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BBT > SEC Filings for BBT > Form 10-Q on 28-Jul-2014All Recent SEC Filings

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Form 10-Q for BB&T CORP


28-Jul-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.

Enhanced Prudential Standards for Bank Holding Companies and Foreign Banking

The FRB has adopted amendments to Regulation YY to implement certain components of the enhanced prudential standards required to be established under Section 165 of the Dodd-Frank Act. The enhanced prudential standards include risk-based and leverage capital requirements, liquidity standards, requirements for overall risk management, stress-test requirements, and a 15-to-1 debt-to-equity limit for companies that the Financial Stability Oversight Counsel has determined pose a grave threat to financial stability. The amendments also establish risk-committee requirements and capital stress-testing requirements for certain BHCs and foreign banking organizations with total consolidated assets of $10 billion or more. The amendments became effective on June 1, 2014, and BB&T is on schedule to comply with all subsections of subpart D by the end of 2014.

Foreign Account Tax Compliance Act and Conforming Regulations

In May 2014, the IRS issued Notice 2014-33 (the "Notice") regarding the Foreign Account Tax Compliance Act and its related withholding provisions. The Notice announces that calendar years 2014 and 2015 will be regarded as a transition period for purposes of IRS enforcement and administration with respect to the implementation of FATCA by withholding agents, foreign financial institutions and other entities with IRC chapter 4 responsibilities. The Notice also announces the IRS's intention to further amend the regulations under Sections 1441, 1442, 1471, and 1472 of the IRC. Prior to the IRS issuing these amendments, taxpayers may rely on the provisions of the Notice regarding the proposed amendments to the regulations. The transition period and other guidance described in the Notice are intended to facilitate an orderly transition for withholding agent and foreign financial institution compliance with FATCA's requirements and respond to comments regarding certain aspects of the regulations under chapters 3 and 4 of the IRC. BB&T expects to be in compliance with FATCA and its related provisions by the applicable effective dates.

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 second quarter of 2014 was $425 million, a decrease of $122 million compared to the same quarter of 2013. Financial results for the second quarter were negatively impacted by after-tax adjustments totaling $88 million, or $0.12 per diluted share, that were recorded in connection with the identification of potential exposures related to FHA-insured residential mortgage loans originated by BB&T, and in connection with certain new information that impacted a previously recorded income tax reserve. These adjustments are more fully described below.

In June 2014, BB&T was notified that its FHA-insured loan origination process would be the subject of an audit survey by the HUD-OIG. While there are no findings at this time, in light of announcements made by other financial institutions related to the outcomes of similar audits and related matters and after further review of the exposure, an $85 million reserve was established, which had a $53 million negative impact on BB&T's after-tax results of operations.

In the second quarter of 2014, BB&T also recognized a $33 million adjustment related to its indemnification reserves for mortgage loans sold, which represents an increase in estimated losses that may be incurred on FHA-insured mortgage loans that have not yet defaulted. This adjustment had a $21 million negative impact on BB&T's after-tax results of operations.

In June 2014, BB&T was also notified of a change in the Internal Revenue Service's stance related to an income tax position currently under examination. As a result, BB&T recognized a $14 million income tax adjustment in the second quarter of 2014.

On a diluted per common share basis, earnings for the second quarter of 2014 were $0.58, compared to $0.77 for the same period in 2013. Excluding the impact of the previously described adjustments, diluted earnings per share for the second quarter of 2014 were $0.70. BB&T's results of operations for the second quarter of 2014 produced an annualized return on average assets of 1.04%, an annualized return on average risk-weighted assets of 1.37%, and an annualized return on average common shareholders' equity of 8.03%, compared to prior year ratios of 1.27%, 1.68% and 11.39%, respectively.

Total revenues, which include net interest income on a FTE basis and noninterest income, were $2.3 billion for the second quarter of 2014, a decrease of $187 million compared to the second quarter of 2013. The decrease in total revenues included a $74 million decrease in FTE net interest income and a $113 million decrease in noninterest income. The decrease in FTE net interest income reflects a $108 million decrease in interest income, which primarily reflects lower yields on new loans, the continued runoff of higher yielding covered loans, and the sale of a consumer lending subsidiary during the fourth quarter of 2013. The decrease in interest income was partially offset by a $34 million decrease in funding costs compared to the same quarter of the prior year. NIM was 3.43%, down 27 basis points compared to the second quarter of 2013. The decrease in noninterest income reflects declines in mortgage banking income, net securities gains and other income totaling $82 million, $23 million, and $11 million, respectively. The decrease in mortgage banking income reflects a decline in the volume of residential mortgage loan production and sales and tighter margins. The decrease in net securities gains reflects gains in the earlier quarter that totaled $23 million. The $11 million decrease in other income primarily reflects increased write-downs on affordable housing investments and decreased income from assets related to certain post-employment benefits, which is offset in personnel expense.

The provision for credit losses, excluding covered loans, declined $96 million, or 53.6%, compared to the second quarter of 2013, due to improved credit quality. Net charge-offs, excluding covered loans, for the second quarter of 2014 were $98 million lower than the earlier quarter, a decline of 45.6%. Excluding the reserve for unfunded lending commitments, the reserve release was $39 million for the second quarter of 2014, compared to $61 million in the earlier quarter. Management currently expects minimal reserve release, if any, in the third quarter of 2014 and none thereafter unless credit improves substantially.

Noninterest expense was $1.6 billion for the second quarter of 2014, an increase of $55 million compared to the second quarter of 2013. This increase reflects the impact of $118 million in adjustments related to the previously described FHA-insured loan exposures, which were partially offset by decreases in personnel expense, merger-related and restructuring charges and professional services totaling $35 million, $14 million and $13 million, respectively.

The provision for income taxes was $173 million for the second quarter of 2014, compared to $221 million for the same quarter of the prior year. This produced an effective tax rate for the second quarter of 2014 of 26.6%, compared to 27.7% for the earlier quarter. The decrease in the effective tax rate primarily reflects a higher level of federal tax credits and permanent tax differences relative to pre-tax earnings, which was partially offset by the tax charge previously mentioned.

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NPAs, excluding covered foreclosed real estate, decreased $70 million compared to March 31, 2014, reflecting declines in NPLs and foreclosed property totaling $62 million and $8 million, respectively. At June 30, 2014, nonperforming loans and leases represented 0.70% of total loans and leases, excluding covered assets, compared to 0.78% at March 31, 2014.

Average loans held for investment for the second quarter of 2014 totaled $117.1 billion, an increase of $2.1 billion, or 7.2% on an annualized basis, compared to the first quarter of 2014. This increase was driven by growth in the commercial and industrial, sales finance and other lending subsidiaries portfolios of $962 million, $600 million and $317 million, respectively. Growth in average loans held for investment was negatively impacted by continued runoff in the covered loan portfolio of $135 million, or 28.9% on an annualized basis.

Average deposits for the second quarter of 2014 totaled $129.6 billion, an increase of $3.9 billion, or an annualized 12.4%, compared to the first quarter of 2014. Deposit mix remained relatively stable, with average noninterest-bearing deposits increasing slightly to 28.3% of total average deposits for the second quarter of 2014, compared to 28.2% for the prior quarter. The cost of interest-bearing deposits was 0.26% for the second quarter of 2014, a decrease of one basis point from the prior quarter.

Total shareholders' equity increased $1.2 billion compared to December 31, 2013. This increase was primarily driven by net income of $1.1 billion, net proceeds related to the issuance of equity awards totaling $248 million, and a net change in AOCI that totaled $187 million, which primarily reflects a net increase in unrealized gains on AFS securities. These increases were partially offset by common and preferred dividends totaling $336 million and $74 million, respectively.

The Tier 1 common ratio, Tier 1 risk-based capital and total risk-based capital ratios were 10.2%, 12.0% and 14.3% at June 30, 2014, respectively. These risk-based capital ratios remain well above regulatory standards for well-capitalized banks. As of June 30, 2014, the Tier 1 common equity ratio was not required by the regulators and, therefore, was considered a non-GAAP measure. Refer to the section titled "Capital" herein for a discussion of how BB&T calculates and uses this measure in the evaluation of the Company.

BB&T completed the acquisition of 21 retail branches in Texas during the second quarter of 2014, which resulted in the addition of $1.2 billion in deposits and $112 million in loans.

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.

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Analysis Of Results Of Operations



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



                                                                Table 1
                                                    Annualized Performance Measures

                                                                                  Three Months Ended
                                                      (1)                                                       (2)
                                                    6/30/14            3/31/14            12/31/13            9/30/13      6/30/13
Rate of return on:
    Average assets                                 1.04  %            1.29  %             1.30  %            0.68  %       1.27  %
    Average common shareholders' equity            8.03               9.87               10.85               5.44         11.39
NIM (FTE)                                          3.43               3.52                3.56               3.68          3.70

(1) Includes the impact of after-tax adjustments totaling $88 million that were recorded in connection with the previously described FHA-insured loan exposures and new information that impacted a previously recorded income tax reserve.
(2) Includes the impact of an adjustment for uncertain income tax positions of $235 million related to a ruling issued by the U.S. Court of Federal Claims on September 20, 2013 regarding 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.

Consolidated net income available to common shareholders for the first six months of 2014 totaled $926 million, compared to $757 million earned during the corresponding period of the prior year. Financial results for the first six months of 2014 were negatively impacted by the previously described after-tax adjustments totaling $88 million, while the financial results for the corresponding period of the prior year were negatively impacted by an adjustment to the provision for income taxes totaling $281 million. On a diluted per common share basis, earnings for the first six months of 2014 were $1.27, compared to $1.06 earned during the first six months of 2013.

Net Interest Income and NIM

Second Quarter 2014 compared to Second Quarter 2013

Net interest income on a FTE basis was $1.4 billion for the second quarter of 2014, a decrease of 5.1% compared to the same period in 2013. The decrease in net interest income was driven by a $108 million decrease in interest income, partially offset by a $34 million decrease in funding costs compared to the same quarter of the prior year. Average earning assets for the second quarter of 2014 increased $3.9 billion, or 2.5%, compared to the same period of 2013, while average interest-bearing liabilities decreased $1.7 billion, or 1.4%. The NIM was 3.43% for the second quarter of 2014, compared to 3.70% for the same period of 2013. The 27 basis point decline in the NIM was primarily driven by lower earning asset yields and continued runoff of covered assets, partially offset by improved funding costs.

The annualized FTE yield on the average securities portfolio for the second quarter of 2014 was 2.43%, which was six basis points lower than the earlier period.

The annualized FTE yield for the total loan portfolio for the second quarter of 2014 was 4.45%, compared to 4.90% in the second quarter of 2013. The decrease in the FTE yield on the total loan portfolio was primarily driven by lower yields on new loans, the continued runoff of higher yielding covered loans, and the sale of a consumer lending subsidiary during the fourth quarter of 2013.

The annualized cost of interest-bearing deposits for the second quarter of 2014 was 0.26%, compared to 0.32% for the same period in the prior year. This decrease was driven by a 20 basis point improvement in the cost of certificates and other time deposits and an improvement in deposit mix.

For the second quarter of 2014, the average annualized FTE rate paid on short-term borrowings was 0.16%, compared to 0.18% during the second quarter of 2013. The average annualized rate paid on long-term debt for the second quarter of 2014 was 2.38%, compared to 3.23% for the same period in 2013. This decrease was primarily the result of lower rates on new issues during the last twelve months.

Management expects NIM to decrease by approximately five to ten basis points during the third quarter of 2014, mainly due to covered asset runoff. Net interest income for the third quarter of 2014 is expected to be relatively flat compared to the current quarter.

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Six Months of 2014 compared to Six Months of 2013

Net interest income on a FTE basis was $2.8 billion for the six months ended June 30, 2014, a decrease of $150 million, or 5.2%, compared to the same period in 2013. The decrease in net interest income reflects a $223 million decrease in interest income, which was partially offset by a $73 million decline in funding costs. For the six months ended June 30, 2014, average earning assets increased $2.9 billion, or 1.8%, compared to the same period of 2013, while average interest-bearing liabilities decreased $2.7 billion, or 2.2%. The NIM was 3.47% for the six months ended June 30, 2014, compared to 3.73% for the same period of 2013. The 26 basis point decrease in the NIM was due to lower yields on new earning assets 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, 2014 was 2.46%, a decrease of two basis points compared to the annualized yield earned during the same period of 2013.

The annualized FTE yield for the total loan portfolio for the six months ended June 30, 2014 was 4.51%, compared to 4.97% in the corresponding period of 2013. 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 annualized cost of interest-bearing deposits for the six months ended June 30, 2014 was 0.26%, compared to 0.34% for the same period in the prior year, reflecting improvements in mix.

For the six months ended June 30, 2014, the average annualized FTE rate paid on short-term borrowings was 0.13%, a five basis point decline from the rate paid for the same period of 2013. The average annualized rate paid on long-term debt for the six months of 2014 was 2.44%, compared to 3.23% for the same period in 2013. The decrease in the average rate paid on long-term debt primarily reflects lower rates on new debt issuances that have occurred over the last twelve months.

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, 2014 compared to the same periods 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 2-1
                                                                           FTE Net Interest Income and Rate / Volume Analysis (1)
                                                                                  Three Months Ended June 30, 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                                                                $       1,932     $         360           1.50  %       0.23  %   $      7    $     -     $         7    $    4    $    3
      GSE                                                                                  5,604             4,872           2.08          2.01            29          25              4         1         3
      MBS issued by GSE                                                                   29,627            27,803           1.97          1.97           146         138              8        -          8
      States and political subdivisions                                                    1,831             1,836           5.78          5.81            27          26              1         1        -
      Non-agency MBS                                                                         250               289           7.65          5.57             4           4             -          1        (1)
      Other                                                                                  464               466           1.46          1.51             2           1              1         1        -
      Covered                                                                                948             1,093          13.56         12.48            32          34             (2)        3        (5)
            Total securities                                                              40,656            36,719           2.43          2.49           247         228             19        11         8
Other earning assets (3)                                                                   1,977             2,626           1.60          1.40             8           9             (1)        1        (2)
Loans and leases, net of unearned income (4)(5)
      Commercial:
            Commercial and industrial                                                     39,397            38,359           3.38          3.67           332         351            (19)      (28)        9
            CRE - income producing properties                                             10,382             9,864           3.50          3.75            90          92             (2)       (7)        5
            CRE - construction and development                                             2,566             2,668           3.57          3.82            23          26             (3)       (2)       (1)
. . .
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