         Total interest-bearing deposits   68,592   62,413 3.73   3.20     639   496   143     95     48  
Federal funds purchased, securities sold                                          
   under repurchase agreements and                                          
   short-term borrowed funds   9,000   7,507 4.55   4.30     102   81   21     5     16  
Long-term debt   18,471   13,826 5.51   5.04     254     174     80     17     63  
 
         Total interest-bearing liabilities   96,063   83,746 4.15   3.60     995     751     244   117     127  
 
         Noninterest-bearing deposits   13,367   13,213                                  
         Other liabilities   3,305   4,203                                  
         Shareholders' equity   12,113   11,221                                  
 
         Total liabilities and                                          
                   shareholders' equity $ 124,848 $ 112,383                                  
Average interest rate spread         2.99   3.17                            
Net interest margin         3.55  % 3.76  % $ 985   $ 939   $ 46   $ (31 ) $ 77  
 
Taxable equivalent adjustment                 $ 19   $ 22                  

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

 

BB&T Corporation       Page 40       Second Quarter 2007 10-Q

 

 

Table 5-2
FTE Net Interest Income and Rate / Volume Analysis
For the Six Months Ended June 30, 2007 and 2006
 
  Average Balances Annualized Yield / Rate Income / Expense   Increase   Change due to
  2007 2006 2007 2006 2007 2006   (Decrease)   Rate Volume
  (Dollars in millions)
Assets                                          
Securities, at amortized cost (1):                                          
   U.S. Treasury securities $ 85 $ 125 4.50  % 3.15  % $ 2 $ 2 $ -   $ 1   $ (1 )
   U.S. government-sponsored entity securities (6)   10,096   11,934 4.50   3.96     227   236   (9 )   30     (39 )
   Mortgage-backed securities   8,256   6,584 5.05   4.82     208   159   49     8     41  
   States and political subdivisions   573   627 6.86   6.83     20   22   (2 )   -     (2 )
   Other securities   2,433   940 6.47   5.62     78   26   52     5     47  
   Trading securities   1,059   808 5.04   3.29     27   13   14     9     5  
         Total securities (5)   22,502   21,018 5.00   4.36     562   458   104     53     51  
Other earning assets (2)   904   874 5.12   4.02     23   17   6     5     1  
Loans and leases, net                                          
   of unearned income (1)(3)(4)(5)   85,922   76,717 7.74   7.33     3,304   2,793   511     163     348  
 
         Total earning assets   109,328   98,609 7.16   6.67     3,889   3,268   621     221     400  
 
         Non-earning assets   13,633   12,158                                  
 
Total assets $ 122,961 $ 110,767                                  
 
Liabilities and Shareholders' Equity                                          
Interest-bearing deposits:                                          
   Interest-checking $ 2,348 $ 2,071 2.34   1.59   $ 27 $ 16   11     9     2  
   Other client deposits   33,628   30,748 2.84   2.16     473   329   144     111     33  
   Client certificates of deposit   25,498   20,766 4.62   3.83     584   395   189     90     99  
   Other interest-bearing deposits   7,607   8,298