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BBT > SEC Filings for BBT > Form 10-Q on 2-May-2013All Recent SEC Filings

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Form 10-Q for BB&T CORP


2-May-2013

Quarterly Report


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

BB&T is a financial holding company organized under the laws of North Carolina. BB&T conducts operations through its principal bank subsidiary, Branch Bank, 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, insurance 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 NIM 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 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;

a reduction may occur 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;

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.

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, 2012 under the section entitled "Item 1A. Risk Factors" and from time to time, in other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report.

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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, FINRA, 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, 2012 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 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 ACL, determining fair value of financial instruments, intangible assets, 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, 2012. 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, 2012. There have been no changes to BB&T's significant accounting policies during 2013. 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 was $210 million for the first quarter of 2013, down 51.3% compared to $431 million that was earned during the same period in 2012. On a diluted per common share basis, earnings for the first quarter of 2013 were $0.29, down 52.5% compared to $0.61 for the same period in 2012. BB&T's results of operations for the first quarter of 2013 produced an annualized return on average assets of 0.57% and an annualized return on average common shareholders' equity of 4.44%, compared to prior year ratios of 1.03% and 9.75%, respectively.

As previously announced, financial results for the first quarter of 2013 were negatively impacted by a $281 million adjustment to the provision for income taxes. This occurred following a February 11, 2013 opinion by the U.S. Tax Court with respect to a case between the Bank of New York Mellon and the IRS involving a transaction with a structure similar to a financing transaction entered into by BB&T in 2002. BB&T is currently in litigation with the IRS and no decision has been rendered by the court. Excluding the impact of this adjustment, diluted earnings per common share were $0.691 for the first quarter of 2013, and BB&T's adjusted results of operations for the first quarter of 2013 produced an annualized return on average assets of 1.20%1 and an annualized return on average common shareholders' equity of 10.34%1.

Total revenues were $2.5 billion for the first quarter of 2013, an increase of $116 million compared to the first quarter of 2012. The increase in total revenues included a $130 million increase in noninterest income and a $14 million decrease in taxable-equivalent net interest income. The decrease in taxable-equivalent net interest income reflects an $84 million decrease in interest income primarily driven by lower yields on new loans and securities, which is reflective of the low interest rate environment, and covered loan run-off, partially offset by a $70 million decrease in funding costs compared to the same quarter of the prior year. Net interest margin was 3.76%, down 17 basis points compared to the first quarter of 2012. The increase in noninterest income includes a $94 million increase in insurance income, a $32 million increase in net securities gains, and a $26 million increase in other income, partially offset by a $36 million decrease in mortgage banking income. The increase in insurance income included approximately $78 million as a result of the acquisition of the life and

1See Non-GAAP Information on page 68.

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property and casualty insurance operating divisions of Crump Group Inc. ("Crump Insurance") on April 2, 2012, with the remaining increase largely attributable to firming market conditions for insurance premiums. Net securities gains for the first quarter of 2013 totaled $23 million compared to a net securities loss of $9 million in the first quarter of the prior year. The increase in other income was primarily due to $42 million of write-downs on affordable housing investments that were recorded in the first quarter of the prior year. The $36 million decrease in mortgage banking income was largely the result of a $30 million decrease in mortgage servicing rights' valuation adjustments.

The provision for credit losses, excluding covered loans, declined $38 million, or 13.3%, compared to the first quarter of 2012, as improving credit quality resulted in lower provision expense. Net charge-offs, excluding covered loans, for the first quarter of 2013 were $62 million lower than the first quarter of 2012.

Noninterest expense was $1.4 billion for the first quarter of 2013, an increase of $29 million, or 2.1%, compared to the first quarter of 2012. Personnel and occupancy and equipment expense increased $87 million and $18 million, respectively, primarily due to the acquisitions of Crump Insurance and BankAtlantic during 2012. These increases were partially offset by a $74 million decrease in foreclosed property expense, which was the result of lower write-downs, losses and carrying costs associated with foreclosed property.

The provision for income taxes was $481 million for the first quarter of 2013, compared to $189 million for the first quarter of 2012. The effective tax rate for the first quarter of 2013 was 65.3%, compared to 29.8% for the prior year's first quarter. The increase in the effective tax rate was due to the $281 million adjustment to the income tax provision described previously. Excluding the impact of this adjustment, the effective tax rate for the first quarter of 2013 was 27.1%2, compared to 29.8% in the same quarter of the prior year. This decrease in the adjusted effective tax rate was the result of $16 million in tax expense recorded in the first quarter of 2012 related to changes in the treatment of certain credits related to affordable housing partnership investments. The effective tax rate for the second quarter of 2013 is expected to be similar to the adjusted effective tax rate for the first quarter of 2013.

NPAs, excluding covered foreclosed real estate, decreased $123 million during the first quarter of 2013, due to declines of $97 million in NPLs and $26 million in foreclosed real estate and other foreclosed property. This is the 12th consecutive quarterly decline in NPAs and the amount is the lowest since the second quarter of 2008.

BB&T's total assets at March 31, 2013 were $180.8 billion, a decrease of $3.0 billion compared to December 31, 2012. Average loans held for investment for the first quarter of 2013 totaled $113.2 billion, up $5.7 billion, or 5.3%, compared to the first quarter of 2012. The growth in average loans held for investment was broad based, with notable growth in the residential mortgage, commercial and industrial, direct retail and other lending subsidiaries portfolios.

Average deposits for the first quarter of 2013 increased $5.8 billion, or 4.7%, compared to the first quarter of 2012. This increase included growth in noninterest-bearing deposits totaling $6.3 billion, or 24.2%. The cost of interest-bearing deposits was 0.36% for the first quarter of 2013, a decrease of 13 basis points compared to the same period of 2012.

Total shareholders' equity was up slightly compared to December 31, 2012, with earnings of $256 million offset by common and preferred dividends totaling $161 million and $30 million, respectively, and an increase in the accumulated other comprehensive loss totaling $53 million.

The Tier 1 common ratio was 9.2% and 9.1% at March 31, 2013 and December 31, 2012, respectively. In addition, the Tier 1 risk-based capital and total risk-based capital ratios were 10.8% and 13.6% at March 31, 2013, respectively, compared to 10.7% and 13.6%, respectively, at December 31, 2012. BB&T's risk-based capital ratios remain well above regulatory standards for well-capitalized banks. As of March 31, 2013, 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 and adjustments made to certain regulatory capital ratios previously presented.

On March 14, 2013, the FRB informed BB&T that it objected to certain elements of its capital plan. However, based on the quantitative results of the stress test, BB&T does not believe these objections were related to the Company's capital strength, earnings power or financial condition. The FRB did not object to BB&T's continuation in future quarters of its first quarter dividend of $.23 per share. The FRB also did not object to BB&T's continued payment of preferred dividends for its outstanding classes of preferred stock. The CCAR resubmission is due June 11, 2013 and the regulators will then have up to 75 days to review. Following this objection, both Moody's Investor Services and S&P revised their outlook from stable to negative.

2 See Non-GAAP Information on page 68.

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Refer to BB&T's Annual Report on Form 10-K for the year ended December 31, 2012, 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 2013, compared to the corresponding period of 2012, are further discussed in the following sections.

Analysis Of Results Of Operations



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



                                                           Table 1
                                              Annualized Profitability Measures

                                                                            Three Months Ended
                                                            Adjusted
                                                               (1)
                                             3/31/13         3/31/13        12/31/12        9/30/12        6/30/12    3/31/12
Rate of return on:
    Average assets                           0.57  %         1.20  %         1.20  %        1.10  %         1.22  %    1.03  %
    Average common shareholders' equity      4.44           10.34           10.51           9.94           11.21       9.75
NIM (FTE)                                    3.76              N/A           3.84           3.94            3.95       3.93

(1) Calculated excluding the impact of the $281 million adjustment to income taxes recorded in the first quarter of 2013. For additional information, see Non-GAAP Information on page 68.

Net Interest Income and Net Interest Margin

Net interest income on a FTE basis was $1.5 billion for the first quarter of 2013, a decrease of 1.0% compared to the same period in 2012. The decrease in net interest income was driven by an $84 million decrease in interest income, partially offset by a $70 million decrease in funding costs compared to the same quarter of the prior year. For the quarter ended March 31, 2013, average earning assets increased $6.1 billion, or 4.1%, compared to the same period of 2012, while average interest-bearing liabilities decreased $2.8 billion, or 2.2%. The NIM was 3.76% for the first quarter of 2013, compared to 3.93% for the same period of 2012. The 17 basis point decline in the NIM was primarily due to the runoff of covered loans and lower yields on new loans and securities, partially offset by growth in earning assets and lower funding costs.

The FTE yield on the average securities portfolio for the first quarter of 2013 was 2.48%, which was 22 basis points lower than the annualized yield earned during the first quarter of 2012.

The annualized FTE yield for the total loan portfolio for the first quarter of 2013 was 5.03%, compared to 5.56% in the first quarter of 2012. 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 first quarter of 2013 was 0.36%, compared to 0.49% for the same period in the prior year, which is reflective of the low interest rate environment.

For the first quarter of 2013, the average annualized FTE rate paid on short-term borrowings was 0.18% compared to 0.23% during the first quarter of 2012. The average annualized rate paid on long-term debt for the first quarter of 2013 was 3.23%, compared to 3.41% for the same period in 2012.

Management expects NIM to decrease up to 10 basis points in the second quarter of 2013 as a result of the runoff of covered loans and lower rates on new earning assets, partially offset by lower deposit costs.

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, 2013, compared to the same period in 2012, 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.

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                                                                                                   Table 2
                                                                           FTE Net Interest Income and Rate / Volume Analysis (1)
                                                                                 Three Months Ended March 31, 2013 and 2012

                                                                                        Average Balances (6)             Annualized Yield/Rate          Income/Expense        Increase       Change due to
                                                                                       2013             2012               2013            2012        2013        2012      (Decrease)      Rate     Volume

                                                                                                                                     (Dollars in millions)
Assets
Total securities, at amortized cost (2)
      GSE securities                                                              $       4,522     $         820           1.87  %        1.54  %   $     21    $      3    $       18    $     1    $   17
      RMBS issued by GSE                                                                 28,540            31,742           1.92           2.20           137         174           (37)       (20)      (17)
      States and political subdivisions                                                   1,837             1,858           5.80           5.84            27          27            ?          ?         ?
      Non-agency RMBS                                                                       300               411           5.58           5.98             4           6            (2)        ?         (2)
      Other securities                                                                      477               532           1.41           1.64             2           2            ?          ?         ?
      Covered securities                                                                  1,125             1,226          13.18          11.02            37          34             3          6        (3)
            Total securities                                                             36,801            36,589           2.48           2.70           228         246           (18)       (13)       (5)
Other earning assets (3)                                                                  2,838             3,502           1.64           0.76            12           7             5          6        (1)
Loans and leases, net of unearned income (4)(5)
      Commercial:
            Commercial and industrial                                                    37,916            36,021           3.76           4.04           353         362            (9)       (28)       19
            CRE - other                                                                  11,422            10,678           3.81           3.81           107         101             6         ?          6
            CRE - residential ADC                                                         1,238             1,989           4.15           3.58            13          18            (5)         3        (8)
      Direct retail lending                                                              15,757            14,712           4.73           4.98           184         182             2        (10)       12
      Sales finance                                                                       7,838             7,516           3.52           4.27            68          80           (12)       (15)        3
      Revolving credit                                                                    2,279             2,175           8.51           8.51            48          46             2         ?          2
      Residential mortgage                                                               23,618            21,056           4.26           4.54           251         239            12        (15)       27
      Other lending subsidiaries                                                          9,988             8,668          10.84          11.53           267         249            18        (16)       34
            Total loans and leases held for investment (excluding covered
            loans)                                                                      110,056           102,815           4.74           4.99         1,291       1,277            14        (81)       95
      Covered                                                                             3,133             4,672          17.49          19.32           135         224           (89)       (20)      (69)
            Total loans and leases held for investment                                  113,189           107,487           5.09           5.61         1,426       1,501           (75)      (101)       26
      LHFS                                                                                3,792             2,916           3.28           3.62            31          26             5         (3)        8
            Total loans and leases                                                      116,981           110,403           5.03           5.56         1,457       1,527           (70)      (104)       34
            Total earning assets                                                        156,620           150,494           4.37           4.75         1,697       1,780           (83)      (111)       28
            Nonearning assets                                                            24,738            23,475
                         Total assets                                             $     181,358     $     173,969

Liabilities and Shareholders' Equity
Interest-bearing deposits:
      Interest-checking                                                           $      20,169     $      19,712           0.09           0.13             5           6            (1)        (1)       ?
      Money market and savings                                                           48,431            45,667           0.15           0.19            18          22            (4)        (5)        1
      Certificates and other time deposits                                               28,934            32,942           0.89           1.13            63          93           (30)       (19)      (11)
      Foreign deposits - interest-bearing                                                   385               112           0.12           0.03            ?           ?             ?          ?         ?
            Total interest-bearing deposits                                              97,919            98,433           0.36           0.49            86         121           (35)       (25)      (10)
Short-term borrowings                                                                     4,217             3,452           0.18           0.23             2           1             1          1        ?
Long-term debt                                                                           18,690            21,720           3.23           3.41           150         185           (35)        (9)      (26)
            Total interest-bearing liabilities                                          120,826           123,605           0.79           1.00           238         307           (69)       (33)      (36)
            Noninterest-bearing deposits                                                 32,518            26,173
            Other liabilities                                                             6,699             6,362
            Shareholders' equity                                                         21,315            17,829
                         Total liabilities and shareholders' equity               $     181,358     $     173,969
Average interest rate spread                                                                                                3.58  %        3.75  %
NIM/net interest income                                                                                                     3.76  %        3.93  %   $  1,459    $  1,473    $      (14)   $   (78)   $   64
Taxable-equivalent adjustment                                                                                                                        $     37    $     37

(1) Yields are stated on a taxable-equivalent basis assuming tax rates in effect for the periods presented.
(2) Total securities include AFS securities and HTM securities.
(3) Includes Federal funds sold, securities purchased under resale agreements or similar arrangements, interest-bearing deposits with banks, trading securities, FHLB stock and other earning assets.
(4) Loan fees, which are not material for any of the periods shown, have been included for rate calculation purposes.
(5) Nonaccrual loans have been included in the average balances.
(6) Excludes basis adjustments for fair value hedges.

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Revenue, Net of Provision Impact from Covered Assets


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