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BBT > SEC Filings for BBT > Form 10-Q on 2-Nov-2012All Recent SEC Filings

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Form 10-Q for BB&T CORP


2-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BB&T Corporation ("BB&T," the "Corporation," the "Parent Company" or the "Company") is a financial holding company organized under the laws of North Carolina. BB&T conducts operations through its principal bank subsidiary, Branch Banking and Trust Company ("Branch Bank"), BB&T Financial FSB ("BB&T FSB"), a federally chartered thrift institution, and its nonbank subsidiaries.

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," "could," 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 and cash flow reassessments 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, regulatory or accounting 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"), 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;

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;

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

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

cyber-security risks, including "denial of service," "hacking" and "identity theft," that could adversely affect our business and financial performance, or our reputation.

Table of Contents

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, 2011 under the section entitled "Item 1A. Risk Factors" and 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, 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 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 third quarter of 2012 of $469 million was up 28.1% compared to $366 million earned during the same period in 2011. On a diluted per common share basis, earnings for the third quarter of 2012 were $0.66, up 26.9% compared to $0.52 for the same period in 2011. BB&T's results of operations for the third quarter of 2012 produced an annualized return on average assets of 1.10% and an annualized return on average common shareholders' equity of 9.94% compared to prior year ratios of 0.89% and 8.30%, respectively.

Total revenues were $2.5 billion for the third quarter of 2012, up $339 million compared to the third quarter of 2011. The increase in total revenues included $66 million of higher taxable-equivalent net interest income, which was primarily driven by a 28.7% decrease in funding costs from the same quarter of the prior year. The decline in funding costs included a $26 million benefit from accelerated amortization of deferred hedge gains and issuance costs due to a change in the expected life resulting from the redemption of the Company's trust preferred securities. The net interest margin was 3.94%, down 15 basis points compared to the third quarter of 2011, which reflects the runoff of covered loans, lower yields on new loans and securities partially offset by the lower funding costs described above. Noninterest income increased $273 million, primarily attributable to a $92 million increase in insurance income and an $88 million increase in mortgage banking income. The increase in insurance income included approximately $74 million as a result of the acquisition of the life and property and casualty insurance operating divisions of Crump Group Inc. ("Crump Insurance") on April 2, 2012, as well as the benefit of other acquisitions that closed in the fourth quarter of 2011 and firming market conditions for insurance premiums. In addition, other income was up $50 million due to $37 million in net losses and write-downs recorded on commercial loans held for sale in the earlier quarter.

Table of Contents

The provision for credit losses, excluding covered loans, for the third quarter of 2012, totaled $244 million, compared to $243 million for the third quarter of 2011. Net charge-offs, excluding covered loans, for the third quarter of 2012 were $63 million lower than the third quarter of 2011 reflecting improved credit quality.

Noninterest expenses were $1.5 billion for the third quarter of 2012, up $112 million compared to the third quarter of 2011. The increase in noninterest expenses was primarily due to higher personnel costs, which were up $126 million compared to the third quarter of 2011, primarily due to the Crump Insurance and BankAtlantic acquisitions as well as other increases in salary and benefits. In addition, merger-related and restructuring charges were $43 million higher than the earlier quarter. Loan processing expense increased $30 million compared to the same quarter of the prior year, primarily due to $28 million in expenses related to better identification of unrecoverable costs associated with investor-owned loans. Partially offsetting these increases was a decrease in foreclosed property expense totaling $114 million. This decrease was the result of fewer net losses and lower carrying costs associated with foreclosed property.

The provision for income taxes was $177 million for the third quarter of 2012 compared to $68 million for the third quarter of 2011. This resulted in an effective tax rate for the third quarter of 2012 of 26.3% compared to 15.5% for the prior year's third quarter. The increase in the effective tax rate was primarily due to higher levels of pre-tax earnings relative to permanent tax differences.

Nonperforming assets, excluding covered foreclosed real estate, decreased $179 million during the third quarter of 2012 due to declines of $107 million in nonperforming loans and $82 million in foreclosed real estate offset by a slight increase in other foreclosed property. This is the 10th consecutive quarterly decline in nonperforming assets and the amount is the lowest since the third quarter of 2008.

On July 31, 2012, BB&T completed the acquisition of Fort Lauderdale, Florida-based BankAtlantic that expanded BB&T's presence in the attractive Southeast Florida market. In connection with this transaction, BB&T assumed approximately $3.5 billion of deposits and acquired $1.8 billion in loans.

BB&T's total assets at September 30, 2012 were $182.0 billion, up 5.7% on an annualized basis compared to December 31, 2011. Average loans held for investment for the third quarter of 2012 totaled $112.7 billion, up $3.5 billion compared to the second quarter of 2012. Excluding the impact of the BankAtlantic acquisition, average loans held for investment were up $2.3 billion or 8.4% annualized compared to the prior quarter, reflecting broad-based growth, led by increases in residential mortgage, commercial and industrial, and other lending subsidiaries portfolios.

Average deposits for the third quarter of 2012 increased $3.3 billion, or 10.6% compared to the second quarter of 2012. Excluding the impact of the BankAtlantic acquisition, average deposits were up $1.1 billion or 3.3% annualized compared to the prior quarter. This increase included growth in noninterest-bearing deposits totaling $1.7 billion, or 25.0% on an annualized basis. The cost of interest-bearing deposits was 0.42% for the third quarter of 2012, a decrease of 2 basis points compared to the prior quarter.

Total shareholders' equity increased $1.6 billion, or 8.5%, compared to June 30, 2012. The increase was primarily driven by earnings of $496 million and net proceeds of $1.1 billion from the issuance of Tier 1 qualifying non-cumulative perpetual preferred stock. The Tier 1 common ratio was 9.5% and 9.7% at September 30, 2012 and June 30, 2012, respectively. In addition, the Tier 1 risk-based capital and total risk-based capital ratios were 10.9% and 14.0% at September 30, 2012, respectively, compared to 10.2% and 13.5%, respectively, at June 30, 2012. The decline in the Tier 1 common equity ratio was primarily attributable to the intangible assets associated with the acquisition of BankAtlantic on July 31, 2012, while the increases to Tier 1 risk-based and total risk-based capital were due to the issuance of Tier 1 qualifying non-cumulative perpetual preferred stock during the third quarter. BB&T's risk-based capital ratios remain well above regulatory standards for well-capitalized banks. As of September 30, 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.

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 third quarter of 2012 compared to the corresponding period of 2011 are further discussed in the following sections.

Table of Contents

Analysis Of Results Of Operations

Consolidated net income available to common shareholders totaled $469 million, which generated diluted earnings per common share of $0.66 in the third quarter of 2012. Net income available to common shareholders for the same period of 2011 totaled $366 million, which generated diluted earnings per common share of $0.52. The increase in earnings was driven by lower funding costs, higher noninterest income and lower foreclosed property expense. BB&T's results of operations for the third quarter of 2012 produced an annualized return on average assets of 1.10% and an annualized return on average common shareholders' equity of 9.94%, compared to prior year returns of 0.89% and 8.30%, respectively.

Consolidated net income available to common shareholders totaled $1.4 billion, which generated diluted earnings per common share of $1.99 in the first nine months of 2012. Net income available to common shareholders for the same period of 2011 totaled $898 million, which generated diluted earnings per common share of $1.27. The increase in earnings was driven by lower funding and credit-related costs and higher noninterest income. BB&T's results of operations for the first nine months of 2012 produced an annualized return on average assets of 1.12% and an annualized return on average common shareholders' equity of 10.30%, compared to prior year returns of 0.78% and 7.05%, respectively.

The following table sets forth selected financial ratios for the last five calendar quarters.

                                            Table 1
                               Annualized Profitability Measures

                                                            Three Months Ended
                                           9/30/12    6/30/12    3/31/12    12/31/11    9/30/11
Rate of return on:
   Average assets                           1.10  %    1.22  %    1.03  %     0.93  %    0.89  %
   Average common shareholders' equity      9.94      11.21       9.75        8.76       8.30
Net interest margin (taxable equivalent)    3.94       3.95       3.93        4.02       4.09

Net Interest Income and Net Interest Margin

Third Quarter 2012 compared to Third Quarter 2011

Net interest income on a fully taxable-equivalent ("FTE") basis was $1.5 billion for the third quarter of 2012, an increase of 4.5% compared to the same period in 2011. The higher net interest income was driven by a decrease in funding costs. This decline in funding costs included a $26 million benefit from the accelerated amortization of deferred hedge gains and issuance costs due to a change in the expected life resulting from the announced redemption of the Company's trust preferred securities. For the quarter ended September 30, 2012, average earning assets increased $12.7 billion, or 9.0%, compared to the same period of 2011, while average interest-bearing liabilities increased $3.5 billion, or 3.0%. The net interest margin was 3.94% for the third quarter of 2012 compared to 4.09% for the same period of 2011. The 15 basis point decline in the net interest margin was due to runoff of covered loans, lower yields on new loans and growth in the securities portfolio, which has been partially offset by lower funding costs.

The FTE yield on the average securities portfolio for the third quarter of 2012 was 2.64%, which was 4 basis points lower than the annualized yield earned during the third quarter of 2011.

The annualized FTE yield for the total loan portfolio for the third quarter of 2012 was 5.23% compared to 5.91% in the third quarter of 2011. The decrease in the FTE yield on the total loan portfolio was primarily due to runoff of covered loans and lower yields on new loans due to the low interest-rate environment.

The average rate for interest-bearing deposits for the third quarter of 2012 was 0.42% compared to 0.65% for the same period in the prior year, reflecting management's ability to lower rates on nearly all categories of interest bearing deposit products.

For the third quarter of 2012, the average annualized FTE rate paid on short-term borrowings was 0.25% compared to 0.31% during the third quarter of 2011. The average annualized rate paid on long-term debt for the third quarter of 2012 was 2.64% compared to 3.22% for the same period in 2011. The decline in the average rate paid on long-term debt reflects the positive impact of $26 million in accelerated amortization of gains from derivatives that were unwound in a gain position related to the redemption of the Company's trust preferred securities in the third quarter.

Management expects net interest margin to be in the mid 3.70% range in the fourth quarter of 2012 as a result of the runoff of covered loans, lower rates on new earning assets, and higher long-term debt costs, partially offset by lower deposit costs.

Table of Contents

Nine Months of 2012 compared to Nine Months of 2011

Net interest income on a FTE basis was $4.5 billion for the nine months ended September 30, 2012, an increase of 7.9% 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 nine months ended September 30, 2012, average earning assets increased $16.0 billion, or 11.7%, compared to the same period of 2011, while average interest-bearing liabilities increased $8.0 billion, or 6.9%. The net interest margin was 3.94% for the nine months ended September 30, 2012 compared to 4.08% for the same period of 2011. The 14 basis point decline in the net interest margin was due to runoff of covered assets, lower yields on new loans and growth in the securities portfolio, which has been partially offset by lower funding costs.

The FTE yield on the average securities portfolio for the nine months ended September 30, 2012 was 2.66%, which represents an increase of 3 basis points compared to the annualized yield earned during the same period of 2011.

The annualized FTE yield for the total loan portfolio for the nine months ended September 30, 2012 was 5.41% compared to 5.93% in the corresponding period of 2011. The decrease in the FTE yield on the total loan portfolio 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 nine months ended September 30, 2012 was 0.45% compared to 0.73% for the same period in the prior year, reflecting management's ability to lower rates on nearly all categories of interest bearing deposit products.

For the nine months ended September 30, 2012, the average annualized FTE rate paid on short-term borrowings was 0.26%, a 2 basis point decline from the rate paid for the same period of 2011. The average annualized rate paid on long-term debt for the nine months of 2012 was 2.95% compared to 3.44% 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 following tables set forth the major components of net interest income and the related annualized yields and rates for the three and nine months ended September 30, 2012 compared to the same periods 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 of Contents

                                                                                               Table 2-1
                                                                          FTE Net Interest Income and Rate / Volume Analysis
                                                                            Three Months Ended September 30, 2012 and 2011

                                                                                     Average Balances (6)             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)                                  $         870     $        236         1.43  %         0.88  %   $     3    $     1    $        2    $      ?   $    2
      Mortgage-backed securities issued by GSE                                         30,338           27,104         2.00            1.89          151        129            22          8        14
      States and political subdivisions                                                 1,848            1,864         5.83            5.78           27         26             1           ?        1
      Non-agency mortgage-backed securities                                               325              511         5.55            6.90            5          9            (4)        (2)       (2)
      Other securities                                                                    708              598         1.57            1.55            3          2             1           ?        1
      Covered securities                                                                1,171            1,254        15.12           14.21           44         45            (1)         3        (4)
              Total securities                                                         35,260           31,567         2.64            2.68          233        212            21          9        12
Other earning assets (3)                                                                3,049            4,034         1.07            0.51            8          6             2          4        (2)
Loans and leases, net of unearned income (1)(4)(5)
      Commercial:
              Commercial and industrial                                                37,516           34,280         3.89            4.21          367        363             4        (29)       33
              Commercial real estate-other                                             10,823           11,069         3.83            3.78          104        105            (1)         1        (2)
              Commercial real estate-residential ADC                                    1,534            2,576         3.78            3.53           14         23            (9)         2       (11)
      Direct retail lending                                                            15,520           13,802         4.81            5.20          187        181             6        (14)       20
      Sales finance                                                                     7,789            7,234         3.85            4.78           75         87           (12)       (18)        6
      Revolving credit                                                                  2,234            2,109         8.39            8.77           47         46             1         (2)        3
      Residential mortgage                                                             23,481           18,818         4.28            4.83          252        228            24        (28)       52
      Other lending subsidiaries                                                        9,998            8,652        10.80           11.28          271        246            25        (11)       36
              Total loans and leases held for investment (excluding covered
              loans)                                                                  108,895           98,540         4.82            5.16        1,317      1,279            38        (99)      137
      Covered                                                                           3,826            5,342        18.21           20.29          175        273           (98)       (26)      (72)
              Total loans and leases held for investment                              112,721          103,882         5.27            5.94        1,492      1,552           (60)      (125)       65
      Loans held for sale                                                               2,888            1,776         3.35            3.98           25         18             7         (3)       10
              Total loans and leases                                                  115,609          105,658         5.23            5.91        1,517      1,570           (53)      (128)       75
              Total earning assets                                                    153,918          141,259         4.55            5.03        1,758      1,788           (30)      (115)       85
              Nonearning assets                                                        25,388           24,261
                         Total assets                                           $     179,306     $    165,520

Liabilities and Shareholders' Equity
Interest-bearing deposits:
. . .
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