Highlights From BBT's Q3 Conference Call: Merger with Colonial Helped Gain Market Share in Certain States

October 19, 2009 2:25 PM EDT

BB&T Corp. (NYSE: BBT) reports Q3 EPS of $0.23, or about $0.24 excluding certain items, versus the analyst estimate of $0.22. Shares are down 4.28% today.

Highlights From BBT's Q3 Conference Call:

• (CEO) Our net income available to common shareholders was $152 million.
  
• Earnings power is defined as pre-tax, pre-provision and if you look at Q3, it was 881 million compared to 916 in the second. But remember, we have some seasonal down draft in the third.
  
• Year-to-date we have 2.7 billion in year-to-date '09 versus 2.6 for year-to-date '08.
  
• We had $25 million pre-tax contingent liability on a non-recurring item that's about 2.5%. We did have $18 million in merger charges related to Colonial.
  
• Also about $31 million in securities gains, which is about $0.05.
  
• Obviously credit quality is the primary focus for us all today. I'll just make an editorial comment as we begin to look through these numbers. You all are going to need to really focus on the impact of Colonial in some of our credit metrics, because as you know, we're required to report on a GAAP basis. But in some cases it makes more sense to look at the numbers excluding the impact of the eight or so billion dollars in Colonial loans because, as you will recall, those are covered loans with a loss share agreement with the FDIC which makes them substantially risk free.
  
• So our non-performers increased in the quarter from 3.3 billion to 4.1 billion ending at 2.48%.
  
• If you look at non-performers excluding covered assets that number would come down to 3.9 billion versus 4.1. But the ratio goes up to 2.52.
  
• Net charge-offs were 446 million; down a little bit from the 451 in Q2. The charge-offs as percentage was 1.71 versus 1.81 for Q2.
  
• Our provision for credit losses was 709 million versus the charge-offs of 446. So we had a $263 million allowance build in the quarter, which is again a significant number.
  
• We are having additional deterioration in our housing related portfolios particularly our ADC, builder/developer portfolios is deteriorating about as we expected but a steady deterioration. Primary areas are still pretty much where we've had it in Florida, Atlanta, Metro D.C., although Metro D.C. is stabilizing somewhat.
  
• We've seen a leveling off in the rate of change in non-performing loans and non-performing asset formation. For example, non-performing loans increased 22%, 21%, and 23% respectively for Q1, Q2 and Q3.
  
• Same thing in terms of non-performing assets. You see an actual decline in terms of the percentage increase where the first quarter was 35% increase, Q2 was 21% increase and Q3 was 18%.
  
• Charge-offs are up from 4.35 in the second to 6.35 in the third. That's part of the resolution process. But we do expect to see further deterioration in that portfolio.
  
• Looking at other CRE. It's holding up reasonably well in the environment that we are in. But they certainly are increases there. Non-accruals are up from 1.82 to 2.35. Our charge-offs are up from 0.47 to one. I'll remind you though this is very granular portfolio; average note size is 543,000. We have $25 million project limit so we just don't have the large projects.
  
• There's soft demand out there but non-performing loans are up to 2.05 versus 1.40 in the second. Charge-offs are 0.94 versus 0.60 in the second.
  
• And so if you look at Q2 lock loan charges including the reversal, we only have 2.5% in the third.
  
• Home equity loans and lines just not a material concern for us now. It's very stable.
  
• Mortgage continues to be a bright spot for us at 6.9 billion in production for the third. It was down from 8.5 billion in the second. Application volume was down 27% from the second. But remember the second was a phenomenal blow-out quarter.
  
• Non-accruals were 4.31 versus 3.82, so an up tick there. Charge-offs were 2%, versus 1.95. Again, an uptick but very low numbers relative to industry averages.
  
• ORE of course deserves a lot of attention. It increased 10% to 1.3 billion. Had some increases in Georgia, had a property to increase in Maryland.
  
• So our net interest income second to third was reported 34%. Our reported numbers are all high now. Because of the Colonial impact and in some cases some insurance impact. Those are real transactions though.
  
• If you look at non-interest income growth, second to third, it was down without items 29%.
  
• So if you look at net revenue growth, third to third, we are up without items, 7.5% which is very strong. And year-to-date, 9.7% which we feel very good about. If you look at the fee income ratio, third to third is up from 41.4 to 41.8.
  
• Our annualized second to third of commercial loan growth was down 2.9. Direct retail which has been down for several quarters is down 7.5. So total loan growth second to third is down 4.2. Now, third to third is up 1.6 because we did have decent growth in Q1 and first part of Q2 and year-to-date is up 3.9%.
  
• We believe we are actually growing market share in the C&I area.
  
• Non-interest bearing deposits year-to-date up 13.5% which is very strong. Client deposits are up 13.8%.
  
• We're continuing to grow net new transaction accounts. We increased 17,400 during in third quarter.
  
• A comment for you about the Colonial integration. We're very pleased about this merger, as we said...Strategically it improved our market share in Florida from 16 to number five which is very, very important from a long term point of view. We pick up a really strong number four position in Alabama. It's a really good market.
  
• And we also pick up a nice toe hold in Texas in the Dallas/Fort Worth area. Small operation in Austin. There's been some question about our attitude with regard to that.
  
• (CFO) Let me first discuss margin and the balance sheet activity. Link-quarter margin was up 12 basis points to 3.68%. Link-quarter margin increased is primarily attributable to the acquisition of Colonial which added about 10 basis points.
  
• Retail loan credit spreads widened by 14 basis points and mortgage loan credit spreads widened six basis points, offset by reduced carry on transactions that we entered to become more asset sensitive.
  
• We believe that margin for the fourth quarter will be in the low 370s, improving our outlook for the full year 2009 to the mid 360s. Looking into 2010 we expect margin to hover in the low 370s. The primary drivers for margin for the next few quarters will be the effect of the Colonial acquisition, rates paid on deposits, and the level of growth.
  
• With respect to securities, we've sold 2.4 billion of agency securities acquired from Colonial. We retained 1.2 billion of non-agency mortgage backed securities and municipal securities. Almost all of these retained securities are covered by the FDIC loss share agreement.
  
• We paid off 1.6 billion of higher cost for upper deposits, 815 million of mortgage warehouse business-related escrow deposits were paid down, mostly due to the Taylor, Bean runoff. We prepaid 2.8 billion of Colonial's federal home loan bank advances, and we used approximately 4.1 billion cash proceeds from the FDIC to pay down liabilities.
  
• The acquisition resulted in 690 million of goodwill and 176 million of core deposit intangibles.
  
• Looking on a common quarter basis, non-interest expense increased 31.3%. Excluding merger related costs, and adjusting for the impact of purchase acquisitions and significant items, non-interest expense increased 179 million or 15.5%.
  
• We remain confident that our estimated cost savings of 170 million range and expected will be at the full run rate by Q4 of next year.
  
• The timing for one-time costs will be over the next four quarters with the bulk of the costs in Q2 of 2010, in connection with our systems conversion. Overall, we are aggressively managing our controllable non-interest expenses, and will continue to pursue opportunities for expense management.
  
• We continue to see some deterioration related to costs for the current credit environment and for the initial impact of including Colonial into our company. Efficiency rose to 52% for Q3 compared to 49.8% in Q2.
  
• Looking at our full-time equivalent positions decreased by 325, excluding acquisitions in the third quarter. Including Colonial, we expect to see significant reduction in FTEs. Mainly in the support functions over the next three to four quarters.
  
• Finally, taking a look at capital despite the economic challenges, a regulatory capital ratios remain very strong. The leverage capital ratio was 8.5%. Tier 1 capital was 11.1% and total capital was 15.6%. Our Tier 1 common to risk rated asset ratio was 8.4% among the strongest of our peer group. Additionally, our tangible common equity ratio remains strong at 6.1%.
  
• (Q&A) Can you just give more color on the sale of some of OREO that you did this quarter in terms of what you got versus where it was being carried at? And then I assume that feeds into some of the OREO expenses like we saw this quarter. (A)So we've been basically selling, you know, the primarily focusing on the verticals during the most recent quarter. And I think as we reported, the sales price, if you look at it from all the way through, from the original loan, all the way to the final exit value, there's a reduction of 37%. And so what we to is when we put into OREO, we take a reduction, that's usually about 27%. And then we, you know, write it down if necessary based on further appraisals during the time we have it. And last quarter averaged about 10%. And then we actually sold it for about 5% less on the average than what we had it at. So now that math doesn't exactly add up because you're talking about the 10% is also the 73% and the 5% is softer so you have to go through that. But when you look at the math, the final disposition price to us is 37% of the original loan balance.
  
• And I know it's not impossible to know what the sales activity will look like this quarter, but as you think about the OREO cost going forward, is this a decent run rate to start off? Or should we be adjusting it up or down? (A) That's a good question and a horrible answer but I intuitively think we are kind of a level we'll be at for the next probably two, three quarters. I don't see it materially changing one way or the other. Because what happens to you is you kind of, you know, if you've ever worked with these kind of projects you get the project in. You have some early calls. You have to kind of cut the grass or, you know, you got to get all the up front things done. Sometimes there are repairs that have to be made whether it's a house or whether it's a project. You get a lot of up front expense. But then when you get it up to ready to sell state you're just kind of holding it. Then you kind of got the taxes. And then whether or not you have any write-downs but I think we are kind of at a level that we will probably be able to sustain for the next two, three quarters.
  
• Just a couple questions in terms of the purchase accounting for the quarter. Kelly, could you talk a little bit about the final marks in term us of the Colonial loan book. And then given that it looks like with the SOP '03 accounting affect, with the assets coming on board, can you talk a little bit about just in terms of the optics for NPAs going forward as those assets deteriorate, what we can expect as we think about kind of a repopulation effect? (A)Let me just give a general answer. And Daryl will give you more color on that. But basically in business terms, you know, the way to think about that book of business is that through the whole cycle, you know, we have about a 5% exposure. Now, it gets real tricky in the accounting because you have FDIC receivable. You take marks on the portfolio. And then as you begin to collect those loans. You basically assess it on a regular basis and adjusted numbers at least quarterly. And so you are constantly adjusting the receivable and the mark based on your actual collection reality. And so you'll see some changes in our numbers over the next several years. But the net earnings impact on this, we still believe will be very positive. What you'll have to do though is when you look at non-performers from a GAAP point-of-view, we'll have to report those non-performers. I say they because we're actually in our own company. We're creating that book as a non-legacy part of the bank. And we've got a warehouse circled off, and we'll, you know, be managing that with a separate work group. Let me ask Daryl to give you more detail on that. (A)Todd, as it goes forward, as the OREO balances, as we work through the assets on Colonial, the OREO balances will build up, and that will go into non-performing assets. All the other assets really won't be considered non-performing because we have the loss share agreement with the FDIC so we're going to be paid principal back plus the accrued interest on the loans. So it's only the more the residential mortgages will go under OREO will increase. Which should be a smaller percentage because Colonial mainly had commercial mortgages on their balance sheet.

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