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BBT > SEC Filings for BBT > Form 10-Q on 8-Aug-2013All Recent SEC Filings

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Form 10-Q for BB&T CORP


8-Aug-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.

Basel III

On July 2, 2013, the FRB approved final rules that established a new comprehensive capital framework for U.S. banking organizations. These rules established a more conservative definition of capital, including the elimination of trust-preferred securities for certain institutions. The rules also revised the calculation of risk-weighted assets and the minimum capital thresholds. Based on June 30, 2013 financial information, BB&T would be considered a Standardized Approach banking organization and must comply with the new requirements beginning on January 1, 2015. Institutions with greater than $250 billion in assets would be considered an Advanced Approach banking organization, which requires a more conservative calculation of risk-weighted assets, with a compliance date of January 1, 2014. Among other requirements, the minimum required common equity Tier 1 ratio, including the capital conservation buffer, will gradually increase from 4.5% on January 1, 2015 to 7.0% on January 1, 2019.

For BB&T, the final rules eased the requirements for determining risk-weighted assets when compared to the previously proposed requirements. Specifically, more conservative risk-weighting of certain residential mortgage loans and the requirement to recognize in capital the value of unrecognized gains and losses in AFS securities were not retained. Additionally, the new rules require that in order to receive Tier 2 capital treatment, subordinated debt must be subordinated to depositors and general creditors of the banking organization. This could reduce BB&T's total risk based capital ratio if it is determined that BB&T's existing subordinated debt no longer qualifies as Tier 2 capital as of the rule's January 1, 2015 effective date.

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 for the second quarter of 2013 was $547 million, up 7.3%, compared to $510 million earned during the same period in 2012. On a diluted per common share basis, earnings for the second quarter of 2013 were $0.77, up 6.9% compared to $0.72 for the same period in 2012. BB&T's results of operations for the second quarter of 2013 produced an annualized return on average assets of 1.27% and an annualized return on average common shareholders' equity of 11.39% compared to prior year ratios of 1.22% and 11.21%, respectively.

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On April 23, 2013, BB&T's shareholders approved a plan that modified the record date and payment date of preferred stock dividends to align with the record and payment date practices associated with common stock dividends. This action was undertaken in order to achieve administrative and Board-level efficiencies and reduce the costs associated with multiple record dates and multiple payment dates. The implementation of this plan resulted in the declaration of dividends on all classes of preferred stock totaling $13 million, which represented dividend payments for the period from May 1 to May 31, 2013. Based on the number of shares of preferred stock outstanding at June 30, 2013, future quarterly preferred stock dividends are expected to total approximately $37 million if declared by the Board of Directors.

Total revenues were $2.5 billion for the second quarter of 2013, an increase of $32 million compared to the second quarter of 2012. The increase in total revenues included an $80 million increase in noninterest income and a $48 million decrease in taxable-equivalent net interest income. The decrease in taxable-equivalent net interest income reflects an $87 million decrease in interest income, primarily driven by lower yields on new loans, which is reflective of the low interest rate environment, and covered loan run-off, partially offset by a $39 million decrease in funding costs compared to the same quarter of the prior year. Net interest margin was 3.70%, down 25 basis points compared to the second quarter of 2012.

The increase in noninterest income includes a $33 million increase in insurance income, a $25 million increase in net securities gains, and a $17 million increase in other income, partially offset by a $14 million decrease in mortgage banking income. The increase in insurance income was primarily attributable to firming market conditions for insurance premiums. Net securities gains for the second quarter of 2013 totaled $23 million compared to a net securities loss of $2 million in the second quarter of the prior year. The increase in other income was primarily due to $20 million in higher income related to assets for certain post-employment benefits, which was offset in personnel costs. The $14 million decrease in mortgage banking income was the result of a decrease in gains on residential mortgage loan production and sales, as record volume was more than offset by tighter margins, and a decrease in the net mortgage servicing rights valuation.

The provision for credit losses, excluding covered loans, declined $80 million, or 30.9%, compared to the second quarter of 2012, as improving credit quality resulted in lower provision expense. Net charge-offs, excluding covered loans, for the second quarter of 2013 were $110 million lower than the second quarter of 2012, a decline of 33.8%. The reserve release was $36 million for the second quarter of 2013 compared to $66 million in the earlier quarter.

Noninterest expense was $1.5 billion for the second quarter of 2013, an increase of $70 million, or 4.9%, compared to the second quarter of 2012. This increase was primarily attributable to a $69 million increase in personnel expense, a $25 million increase in merger-related and restructuring charges, and a $20 million increase in other expense, which were partially offset by decreased foreclosed property expense. The increase in personnel expense was driven by the BankAtlantic acquisition in the third quarter of 2012, an increase in other post-employment benefits, which is offset in other income, and higher production-based incentives and commissions. The increase in merger-related and restructuring charges primarily related to optimization activities related to Community Banking that began during the second quarter, and the increase in other expense was attributable to project-related expenses, higher operating charge-offs, and other various expenses. Foreclosed property expense decreased $60 million, which was the result of lower write-downs, losses and carrying costs associated with foreclosed property.

The provision for income taxes was $221 million for the second quarter of 2013, compared to $191 million for the second quarter of 2012. The effective tax rate for the second quarter of 2013 was 27.7%, compared to 26.2% for the prior year's second quarter. This increase in the effective tax rate was the result of a $12 million income tax benefit recorded in the second quarter of 2012 related to the termination of a leveraged lease.

Nonperforming assets, excluding covered foreclosed real estate, decreased $137 million compared to March 31, 2013, and $260 million compared to December 31, 2012. The decrease in nonperforming assets over the six months ended June 30, 2013 reflects a $231 million reduction in nonperforming loans and leases and a $29 million decline in foreclosed property. At June 30, 2013, nonperforming loans and leases represented 0.99% of total loans and leases, excluding covered assets, which is its lowest level since the first quarter of 2008.

Average loans held for investment for the second quarter of 2013 totaled $114.3 billion, up $1.1 billion, or 3.8%, compared to the first quarter of 2013. The growth in average loans held for investment was driven by strong growth in the sales finance and other lending subsidiary portfolios, along with steady growth in the commercial and industrial and direct retail lending portfolios.

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Average deposits for the second quarter of 2013 decreased $454 million, or 1.4%, compared to the prior quarter. While total average deposits declined during the quarter, the mix of the portfolio has continued to improve as average noninterest-bearing deposits grew $1.1 billion while average certificates and other time deposits decreased $900 million during the quarter. The cost of interest-bearing deposits was 0.32% for the second quarter of 2013, a decrease of 12 basis points compared to the same period of 2012.

Total shareholders' equity increased $773 million compared to December 31, 2012, which reflects net proceeds of $487 million from the issuance of Tier 1 qualifying non-cumulative perpetual preferred stock in the second quarter, and net income of $832 million offset by common and preferred dividends totaling $322 million and $43 million, respectively. These increases were partially offset by a $225 million change in AOCI, which primarily reflects a decrease in unrealized net gains on available for sale securities totaling $415 million, and a $162 million decrease in unrealized net losses on cash flow hedges, both of which relate to the increase in certain interest rates during the six months ended June 30, 2013.

The Tier 1 common ratio, Tier 1 risk-based capital and total risk-based capital ratios were 9.3%, 11.1% and 13.9% at June 30, 2013, respectively. BB&T's risk-based capital ratios remain well above regulatory standards for well-capitalized banks. As of June 30, 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.

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.

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)
                                             6/30/13       3/31/13      3/31/13       12/31/12      9/30/12      6/30/12
Rate of return on:
    Average assets                            1.27  %      0.57  %       1.20  %       1.20  %      1.10  %       1.22  %
    Average common shareholders' equity      11.39         4.44         10.34         10.51         9.94         11.21
NIM (FTE)                                     3.70         3.76            N/A         3.84         3.94          3.95

(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 80.

Consolidated net income available to common shareholders totaled $547 million, which generated diluted earnings per common share of $0.77 in the second quarter of 2013. Net income available to common shareholders for the same period of 2012 totaled $510 million, which generated diluted earnings per common share of $0.72. The increase in earnings was driven by lower funding and credit-related costs, as well as an increase in noninterest income. BB&T's results of operations for the second quarter produced an annualized return on average assets of 1.27% and an annualized return on average common shareholders' equity of 11.39%, compared to prior year returns of 1.22% and 11.21%, respectively.

Consolidated net income available to common shareholders for the first six months of 2013 totaled $757 million, compared to $941 million earned during the corresponding period of the prior year. Financial results for the first six months 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.

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On a diluted per common share basis, earnings for the first six months of 2013 were $1.06 ($1.46 excluding the tax adjustment) compared to $1.33 earned during the first six months of 2012. BB&T's results of operations for the first six months of 2013 produced an annualized return on average assets of 0.92% (1.23% adjusted) and an annualized return on average common shareholders' equity of 7.95% (10.79% adjusted), compared to prior year returns of 1.13% and 10.49%, respectively. See Non-GAAP Information on page 80.

Net Interest Income and Net Interest Margin

Second Quarter 2013 compared to Second Quarter 2012

Net interest income on a FTE basis was $1.5 billion for the second quarter of 2013, a decrease of 3.2% compared to the same period in 2012. The decrease in net interest income was driven by an $87 million decrease in interest income, partially offset by a $39 million decrease in funding costs compared to the same quarter of the prior year. For the quarter ended June 30, 2013, average earning assets increased $4.8 billion, or 3.2%, compared to the same period of 2012, while average interest-bearing liabilities decreased $3.8 billion, or 3.1%. The NIM was 3.70% for the second quarter of 2013, compared to 3.95% for the same period of 2012. The 25 basis point decline in the NIM was primarily due to the runoff of covered assets and lower yields on new loans, partially offset by lower funding costs.

The annualized FTE yield on the average securities portfolio for the second quarter of 2013 was 2.49%, which was 13 basis points lower than the annualized yield earned during the second quarter of 2012, driven by a decline in the benefit of higher-yielding covered securities.

The annualized FTE yield for the total loan portfolio for the second quarter of 2013 was 4.90%, compared to 5.45% in the second 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 continued low interest rate environment.

The average rate for interest-bearing deposits for the second quarter of 2013 was 0.32%, compared to 0.44% 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 second quarter of 2013, the average annualized FTE rate paid on short-term borrowings was 0.18% compared to 0.31% during the second quarter of 2012. The average annualized rate paid on long-term debt for the second quarter of 2013 was 3.23%, compared to 2.79% for the same period in 2012. The increase in the average rate paid on long-term debt reflects the impact of $29 million in accelerated amortization and issuance costs in the second quarter of 2012 resulting from the announced redemption of the Company's trust preferred securities.

Management expects NIM to decrease by five to ten basis points in the third quarter of 2013 as a result of lower rates on new earning assets, the runoff of covered loans and tighter retail credit spreads, partially offset by lower deposit costs and anticipated favorable funding and asset mix change.

Six Months of 2013 compared to Six Months of 2012

Net interest income on a FTE basis was $2.9 billion for the six months ended June 30, 2013, a decrease of 2.1% compared to the same period in 2012. The decrease in net interest income reflects a $170 million decrease in interest income, which was partially offset by a $108 million decline in funding costs. For the six months ended June 30, 2013, average earning assets increased $5.5 billion, or 3.6%, compared to the same period of 2012, while average interest-bearing liabilities decreased $3.3 billion, or 2.7%. The net interest margin was 3.73% for the six months ended June 30, 2013, compared to 3.94% for the same period of 2012. The 21 basis point decrease in the net interest margin was due to lower yields on new loans and runoff of covered assets, partially offset by lower funding costs.

The annualized FTE yield on the average securities portfolio for the six months ended June 30, 2013 was 2.48%, which represents a decrease of 18 basis points compared to the annualized yield earned during the same period of 2012, which primarily reflects a change in the mix of the securities portfolio driven by continued runoff of higher yielding securities.

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The annualized FTE yield for the total loan portfolio for the six months ended June 30, 2013 was 4.97% compared to 5.50% in the corresponding period of 2012. The decrease in the FTE yield on the total loan portfolio was primarily due to lower yields on new loans due to the low interest-rate environment and the runoff of covered loans.

The average cost of interest-bearing deposits for the six months ended June 30, 2013 was 0.34% compared to 0.47% 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 six months ended June 30, 2013, the average annualized FTE rate paid on short-term borrowings was 0.18%, a nine basis point decline from the rate paid for the same period of 2012. The average annualized rate paid on long-term debt for the six months of 2013 was 3.23% compared to 3.10% for the same period in 2012. The increase in the average rate paid on long-term debt is due to the prior period 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 six months ended June 30, 2013 compared to the same periods 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 2-1
                                                                           FTE Net Interest Income and Rate / Volume Analysis (1)
                                                                                  Three Months Ended June 30, 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                                                              $       5,232     $       1,054           1.89  %        1.45  %   $     25    $      4    $       21    $     1    $   20
      RMBS issued by GSE                                                                 27,803            32,176           1.97           1.98           138         160           (22)        (1)      (21)
      States and political subdivisions                                                   1,836             1,857           5.81           5.85            26          27            (1)        ?         (1)
      Non-agency RMBS                                                                       289               338           5.57           5.76             4           5            (1)        ?         (1)
      Other securities                                                                      466               498           1.51           1.70             1           2            (1)        (1)       ?
      Covered securities                                                                  1,093             1,191          12.48          15.62            34          46           (12)        (8)       (4)
            Total securities                                                             36,719            37,114           2.49           2.62           228         244           (16)        (9)       (7)
Other earning assets (3)                                                                  2,626             3,511           1.40           0.69             9           6             3          5        (2)
Loans and leases, net of unearned income (4)(5)
      Commercial:
            Commercial and industrial                                                    38,359            36,293           3.67           4.06           351         366           (15)       (35)       20
. . .
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