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BBT > SEC Filings for BBT > Form 10-Q on 9-Nov-2011All Recent SEC Filings

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Form 10-Q for BB&T CORP


9-Nov-2011

Quarterly Report

Management's Discussion and Analysis Third Quarter 2011

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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the financial condition, results of operations, business plans and the future performance of BB&T that 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. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "plans," "projects," "may," "will," "should," and other similar expressions are intended to identify these forward-looking statements. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. Such factors include, but are not limited to, the following:

general economic or business conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit or other services;

disruptions to the credit and financial markets, either nationally or globally, including the impact of a downgrade of U.S. government obligations by one of the credit ratings agencies and the adverse effects of the ongoing sovereign debt crisis in Europe;

changes in the interest rate environment may reduce net interest margins and/or the volumes and values of loans made or held as well as the value of other financial assets held;

competitive pressures among depository and other financial institutions may increase significantly;

legislative or regulatory changes, including changes resulting from the adoption and implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") and 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;

reduction in BB&T's credit ratings;

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 and may be subject to different regulatory standards 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;

unpredictable natural or other disasters could have an adverse effect on BB&T in that such events could materially disrupt BB&T's operations or the ability or willingness of BB&T's customers to access the financial services BB&T offers;

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

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

These and other risk factors are more fully described in BB&T's Annual Report on Form 10-K for the year ended December 31, 2010 under the section entitled "Risk Factors Related to BB&T's Business," its Quarterly Report on Form 10-Q for the quarter ended June 30, 2011 under the section entitled, "Item 1A. Risk Factors" and


BB&T Corporation and Subsidiaries Management's Discussion and Analysis Third Quarter 2011

from time to time, in other filings with the Securities and Exchange Commission ("SEC"). Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Actual results may differ materially from those expressed in or implied by any forward-looking statements. Except to the extent required by applicable law or regulation, BB&T undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

Regulatory Considerations

BB&T and its subsidiaries and affiliates are subject to numerous examinations by federal and state banking regulators, as well as the SEC, the Financial Industry Regulatory Authority, 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. Refer to BB&T's Annual Report on Form 10-K for the year ended December 31, 2010 for additional disclosures with respect to laws and regulations affecting the Company's businesses.

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 ("GAAP") and conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. BB&T's financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Different assumptions in the application of these policies could result in material changes in BB&T's consolidated financial position and/or consolidated results of operations and related disclosures. The more critical accounting and reporting policies include BB&T's accounting for the allowance for credit losses, determining fair value of financial instruments, intangible assets and other purchase accounting related adjustments associated with mergers and acquisitions, costs and benefit obligations associated with BB&T's pension and postretirement benefit plans, and income taxes. Understanding BB&T's accounting policies is fundamental to understanding BB&T's consolidated financial position and consolidated results of operations. Accordingly, BB&T's significant accounting policies and changes in accounting principles and effects of new accounting pronouncements are discussed in detail in Note 1 in the "Notes to Consolidated Financial Statements" in BB&T's Annual Report on Form 10-K for the year ended December 31, 2010. Additional discussions regarding the effects of new accounting pronouncements are included in Note 1 "Basis of Presentation" included herein.

The following is a summary of BB&T's critical accounting policies that are highly dependent on estimates, assumptions and judgments. These critical accounting policies are reviewed with the Audit Committee of BB&T's Board of Directors on a periodic basis.

Allowance for Credit Losses

It is the policy of BB&T to maintain an allowance for loan and lease losses and a reserve for unfunded lending commitments that represent management's best estimate of probable credit losses inherent in the portfolio at the balance sheet date. Estimates for loan and lease losses are determined by analyzing historical loan and lease losses, historical loan and lease migration to charge-off experience, current trends in delinquencies and charge-offs, expected cash flows on purchased loans, current assessment of problem loans and leases, the results of regulatory examinations, and changes in the size, composition and risk assessment of the loan and lease


BB&T Corporation and Subsidiaries Management's Discussion and Analysis Third Quarter 2011

portfolio. For restructured loans, re-default expectations and estimated slower prepayment speeds are incorporated in the determination of the allowance for loan and lease losses. 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 used in calculating the allowance for loans and leases adjusted for factors specific to binding commitments, including the probability of funding and exposure at the time of funding.

Fair Value of Financial Instruments

A significant portion of BB&T's assets and certain liabilities are financial instruments carried at fair value. This includes securities available for sale, trading securities, derivatives, certain loans held for sale, residential mortgage servicing rights, certain short-term borrowings and venture capital investments. At September 30, 2011, the percentage of total assets and total liabilities measured at fair value on a recurring basis was 18.1% and approximately 1%, respectively. The vast majority of assets and liabilities carried at fair value are based on either quoted market prices or market prices for similar instruments. At September 30, 2011, 6.7% of assets measured at fair value on a recurring basis were based on significant unobservable inputs. This is approximately 1% of BB&T's total assets. See Note 14 "Fair Value Disclosures" in the "Notes to Consolidated Financial Statements" herein for additional disclosures regarding the fair value of financial instruments.

Securities

The fair values for available-for-sale and trading securities are generally based upon quoted market prices or observable market prices for similar instruments. BB&T generally utilizes a third-party pricing service in determining the fair value of its securities portfolio. The pricing service uses observable inputs when available including benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids and offers. These values take into account recent market activity as well as other market observable data such as interest rate, spread and prepayment information. When market observable data is not available, which generally occurs due to the lack of liquidity for certain securities, the valuation of the security is subjective and may involve substantial judgment by management. As of September 30, 2011, BB&T had approximately $1.1 billion of available-for-sale securities, which is less than 1% of total assets, valued using unobservable inputs. This total is almost entirely non-agency mortgage-backed securities that are covered by a loss sharing agreement with the FDIC.

BB&T periodically reviews available-for-sale securities with an unrealized loss. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. The purpose of the review is to consider the length of time and the extent to which the market value of a security has been below its amortized cost. The primary factors BB&T considers in determining whether an impairment is other-than-temporary are long-term expectations and recent experience regarding principal and interest payments, and BB&T's intent to sell and whether it is more likely than not that the Company would be required to sell those securities before the anticipated recovery of the amortized cost basis.

Mortgage Servicing Rights

BB&T has a significant mortgage loan servicing portfolio and related mortgage servicing rights ("MSRs"). BB&T has two primary classes of MSRs for which it separately manages the economic risk: residential and commercial. Residential MSRs are primarily carried at fair value with changes in fair value recorded as a component of mortgage banking income each period. BB&T uses various derivative instruments to mitigate the


BB&T Corporation and Subsidiaries Management's Discussion and Analysis Third Quarter 2011

income statement effect of changes in fair value, due to changes in valuation inputs and assumptions, of its residential MSRs. MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs do occur, the precise terms and conditions typically are not readily available. Accordingly, BB&T estimates the fair value of residential MSRs using an option adjusted spread ("OAS") valuation model to project MSR cash flows over multiple interest rate scenarios, which are then discounted at risk-adjusted rates. The OAS model considers portfolio characteristics, contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. BB&T reassesses and periodically adjusts the underlying inputs and assumptions in the OAS model to reflect market conditions and assumptions that a market participant would consider in valuing the MSR asset. When available, fair value estimates and assumptions are compared to observable market data and to recent market activity and actual portfolio experience. Due to the nature of the valuation inputs, MSRs are classified within Level 3 of the valuation hierarchy. The value of MSRs is significantly affected by mortgage interest rates available in the marketplace, which influence mortgage loan prepayment speeds. In general, during periods of declining interest rates, the value of MSRs declines due to increasing prepayments attributable to increased mortgage-refinance activity. Conversely, during periods of rising interest rates, the value of MSRs generally increases due to reduced refinance activity. Commercial MSRs are carried at the lower of cost or market and amortized over the estimated period that servicing income is expected to be received based on projections of the amount and timing of estimated future cash flows. The amount and timing of servicing asset amortization is updated based on actual results and updated projections. In addition, BB&T has approximately $13 million of residential MSRs that are valued at the lower of cost or market. These MSRs are associated with government sponsored programs that have prepayment assumptions that are difficult to model, which make it difficult to hedge the associated risk.

Loans Held for Sale

BB&T originates certain mortgage loans to be sold to investors that are carried at fair value. The fair value is primarily based on quoted market prices for securities backed by similar types of loans. Changes in the fair value are recorded as a component of mortgage banking income while mortgage loan origination costs for loans held for sale for which the Corporation elected the Fair Value Option are recognized in noninterest expense when incurred. The changes in fair value of these assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage loan held for sale. BB&T uses various derivative instruments to mitigate the economic effect of changes in fair value of the underlying loans.

In addition, as of September 30, 2011, BB&T held $26 million of commercial loans accounted for at the lower of cost or market in the loans held for sale portfolio. These are nonaccrual loans that were originated as loans held for investment and transferred to the loans held for sale portfolio based on management's nonperforming asset disposition strategy.

Derivative Assets and Liabilities

BB&T uses derivatives to manage various financial risks. The fair values of derivative financial instruments are determined based on quoted market prices, dealer quotes and internal pricing models that are primarily sensitive to market observable data. BB&T mitigates the credit risk by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. In addition, certain counterparties are required to provide collateral to BB&T when their unsecured loss positions exceed certain negotiated limits. The fair value of interest rate lock commitments, which are related to mortgage loan commitments, is based on quoted market prices adjusted for commitments that BB&T does not expect to fund and includes the value attributable to the net servicing fee.


BB&T Corporation and Subsidiaries Management's Discussion and Analysis Third Quarter 2011

Venture Capital and Similar Investments

BB&T has venture capital and similar investments that are carried at fair value. Changes in the fair value of these investments are recorded in other noninterest income each period. In many cases there are no observable market values for these investments and therefore management must estimate the fair value based on a comparison of the operating performance of the company to multiples in the marketplace for similar entities. This analysis requires significant judgment and actual values in a sale could differ materially from those estimated. As of September 30, 2011, BB&T had $276 million of these investments, which is less than 1% of total assets.

Intangible Assets

BB&T's mergers and acquisitions are accounted for using the acquisition method of accounting. Under the acquisition method, BB&T is required to record the assets acquired, including identified intangible assets, and liabilities assumed at their fair value, which often involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective. The amortization of identified intangible assets is based upon the estimated economic benefits to be received, which is also subjective. Acquisitions typically result in goodwill, which is subject to ongoing periodic impairment tests based on the fair value of net assets acquired compared to their carrying value. Refer to Note 1 in the "Notes to Consolidated Financial Statements" in BB&T's Annual Report on Form 10-K for the year ended December 31, 2010 for a description of BB&T's impairment testing process. The major assumptions used in the impairment testing process include the estimated future cash flows of each business unit and discount rates. Discount rates are unique to each business unit and are based upon the cost of capital specific to the industry in which the business unit operates. While the excess of fair value over carrying value of some reporting units narrowed during the economic downturn, the results of BB&T's most recent annual goodwill impairment analysis indicated that the fair value of each reporting unit exceeded its respective carrying value by at least 20%.

Pension and Postretirement Benefit Obligations

BB&T offers various pension plans and postretirement benefit plans to employees. The calculation of the obligations and related expenses under these plans requires the use of actuarial valuation methods and assumptions. Actuarial assumptions used in the determination of future values of plan assets and liabilities are subject to management judgment and may differ significantly if different assumptions are used. The discount rate assumption used to measure the postretirement benefit obligations is set by reference to published high-quality bond indices, as well as certain hypothetical spot-rate yield curves. These yield curves were constructed from the underlying bond price and yield data collected as of the plan's measurement date and are represented by a series of annualized, individual discount rates with durations ranging from six months to thirty years. Each discount rate in the curve was derived from an equal weighting of the double A or higher bond universe, apportioned into distinct maturity groups. For durations where no bond maturities were available, the discount rates for these maturities were extrapolated based on historical relationships from observable data in similar markets. These indices and hypothetical curves give only an indication of the appropriate discount rate because the cash flows of the bonds comprising the indices and curves do not match the projected benefit payment stream of the plan precisely. For this reason, we also consider the individual characteristics of the plan, such as projected cash flow patterns and payment durations, when setting the discount rate.

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


BB&T Corporation and Subsidiaries Management's Discussion and Analysis Third Quarter 2011

to the tax laws and regulations that apply to the specific facts and circumstances for any tax position under evaluation. For tax positions that are uncertain in nature, management determines whether the tax position is more likely than not to be sustained upon examination. For tax positions that meet this threshold, management then estimates the amount of the tax benefit to recognize in the financial statements. Management closely monitors tax developments in order to evaluate the effect they may have on the Company's overall tax position and the estimates and judgments used in determining the income tax provision and records adjustments as necessary.

EXECUTIVE SUMMARY

Consolidated net income for the third quarter of 2011 totaled $371 million, an increase of $152 million, or 69.4%, compared to $219 million earned during the third quarter of 2010. Consolidated net income available to common shareholders for the third quarter of 2011 totaled $366 million, an increase of $156 million, or 74.3%, compared to $210 million earned during the same period in 2010. On a diluted per common share basis, earnings for the three months ended September 30, 2011 were $0.52, compared to $0.30 for the same period in 2010, an increase of 73.3%. BB&T's results of operations for the third quarter of 2011 produced an annualized return on average assets of 0.89% and an annualized return on average common shareholders' equity of 8.30% compared to prior year ratios of 0.56% and 4.91%, respectively.

Consolidated net income for the first nine months of 2011 totaled $932 million, an increase of $295 million, or 46.3%, compared to $637 million earned during the first nine months of 2010. Consolidated net income available to common shareholders for the first nine months of 2011 totaled $898 million, an increase of $290 million, or 47.7%, compared to $608 million earned during the same period in 2010. On a diluted per common share basis, earnings for the nine months ended September 30, 2011 were $1.27, compared to $0.87 for the same period in 2010, an increase of 46.0%. BB&T's results of operations for the first nine months of 2011 produced an annualized return on average assets of 0.78% and an annualized return on average common shareholders' equity of 7.05% compared to prior year ratios of 0.53% and 4.84%, respectively.

BB&T's taxable-equivalent net interest income increased 7.9% compared to the third quarter of 2010. The increase in net interest income was due to lower deposits costs and a more favorable funding mix. The net interest margin was 4.09% for the third quarter of 2011 and 2010. Noninterest income declined 37.8% compared to the third quarter of 2010, primarily as a result of decreases of $278 million from net securities gains and $61 million in mortgage banking income. In addition, FDIC loss share income was lower $61 million, due primarily to improved performance from covered loans. Noninterest expenses were up slightly in the third quarter of 2011 compared with the corresponding period of 2010. Noninterest expenses for third quarter of 2011 includes a pre-tax loss of $16 million from the sale of a leveraged lease transaction. Including $26 million of tax benefits from this transaction, the sale added approximately $10 million to net income for the third quarter of 2011.

Asset quality continued to show significant improvement during the third quarter of 2011. Total nonperforming assets, excluding covered assets, were $3.0 billion at September 30, 2011, a decrease of $384 million, or 11.5%, compared to June 30, 2011. The decline this quarter is the sixth consecutive quarterly decline in nonperforming assets. The decline in nonperforming assets reflects a 12.1% decrease in inflows into nonaccrual status compared to the second quarter of 2011. In addition, foreclosed property declined 16.2% compared to the second quarter of 2011, as management began a more aggressive strategy to reduce the inventory of foreclosed property. The provision for credit losses for the third quarter of 2011 declined $520 million, or 67.5%, compared to the third quarter of 2010, as improving credit resulted in lower provision expense. Net charge-offs for the third quarter of 2011 were $454 million lower than the third quarter of 2010 and the level of nonperforming assets, loans 90 days or more past due and still accruing and the outlook for future credit losses continued to improve.


BB&T Corporation and Subsidiaries Management's Discussion and Analysis Third Quarter 2011

BB&T's total assets at September 30, 2011 were $167.7 billion, an increase of 6.7% compared to December 31, 2010. Total loans and leases at September 30, 2011 were $107.4 billion, a slight increase compared to the balance at year-end. Loan growth improved during the third quarter of 2011, as average loans held for investment grew 4.3% on annualized basis compared to the second quarter of 2011. The growth in average loans held for investment was broad based and led by a 7.5% annualized increased in commercial and industrial lending. The total securities portfolio increased $9.6 billion compared to December 31, 2010. Securities available for sale increased $1.5 billion and securities held to maturity increased $8.1 billion compared to the balances at December 31, 2010. The growth in held to maturity securities reflects a transfer of $8.3 billion during the first quarter of 2011 to mitigate possible negative impacts on its regulatory capital under the proposed Basel III capital guidelines. During the third quarter of 2011, BB&T purchased $5.3 billion in GNMA securities as part of a strategy to mitigate possible negative impacts under the proposed Basel III liquidity guidelines.

Deposits totaled $117.6 billion at September 30, 2011, an increase of 9.7% compared to December 31, 2010. Noninterest-bearing deposits at September 30, 2011 increased $3.9 billion, or 19.0%, compared to December 31, 2010. Deposit growth accelerated during the third quarter of 2011, as part of management's strategy related to complying with proposed Basel III liquidity guidelines. Management attracted high-quality money market and certificates of deposits from corporate and public funds clients. The cost of interest-bearing deposits continued to decline during the third quarter and was 0.65% for the third quarter of 2011, compared to 0.72% for the second quarter of 2011. The deposit mix has continued to improve throughout 2011, with noninterest-bearing accounts representing 20.9% of total deposits at September 30, 2011, compared with 19.2% at December 31, 2010.

Total shareholders' equity increased $1.0 billion, or 6.3%, compared to December 31, 2010. The Tier 1 common ratio was 9.8% and 9.1% at September 30, 2011 and December 31, 2010, respectively. In addition, the Tier 1 risk-based . . .

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