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BBT > SEC Filings for BBT > Form 10-K on 26-Feb-2014All Recent SEC Filings

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Form 10-K for BB&T CORP


26-Feb-2014

Annual Report


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

Executive Overview

Significant accomplishments in 2013

The Company's more significant accomplishments during 2013 were:

Record income before taxes of $3.1 billion, an 11.9% increase over the prior year.

Continued improvement in credit quality:

o NPAs, excluding covered assets, declined $483 million, or 31.4%. NPAs are at their lowest level since 2007.

o Net charge-offs as a percentage of average loans and leases were 0.67%, compared to 1.14% and 1.57% for 2012 and 2011, respectively.

o ALLL was 219% of net charge-offs at December 31, 2013, compared to 156% and 136% at December 31, 2012 and 2011, respectively.

Growth in noninterest income was driven by record revenues in the insurance, investment banking and brokerage, bankcard fees and merchant discounts, and trust and investment advisory LOBs.

Continued improvement in deposit mix and average cost:

o Average noninterest-bearing deposits increased 17.3% during 2013 and represented 26.4% of total average deposits for 2013 compared to 22.7% in 2012.

o The average cost of interest-bearing deposits for 2013 was 0.32%, a decline of 11 basis points compared to the prior year. The average cost was 0.28% for the fourth quarter of 2013.

Strong growth in all regulatory capital ratios throughout 2013:

o Tier 1 risk-based capital increased to 11.8% at year-end 2013, compared to 10.5% at year-end 2012.

o Total capital was 14.3% at year-end 2013, compared to 13.4% at year-end 2012.

o Leverage capital was 9.3% at year-end 2013, compared to 8.2% at year-end 2012.

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:

Global economic uncertainty - including the impact of U.S. fiscal debt, budget and tax negotiations

Intense competition within the financial services industry given the challenge in growing assets during a period of sustained low interest rates

Cost and risk associated with the regulatory reform and initiatives and IT projects

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Overview of Significant Events and Financial Results

BB&T generated strong operating results for 2013, despite the challenges associated with the continued low interest rate environment, increased costs associated with certain regulatory initiatives and intense competition for loans to qualified borrowers. From a NIM perspective, the negative impact associated with lower yields on new loans and securities was partially mitigated by a 15.9% decrease in funding costs, primarily driven by a decline in the cost of interest-bearing deposits to 0.32% compared to 0.43% in the prior year. The provision for credit losses declined 44.0% compared to the prior year, reflecting continued improvement in credit quality. Noninterest income increased compared to the prior year, based on record insurance income, investment banking and brokerage fees and commissions, bankcard fees and merchant discounts and trust and investment advisory revenues, while noninterest expense was essentially flat compared to the prior year, despite significant costs associated with systems, process-related enhancements and regulatory costs.

Consolidated net income available to common shareholders for 2013 totaled $1.6 billion, a decrease of $354 million, or 18.5%, compared to $1.9 billion earned during 2012. On a diluted per common share basis, earnings for 2013 were $2.19, compared to $2.70 for 2012. BB&T's results of operations for 2013 produced a return on average assets of 0.95% and a return on average common shareholders' equity of 8.06% compared to prior year ratios of 1.14% and 10.35%, respectively.

During 2013, BB&T recognized $516 million in adjustments to the provision for income taxes. On September 20, 2013, the U.S. Court of Federal Claims denied BB&T's refund claim related to the IRS's disallowance of tax deductions and foreign tax credits taken in connection with a financing transaction entered into by BB&T in 2002. BB&T has appealed this ruling. Excluding the impact of these adjustments, diluted EPS was $2.91 and the adjusted results of operations for 2013 produced an annualized return on average assets of 1.24% and an annualized return on average common shareholders' equity of 10.55%. See non-GAAP information on page 83.

BB&T's revenues for 2013 were $9.7 billion on a FTE basis, a decrease of 1.3% compared to 2012. Net interest income on a FTE basis was $244 million lower than the prior year, which reflects a $414 million decrease in interest income that was partially offset by a decrease in funding costs totaling $170 million. Noninterest income increased 3.1% compared to 2012, which reflects solid growth in insurance income, trust and investment advisory revenues and bankcard fees and merchant discounts totaling 11.6%, 8.7% and 8.5%, respectively. These increases were partially offset by a 32.7% decrease in mortgage banking income.

Credit costs declined significantly during 2013 as NPAs, excluding covered assets, declined $483 million, or 31.4%, compared to 2012. This decline included a $445 million decrease in NPLs and a $38 million decrease in foreclosed real estate and other property. Net charge-offs for 2013, excluding covered, were $773 million, a decrease of $487 million, or 38.7%, compared to the prior year. BB&T's provision for credit losses, excluding covered, totaled $587 million in 2013, compared to $1.0 billion in the prior year. The ratio of the ALLL to net charge-offs excluding covered was 2.09x for 2013, compared to 1.50x in 2012. Foreclosed property expenses declined $211 million, or 79.3%, during 2013, reflecting fewer losses and write-downs related to foreclosed property.

BB&T's total assets at December 31, 2013 were $183.0 billion, a decrease of $1.5 billion compared to December 31, 2012. This decline includes a $1.2 billion decrease in total loans and leases, a $900 million decrease in cash and cash equivalents and a $1.0 billion decrease in other assets. These decreases were partially offset by a $1.5 billion increase in the securities portfolio. The decrease in the total loan and lease portfolio was primarily driven by a $2.5 billion decrease in LHFS and a $1.3 billion decrease in the covered loan portfolio, partially offset by a $2.6 billion increase in loans and leases held for investment. The increase in the total securities portfolio is primarily the result of increased securities purchases during the fourth quarter of 2013, which occurred in response to a decrease in loan originations. The decrease in other assets primarily relates to the previously described income tax adjustments.

Total deposits at December 31, 2013 were $127.5 billion, a decrease of $5.6 billion, or 4.2%, from December 31, 2012. The decrease in deposits reflects a decrease in certificates and other time deposits and interest checking totaling $6.7 billion and $2.2 billion, respectively. These decreases were partially offset by an increase in noninterest-bearing deposits totaling $2.5 billion. These changes resulted in a substantial improvement to deposit mix, with noninterest-bearing accounts representing 27.4% of total deposits at December 31, 2013, compared to 24.4% at December 31, 2012. The cost of interest-bearing deposits for 2013 declined 11 basis points compared to the prior year.

Total shareholders' equity increased $1.6 billion, or 7.5%, compared to December 31, 2012. This increase was primarily driven by net income in excess of dividends totaling $915 million and proceeds from the issuance of Tier 1 qualifying Series G Non-Cumulative Preferred Stock totaling $487 million. BB&T's Tier 1 risk-based capital and total risk-based capital ratios at December 31, 2013 increased to 11.8% and 14.3%, respectively, compared to 10.5% and 13.4% at December 31, 2012, respectively. BB&T's risk-based capital ratios remain well above regulatory standards for well-capitalized banks.

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Reclassifications

In certain circumstances, reclassifications have been made to prior period information to conform to the 2013 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 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. As part of this process, BB&T develops a series of loss estimate factors, which are modeled projections of the frequency, timing and severity of losses. These loss estimate factors are based on historical loss experience, economic and political environmental considerations and any other data that management believes will provide evidence about the expected collectability of outstanding loan and lease amounts. The following table summarizes the loss estimate factors used to determine the ALLL.

     Loss Estimate Factor      Description
     Loss Frequency            Indicates the likelihood of a borrower defaulting on a
                               loan
     Loss Severity             Indicates the amount of estimated loss at the time of
                               default

For collectively evaluated loans, the ALLL is determined by multiplying the loan exposure by the loss frequency and loss severity factors. For individually evaluated loans, the ALLL is determined through review of data specific to the borrower. 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

The vast majority of assets and liabilities carried at fair value are based on either quoted market prices or market prices for similar instruments. See Note
17 "Fair Value Disclosures" in the "Notes to Consolidated Financial Statements" herein for additional disclosures regarding the fair value of financial instruments.

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Securities

BB&T generally utilizes a third-party pricing service in determining the fair value of its AFS 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 provider. 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, 2013, BB&T had approximately $861 million of AFS securities valued using unobservable inputs, the majority of which were non-agency MBS securities that are covered by a loss sharing agreement with the FDIC.

BB&T periodically reviews AFS 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.

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 6 "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.

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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 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, 2013, BB&T had $291 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, which requires that acquired assets and liabilities are recorded at their fair values. This often involves estimates based on third party valuations 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. 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 the 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 a high-quality (AA-rated or higher) corporate bond yield curve and the individual characteristics of the plans such as projected cash flow patterns and payment durations. Management evaluated the sensitivity changes that the expected return on plan assets and the discount rate would have on pension expense for 2014. A decrease of 25 basis points in the discount rate would result in additional pension expense of approximately $17 million for 2014, while a decrease of 100 basis points in the expected return on plan assets would result in an increase of approximately $37 million in pension expense for 2014. Refer to Note 13 "Benefit Plans" in the "Notes to Consolidated Financial Statements" for disclosures related to BB&T's benefit plans.

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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

                                                               Table 7
                                                        Profitability Measures

                                                                               Years Ended December 31,
                                                           2013           Adjusted 2013 (1)          2012              2011
   EPS:
          Basic                                        $    2.22          $       2.96          $     2.74          $    1.85
          Diluted                                           2.19                  2.91                2.70               1.83
   Rate of return on:
          Average assets                                    0.95  %               1.24  %             1.14  %            0.82  %
          Average common shareholders' equity               8.06                 10.55               10.35               7.49
   NIM (FTE)                                                3.68                    N/A               3.91               4.06

(1) Calculated excluding the impact of the adjustments for uncertain income tax positions of $516 million recorded during 2013. For additional information, see Non-GAAP Information on page 83.

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.

2013 compared to 2012

For 2013, net interest income on an FTE-adjusted basis totaled $5.8 billion, a decrease of $244 million or 4.1%, compared to the prior year. The decrease in net interest income reflects lower yields on new loans and securities and runoff in the covered loan portfolio, partially offset by lower funding costs, which declined $170 million compared to 2012. The improvement in funding costs reflects an 11 basis point reduction in the average cost of interest-bearing deposits and a lower average long-term debt balance.

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 3.68% in 2013 compared with 3.91% in 2012. The decline in the NIM primarily reflects lower yields on new loans and securities and covered loan runoff, partially offset by the lower funding costs described above. The average annualized FTE yield for total loans and leases was 4.85% for 2013, compared to 5.35% for the prior year. The decrease was primarily due to lower yields on new loan originations and the runoff of higher yielding covered loans. The FTE yield on the total securities portfolio was 2.51% for the year ended December 31, 2013, compared to 2.64% for the prior year. This decrease reflects runoff in the covered security portfolio and security duration adjustments.

Management expects NIM to decline approximately five basis points in the first quarter of 2014 as a result of an increase in the relative size of the securities portfolio and lower earning asset yields, partially offset by lower funding costs.

The average rate paid on interest-bearing deposits dropped to 0.32% during 2013, from 0.43% in 2012. This improvement included a 16 basis point reduction in the cost of certificates and other time deposits and a five basis point reduction in the cost of money market and savings accounts.

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