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| BBT > SEC Filings for BBT > Form 10-Q on 4-May-2012 | All Recent SEC Filings |
4-May-2012
Quarterly Report
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, 2011 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 critical accounting policies are discussed in detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in BB&T's Annual Report on Form 10-K for the year ended December 31, 2011. 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, 2011. There have been no changes to BB&T's significant accounting policies during the three months ended March 31, 2012. Additional disclosures regarding the effects of new accounting pronouncements are included in Note 1 "Basis of Presentation" included herein.
Executive Summary
Consolidated net income available to common shareholders for the first quarter of 2012 of $431 million was up 91.6% compared to $225 million earned during the same period in 2011. On a diluted per common share basis, earnings for the first quarter of 2012 were $0.61, up 90.6% compared to $0.32 for the same period in 2011. BB&T's results of operations for the first quarter of 2012 produced an annualized return on average assets of 1.03% and an annualized return on average common shareholders' equity of 9.75% compared to prior year ratios of 0.60% and 5.48%, respectively.
Total revenues, on a tax equivalent basis, were $2.3 billion for the first quarter of 2012, up $309 million compared to the first quarter of 2011. The increase in total revenues was due to $152 million of higher net interest income, primarily driven by an increase in earning assets and lower funding costs. The net interest margin was 3.93%, down 8 basis points compared to the first quarter of 2011. Noninterest income increased $157 million. The increase in noninterest income was largely attributable to $121 million of higher revenues from mortgage banking activities and a $21 million increase in insurance income. In addition, other income was up $38 million due to $74 million of fewer losses and write-downs on the commercial loans held for sale in connection with management's nonperforming loan disposition strategy, partially offset by $42 million of
increased write-downs on affordable housing investments due to revised estimates and processes used to value these investments. The increases were partially offset by a decline of $29 million from checkcard fees primarily due to the implementation of the Durbin amendment.
The provision for credit losses, excluding covered loans, for the first quarter of 2012 declined $55 million, or 16.2%, compared to the first quarter of 2011, as improving credit quality resulted in lower provision expense. Net charge-offs, excluding covered loans, for the first quarter of 2012 were $67 million lower than the first quarter of 2011.
Noninterest expenses were $1.4 billion for the first quarter of 2012, up slightly compared to the first quarter of 2011. The increase in noninterest expenses was primarily due to higher personnel costs, which were up $36 million compared to the first quarter of 2011. The increase in personnel costs was due to higher salaries and wages, as well as an increase in pension expense. In addition, other expenses were up $22 million due to a $15 million valuation loss on leveraged lease investments. These increases were partially offset by a reduction of $51 million in foreclosed property expenses due to fewer losses and lower carry costs and a $20 million reduction in regulatory charges due to lower deposit insurance expense.
The provision for income taxes was $189 million for the first quarter of 2012 compared to $53 million for the first quarter of 2011. This resulted in an effective tax rate for the first quarter of 2012 of 29.8% compared to 18.5% for the prior year's first quarter. The increase in the effective tax rate was primarily due to higher levels of pre-tax earnings relative to permanent tax differences in 2012 compared to 2011. The current quarter also included $16 million in tax expense primarily due to changes in the treatment of certain credits related to affordable housing partnership investments.
Asset quality continued to show improvement during the first quarter of 2012. Total nonperforming assets, excluding covered assets, were $2.3 billion at March 31, 2012, a decrease of $194 million, or 7.9%, compared to December 31, 2011. The decline this quarter is the eighth consecutive quarterly decline in nonperforming assets. In addition, loan delinquencies improved significantly during the first quarter of 2012, with improvements in both loans 30-89 days past due and loans 90 days or more past due and still accruing interest.
BB&T's total assets at March 31, 2012 were $174.8 billion, up slightly compared to December 31, 2011. Average loans held for investment grew 4.7% compared to the first quarter of 2011. The growth in average loans held for investment was broad based across all major portfolios. Average deposits increased 18.0% compared to the first quarter of 2011. In addition, the mix of the portfolio continues to improve with average noninterest-bearing deposits representing 21.0% of average deposits in the first quarter of 2012, compared to 19.9% in the same period of the prior year. The cost of interest-bearing deposits continued to decline during the first quarter and was 0.49% for the first quarter of 2012, compared to 0.82% for the first quarter of 2011.
Total shareholders' equity increased $402 million, or 2.3%, compared to December 31, 2011. The Tier 1 common ratio was 10.0% and 9.7% at March 31, 2012 and December 31, 2011, respectively. In addition, the Tier 1 risk-based capital and total risk-based capital ratios were 12.7% and 16.2% at March 31, 2012, respectively, compared to 12.5% and 15.7%, respectively, at December 31, 2011. BB&T's risk-based capital ratios remain well above regulatory standards for well-capitalized banks. As of March 31, 2012, measures of tangible capital were not required by the regulators and, therefore, were considered non-GAAP measures. Refer to the section titled "Capital Adequacy and Resources" herein for a discussion of how BB&T calculates and uses these measures in the evaluation of the Company.
In March, the Federal Reserve published the results of the 2012 Comprehensive Capital Analysis and Review. The regulators had no objections to BB&T's 2012 capital plans submitted for review. Following the review, the Board of Directors increased the quarterly cash dividend 25% to $0.20.
On March 13, 2012, BB&T announced that it had entered into an amendment to its agreement to acquire Fort Lauderdale, Florida-based BankAtlantic, a wholly-owned subsidiary of BankAtlantic Bancorp. The core provisions of the original agreement remain unchanged. BB&T will acquire approximately $2.1 billion in loans
and assume approximately $3.3 billion in deposits for an estimated premium of $301 million above the net asset value of BankAtlantic at closing. This represents a 9% deposit premium based on September 30, 2011 balances. The premium to be paid by BB&T is subject to adjustment based on actual deposit balances at close, but in no event will it exceed $316 million. Under the terms of the modified agreement, BB&T will assume BankAtlantic Bancorp's obligations with respect to outstanding trust preferred securities, with an aggregate principal balance of approximately $285 million. In exchange for the assumption of these liabilities, BB&T will receive a 95% preferred interest (5% preferred interest will be held by BankAtlantic Bancorp) in a newly established LLC, that will hold a $423 million pool of loans and $17 million of other net assets (based on BankAtlantic's book value gross of any reserves as of January 31, 2012). The pool of loans, which has an unpaid principal balance of approximately $500 million, represents a portion of the loans that were originally anticipated to be retained by BankAtlantic Bancorp pursuant to the original agreement. BankAtlantic Bancorp will also provide BB&T with an incremental $35 million guarantee to further assure BB&T's recovery of the $285 million assumed liability. The LLC's assets will be monetized over time and once BB&T has recovered $285 million in preference amount from the LLC, BB&T's interest in the LLC will terminate. The acquisition is expected to close in the second quarter of 2012, subject to regulatory approvals.
On April 2, 2012, BB&T closed the acquisition of the life and property and casualty insurance operating divisions of Roseland, N.J.-based Crump Group Inc. The acquisition creates the largest independent wholesale distributor of life insurance and one of the largest providers of wholesale commercial insurance brokerage and specialty programs in the U.S. BB&T paid $570 million in cash to complete the transaction, which is expected to be accretive to earnings and to add approximately $300 million in annual revenue to Insurance Services. The acquisition did not include Crump's retirement services business, Ascensus.
Refer to BB&T's Annual Report on Form 10-K for the year ended December 31, 2011, 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 first quarter of 2012 compared to the corresponding period of 2011 are further discussed in the following sections.
Analysis Of Results Of Operations
Consolidated net income available to common shareholders totaled $431 million, which generated diluted earnings per common share of $0.61 in the first quarter of 2012. Net income available to common shareholders for the same period of 2011 totaled $225 million, which generated diluted earnings per common share of $0.32. The increase in earnings was driven by higher revenues and lower credit-related costs. BB&T's results of operations for the first quarter of 2012 produced an annualized return on average assets of 1.03% and an annualized return on average common shareholders' equity of 9.75%, compared to prior year returns of 0.60% and 5.48%, respectively.
The following table sets forth selected financial ratios for the last five calendar quarters.
Table 1
Annualized Profitability Measures
Three Months Ended
3/31/12 12/31/11 9/30/11 6/30/11 3/31/11
Rate of return on:
Average assets 1.03 % 0.93 % 0.89 % 0.83 % 0.60 %
Average common
shareholders' equity 9.75 8.76 8.30 7.25 5.48
Net interest margin
(taxable equivalent) 3.93 4.02 4.09 4.15 4.01
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Net Interest Income and Net Interest Margin
Net interest income on a fully taxable-equivalent ("FTE") basis was $1.5 billion for the first quarter of 2012, an increase of 11.5% compared to the same period in 2011. The higher net interest income was driven by an increase in earning assets and lower funding costs. For the quarter ended March 31, 2012, average earning assets
increased $17.2 billion, or 12.9%, compared to the same period of 2011, while average interest-bearing liabilities increased $9.8 billion, or 8.6%. The net interest margin was 3.93% for the first quarter of 2012 compared to 4.01% for the same period of 2011. The 8 basis point decline in the net interest margin was due to runoff of covered assets and lower yields on new loans, which has been partially offset by lower funding costs.
The FTE yield on the average securities portfolio for the first quarter of 2012 was 2.70%, which represents an increase of 11 basis points compared to the annualized yield earned during the first quarter of 2011.
The annualized FTE yield for the total loan portfolio for the first quarter of 2012 was 5.56% compared to 5.94% in the first quarter of 2011. The decrease in the FTE yield on the total loan portfolio for the first three months of 2012 was primarily due to runoff of covered loans from the Colonial acquisition and lower yields on new loans due to the low interest-rate environment.
The average rate for interest-bearing deposits for the first quarter of 2012 was 0.49% compared to 0.82% for the same period in the prior year, reflecting a decrease in relatively higher-rate certificates of deposit and management's ability to lower rates on other deposit products.
For the first quarter of 2012, the average annualized FTE rate paid on short-term borrowings was 0.23% compared to 0.30% during the first quarter of 2011. The average annualized rate paid on long-term debt for the first quarter of 2012 was 3.41% compared to 3.97% for the same period in 2011. The decline in the average rate paid on long-term debt reflects the positive impact of accelerated amortization from certain derivatives that were unwound in a gain position. The benefits from the derivatives gains are being amortized over the remaining expected life of the respective debt.
Management expects that the second quarter of 2012 net interest margin will be in the 3.80% to 3.90% range due to the continued runoff of the covered loan portfolio.
The following table provides information related to covered and acquired loans, covered securities and the FDIC loss sharing asset recognized in the Colonial acquisition. The table excludes all amounts related to other assets acquired and liabilities assumed in the acquisition.
Table 2
Revenue, Net of Provision Impact from Acquired Assets
Three Months Ended March 31,
2012 2011
(Dollars in millions)
Interest income-loans $ 228 $ 266
Interest income-securities 34 37
Total interest income 262 303
Provision for covered loans (3 ) -
Other-than-temporary impairment ("OTTI") for
covered securities (4 ) -
FDIC loss share income, net (57 ) (58 )
Net revenue after provision for covered loans $ 198 $ 245
FDIC loss share income, net
Offset to provision for covered loans $ 3 $ -
Accretion due to credit loss improvement (57 ) (50 )
Offset to OTTI for covered securities 3 -
Accretion for securities (6 ) (8 )
$ (57 ) $ (58 )
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Interest income for the first quarter of 2012 on loans and securities acquired in the Colonial acquisition decreased $41 million compared to the first quarter of 2011. Interest income on acquired loans decreased $38 million reflecting lower average loan balances partially offset by higher yields due to the cumulative impact of changes
to expected cash flows based on the quarterly cash flow reassessment process required by acquisition accounting. The yield on covered and other acquired loans for the first quarter of 2012 was 19.49% compared to 18.09% in 2011. At March 31, 2012, the accretable yield balance on these loans was $1.4 billion. Accretable yield represents the excess of future cash flows above the current net carrying amount of loans and will be recognized into income over the remaining life of the covered and acquired loans.
During the three months ended March 31, 2012, the accretable yield of purchased nonimpaired loans and purchased impaired loans decreased $62 million and $69 million, respectively, due primarily to changes in the expected lives of loans.
The provision for covered loans was $3 million in the current quarter. There was no provision for covered loans in the first quarter of 2011. The first quarter of 2012 reassessment showed decreases in expected cash flows in certain loan pools that were partially offset by recoveries in other previously impaired loan pools.
FDIC loss share income, net was a negative $57 million for the first quarter of 2012, which was principally negative accretion attributable to the offset for the cumulative impact of cash flow reassessments for covered loans. The negative accretion related to the improvement in credit losses is recognized on a level yield basis over the life of the related FDIC loss share asset, which has a shorter weighted average life than the corresponding loans.
The following table sets forth the major components of net interest income and the related annualized yields and rates for the three months ended March 31, 2012 compared to the same period in 2011, as well as the variances between the periods caused by changes in interest rates versus changes in volumes. Changes attributable to the mix of assets and liabilities have been allocated proportionally between the changes due to rate and the changes due to volume.
Table 3
FTE Net Interest Income and Rate / Volume Analysis
Three Months Ended March 31, 2012 and 2011
Average Balances Annualized Yield/Rate Income/Expense Increase Change due to
2012 2011 2012 2011 2012 2011 (Decrease) Rate Volume
(Dollars in millions)
Assets
Total securities, at amortized cost (1)(2)
U.S. government-sponsored entities (GSE) $ 820 $ 93 1.54 % 2.41 % $ 3 $ 1 $ 2 $ - $ 2
Mortgage-backed securities issued by GSE 31,742 20,409 2.20 1.65 174 84 90 34 56
States and political subdivisions 1,858 1,969 5.84 5.55 27 27 - 1 (1 )
Non-agency mortgage-backed securities 411 595 5.98 6.38 6 10 (4 ) (1 ) (3 )
Other securities 532 750 1.64 1.56 2 3 (1 ) - (1 )
Covered securities 1,226 1,243 11.02 12.06 34 37 (3 ) (2 ) (1 )
Total securities 36,589 25,059 2.70 2.59 246 162 84 32 52
Other earning assets (3) 3,502 2,978 0.76 0.80 7 6 1 - 1
Loans and leases, net of unearned income (1)(4)(5)
Commercial:
Commercial and industrial 36,021 33,433 4.04 4.35 362 359 3 (27 ) 30
Commercial real estate-other 10,678 11,368 3.81 3.84 101 108 (7 ) (1 ) (6 )
Commercial real estate-residential ADC 1,989 3,281 3.58 3.50 18 28 (10 ) 1 (11 )
Direct retail lending 14,674 13,672 4.89 5.17 178 174 4 (10 ) 14
Sales finance 7,516 7,080 4.27 5.23 80 91 (11 ) (16 ) 5
Revolving credit 2,175 2,082 8.51 8.90 46 46 - (2 ) 2
Residential mortgage 21,056 17,926 4.54 4.97 239 223 16 (20 ) 36
Specialized lending 8,668 7,797 11.53 11.76 249 227 22 (5 ) 27
Other acquired 38 57 39.18 31.68 4 4 - 1 (1 )
Total loans and leases held for investment (excluding
covered loans) 102,815 96,696 4.99 5.27 1,277 1,260 17 (79 ) 96
Covered 4,672 5,927 19.32 17.96 224 262 (38 ) 19 (57 )
Total loans and leases held for investment 107,487 102,623 5.61 6.00 1,501 1,522 (21 ) (60 ) 39
Loans held for sale 2,916 2,671 3.62 3.48 26 23 3 1 2
Total loans and leases 110,403 105,294 5.56 5.94 1,527 1,545 (18 ) (59 ) 41
Total earning assets 150,494 133,331 4.75 5.19 1,780 1,713 67 (27 ) 94
Nonearning assets 23,475 23,600
Total assets $ 173,969 $ 156,931
Liabilities and Shareholders' Equity
Interest-bearing deposits
Interest-checking $ 19,712 $ 17,622 0.13 0.17 6 7 (1 ) (2 ) 1
Money market and savings 45,667 38,724 0.19 0.42 22 40 (18 ) (24 ) 6
Certificates and other time deposits 32,942 26,815 1.13 1.88 93 124 (31 ) (55 ) 24
Foreign deposits-interest-bearing 112 1,463 0.03 (0.26 ) - - - - -
Total interest-bearing deposits 98,433 84,624 0.49 0.82 121 171 (50 ) (81 ) 31
Federal funds purchased, securities sold under
repurchase agreements and short-term borrowed funds (1) 3,452 7,286 0.23 0.30 1 5 (4 ) (1 ) (3 )
Long-term debt 21,720 21,879 3.41 3.97 185 216 (31 ) (29 ) (2 )
Total interest-bearing liabilities 123,605 113,789 1.00 1.39 307 392 (85 ) (111 ) 26
Noninterest-bearing deposits 26,173 20,990
Other liabilities 6,362 5,479
Shareholders' equity 17,829 16,673
Total liabilities and shareholders' equity $ 173,969 $ 156,931
Average interest rate spread 3.75 % 3.80 %
Net interest margin/ net interest income 3.93 % 4.01 % $ 1,473 $ 1,321 $ 152 $ 84 $ 68
. . .
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