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BBT > SEC Filings for BBT > Form 10-Q on 30-Apr-2014All Recent SEC Filings

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Form 10-Q for BB&T CORP


30-Apr-2014

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;

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

failure to implement part or all of the Company's new ERP system could result in impairment charges that adversely impact BB&T's financial condition and results of operations and could result in significant additional costs to BB&T.

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These and other risk factors are more fully described in this report and in BB&T's Annual Report on Form 10-K for the year ended December 31, 2013 under the sections 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. 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 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 has 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, 2013 for additional disclosures with respect to laws and regulations affecting BB&T.

Dodd-Frank Act

The FRB has announced extensions for compliance with certain requirements of the Dodd-Frank Act that impact instruments held by BB&T. BB&T is currently evaluating the potential impact of these requirements on its financial condition and results of operations.

Interchange Fees

During March 2014, the D.C. Circuit Court of Appeals overturned the July 2013 lower court decision that ruled against the debit card interchange fee limits imposed by the FRB. Interchange fees, or "swipe fees," are charges that merchants pay to card-issuing banks for processing electronic payment transactions. The case was remanded to the lower court for further proceedings on the FRB's anti-exclusivity rule. The merchants may appeal the decision for rehearing before the D.C. Circuit Court of Appeals or petition the U.S. Supreme Court.

Foreign Account Tax Compliance Act and Conforming Regulations

In February 2014, The U.S. Treasury and IRS released the last substantial package of regulations necessary to implement the Foreign Account Tax Compliance Act. These regulations affect persons making certain U.S.-related payments to Foreign Financial Institutions and other foreign entities, as well as payments by Foreign Financial Institutions to other persons. In addition, these regulations revise certain existing provisions regarding tax withholding on certain U.S. source income paid to foreign persons, information reporting and backup withholding with respect to payments made to certain U.S. persons, portfolio interest paid to nonresident alien individuals and foreign corporations, and the associated requirements governing collection, refunds, and credits of amounts withheld under these rules.

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. 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 the consolidated financial position and/or consolidated results of operations and related disclosures. The more critical accounting and reporting policies include accounting for the ACL, determining fair value of financial instruments, intangible assets, costs and benefit obligations associated with 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, the 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, 2013. 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, 2013. There have been no changes to the significant accounting policies during 2014. Additional disclosures regarding the effects of new accounting pronouncements are included in Note 1 "Basis of Presentation" included herein.

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Executive Summary

Consolidated net income available to common shareholders for the first quarter of 2014 was $501 million, a 138.6% increase compared to $210 million earned during the same period in 2013. Net income available to common shareholders for the first quarter of 2014 was reduced by a $16 million adjustment ($0.02 impact to diluted earnings per share) that reflects the reallocation of certain partnership profit interests to non-controlling interest holders. Financial results for the first quarter of 2013 were negatively impacted by a $281 million adjustment to the provision for income taxes, which was driven by a U.S. Tax Court ruling on February 11, 2013 that had implications on positions BB&T had taken in a similar transaction that was the subject of litigation in the U.S. Court of Federal Claims.

On a diluted per common share basis, earnings for the first quarter of 2014 were $0.69, compared to $0.29 for the same period in 2013. Excluding the impact of the tax adjustment, diluted earnings per share for the first quarter of 2013 were $0.69. BB&T's results of operations for the first quarter of 2014 produced an annualized return on average assets of 1.29%, an annualized return on average risk-weighted assets of 1.71%, and an annualized return on average common shareholders' equity of 9.87%, compared to prior year ratios of 0.57% (1.20% adjusted), 0.76% (1.60% adjusted) and 4.44% (10.34% adjusted), respectively. See Non-GAAP Information on page 66.

Total revenues, which include taxable-equivalent net interest income and noninterest income, were $2.3 billion for the first quarter of 2014, down $166 million compared to the first quarter of 2013. The decrease in total revenues included a $76 million decrease in taxable-equivalent net interest income and a $90 million decrease in noninterest income. The decrease in taxable-equivalent net interest income reflects a $115 million decrease in interest income, which primarily reflects the continued runoff of higher yielding covered loans, the sale of a consumer lending subsidiary during the fourth quarter of 2013, and lower yields on new loans. The decrease in interest income was partially offset by a $39 million decrease in funding costs compared to the same quarter of the prior year. NIM was 3.52%, down 24 basis points compared to the first quarter of 2013.

The decrease in noninterest income reflects declines in mortgage banking income, FDIC loss share income and net securities gains (losses) totaling $106 million, $25 million and $21 million, respectively. These decreases were partially offset by a $62 million increase in insurance income. The decrease in mortgage banking income reflects a decline in the volume of residential mortgage loan production, tighter pricing and the retention of certain mortgage loans in the held-for-investment portfolio in the fourth quarter of 2013 through the first quarter of 2014. The decrease in FDIC loss share income primarily relates to a provision for covered loans offset recorded in the earlier quarter. Net securities gains for the first quarter of 2014 totaled $2 million compared to $23 million in the earlier quarter. Insurance income was $62 million higher than the earlier quarter, which reflects higher performance-based commission income, firming market conditions for insurance premiums and $23 million due to an improved process used to estimate commission income.

The provision for credit losses, excluding covered loans, declined $180 million, or 72.9%, compared to the first quarter of 2013, as improved credit quality resulted in lower provision expense. Net charge-offs, excluding covered loans, for the first quarter of 2014 were $119 million lower than the first quarter of 2013, a decline of 43.3%. Excluding the reserve for unfunded lending commitments and covered loans, the reserve release was $80 million for the first quarter of 2014, compared to $54 million in the earlier quarter.

Noninterest expense was $1.4 billion for the first quarter of 2014, a decrease of $11 million, or 0.8%, compared to the first quarter of 2013. This decline was primarily driven by a decrease in personnel expense totaling $35 million, which was largely the result of lower pension plan expense, driven by estimated returns on plan assets and lower amortization of net actuarial losses, and lower post-employment benefits expense, which is offset in other income. The decrease in noninterest expense also included declines in foreclosed property expense, regulatory charges, amortization of intangibles and professional services, which in the aggregate declined $22 million compared to the same quarter of the prior year. The overall decline in noninterest expense was partially offset by increases in other expense and loan-related expense of $22 million and $11 million, respectively. The increase in other expense includes higher project-related expenses, operating charge-offs and other related expenses, while the increase in loan-related expense primarily reflects higher expenses associated with certain investor-owned loans.

The provision for income taxes was $217 million for the first quarter of 2014, compared to $481 million for the first quarter of 2013. The effective tax rate for the first quarter of 2014 was 27.3%, compared to 65.3% for the prior year's first quarter. The decrease in the effective tax rate primarily reflects the $281 million prior year adjustment to the income tax provision described previously.

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NPAs, excluding covered foreclosed real estate, decreased $67 million compared to December 31, 2013, reflecting declines in NPLs and foreclosed property totaling $32 million and $35 million, respectively. Excluding covered assets, NPAs represented 0.54% of total assets as of March 31, 2014, which is the lowest percentage since 2007.

Average loans held for investment for the first quarter of 2014 totaled $115.1 billion, up $266 million, or 0.9% on an annualized basis, compared to the fourth quarter of 2013. This increase was driven by growth in the commercial and industrial, CRE - income producing properties and sales finance loan portfolios of $334 million, $262 million and $166 million, respectively. Growth in average loans held for investment was negatively impacted by continued runoff in the covered loan portfolio of $312 million, or 57.9% annualized, and a $212 million decrease in the other lending subsidiaries portfolio.

Average deposits for the first quarter of 2014 decreased $188 million compared to the fourth quarter of 2013. Deposit mix remained relatively stable, with average noninterest-bearing deposits increasing slightly to 28.2% of total average deposits for the first quarter of 2014, compared to 28.1% for the prior quarter. The cost of interest-bearing deposits was 0.27% for the first quarter of 2014, a decrease of one basis point from the prior quarter.

Total shareholders' equity increased $747 million compared to December 31, 2013. This increase was primarily driven by net income of $578 million offset by common and preferred dividends totaling $163 million and $37 million, respectively. Other factors contributing to the increase in shareholders' equity include $250 million in net activity related to equity awards and a $93 million net increase in AOCI, which primarily reflects a decrease in unrealized losses on AFS securities.

The Tier 1 common ratio, Tier 1 risk-based capital and total risk-based capital ratios were 10.2%, 12.1% and 14.6% at March 31, 2014, respectively. These risk-based capital ratios remain well above regulatory standards for well-capitalized banks. As of March 31, 2014, 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, 2013 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                                  Adjusted
                                                                                                   (1)                                       (1)
                                                  3/31/14        12/31/13        9/30/13         9/30/13         6/30/13        3/31/13    3/31/13
Rate of return on:
    Average assets                                1.29  %         1.30  %        0.68  %         1.19  %         1.27  %        0.57  %     1.20  %
    Average common shareholders' equity           9.87           10.85           5.44           10.22           11.39           4.44       10.34
NIM (FTE)                                         3.52            3.56           3.68              N/A           3.70           3.76          N/A

(1) Calculated excluding the impact of the adjustments for uncertain income tax positions of $281 million and $235 million recorded in the first and third quarters of 2013, respectively. For additional information, see Non-GAAP Information on page 66.

Net Interest Income and NIM

First Quarter 2014 compared to First Quarter 2013

Net interest income on a FTE basis was $1.4 billion for the first quarter of 2014, a decrease of 5.2% compared to the same period in 2013. The decrease in net interest income was driven by a $115 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 three months ended March 31, 2014, average earning assets increased $1.7 billion, or 1.1%, compared to the same period of 2013, while average interest-bearing liabilities decreased $3.7 billion, or 3.1%. The NIM was 3.52% for the first quarter of 2014, compared to

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3.76% for the same period of 2013. The 24 basis point decline in the NIM was primarily driven by lower yields on new loans and securities, and covered loan run-off, partially offset by lower funding costs.

The annualized FTE yield on the average securities portfolio for the first quarter of 2014 was 2.48%, which was unchanged from the earlier period.

The annualized FTE yield for the total loan portfolio for the first quarter of 2014 was 4.58%, compared to 5.03% in the first quarter of 2013. The decrease in the FTE yield on the total loan portfolio was primarily due to continued runoff of higher yielding covered loans, the sale of a consumer lending subsidiary during the fourth quarter of 2013, and lower yields on new loans.

The annualized cost of interest-bearing deposits for the first quarter of 2014 was 0.27%, compared to 0.36% for the same period in the prior year, reflecting lower rates on all categories of interest-bearing deposit products.

For the first quarter of 2014, the average annualized FTE rate paid on short-term borrowings was 0.11% compared to 0.18% during the first quarter of 2013. The average annualized rate paid on long-term debt for the first quarter of 2014 was 2.49%, compared to 3.23% for the same period in 2013. This decrease was the result of lower rates on new debt issuances.

Management expects NIM to decrease by approximately ten basis points in the second quarter of 2014 with approximately half of the decline due to covered asset runoff. The other half of the decline is due to core margin changes as a result of lower earning asset yields driven by tighter credit spreads, partially offset by lower funding costs and favorable funding mix changes. Thereafter, the core margin is expected to be relatively stable for the remainder of the year.

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, 2014, compared to the same period in 2013, 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, 2014 and 2013

                                                                                         Average Balances (7)             Annualized Yield/Rate         Income/Expense         Increase       Change due to
                                                                                        2014             2013               2014           2013        2014        2013       (Decrease)      Rate     Volume

                                                                                                                                      (Dollars in millions)
Assets
Total securities, at amortized cost (2)
      U.S. Treasury                                                                $       1,634     $         302           1.50  %       0.24  %   $      6    $     -     $         6    $     3    $    3
      GSE                                                                                  5,603             4,220           2.09          1.99            29          21              8          1         7
      MBS issued by GSE                                                                   29,339            28,540           2.04          1.92           150         137             13          9         4
      States and political subdivisions                                                    1,833             1,837           5.77          5.80            26          27             (1)        (1)       -
      Non-agency MBS                                                                         259               300           6.99          5.58             5           4              1          2        (1)
      Other                                                                                  477               477           1.57          1.41             2           2             -          -         -
      Covered                                                                                972             1,125          12.86         13.18            31          37             (6)        (1)       (5)
            Total securities                                                              40,117            36,801           2.48          2.48           249         228             21         13         8
Other earning assets (3)                                                                   1,875             2,838           3.30          1.64            15          12              3          8        (5)
Loans and leases, net of unearned income (4)(5)
      Commercial:
            Commercial and industrial                                                     38,435            37,916           3.43          3.76           325         353            (28)       (33)        5
            CRE - income producing properties                                             10,293             9,862           3.57          3.84            91          93             (2)        (6)        4
            CRE - construction and development                                             2,454             2,798           3.64          3.89            22          27             (5)        (2)       (3)
      Direct retail lending (6)                                                            9,349            15,757           4.28          4.73            99         184            (85)       (16)      (69)
      Sales finance                                                                        9,428             7,838           2.84          3.52            66          68             (2)       (14)       12
      Revolving credit                                                                     2,357             2,279           8.78          8.51            51          48              3          2         1
      Residential mortgage (6)                                                            30,635            23,618           4.26          4.26           325         251             74         -         74
      Other lending subsidiaries                                                          10,236             9,988           9.42         10.84           238         267            (29)       (35)        6
            Total loans and leases held for investment (excluding covered
            loans)                                                                       113,187           110,056           4.34          4.74         1,217       1,291            (74)      (104)       30
      Covered                                                                              1,874             3,133          18.65         17.49            86         135            (49)         8       (57)
            Total loans and leases held for investment                                   115,061           113,189           4.58          5.09         1,303       1,426           (123)       (96)      (27)
      LHFS                                                                                 1,311             3,792           4.46          3.28            15          31            (16)         8       (24)
            Total loans and leases                                                       116,372           116,981           4.58          5.03         1,318       1,457           (139)       (88)      (51)
            Total earning assets                                                         158,364           156,620           4.03          4.37         1,582       1,697           (115)       (67)      (48)
            Nonearning assets                                                             24,033            25,393
                         Total assets                                              $     182,397     $     182,013

Liabilities and Shareholders' Equity
Interest-bearing deposits:
      Interest-checking                                                            $      18,615     $      20,169           0.07          0.09             3           5             (2)        (2)       -
      Money market and savings                                                            48,767            48,431           0.13          0.15            15          18             (3)        (3)       -
      Certificates and other time deposits                                                21,935            28,934           0.75          0.89            42          63            (21)        (9)      (12)
. . .
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