ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview

Significant accomplishments in 2012

The Company's more significant accomplishments during 2012 were:

· Record net income available to common shareholders of $1.9 billion represented a 48.6% increase over the prior year

· Strong growth in noninterest income was driven by record insurance, mortgage banking and investment banking and brokerage commission revenues

· Continued improvement in credit quality with NPAs, excluding covered foreclosed property, declining $914 million, or 37.3%. NPAs are now at their lowest level since June 30, 2008

· Strong results from the FRB's 2012 CCAR process, which resulted in a 25% increase to the quarterly dividend in 2012 and a 15% increase to the quarterly dividend in the first quarter of 2013. Highlights of the stress test results include:

o One of the strongest Tier 1 common ratios (excluding capital issuances) among traditional banks

o Lowest loan loss rate under the stress scenario among traditional banks

· Total end of period loans held for investment increased 6.6% driven by growth in the residential mortgage, commercial and industrial, other lending subsidiaries and direct retail lending portfolios

· Continued improvement in deposit mix and average cost, as evidenced by a 26.4% increase in noninterest-bearing deposits, and a 25 basis point reduction in the average cost of interest-bearing deposits, during 2012

· Successful acquisition of Crump Insurance in April 2012 resulted in BB&T establishing a #1 market share in wholesale life and a #2 market share in wholesale property and casualty in U.S. markets

· Successful acquisition of BankAtlantic in July 2012, which enhanced BB&T's presence in the Southeast Florida market and resulted in a $3.5 billion increase in deposits

Challenges

BB&T's business has become more dynamic and complex in recent years. Consequently, management has annually evaluated and, as necessary, adjusted the Company's business strategy in the context of the current operating environment. During this process, management considers the current financial condition and performance of the Company and its expectations for future economic activity from both a national and local market perspective. The achievement of BB&T's key strategic objectives and established long-term financial goals is subject to many uncertainties and challenges. In the opinion of management, the challenges that are most relevant and likely to have a near term impact on performance are presented below:

· The impact of U.S. fiscal debt, budget and tax negotiations

· Intense competition within the financial services industry

· Cost and risk associated with the regulatory initiatives

Overview of Significant Events and Financial Results

Despite challenging market conditions throughout the year, BB&T produced record annual earnings for 2012. These results were driven by broad-based loan growth, improvements in deposit mix and cost, a significant increase in noninterest income, and a continued focus on controlling noninterest expense. In addition, BB&T continued to make significant progress towards reducing the level of NPAs, which had a beneficial impact on credit costs incurred during the year.

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Consolidated net income available to common shareholders for 2012 totaled $1.9 billion, an increase of $627 million, or 48.6%, compared to $1.3 billion earned during 2011. On a diluted per common share basis, earnings for 2012 were $2.70, compared to $1.83 for 2011. BB&T's results of operations for 2012 produced a return on average assets of 1.14% and a return on average common shareholders' equity of 10.35% compared to prior year ratios of 0.82% and 7.49%, respectively.

BB&T's revenues for 2012 were $9.8 billion on a FTE basis, up 12.1% compared to 2011. The increase in revenues was broad based, with $350 million of the increase attributable to higher net interest income and $707 million related to an increase in noninterest income. Net interest income on a FTE basis was up 6.2% compared to 2011, primarily the result of a 23.1% decrease in interest expense compared to 2011. Noninterest income increased 22.7% compared to 2011, largely the result of record insurance, mortgage banking and investment banking and brokerage commission revenues.

Credit costs continued to improve during 2012 as NPAs, excluding covered foreclosed property, declined $914 million, or 37.3%, compared to 2011. This decline included a $492 million decrease in NPLs and a $422 million decrease in foreclosed real estate and other property. Net charge-offs for 2012, excluding covered, were $1.3 billion, a decrease of $334 million, or 21.0%, compared to the prior year. BB&T recorded a $1.0 billion provision for credit losses in 2012, excluding covered, compared to $1.1 billion in the prior year. The ratio of the ALLL to net charge-offs excluding covered was 1.50x for 2012 compared to 1.32x in 2011. Foreclosed property expenses declined $536 million, or 66.8%, during 2012, reflecting the impact of a more aggressive approach to reducing the inventory of foreclosed property that was implemented during the fourth quarter of 2011.

BB&T's total assets at December 31, 2012 were $183.9 billion, an increase of $9.3 billion, or 5.3%, compared to December 31, 2011. The growth in total assets includes an increase of $7.2 billion in total loans and leases and $2.3 billion in the total securities portfolio. The growth in the loan and lease portfolio reflects broad-based growth, led by increases in the residential mortgage, commercial and industrial and direct retail lending portfolios. The increase in the total securities portfolio is primarily the result of purchases of investment securities that were made in the fourth quarter of 2012 in response to slowing loan growth forecasts.

Total deposits at December 31, 2012 were $133.1 billion, an increase of $8.1 billion, or 6.5%, from December 31, 2011. The increase in deposits was led by noninterest-bearing deposits, which increased $6.8 billion, or 26.4%, and money market and savings accounts, which increased $3.3 billion, or 7.4%. These increases were partially offset by a decrease in certificates and other time deposits totaling $2.3 billion. These changes resulted in a substantial improvement to deposit mix, with noninterest-bearing accounts representing 24.4% of total deposits at December 31, 2012, compared to 20.6% at December 31, 2011. The cost of interest-bearing deposits for 2012 declined to 0.43%, a decline of 25 basis points from 0.68% for 2011.

Total shareholders' equity increased 21.4% compared to December 31, 2011. This increase was primarily driven by net proceeds of $2.1 billion of Tier 1 qualifying non-cumulative perpetual preferred stock during 2012 and net income retained after dividends declared. The Tier 1 common ratio was 9.3% at December 31, 2012, compared to 9.4% at December 31, 2011. In addition, the Tier 1 risk-based capital and total risk-based capital ratios were 11.0% and 13.9% at December 31, 2012, respectively. BB&T's risk-based and tangible capital ratios remain well above regulatory standards for well-capitalized banks. As of December 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" herein for a discussion of how BB&T calculates and uses these measures in the evaluation of the Company.

Reclassifications

In certain circumstances, reclassifications have been made to prior period information to conform to the 2012 presentation. Such reclassifications had no effect on previously reported shareholders' equity or net income.

Critical Accounting Policies

The accounting and reporting policies of BB&T are in accordance with GAAP and conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. The 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 the consolidated financial position and/or consolidated results of operations and related disclosures. The more critical accounting and reporting policies include those related to the ACL, 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 the consolidated financial position and consolidated results of operations. Accordingly, BB&T's significant accounting policies

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and changes in accounting principles and effects of new accounting pronouncements are discussed in detail in Note 1 "Summary of Significant Accounting Policies" in the "Notes to Consolidated Financial Statements."

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.

ACL

It is the policy of BB&T to maintain an ALLL and a RUFC 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 portfolio. For TDRs, default expectations and estimated slower prepayment speeds that are specific to each of the restructured loan populations are incorporated in the determination of the ALLL. 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 RUFC is inherently similar to the methodology used in calculating the ALLL adjusted for factors specific to binding commitments, including the probability of funding and exposure at the time of funding. A detailed discussion of the methodology used in determining the ALLL and the RUFC is included in Note 1 "Summary of Significant Accounting Policies" in the "Notes to Consolidated Financial Statements."

Fair Value of Financial Instruments

At December 31, 2012, the percentage of total assets and total liabilities measured at fair value on a recurring basis was 17.3% and 0.9%, respectively, including securities available for sale, trading securities, derivatives, LHFS, residential MSRs and private equity investments. 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 December 31, 2012, 6.3% of assets measured at fair value on a recurring basis, or 1.1% of total assets, were based on significant unobservable inputs. See Note 18 "Fair Value Disclosures" in the "Notes to Consolidated Financial Statements" herein for additional disclosures regarding the fair value of financial instruments.

Securities

BB&T generally utilizes a third-party pricing service in determining the fair value of its available for sale and trading securities. Fair value measurements are derived from market-based pricing matrices that were developed using observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads and broker quotes. Management performs various procedures to evaluate the accuracy of the fair values provided by the third-party service. These procedures, which are performed independent of the responsible LOB, include comparison of pricing information received from the third party pricing service to other third party pricing sources, review of additional information provided by the third party pricing service and other third party sources for selected securities, and back-testing to compare the price realized on any security sales to the daily pricing information received from the third party pricing service. The IPV committee, which provides oversight to BB&T's enterprise-wide IPV function, is responsible for oversight of the comparison of pricing information received from the third party pricing service to other third party pricing sources, approving tolerance limits determined by IPV for price comparison exceptions, reviewing significant changes to pricing and valuation policies, and reviewing and approving the pricing decisions made on any illiquid and hard-to-price securities. 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 December 31, 2012, BB&T had approximately $994 million of available for sale securities, which is less than 1% of total assets, valued using unobservable inputs, the majority of which were non-agency RMBS 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.

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MSRs

BB&T has a significant mortgage loan servicing portfolio and related MSRs. BB&T has two 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. BB&T uses various derivative instruments to mitigate the 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 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.

Fair value estimates and assumptions are compared to industry surveys, recent market activity, actual portfolio experience and, when available, observable market data. 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 based on actual results and updated projections. Refer to Note 7 "Loan Servicing" in the "Notes to Consolidated Financial Statements" for quantitative disclosures reflecting the effect that changes in management's assumptions would have on the fair value of MSRs.

LHFS

BB&T originates certain mortgage loans for sale 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 the related origination costs 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.

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.

Private Equity and Similar Investments

BB&T has private equity 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 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 December 31, 2012, BB&T had $323 million of these investments, which represented 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 values, 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.

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Acquisitions typically result in goodwill, which is subject to ongoing periodic impairment tests based on the fair values of the reporting units to which the acquired goodwill relates. Refer to Note 1 "Summary of Significant Accounting Policies" in the "Notes to Consolidated Financial Statements" for a description of BB&T's impairment testing process. Management considers the sensitivity of the significant assumptions in its impairment analysis including consideration of a 10% change in estimated future cash flows or the discount rate for each reporting unit.

Pension and Postretirement Benefit Obligations

BB&T offers various pension plans and postretirement benefit plans to employees. 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, BB&T also considers the individual characteristics of the plan, such as projected cash flow patterns and payment durations, when setting the discount rate. Management evaluated the sensitivity changes that the expected return on plan assets and the discount rate would have on pension expense for 2013. A decrease of 25 basis points in the discount rate would result in additional pension expense of approximately $19 million for 2013. Based on the balance of plan assets on December 31, 2012, a decrease of one percent in the expected return on plan assets would result in an increase of approximately $30 million in pension expense for 2013. Refer to Note 14 "Benefit Plans" in the "Notes to Consolidated Financial Statements" for disclosures related to BB&T's benefit plans.

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 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.

Analysis of Results of Operations

Consolidated net income available to common shareholders totaled $1.9 billion for 2012, which generated basic EPS of $2.74 and diluted EPS of $2.70. Net income available to common shareholders for 2011 and 2010 was $1.3 billion and $816 million, respectively. Basic EPS was $1.85 in 2011 and $1.18 in 2010, while diluted EPS was $1.83 and $1.16 for 2011 and 2010, respectively.

Two important and commonly used measures of bank profitability are return on average assets (net income as a percentage of average total assets) and return on average common shareholders' equity (net income available to common shareholders as a percentage of average common shareholders' equity). BB&T's returns on average assets were 1.14%, 0.82%, and 0.54% for the years ended December 31, 2012, 2011 and 2010, respectively. The returns on average common shareholders' equity were 10.35%, 7.49%, and 4.85% for the last three years.

Net Interest Income and NIM

Net interest income is BB&T's primary source of revenue. Net interest income is influenced by a number of factors, including the volume, mix and maturity of interest-earning assets and interest-bearing liabilities and the interest rates earned and paid thereon. The difference between rates earned on interest-earning assets and the cost of funds (with a FTE adjustment made to tax-exempt items to provide comparability with taxable items) is measured by the NIM.

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2012 compared to 2011

For 2012, net interest income on an FTE-adjusted basis totaled $6.0 billion, compared with $5.7 billion in 2011. Net interest income on an FTE-adjusted basis increased 6.2% in 2012 compared to 2011. The increase in net interest income was primarily driven by lower funding costs, which declined $319 million compared to 2011. The improvement in funding costs reflects a 25 basis point reduction in the average cost of interest-bearing deposits for 2012 compared to the prior year and the 2012 redemption of all junior subordinated debt to unconsolidated trusts. Net interest income also benefited from the growth in average earning assets, which more than offset the negative impact of lower yields on new loans.

The FTE-adjusted NIM is the primary measure used in evaluating the gross profit margin from the portfolios of earning assets. The FTE-adjusted NIM was 3.91% in 2012 compared with 4.06% in 2011. The decline in the NIM primarily reflects the runoff of higher yielding covered loans and lower yields on new loans, partially offset by the lower funding costs described above.

Management expects NIM to be in the mid 3.70s% range in the first quarter of 2013 as a result of lower rates on new earning assets and the runoff of covered loans, partially offset by lower funding costs and improved asset mix. Deposit costs are expected to continue to trend lower in 2013, which would benefit net interest income.

The FTE yield on the total securities portfolio was 2.64% for the year ended December 31, 2012 compared to 2.67% for the prior year. The decrease reflects a higher volume of lower yielding RMBS securities issued by GSEs.

The average annualized FTE yield for 2012 for the total loan portfolio was 5.35% compared to 5.87% for the prior year. The decrease was primarily due to the runoff of higher yielding covered loans and a higher volume of new loans originated at lower rates.

The average rate paid on interest-bearing deposits dropped to 0.43% during 2012, from 0.68% in 2011. This improvement was a result of lower rates on interest-bearing deposits, including a 56 basis point reduction in the cost of certificates and other time deposits and a 13 basis point reduction in the cost of money market and savings accounts.

The rates paid on average short-term borrowings declined from 0.27% in 2011 to 0.26% during 2012. At December 31, 2012, the targeted Federal funds rate was a range of zero percent to 0.25%. The average rate on long-term debt during 2012 was 3.02%, a decrease of 38 basis points compared to the prior year. This reduction was primarily due to the redemption of all higher cost junior subordinated debt to unconsolidated trusts during 2012 and the related benefit associated with accelerated amortization of derivatives that were unwound in a gain position.

2011 compared to 2010

For 2011, net interest income on an FTE-adjusted basis totaled $5.7 billion, . . .