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BB&T CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
BB&T Corporation ("BB&T," the "Corporation," the "Parent Company" or the
"Company") is a financial holding company organized under the laws of North
Carolina. BB&T conducts operations through its principal bank subsidiary, Branch
Banking and Trust Company ("Branch Bank"), BB&T Financial FSB ("BB&T FSB"), a
federally chartered thrift institution, 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 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
net interest margins 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 Wall Street Reform and
Consumer Protection Act of 2010 (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;
• reduction 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;
• unpredictable 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.
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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, 2011 under the section entitled "Item
1A. Risk Factors" and from time to time, in other filings with the Securities
and Exchange Commission ("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 subsidiaries and affiliates are subject to numerous examinations by
federal and state banking regulators, as well as the SEC, the Financial Industry
Regulatory Authority, 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, 2011 for additional
disclosures with respect to laws and regulations affecting the Company's
businesses.
Critical Accounting Policies
The accounting and reporting policies of BB&T Corporation and its subsidiaries
are in accordance with accounting principles generally accepted in the United
States of America ("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 allowance
for credit losses, 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 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, 2011. 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, 2011. There have been no changes to BB&T's significant
accounting policies during 2012. 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 third quarter
of 2012 of $469 million was up 28.1% compared to $366 million earned during the
same period in 2011. On a diluted per common share basis, earnings for the third
quarter of 2012 were $0.66, up 26.9% compared to $0.52 for the same period in
2011. BB&T's results of operations for the third quarter of 2012 produced an
annualized return on average assets of 1.10% and an annualized return on average
common shareholders' equity of 9.94% compared to prior year ratios of 0.89%and
8.30%, respectively.
Total revenues were $2.5 billion for the third quarter of 2012, up $339 million
compared to the third quarter of 2011. The increase in total revenues included
$66 million of higher taxable-equivalent net interest income, which was
primarily driven by a 28.7% decrease in funding costs from the same quarter of
the prior year. The decline in funding costs included a $26 million benefit from
accelerated amortization of deferred hedge gains and issuance costs due to a
change in the expected life resulting from the redemption of the Company's trust
preferred securities. The net interest margin was 3.94%, down 15 basis points
compared to the third quarter of 2011, which reflects the runoff of covered
loans, lower yields on new loans and securities partially offset by the lower
funding costs described above. Noninterest income increased $273 million,
primarily attributable to a $92 million increase in insurance income and an $88
million increase in mortgage banking income. The increase in insurance income
included approximately $74 million as a result of the acquisition of the life
and property and casualty insurance operating divisions of Crump Group Inc.
("Crump Insurance") on April 2, 2012, as well as the benefit of other
acquisitions that closed in the fourth quarter of 2011 and firming market
conditions for insurance premiums. In addition, other income was up $50 million
due to $37 million in net losses and write-downs recorded on commercial loans
held for sale in the earlier quarter.
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The provision for credit losses, excluding covered loans, for the third quarter
of 2012, totaled $244 million, compared to $243 million for the third quarter of
2011. Net charge-offs, excluding covered loans, for the third quarter of 2012
were $63 million lower than the third quarter of 2011 reflecting improved credit
quality.
Noninterest expenses were $1.5 billion for the third quarter of 2012, up $112
million compared to the third quarter of 2011. The increase in noninterest
expenses was primarily due to higher personnel costs, which were up $126 million
compared to the third quarter of 2011, primarily due to the Crump Insurance and
BankAtlantic acquisitions as well as other increases in salary and benefits. In
addition, merger-related and restructuring charges were $43 million higher than
the earlier quarter. Loan processing expense increased $30 million compared to
the same quarter of the prior year, primarily due to $28 million in expenses
related to better identification of unrecoverable costs associated with
investor-owned loans. Partially offsetting these increases was a decrease in
foreclosed property expense totaling $114 million. This decrease was the result
of fewer net losses and lower carrying costs associated with foreclosed
property.
The provision for income taxes was $177 million for the third quarter of 2012
compared to $68 million for the third quarter of 2011. This resulted in an
effective tax rate for the third quarter of 2012 of 26.3% compared to 15.5% for
the prior year's third quarter. The increase in the effective tax rate was
primarily due to higher levels of pre-tax earnings relative to permanent tax
differences.
Nonperforming assets, excluding covered foreclosed real estate, decreased $179
million during the third quarter of 2012 due to declines of $107 million in
nonperforming loans and $82 million in foreclosed real estate offset by a slight
increase in other foreclosed property. This is the 10th consecutive quarterly
decline in nonperforming assets and the amount is the lowest since the third
quarter of 2008.
On July 31, 2012, BB&T completed the acquisition of Fort Lauderdale,
Florida-based BankAtlantic that expanded BB&T's presence in the attractive
Southeast Florida market. In connection with this transaction, BB&T assumed
approximately $3.5 billion of deposits and acquired $1.8 billion in loans.
BB&T's total assets at September 30, 2012 were $182.0 billion, up 5.7% on an
annualized basis compared to December 31, 2011. Average loans held for
investment for the third quarter of 2012 totaled $112.7 billion, up $3.5 billion
compared to the second quarter of 2012. Excluding the impact of the BankAtlantic
acquisition, average loans held for investment were up $2.3 billion or 8.4%
annualized compared to the prior quarter, reflecting broad-based growth, led by
increases in residential mortgage, commercial and industrial, and other lending
subsidiaries portfolios.
Average deposits for the third quarter of 2012 increased $3.3 billion, or 10.6%
compared to the second quarter of 2012. Excluding the impact of the BankAtlantic
acquisition, average deposits were up $1.1 billion or 3.3% annualized compared
to the prior quarter. This increase included growth in noninterest-bearing
deposits totaling $1.7 billion, or 25.0% on an annualized basis. The cost of
interest-bearing deposits was 0.42% for the third quarter of 2012, a decrease of
2 basis points compared to the prior quarter.
Total shareholders' equity increased $1.6 billion, or 8.5%, compared to June 30,
2012. The increase was primarily driven by earnings of $496 million and net
proceeds of $1.1 billion from the issuance of Tier 1 qualifying non-cumulative
perpetual preferred stock. The Tier 1 common ratio was 9.5% and 9.7% at
September 30, 2012 and June 30, 2012, respectively. In addition, the Tier 1
risk-based capital and total risk-based capital ratios were 10.9% and 14.0% at
September 30, 2012, respectively, compared to 10.2% and 13.5%, respectively, at
June 30, 2012. The decline in the Tier 1 common equity ratio was primarily
attributable to the intangible assets associated with the acquisition of
BankAtlantic on July 31, 2012, while the increases to Tier 1 risk-based and
total risk-based capital were due to the issuance of Tier 1 qualifying
non-cumulative perpetual preferred stock during the third quarter. BB&T's
risk-based capital ratios remain well above regulatory standards for
well-capitalized banks. As of September 30, 2012, 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.
Refer to BB&T's Annual Report on Form 10-K for the year ended December 31, 2011,
for additional information with respect to BB&T's recent accomplishments and
significant challenges. The factors causing the fluctuations in the major
balance sheet and income statement categories for the third quarter of 2012
compared to the corresponding period of 2011 are further discussed in the
following sections.
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Analysis Of Results Of Operations
Consolidated net income available to common shareholders totaled $469 million,
which generated diluted earnings per common share of $0.66 in the third quarter
of 2012. Net income available to common shareholders for the same period of 2011
totaled $366 million, which generated diluted earnings per common share of
$0.52. The increase in earnings was driven by lower funding costs, higher
noninterest income and lower foreclosed property expense. BB&T's results of
operations for the third quarter of 2012 produced an annualized return on
average assets of 1.10% and an annualized return on average common shareholders'
equity of 9.94%, compared to prior year returns of 0.89% and 8.30%,
respectively.
Consolidated net income available to common shareholders totaled $1.4 billion,
which generated diluted earnings per common share of $1.99 in the first nine
months of 2012. Net income available to common shareholders for the same period
of 2011 totaled $898 million, which generated diluted earnings per common share
of $1.27. The increase in earnings was driven by lower funding and
credit-related costs and higher noninterest income. BB&T's results of operations
for the first nine months of 2012 produced an annualized return on average
assets of 1.12% and an annualized return on average common shareholders' equity
of 10.30%, compared to prior year returns of 0.78% and 7.05%, respectively.
The following table sets forth selected financial ratios for the last five
calendar quarters.
Table 1
Annualized Profitability Measures
Three Months Ended
9/30/12 6/30/12 3/31/12 12/31/11 9/30/11
Rate of return on:
Average assets 1.10 % 1.22 % 1.03 % 0.93 % 0.89 % Average common shareholders' equity 9.94 11.21 9.75
8.76 8.30
Net interest margin (taxable equivalent) 3.94 3.95 3.93 4.02 4.09
Net Interest Income and Net Interest Margin
Third Quarter 2012 compared to Third Quarter 2011
Net interest income on a fully taxable-equivalent ("FTE") basis was $1.5 billion
for the third quarter of 2012, an increase of 4.5% compared to the same period
in 2011. The higher net interest income was driven by a decrease in funding
costs. This decline in funding costs included a $26 million benefit from the
accelerated amortization of deferred hedge gains and issuance costs due to a
change in the expected life resulting from the announced redemption of the
Company's trust preferred securities. For the quarter ended September 30, 2012,
average earning assets increased $12.7 billion, or 9.0%, compared to the same
period of 2011, while average interest-bearing liabilities increased $3.5
billion, or 3.0%. The net interest margin was 3.94% for the third quarter of
2012 compared to 4.09% for the same period of 2011. The 15 basis point decline
in the net interest margin was due to runoff of covered loans, lower yields on
new loans and growth in the securities portfolio, which has been partially
offset by lower funding costs.
The FTE yield on the average securities portfolio for the third quarter of 2012
was 2.64%, which was 4 basis points lower than the annualized yield earned
during the third quarter of 2011.
The annualized FTE yield for the total loan portfolio for the third quarter of
2012 was 5.23% compared to 5.91% in the third quarter of 2011. The decrease in
the FTE yield on the total loan portfolio was primarily due to runoff of covered
loans and lower yields on new loans due to the low interest-rate environment.
The average rate for interest-bearing deposits for the third quarter of 2012 was
0.42% compared to 0.65% 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 third quarter of 2012, the average annualized FTE rate paid on
short-term borrowings was 0.25% compared to 0.31% during the third quarter of
2011. The average annualized rate paid on long-term debt for the third quarter
of 2012 was 2.64% compared to 3.22% for the same period in 2011. The decline in
the average rate paid on long-term debt reflects the positive impact of $26
million in accelerated amortization of gains from derivatives that were unwound
in a gain position related to the redemption of the Company's trust preferred
securities in the third quarter.
Management expects net interest margin to be in the mid 3.70% range in the
fourth quarter of 2012 as a result of the runoff of covered loans, lower rates
on new earning assets, and higher long-term debt costs, partially offset by
lower deposit costs.
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Nine Months of 2012 compared to Nine Months of 2011
Net interest income on a FTE basis was $4.5 billion for the nine months ended
September 30, 2012, an increase of 7.9% compared to the same period in 2011. The
higher net interest income was driven by an increase in earning assets and lower
funding costs. For the nine months ended September 30, 2012, average earning
assets increased $16.0 billion, or 11.7%, compared to the same period of 2011,
while average interest-bearing liabilities increased $8.0 billion, or 6.9%. The
net interest margin was 3.94% for the nine months ended September 30, 2012
compared to 4.08% for the same period of 2011. The 14 basis point decline in the
net interest margin was due to runoff of covered assets, lower yields on new
loans and growth in the securities portfolio, which has been partially offset by
lower funding costs.
The FTE yield on the average securities portfolio for the nine months ended
September 30, 2012 was 2.66%, which represents an increase of 3 basis points
compared to the annualized yield earned during the same period of 2011.
The annualized FTE yield for the total loan portfolio for the nine months ended
September 30, 2012 was 5.41% compared to 5.93% in the corresponding period of
2011. The decrease in the FTE yield on the total loan portfolio was primarily
due to runoff of covered loans from the Colonial acquisition and lower yields on
new loans due to the low interest-rate environment.
The average rate for interest-bearing deposits for the nine months ended
September 30, 2012 was 0.45% compared to 0.73% 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 nine months ended September 30, 2012, the average annualized FTE rate
paid on short-term borrowings was 0.26%, a 2 basis point decline from the rate
paid for the same period of 2011. The average annualized rate paid on long-term
debt for the nine months of 2012 was 2.95% compared to 3.44% for the same period
in 2011. The decline in the average rate paid on long-term debt reflects the
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 nine months ended
September 30, 2012 compared to the same periods in 2011, 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
Three Months Ended September 30, 2012 and 2011
Average Balances (6) Annualized Yield/Rate Income/Expense Increase Change due to
2012 2011 2012 2011 2012 2011 (Decrease) Rate Volume
(Dollars in millions)Assets
Total securities, at amortized cost (1)(2)
U.S. government-sponsored entities (GSE) $ 870 $ 236 1.43 % 0.88 % $ 3 $ 1 $ 2 $ $ 2
Mortgage-backed securities issued by GSE 30,338 27,104 2.00 1.89 151 129 22 8 14
States and political subdivisions 1,848 1,864 5.83 5.78 27 26 1 1
Non-agency mortgage-backed securities 325 511 5.55 6.90 5 9 (4) (2) (2)
Other securities 708 598 1.57 1.55 3 2 1 1
Covered securities 1,171 1,254 15.12 14.21 44 45 (1) 3 (4)
Total securities 35,260 31,567 2.64 2.68 233 212 21 9 12Other earning assets (3) 3,049 4,034 1.07 0.51 8 6 2 4 (2)
Loans and leases, net of unearned income (1)(4)(5)
Commercial:
Commercial and industrial 37,516 34,280 3.89 4.21 367 363 4 (29) 33
Commercial real estate-other 10,823 11,069 3.83 3.78 104 105 (1) 1 (2)
Commercial real estate-residential ADC 1,534 2,576 3.78 3.53 14 23 (9) 2 (11)
Direct retail lending 15,520 13,802 4.81 5.20 187 181 6 (14) 20
Sales finance 7,789 7,234 3.85 4.78 75 87 (12) (18) 6
Revolving credit 2,234 2,109 8.39 8.77 47 46 1 (2) 3
Residential mortgage 23,481 18,818 4.28 4.83 252 228 24 (28) 52
Other lending subsidiaries 9,998 8,652 10.80 11.28 271 246 25 (11) 36
Total loans and leases held for investment (excluding covered
loans) 108,895 98,540 4.82 5.16 1,317 1,279 38 (99) 137
Covered 3,826 5,342 18.21 20.29 175 273 (98) (26) (72)
Total loans and leases held for investment 112,721 103,882 5.27 5.94 1,492 1,552 (60) (125) 65
Loans held for sale 2,888 1,776 3.35 3.98 25 18 7 (3) 10
Total loans and leases 115,609 105,658 5.23 5.91 1,517 1,570 (53) (128) 75
Total earning assets 153,918 141,259 4.55 5.03 1,758 1,788 (30) (115) 85
Nonearning assets 25,388 24,261
Total assets $ 179,306 $ 165,520
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-checking $ 20,157 $ 19,004 0.12 0.16 7 8 (1) (1)
Money market and savings 47,500 42,174 0.19 0.29 22 30 (8) (12) 4
Certificates and other time deposits 30,727 30,140 0.99 1.47 76 112 (36) (38) 2
Foreign deposits - interest-bearing 321 368 0.12 0.04
Total interest-bearing deposits 98,705 91,686 0.42 0.65 105 150 (45) (51) 6Federal funds purchased, securities sold under repurchase agreements and
short-term borrowed funds (1)
3,478 4,307 0.25 0.31 3 3 1 (1)
Long-term debt 19,682 22,347 2.64 3.22 130 181 (51) (31) (20)
Total interest-bearing liabilities 121,865 118,340 0.78 1.12 238 334 (96) (81) (15)
Noninterest-bearing deposits 29,990 23,370
Other liabilities 7,326 6,259
Shareholders' equity 20,125 17,551
Total liabilities and shareholders' equity $ 179,306 $ 165,520Average interest rate spread 3.77 % 3.91 %
Net interest margin/ net interest income 3.94 % 4.09 % $ 1,520 $ 1,454 $ 66 $ (34) $ 100
Taxable equivalent adjustment
$ 37 $ 38
(1) Yields are stated on a taxable equivalent basis assuming tax rates in effect for the periods presented.
(2) Total securities include securities available for sale and securities held to maturity.
(3) Includes Federal funds sold, securities purchased under resale agreements or similar arrangements, interest-bearing deposits with banks, trading securities, FHLB stock and other earning assets.
(4) Loan fees, which are not material for any of the periods shown, have been included for rate calculation purposes.
(5) Nonaccrual loans have been included in the average balances.
(6) Excludes basis adjustments for fair value hedges.
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Table 2-2
FTE Net Interest Income and Rate / Volume Analysis
Nine Months Ended September 30, 2012 and 2011
Average Balances (6) Annualized Yield/Rate Income/Expense Increase Change due to
2012 2011 2012 2011 2012 2011 (Decrease) Rate Volume
(Dollars in millions)Assets
Total securities, at amortized cost (1)(2)
U.S. government-sponsored entities (GSE) $ 846 $ 146 1.48 % 1.45 % $ 9 $ 2 $ 7 $ $ 7
Mortgage-backed securities issued by GSE 31,415 23,368 2.06 1.76 485 308 177 58 119
States and political subdivisions 1,854 1,907 5.84 5.69 81 81 2 (2)
Non-agency mortgage-backed securities 358 551 5.78 6.56 16 27 (11) (3) (8)
Other securities 648 695 1.59 1.53 8 8
Covered securities 1,196 1,252 13.89 13.31 124 125 (1) 5 (6)
Total securities 36,317 27,919 2.66 2.63 723 551 172 62 110
Other earning assets (3) 3,352 3,286 0.83 0.63 21 16 5 5
Loans and leases, net of unearned income (1)(4)(5)
Commercial:
Commercial and industrial 36,613 33,789 3.99 4.27 1,095 1,078 17 (73) 90
Commercial real estate-other 10,694 11,240 3.81 3.81 305 320 (15) (15)
Commercial real estate-residential ADC 1,755 2,928 3.67 3.53 48 77 (29) 3 (32)
Direct retail lending 15,103 13,738 4.89 5.25 553 539 14 (39) 53
Sales finance 7,665 7,166 4.05 5.00 232 268 (36) (54) 18
Revolving credit 2,196 2,088 8.42 8.80 138 137 1 (6) 7
Residential mortgage 22,221 18,355 4.42 4.86 738 670 68 (64) 132
Other lending subsidiaries 9,348 8,162 11.15 11.56 780 706 74 (26) 100
Total loans and leases held for investment (excluding covered
loans) 105,595 97,466 4.92 5.20 3,889 3,795 94 (259) 353
Covered 4,235 5,629 18.89 19.21 599 809 (210) (13) (197)
Total loans and leases held for investment 109,830 103,095 5.46 5.97 4,488 4,604 (116) (272) 156
Loans held for sale 2,772 2,004 3.49 3.77 73 57 16 (4) 20
Total loans and leases 112,602 105,099 5.41 5.93 4,561 4,661 (100) (276) 176
Total earning assets 152,271 136,304 4.65 5.12 5,305 5,228 77 (209) 286
Nonearning assets 24,454 23,788
Total assets $ 176,725 $ 160,092
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-checking $ 19,928 $ 18,326 0.13 0.16 19 23 (4) (6) 2
Money market and savings 46,578 40,108 0.19 0.35 66 105 (39) (54) 15
Certificates and other time deposits 31,620 27,657 1.05 1.68 248 347 (99) (144) 45
Foreign deposits - interest-bearing 156 810 0.10 (0.39) (2) 2 1 1
Total interest-bearing deposits 98,282 86,901 0.45 0.73 333 473 (140) (203) 63
Federal funds purchased, securities sold under repurchase agreements and
short-term borrowed funds (1)
3,431 5,682 0.26 0.28 7 12 (5) (1) (4)
Long-term debt 21,310 22,448 2.95 3.44 472 578 (106) (78) (28)
Total interest-bearing liabilities 123,023 115,031 0.88 1.23 812 1,063 (251) (282) 31
Noninterest-bearing deposits 27,943 22,179
Other liabilities 6,857 5,780
Shareholders' equity 18,902 17,102
Total liabilities and shareholders' equity $ 176,725 $ 160,092Average interest rate spread 3.77 3.89
Net interest margin/ net interest income 3.94 % 4.08 % $ 4,493 $ 4,165 $ 328 $ 73 $ 255
Taxable equivalent adjustment
$ 112 $ 110
(1) Yields are stated on a taxable equivalent basis assuming tax rates in effect for the periods presented.
(2) Total securities include securities available for sale and securities held to maturity.
(3) Includes Federal funds sold, securities purchased under resale agreements or similar arrangements, interest-bearing deposits with banks, trading securities, FHLB stock and other earning
assets.
(4) Loan fees, which are not material for any of the periods shown, have been included for rate calculation purposes.
(5) Nonaccrual loans have been included in the average balances.
(6) Excludes basis adjustments for fair value hedges.
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Revenue, Net of Provision Impact from Covered Assets
The following table provides information related to covered loans and securities
and the FDIC loss sharing asset recognized in the Colonial acquisition. The
table excludes all amounts related to other assets acquired and liabilities
assumed in the acquisition.
Table 3
Revenue, Net of Provision Impact from Covered Assets
Three Months Ended September Nine Months Ended September
30, 30,
2012 2011 2012 2011
(Dollars in millions)
Interest income-covered loans $ 175 $ 273 $ 599 $ 809
Interest income-covered securities 44 45 124 125
Total interest income 219 318 723 934
Provision for covered loans (7) (17) (22)
Other-than-temporary-impairment for covered securities (4)
FDIC loss share income, net (90) (104) (221) (243)
Net revenue after provision for covered loans $ 129 $ 207 $ 481 $ 669
FDIC loss share income, net
Offset to provision for covered loans $ $ 6 $ 14 $ 18
Accretion due to credit loss improvement (73) (96) (197) (226)
Offset to OTTI for covered securities 3
Accretion for securities (17) (14) (41) (35)
$ (90) $ (104) $ (221) $ (243)
Third Quarter 2012 compared to Third Quarter 2011
Interest income for the third quarter of 2012 on covered loans and securities
decreased $99 million compared to the third quarter of 2011. Interest income on
covered loans decreased $98 million primarily due to lower average loan
balances. The yield on covered loans for the third quarter of 2012 was 18.21%
compared to 20.29% in 2011.
There was no provision for covered loans in the current quarter, a decrease of
$7 million compared to the third quarter of 2011. The cash flow reassessment
related to the third quarter of 2012 showed decreases in expected cash flows in
certain loan pools that resulted in additional provisions that were fully offset
by recoveries in other previously impaired loan pools.
FDIC loss share income, net was a negative $90 million for the third quarter of
2012, which was due to negative accretion attributable to the offset for the
cumulative impact of cash flow reassessments for covered loans and negative
accretion for covered securities. The negative accretion related to the
improvement in credit losses is recognized on a level yield basis over the life
of the related FDIC loss share asset, which has a shorter weighted average life
than the corresponding loans.
Nine Months of 2012 compared to Nine Months of 2011
Interest income for the nine months ended September 30, 2012 on covered loans
and securities decreased $211 million compared to the nine months ended
September 30, 2011. The decrease was primarily due to lower average loan
balances. The yield on covered loans for the nine months ended September 30,
2012 was 18.89% compared to 19.21% in the corresponding period of 2011. At
September 30, 2012, the accretable yield balance on these loans was $1.0
billion. Accretable yield represents the excess of future cash flows above the
current net carrying amount of loans and will be recognized into income over the
remaining life of the covered and acquired loans.
The provision for covered loans was $17 million for the nine months ended
September 30, 2012, compared to $22 million for the same period of the prior
year.
FDIC loss share income, net was a negative $221 million for the nine months
ended September 30, 2012 compared to a negative $243 million for the
corresponding period of the prior year.
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Provision for Credit Losses
Third Quarter 2012 compared to Third Quarter 2011
The provision for credit losses totaled $244 million for the third quarter of
2012 compared to $250 million (including $7 million for covered loans) for the
third quarter of 2011. The decrease in the overall provision for credit losses
was primarily due to updated loss estimate factors related to the commercial
real estate and residential mortgage portfolios, partially offset by provision
increases related to the commercial and industrial and other lending
subsidiaries portfolios.
Net charge-offs, excluding covered loans, were $63 million lower than the third
quarter of 2011. This decrease in net charge-offs was broad-based in nature,
with the other lending subsidiaries portfolio representing the only increase in
net charge-offs compared to the prior year period. Net charge-offs were 1.05% of
average loans and leases on an annualized basis (or 1.08% excluding covered
loans) for the third quarter of 2012 compared to 1.57% of average loans and
leases (or 1.44% excluding covered loans) for the same period in 2011.
Nine Months of 2012 compared to Nine Months of 2011
The provision for credit losses totaled $805 million (including $17 million for
covered loans) for the nine months ended September 30, 2012, compared to $918
million (including $22 million for covered loans) for the same period of 2011.
The decrease in the provision for credit losses was primarily due to decreases
in the commercial real estate and residential mortgage portfolios, partially
offset by increases in the commercial and industrial, direct retail lending and
other lending subsidiaries portfolios.
Net charge-offs, excluding covered loans, for the nine months ended September
30, 2012 were $249 million lower than the comparable period of the prior year.
While net charge-offs decreased in most portfolios, net charge-offs related to
the commercial and industrial and other lending subsidiaries portfolios
increased modestly when compared to the prior comparable period. Net charge-offs
were 1.18% of average loans and leases on an annualized basis (or 1.19%
excluding covered loans) for the nine months ended September 30, 2012 compared
to 1.61% of average loans and leases (or 1.63% excluding covered loans) forthe
same period in 2011.
Noninterest Income
Third Quarter 2012 compared to Third Quarter 2011
Noninterest income for the three months ended September 30, 2012 totaled $963
million, compared to $690 million for the third quarter of 2011, an increase of
$273 million. The increase in noninterest income was driven by increases in
insurance and mortgage banking income, and decreases in losses on the sale of
securities and commercial loans held for sale, compared to the same quarterof
the prior year.
Insurance income was $92 million higher, primarily due to the acquisition of
Crump Insurance on April 2, 2012, which added approximately $74 million in
revenue for the quarter. The remainder of the increase in insurance income was
attributable to the impact of other acquisitions that closed during the fourth
quarter of 2011 and firming market conditions for insurance premiums. Management
expects seasonally stronger insurance revenues during the fourth quarter of
2012.
Mortgage banking income improved $88 million, which reflects $96 million of
higher gains on residential mortgage loan production due to wider margins and
increased loan originations. Included in mortgage banking income during the
third quarter of 2012 was a gain of $20 million from the net valuation of
residential mortgage servicing rights. This compares to a net gain of $30
million in the third quarter of 2011. Mortgage banking income is expected to
remain strong during the fourth quarter of 2012.
Net securities losses for the third quarter of 2012 were $38 million lower than
the prior year quarter due to lower other-than-temporary impairment. Other
income was up $50 million due to $37 million in losses and write-downs recorded
on commercial loans held for sale in the third quarter of 2011, and $23 million
in higher income related to assets for certain post-employment benefits, which
was offset in personnel costs. These increases were partially offset by a
decrease in income related to private equity and other similar investments.
Other categories of noninterest income, including services charges on deposits,
investment banking and brokerage fees and commissions, checkcard fees, bankcard
fees and merchant discounts, trust and investment advisory revenues, income from
bank-owned life insurance and FDIC loss share income totaled $328 million for
the three months ended September 30, 2012, compared to $323 million for the same
period of 2011. Increases in investment banking and brokerage fees and
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commissions, bankcard fees and merchant discounts and FDIC loss share income
were partially offset by a $30 million decrease in checkcard fees, which
primarily relates to the implementation of the Durbin amendment on October 1,
2011.
Nine Months of 2012 compared to Nine Months of 2011
Noninterest income for the nine months ended September 30, 2012 totaled $2.8
billion, compared to $2.2 billion for the same period in 2011, an increase of
$609 million, or 27.8%. This increase was primarily attributable to increases in
insurance, mortgage banking and other income, partially offset by a decrease in
checkcard fees.
Insurance income, which is BB&T's largest source of noninterest income, totaled
$997 million for the nine months ended September 30, 2012, up 26.2% compared to
the corresponding period of 2011. The increase in insurance income reflects the
acquisition of Crump Insurance during the second quarter of 2012, the
acquisitions of Atlantic Risk Management, Liberty Benefits and Precept that
closed during the fourth quarter of 2011, and firming market conditions for
insurance premiums.
Mortgage banking income totaled $609 million for the nine months ended September
30, 2012, an increase of $308 million compared to the amount earned in the
corresponding period of 2011. This increase is primarily due to $271 million in
higher gains on residential mortgage loan production due to wider margins and
increased loan originations. Also included in mortgage banking income during the
first nine months of 2012 was a gain of $80 million from the net valuation of
residential mortgage servicing rights compared to a gain of $30 million in the
prior year period.
Other income increased $104 million due to $138 million of losses and
write-downs recorded on commercial loans held for sale in the 2011 period,
partially offset by a $42 million write-down related to affordable housing
investments due to revised estimates and processes used to value these
investments that was recorded in the first quarter of 2012.
Other categories of noninterest income, including service charges on deposits,
investment banking and brokerage fees and commissions, checkcard fees, bankcard
fees and merchant discounts, trust and investment advisory revenues, income from
bank-owned life insurance, FDIC loss share income, and securities gains (losses)
totaled $986 million during the nine months ended September 30, 2012, compared
with $996 million for the same period of 2011. Increases in investment banking
and brokerage fees and commissions, bankcard fees and merchant discounts, FDIC
loss share income, and a reduction in securities losses in the current year,
were offset by a $93 million decrease in checkcard fees, which primarily relates
to the implementation of the Durbin amendment on October 1, 2011.
Noninterest Expense
Third Quarter 2012 compared to Third Quarter 2011
Noninterest expenses totaled $1.5 billion for third quarter of 2012, an increase
of $112 million compared to the same quarter of 2011. The increase in
noninterest expenses was primarily driven by an increase in personnel expense,
which was partially attributable to the acquisitions of Crump and BankAtlantic,
merger-related costs associated with the acquisition of BankAtlantic in the
current quarter, and an increase in loan processing expense, partially offset by
a decrease in foreclosed property expense.
Personnel expense, the largest component of noninterest expense, was $797
million for the current quarter compared to $671 million for the same period in
2011, an increase of $126 million, or 18.8%. This increase included $60 million
in personnel expense related to the Crump Insurance and BankAtlantic
acquisitions. Other factors contributing to the increase in personnel expense
include an increase of $23 million in other post-employment benefits, which was
offset in other income, and increases in production related and other incentives
and pension expense, which increased $16 million and $15 million, respectively.
The acquisition of BankAtlantic on July 31, 2012 also resulted in a $43 million
increase in merger-related and restructuring charges in the current quarter.
Loan processing expenses increased $30 million compared to the same quarter of
the prior year, primarily due to $28 million in expenses related to better
identification of unrecoverable costs associated with investor-owned loans.Foreclosed property expense includes the gain or loss on sale of foreclosed
property, valuation adjustments resulting from updated appraisals, and the
ongoing expense of maintaining foreclosed properties. Foreclosed property
expense for the three months ended September 30, 2012 totaled $54 million,
compared to $168 million for the third quarter of 2011. Foreclosed property
expense was lower due to fewer losses and write-downs and lower maintenance
costs due to a reduction in inventory compared to the prior year. Future
decreases in expense will be driven by decreases of inflows to foreclosed
property.
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Other categories of noninterest expenses, including occupancy and equipment
expense, regulatory charges, professional services, software expense,
amortization of intangibles, and other expenses totaled $550 million for the
current quarter compared to $523 million for the same period of 2011. This
increase was due to additional expenses associated with the Crump and
BankAtlantic acquisitions totaling $35 million, a $12 million increase in
operating charge-offs and similar expenses due primarily to the announced
settlement of Visa's litigation in July 2012, and smaller increases in various
other expenses including advertising. These increases were partially offset by a
$16 million improvement as a result of a loss on the sale of a leveraged lease
in the earlier quarter.
Nine Months of 2012 compared to Nine Months of 2011
Noninterest expenses totaled $4.3 billion for the nine months ended September
30, 2012, an increase of $156 million, or 3.7%, over the same period a year ago.
Personnel expense was $2.3 billion for the nine months ended September 30, 2012
compared to $2.0 billion for the same period in 2011, an increase of $254
million, or 12.4%. The acquisitions of Crump Insurance and Bank Atlantic
resulted in a $110 million increase in personnel expense during the current
period. Other factors driving the increase include a $42 million increase in
production related and other incentives, a $44 million increase in pension
expense, primarily due to increased amortization of deferred actuarial losses,
normal salary increases and other adjustments.
Foreclosed property expense for the nine months ended September 30, 2012 totaled
$218 million compared to $456 million for the same period in 2011, a decrease of
$238 million, or 52.2%. Foreclosed property expense was lower due to fewer
losses and write-downs and lower maintenance costs due to a reduction in
inventory compared to the prior year.
Regulatory charges totaled $124 million for the nine months ended September 30,
2012 compared to $166 million for the same period in 2011, a decrease of $42
million, or 25.3%, which reflects improved credit quality that led to lower
deposit insurance premiums. Loan processing expenses were $210 million for the
nine months ended September 30, 2012 compared to $168 million in the same period
of the prior year, reflecting an increase in investor-owned foreclosure expense
and mortgage repurchase reserves. Merger-related and restructuring charges
increased $57 million compared to the prior period, primarily the result of the
Crump Insurance and BankAtlantic acquisitions.
Other categories of noninterest expenses, including occupancy and equipment
expense, professional services, software expense, amortization of intangibles,
and other expenses, totaled $1.4 billion for the nine months ended September 30,
2012 compared to $1.3 billion for the same period of 2011, an increase of $83
million. The increase was due to additional expenses for the Crump Insurance and
BankAtlantic acquisitions, increased advertising and marketing expense, and
other normal operating increases.
Provision for Income Taxes
Third Quarter 2012 compared to Third Quarter 2011
The provision for income taxes was $177 million for the third quarter of 2012,
an increase of $109 million compared to the same period of 2011, primarily due
to higher pre-tax income. BB&T's effective income tax rates for the third
quarters of 2012 and 2011 were 26.3% and 15.5%, respectively. The higher
effective tax rate in the current year is primarily the result of higher pre-tax
income relative to permanent tax differences. The effective tax rate for the
fourth quarter of 2012 is expected to remain consistent with the rate for the
third quarter.
BB&T has extended credit to, and invested in, the obligations of states and
municipalities and their agencies, and has made other investments and loans that
produce tax-exempt income. The income generated from these investments, together
with certain other transactions that have favorable tax treatment, have reduced
BB&T's overall effective tax rate from the statutory rate in 2012 and 2011.Nine Months of 2012 compared to Nine Months of 2011
The provision for income taxes was $557 million for the nine months ended
September 30, 2012, an increase of $345 million compared to the same period of
2011, primarily due to higher pre-tax income. BB&T's effective income tax rates
for the nine months ended September 30, 2012 and 2011 were 27.4% and 18.5%,
respectively. The higher effective tax rate in the current year is primarily the
result of higher pre-tax income relative to permanent tax differences.
Refer to Note 11 "Income Taxes" in the "Notes to Consolidated Financial
Statements" for a discussion of uncertain tax positions and other tax matters.
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Segment Results
BB&T's operations are divided into six reportable business segments: Community
Banking, Residential Mortgage Banking, Dealer Financial Services, Specialized
Lending, Insurance Services, and Financial Services. These operating segments
have been identified based on BB&T's organizational structure. See Note 17
"Operating Segments" in the "Notes to Consolidated Financial Statements"
contained herein and BB&T's Annual Report on Form 10-K for the year ended
December 31, 2011, for additional disclosures related to BB&T's reportable
business segments. Fluctuations in noninterest income and noninterest expense
incurred directly by the operating segments are more fully discussed in the
"Noninterest Income" and "Noninterest Expense" sections above. The following
table reflects the net income (loss) for each of BB&T's operating segments:
Table 4
BB&T Corporation
Net Income by Reportable Segments
Three Months Ended September 30, Nine Months Ended September 30,
2012 2011 2012 2011
(Dollars in millions)
Community Banking $ 250 $ 178 $ 532 $ 486
Residential Mortgage Banking 83 17 280 (52)
Dealer Financial Services 53 60 170 160
Specialized Lending 43 54 163 171
Insurance Services 16 10 105 76
Financial Services 71 70 196 194 Other, Treasury and Corporate (20) (18) 33 (103)
BB&T Corporation $ 496 $ 371 $ 1,479 $ 932
Third Quarter 2012 compared to Third Quarter 2011
Community Banking reported net income of $250 million compared to $178 million
in the prior year. The increase was primarily due to a $121 million decrease in
noninterest expense and a $50 million decrease in the allocated provision for
loan and lease losses, partially offset by a $40 million decrease in segment net
interest income and a $41 million increase in the provision for income taxes.
The decrease in noninterest expense was driven by lower foreclosed property
expenses and related legal fees, while the decline in provision expense was
driven by improving credit trends in the loan portfolio, as well as lower
commercial loan charge-offs as compared to the prior year. The decrease in
segment net interest income was primarily due to lower funds transfer pricing
("FTP") credits earned on deposits compared to the prior year, partially offset
by a corresponding decrease in FTP charges on loans. The decrease in net funds
transfer pricing was further offset by improvements in the deposit mix as a
result of transaction deposit growth and a managed reduction in client
certificates of deposits.
Residential Mortgage Banking reported net income of $83 million compared to $17
million in the prior year. The increase was primarily attributable to a $90
million increase in noninterest income and a $33 million decrease in the
allocated provision for loan and lease losses. The increase in noninterest
income was driven by higher gains on residential mortgage loan production due to
wider margins and increased loan originations, partially offset by a decrease in
the fair value of net mortgage servicing rights. The $33 million decrease in the
allocated provision for loan and lease losses resulted from improving credit
trends in the residential mortgage loan portfolio. The benefit associated with
the increase in noninterest income and decrease in the provision was partially
offset by a $34 million increase in noninterest expense, which was driven by the
costs associated with increased loan originations and an increase in loan
processing expenses, and a $39 million increase in the provision for income
taxes.
Dealer Financial Services reported net income of $53 million compared to $60
million in the prior year. The decrease was primarily due to a $19 million
increase in the allocated provision for loan and lease losses, partially offset
by a $10 million increase in segment net interest income. The increase in the
allocated provision for loan and lease losses reflects the impacts of segment
loan growth and reserve rate adjustments. The increase in segment net interest
income was primarily attributable to Regional Acceptance Corporation, which
benefited from lower FTP cost of funding coupled with growth in the loan
portfolio. Dealer Financial Services grew average loans by 6.3% compared tothe
third quarter of 2011.
Specialized Lending reported net income of $43 million compared to $54 million
in the prior year. The decrease was primarily due to a $39 million increase in
the allocated provision for loan and lease losses, partially offset by a $24
million
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increase in segment net interest income. The increase in the allocated provision
for loan and lease losses was primarily a result of an adjustment to loss
factors in the current quarter on certain consumer loan portfolios, which
largely resulted from an acceleration in the timing of certain consumer loan
charge-offs. Segment net interest income growth was driven by 48.0% growth in
average loan balances in small ticket financing when compared to the third
quarter of 2011, which resulted from expanded dealer financing relationships. In
addition, Mortgage Warehouse Lending's average loan balances grew 108.3% when
compared to the same period of the prior year, as a result of increased market
penetration, higher commitment levels, and higher line usage.
Insurance Services reported net income of $16 million compared to $10 million in
the prior year. Noninterest income growth of $95 million was primarily driven by
the acquisition of Crump Insurance on April 2, 2012, which contributed $74
million of insurance income in the third quarter of 2012. In addition, Insurance
Services benefited from higher commissions on property and casualty insurance,
life insurance, and employee benefits as insurance pricing continues to firm.
Employee benefit commission growth was driven by revenues from two
California-based companies acquired in the fourth quarter of 2011: Precept, a
full-service employee benefits consulting and administrative solutions firm, and
Liberty Benefit Insurance Services, a full-service employee benefits broker.
Higher noninterest income growth was offset by a $74 million increase in
noninterest expense, primarily as a result of acquisition-related personnel
costs.
Financial Services reported net income of $71 million compared to $70 million in
the prior year. Net income results were driven by a $16 million increase in
segment net interest income and an $11 million increase in noninterest income.
The increase in segment net interest income was primarily due to strong loan and
deposit growth generated by Corporate Banking and BB&T Wealth. Corporate
Banking's loan and transaction deposit growth over the prior year totaled 49.6%
and 147.2%, respectively. These increases were generated through strong growth
in both existing core markets as well as newer markets, including Texas and
Alabama. BB&T Wealth reported loan and transaction deposit growth over the prior
year totaling 32.7% and 34.7%, which was driven by client acquisition and
cross-selling initiatives. The increase in noninterest income was primarily
driven by higher investment banking and brokerage commissions, as well as higher
mortgage banking referral income related to BB&T Wealth clients. The growth in
segment net interest income and noninterest income was partially offset by an
$11 million increase in the allocated provision for loan and lease losses and a
$9 million increase in noninterest expense. BB&T Wealth has expanded its loan
delivery platform to provide a tailored origination and servicing experience to
meet the unique needs of the wealth client, making its lending products more
competitive in the market and enabling BB&T Wealth to better serve current
clients and compete for new clients. Segment net interest income for Financial
Services includes the net interest margin and FTP related to the loans and
deposits assigned to BB&T Wealth that are housed in the Community Bank.
Net income in Other, Treasury & Corporate can vary due to changing needs of the
Corporation, including the size of the investment portfolio, the need for
wholesale funding, and income received from derivatives used to hedge the
balance sheet. In the third quarter of 2012, Other, Treasury & Corporate
generated a net loss of $20 million compared to a net loss of $18 million in the
prior year. The increase in net loss was driven by a $102 million increase in
noninterest expense, primarily resulting from merger-related charges and
occupancy and equipment expense associated with the BankAtlantic acquisition and
increased expense related to certain post-employment benefits, partially offset
by a $75 million increase in noninterest income primarily related to reduced
other-than-temporary impairment losses in the investment portfolio, increased
loss share income, service charge income associated with the BankAtlantic
acquisition and other income.
Nine Months of 2012 compared to Nine Months of 2011
Community Banking reported net income of $532 million compared to $486 million
in the prior year. The increase was primarily due to a $250 million decrease in
noninterest expense and a $54 million increase in noninterest income, partially
offset by a $121 million decrease in segment net interest income and a $94
million increase in allocated corporate expenses. The decrease in noninterest
expense was driven by lower foreclosed property expenses and regulatory charges,
while the increase in noninterest income was driven by higher mortgage banking
referral income and bankcard and merchant discount revenue. In addition,
noninterest income in the prior year was impacted by the recognition of losses
on the sale of commercial loans. The decrease in segment net interest income was
primarily due to lower FTP credits earned on deposits compared to the prior
year, partially offset by a corresponding decrease in FTP charges on loans. The
decrease in net funds transfer pricing was further offset by improvements in the
deposit mix as a result of transaction deposit growth and a managed reduction in
client certificates of deposits. The increase in allocated corporate expenses
was driven by higher service center allocations as a result of increased
centralization of credit administration functions and increased information
technology and operations expenses.
Residential Mortgage Banking reported net income of $280 million compared to a
net loss of $52 million in the prior year. The increase was primarily
attributable to a $309 million increase in noninterest income and a $242 million
decrease in the allocated provision for loan and lease losses. The increase in
noninterest income was driven by higher gains on residential
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mortgage loan production due to wider margins and increased loan originations
and an increase in the fair value of net mortgage servicing rights. The decrease
in the allocated provision for loan and lease losses resulted from improving
credit trends in the residential mortgage loan portfolio. The benefit associated
with the increase in noninterest income and decrease in the provision was
partially offset by a $200 million increase in the provision for income taxes.
Dealer Financial Services reported net income of $170 million compared to $160
million in the prior year. The increase was primarily due to a $36 million
increase in segment net interest income, partially offset by a $14 million
increase in the allocated provision for loan and lease losses and a $7 million
increase in noninterest expense. The increase in segment net interest income was
primarily attributable to Regional Acceptance Corporation, which benefited from
lower FTP cost of funding coupled with growth in the loan portfolio. Dealer
Financial Services grew average loans by 6.1% compared to the prior year. The
increase in the allocated provision for loan and lease losses reflects the
impacts of segment loan growth and reserve rate adjustments, while the increase
in noninterest expense was primarily due to higher personnel costs.
Specialized Lending reported net income of $163 million compared to $171 million
in the prior year. The decrease was primarily due to a $68 million increase in
the allocated provision for loan and lease losses and a $12 million increase in
noninterest expense, offset by a $62 million increase in segment net interest
income and a $9 million increase in noninterest income. Segment net interest
income growth was driven by 45.1% growth in average loan balances in small
ticket financing when compared to the prior year, which resulted from expanded
dealer financing relationships. In addition, Mortgage Warehouse Lending's
average loan balances grew 115.0% when compared to the prior year, as a result
of increased market penetration, higher commitment levels, and higher line
usage. The increase in the allocated provision for loan and lease losses was
primarily a result of loan growth and an adjustment to loss factors on certain
consumer loan portfolios, which largely resulted from an acceleration in the
timing of certain consumer loan charge-offs. The increase in noninterest expense
was driven by higher depreciation on operating leases, personnel expense, and
foreclosed property expense. The increase in noninterest income was primarily
due to higher fees generated by the Equipment Finance and Commercial Finance
businesses.
Insurance Services reported net income of $105 million compared to $76 million
in the prior year. Noninterest income growth of $212 million was primarily
driven by the acquisition of Crump Insurance on April 2, 2012, which contributed
$151 million of insurance income post-acquisition. In addition, Insurance
Services benefited from higher commissions on property and casualty insurance,
life insurance, and employee benefits as insurance pricing continues to firm.
Employee benefit commission growth was driven by revenues from two
California-based companies acquired in the fourth quarter of 2011: Precept, a
full-service employee benefits consulting and administrative solutions firm, and
Liberty Benefit Insurance Services, a full-service employee benefits broker.
Higher noninterest income growth was partially offset by a $145 million increase
in noninterest expense, primarily as a result of acquisition-related personnel
costs and a $15 million increase in the provision for income taxes.
Financial Services reported net income of $196 million compared to $194 million
in the prior year. Net income results were driven by a $68 million increase in
segment net interest income and a $19 million increase in noninterest income.
The increase in segment net interest income was primarily due to strong loan and
deposit growth generated by Corporate Banking and BB&T Wealth. Corporate
Banking's loan and transaction deposit growth over the prior year totaled 53.6%
and 124.1%, respectively. These increases were generated through strong growth
in both existing core markets as well as newer markets, including Texas and
Alabama. BB&T Wealth reported loan and transaction deposit growth over the prior
year totaling 34.5% and 39.0%, which was driven by client acquisition and
cross-selling initiatives. The increase in noninterest income was primarily
driven by higher trust and investment advisory revenue, investment banking and
brokerage commissions, and mortgage banking referral income related to BB&T
Wealth clients. The growth in segment net interest income and noninterest income
was partially offset by a $47 million increase in noninterest expense and a $28
million increase in the allocated provision for loan and lease losses. BB&T
Wealth has expanded its loan delivery platform to provide a tailored origination
and servicing experience to meet the unique needs of the wealth client, making
its lending products more competitive in the market and enabling BB&T Wealth to
better serve current clients and compete for new clients. Segment net interest
income for Financial Services includes the net interest margin and FTP related
to the loans and deposits assigned to BB&T Wealth that are housed in the
Community Bank.
Net income in Other, Treasury & Corporate can vary due to changing needs of the
Corporation, including the size of the investment portfolio, the need for
wholesale funding, and income received from derivatives used to hedge the
balance sheet. Other, Treasury & Corporate generated net income of $33 million
compared to a net loss of $103 million in the prior year. The increase was
driven by a $216 million increase in segment net interest income, as a result of
an increase in BB&T's investment portfolio and a decrease in FTP funding credits
on deposits allocated to the Community Banking segment, and a $47 million
decrease in the allocated provision for loan and lease losses, partially offset
by a $107 million reduction in the benefit for income taxes.
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Analysis Of Financial Condition
Investment Activities
The total securities portfolio was $37.2 billion at September 30, 2012, an
increase of $831 million compared with December 31, 2011. As of September 30,
2012, the securities portfolio includes $24.1 billion of available-for-sale
securities and $13.1 billion of securities held to maturity. Management holds a
portion of BB&T's securities portfolio as held to maturity to mitigate possible
negative impacts on its regulatory capital under the proposed Basel III capital
guidelines. The effective duration of the securities portfolio was 2.1 years at
September 30, 2012 compared to 3.3 years at December 31, 2011. The duration of
the securities portfolio excludes equity securities, auction rate securities and
certain non-agency mortgage-backed securities that were acquired in the Colonial
acquisition. The increase in the September 30, 2012 securities portfolio
reflects the purchase of $2.0 billion of securities late in the third quarter,
made in response to slowing loan growth forecasts.
Average securities for the third quarter of 2012 were $35.3 billion, an increase
of $3.7 billion, or 11.7%, compared with the average balance during the third
quarter of 2011. Average securities for the nine months of September 30, 2012
were $36.3 billion, an increase of $8.4 billion, or 30.1%, compared with the
average balance during the same period of 2011. The increases in the average
securities portfolio primarily reflect the purchase of additional GNMA
securities in the latter half of 2011 as part of management's strategy to comply
with the proposed Basel III liquidity guidelines.
See Note 2 "Securities" in the "Notes to Consolidated Financial Statements"
herein for additional disclosures related to BB&T's evaluation of securities for
other-than-temporary impairment.
Lending Activities
For the third quarter of 2012, average total loans were $115.6 billion, an
increase of $10.0 billion, or 9.4%, compared to the same period in 2011. Average
loans held for investment were $112.7 billion for the third quarter of 2012, an
8.5% increase compared to $103.9 billion for the corresponding period of the
prior year. For the nine months ended September 30, 2012, average total loans
were $112.6 billion, an increase of $7.5 billion, or 7.1%, compared to the same
period in 2011. Average loans held for investment were $109.8 billion for the
nine months ended September 30, 2012, a 6.5% increase compared to $103.1 billion
for the same period of the prior year.
The acquisition of BankAtlantic on July 31, 2012 resulted in an increase to
average loans held for investment for the third quarter and first nine months of
2012 of $1.2 billion and $393 million, respectively. Growth in average loans
held for investment was broad-based with notable growth in residential mortgage,
commercial and industrial, direct retail and other lending subsidiaries. Growth
in the average loan portfolio was partially offset by continued runoff in the
commercial real estate-residential ADC portfolio, as well as expected runoff in
the covered loan portfolio. Including the impact of the BankAtlantic
acquisition, loan growth for the fourth quarter of 2012 is expected to be in the
range of 5% to 7% on an annualized basis compared to the third quarter of 2012.
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The following table presents the composition of average loans and leases:
Table 5
Composition of Average Loans and Leases
Three Months Ended September 30,
2012 2011
Balance % of total Balance % of total
(Dollars in millions) Commercial loans and leases:
Commercial and industrial $ 37,516 32.6 % $ 34,280 32.5 %
Commercial real estate - other 10,823 9.4 11,069 10.5
Commercial real estate - residential ADC
(1) 1,534 1.3 2,576 2.4
Direct retail lending 15,520 13.4 13,802 13.0
Sales finance 7,789 6.7 7,234 6.8
Revolving credit 2,234 1.9 2,109 2.0
Residential mortgage 23,481 20.3 18,818 17.8
Other lending subsidiaries 9,998 8.6 8,652 8.2
Total average loans and leases held for
investment (excluding covered loans) 108,895 94.2
98,540 93.2
Covered 3,826 3.3 5,342 5.1
Total average loans and leases held
for investment 112,721 97.5 103,882 98.3
Loans held for sale 2,888 2.5 1,776 1.7
Total average loans and leases $ 115,609 100.0 % $ 105,658 100.0 %
Nine Months Ended September 30,
2012 2011
% of
Balance total Balance % of total
(Dollars in millions)
Commercial loans and leases:
Commercial and industrial $ 36,613 32.4 % $ 33,789 32.1 %
Commercial real estate other 10,694 9.5 11,240 10.7
Commercial real estate residential ADC
(1) 1,755 1.6 2,928 2.8
Direct retail lending 15,103 13.4 13,738 13.0
Sales finance 7,665 6.8 7,166 6.8
Revolving credit 2,196 2.0 2,088 2.0
Residential mortgage 22,221 19.7 18,355 17.5
Other lending subsidiaries 9,348 8.3 8,162 7.8
Total average loans and leases held for
investment (excluding covered loans) 105,595 93.7 97,466 92.7
Covered 4,235 3.8 5,629 5.4
Total average loans and leases held
for investment 109,830 97.5 103,095 98.1
Loans held for sale 2,772 2.5 2,004 1.9
Total average loans and leases $ 112,602 100.0 % $ 105,099 100.0 %
(1) Commercial real estate - residential ADC represents residential acquisition, development and
construction loans.
Average commercial and industrial loans were up 9.4% for the third quarter of
2012 compared to the corresponding period of 2011, and 8.4% for the nine months
ended September 30, 2012 compared to the same period of 2011. The increase in
the commercial and industrial portfolio is largely a result of successful
efforts to expand the geographic and industry sector expertise in the
middle-market corporate lending arena. Average commercial real
estate-residential, acquisition and development loans ("ADC") declined $1.0
billion for the third quarter of 2012 and $1.2 billion for the first nine months
of 2012 compared to the same period of 2011. The declines in this portfolio
reflect management's decision to reduce exposures to higher-risk real estate
lending and continued runoff due to weakness in residential real estate
development. The end of period balance of the ADC portfolio was $1.5 billion as
of September 30, 2012. Average commercial real estate-other loans for the third
quarter of 2012 declined 2.2% compared to the third quarter of 2011, and 4.9%
for the nine months ended
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September 30, 2012 compared to the same period of 2011. The declines in this
portfolio were primarily due to runoff of certain segments of the portfolio.
Average direct retail loans grew $1.7 billion, or 12.4%, for the third quarter
of 2012 compared to the same period of the prior year. For the nine months ended
September 30, 2012, average loans in this portfolio grew 9.9%, compared to the
average for the corresponding period of 2011. This portfolio is primarily home
equity loans and lines to individuals. Period end balances in this portfolio
have increased for each of the last six quarters and have been driven by demand
for home equity loans and non-real estate loans originated through the wealth
and small business lending channels.
Average residential mortgage loans held for investment increased $4.7 billion,
or 24.8%, for the third quarter of 2012 compared to the corresponding period of
2011, as management's strategy was to retain a higher portion of residential
mortgage production in the held for investment portfolio. Management revised its
strategy late in the second quarter of 2012 and began directing the majority of
future mortgage production to the held for sale portfolio. As a result, further
declines in the growth of average residential mortgage loans are expected in
future quarters. Average residential mortgage loans for the nine months ended
September 30, 2012, were up $3.9 billion, or 21.1%, compared to the same period
of 2011.
Average sales finance loans increased 7.7% for the third quarter of 2012
compared to the corresponding period in 2011, and 7.0% for the nine months ended
September 30, 2012 compared to the same period of 2011. The increases in sales
finance loans were due to strong growth in prime automobile loans.
Average loans held within BB&T's other lending subsidiaries increased 15.6% for
the third quarter of 2012 compared to the corresponding period of 2011. For the
nine months ended September 30, 2012, average loans in this portfolio grew
14.5%, compared to the average for the corresponding period of 2011. All of
these specialized lending businesses experienced growth during these periods.
The largest contributors to growth in this portfolio were equipment finance
lending and small ticket consumer finance.
Average loans held for sale increased $1.1 billion, or 62.6%, for the third
quarter of 2012 compared to the same period in 2011, due to growth of $1.3
billion in average residential mortgage loans held for sale as a result of the
historic low-rate environment, partially offset by a decline of $102 million in
average nonperforming commercial loans held for sale that were still held in
2011 as part of management's nonperforming loan disposition efforts. For the
nine months ended September 30, 2012, average loans held for sale were up $768
million, or 38.3%, compared to the same period of 2011. This growth includes an
increase of $1.0 billion in average residential mortgage loans held for sale,
partially offset by a decline of $256 million in average nonperforming
commercial loans held for sale. All of these nonperforming commercial loans held
for sale were disposed of prior to the end of 2011.
Asset Quality
BB&T's asset quality continued to improve during the third quarter of 2012.
Nonperforming assets, which includes foreclosed real estate, repossessions,
nonaccrual loans and nonperforming troubled debt restructurings (nonperforming
"restructurings"), totaled $2.0 billion (or $1.7 billion excluding covered
foreclosed property) at September 30, 2012, compared to $2.8 billion (or $2.5
billion excluding covered foreclosed property) at December 31, 2011. The 29.9%
decrease in nonperforming assets, excluding covered foreclosed property, was
primarily due to a decline of $397 million in foreclosed real estate and $332
million in nonaccrual loans. Nonperforming assets have decreased for ten
consecutive quarters and are at their lowest level since September 30, 2008.
Refer to Table 8 for an analysis of the changes in nonperforming assets during
the nine months ended September 30, 2012. As a percentage of loans and leases
plus foreclosed property, nonperforming assets were 1.70% at September 30, 2012
(or 1.51% excluding covered assets) compared with 2.52% (or 2.29% excluding
covered assets) at December 31, 2011.
During the third quarter of 2012, a national bank regulatory agency issued
guidance that may require certain loans, which have been discharged in
bankruptcy and not reaffirmed by the borrower, to be accounted for as
restructurings and possibly as nonperforming, regardless of their actual payment
history and expected performance. At September 30, 2012, performing loans across
all portfolios totaling approximately $200 million with an estimated collateral
value of $140 million could potentially be impacted by this guidance.
Approximately 70% of these loans have been current for 2 years or more and
approximately 94% are less than 60 days past due. BB&T is working closely with
its regulators to evaluate the impact of this new guidance and expects to
finalize this analysis during the fourth quarter of 2012. This evaluation may
result in additional restructurings and possible increases to nonperforming
assets and charge-offs during the fourth quarter. Since the potential collateral
shortfall has been considered in the allowance for loan and lease losses
recorded at September 30, 2012, the impact of any changes is not expected to
adversely affect fourth quarter earnings.
The current inventory of foreclosed real estate, excluding amounts covered under
FDIC loss sharing agreements, totaled $139 million as of September 30, 2012.
This includes land and lots, which totaled $62 million and had been held for
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approximately 17 months on average. The remaining foreclosed real estate of $77
million, which is primarily single family residential and commercial real
estate, had an average holding period of 10 months.
Management expects nonperforming assets to improve at a modest pace during the
fourth quarter of 2012, assuming no significant economic deterioration during
the quarter. Such improvement excludes any potential impact associated with the
ongoing analysis of new regulatory guidance described above.
Loans 90 days or more past due and still accruing interest, excluding government
guaranteed loans and loans covered by FDIC loss share agreements, totaled $152
million at September 30, 2012, compared with $202 million at year-end 2011, a
decline of 24.8%. Loans 30-89 days past due, excluding government guaranteed
loans and covered loans, totaled $1.0 billion at September 30, 2012, which was a
decline of $104 million, or 9.2%, compared with $1.1 billion at year-end 2011.
Substantially all of the loans acquired in the Colonial acquisition are covered
by loss sharing agreements with the FDIC, whereby the FDIC reimburses BB&T for
the majority of the losses incurred. Given the significant amount of covered
loans that are past due but still accruing, BB&T believes the inclusion of these
loans in certain asset quality ratios including "Loans 30-89 days past due and
still accruing as a percentage of total loans and leases," "Loans 90 days or
more past due and still accruing as a percentage of total loans and leases,"
"Nonperforming loans and leases as a percentage of total loans and leases" and
certain other asset quality ratios that reflect nonperforming assets in the
numerator or denominator (or both) results in significant distortion to these
ratios. In addition, because loan level charge-offs related to the acquired
loans are not recognized in the financial statements until the cumulative
amounts exceed the original loss projections on a pool basis, the net charge-off
ratio for the acquired loans is not consistent with the net charge-off ratio for
other loan portfolios. The inclusion of these loans in the asset quality ratios
described above could result in a lack of comparability across quarters or
years, and could negatively impact comparability with other portfolios that were
not impacted by acquisition accounting. BB&T believes that the presentation of
asset quality measures excluding covered loans and related amounts from both the
numerator and denominator provides better perspective into underlying trends
related to the quality of its loan portfolio. Accordingly, the asset quality
measures in Table 7 present asset quality information both on a consolidated
basis as well as excluding the covered assets and related amounts. In addition,
BB&T has excluded mortgage loans that are guaranteed by the government,
primarily FHA/VA loans, from its asset quality metrics as these loans are
recoverable through various government guarantees. Finally, BB&T has recorded
certain amounts related to delinquent GNMA loans serviced for others that BB&T
has the option, but not the obligation, to repurchase and has effectively
regained control. These amounts are also excluded from asset quality metrics as
reimbursement of insured amounts is proceeding in accordance with investor
guidelines. The amount of government guaranteed mortgage loans and GNMA loans
serviced for others that have been excluded are noted in the footnotes to Table
6.
BB&T's potential problem loans include loans on nonaccrual status or past due as
disclosed in Table 6. In addition, for its commercial portfolio segment, loans
that are rated special mention or substandard performing are closely monitored
by management as potential problem loans. Refer to Note 4 "Allowance for Credit
Losses" in the "Notes to Consolidated Financial Statements" herein for
additional disclosures related to these potential problem loans.
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The following tables summarize asset quality information for the past five quarters:
Table 6
Asset Quality
Three Months Ended
9/30/2012 6/30/2012 3/31/2012 12/31/2011 9/30/2011
(Dollars in millions)Nonperforming assets (1)
Nonaccrual loans and leases
Commercial:
Commercial and industrial $ 597 $ 620 $ 685 $ 582 $ 579
Commercial real estate - other 259 301 312 394 438
Commercial real estate - residential ADC 204 241 312 376 428
Direct retail lending 134 133 139 142 151
Sales finance 7 13 15 7 7
Residential mortgage 266 263 320 308 298
Other lending subsidiaries 73 76 60 63 56
Total nonaccrual loans and leases held for investment 1,540 1,647 1,843 1,872 1,957
Loans held for sale 26
Total nonaccrual loans and leases 1,540 1,647 1,843 1,872 1,983
Foreclosed real estate (2) 139 221 378 536 950
Other foreclosed property 39 29 35 42 36
Total nonperforming assets (excluding covered assets)
(1)(2) $ 1,718 $ 1,897 $ 2,256 $ 2,450 $ 2,969
Performing troubled debt restructurings (TDRs) (3)
Commercial:
Commercial and industrial $ 66 $ 62 $ 76 $ 74 $ 64
Commercial real estate - other 75 78 82 117 124
Commercial real estate - residential ADC 25 28 30 44 55
Direct retail lending 120 114 117 146 141
Sales finance 7 7 7 8 6
Revolving credit 58 58 61 62 63
Residential mortgage (6) 646 636 589 608 568
Other lending subsidiaries 77 69 53 50 46
Total performing TDRs (3)(6) $ 1,074 $ 1,052 $ 1,015 $ 1,109 $ 1,067
Loans 90 days or more past due and still accruing
Commercial:
Commercial and industrial $ 1 $ 2 $ 2 $ 2 $ 1
Commercial real estate - other 1 2
Direct retail lending 41 39 49 56 54
Sales finance 11 11 13 18 19
Revolving credit 14 13 14 17 15
Residential mortgage (7)(9) 80 78 72 104 91
Other lending subsidiaries 5 4 6 5 5
Total loans 90 days or more past due and still accruing
(excluding
covered loans) (4)(7)(9) $ 152 $ 147 $ 157 $ 202 $ 187
Loans 30-89 days past due
Commercial:
Commercial and industrial $ 41 $ 53 $ 62 $ 85 $ 76
Commercial real estate - other 9 16 26 22 27
Commercial real estate - residential ADC 8 9 8 14 27
Direct retail lending 136 119 135 162 149
Sales finance 53 49 50 75 67
Revolving credit 21 20 20 22 23
Residential mortgage (8)(10) 501 423 397 479 445
Other lending subsidiaries 259 218 172 273 243
Total loans 30 - 89 days past due (excluding covered loans)
(5)(8)(10) $ 1,028 $ 907 $ 870 $ 1,132 $ 1,057
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(1) Covered and other acquired loans are considered to be performing due to the
application of the accretion method. Covered loans that are contractually
past due are noted in the footnotes below.
(2) Excludes foreclosed real estate totaling $289 million, $310 million, $364
million, $378 million, and $355 million at September 30, 2012, June 30, 2012,
March 31, 2012, December 31, 2011, and September 30, 2011, respectively, that
are covered by FDIC loss sharing agreements.
(3) Excludes TDRs that are nonperforming totaling $225 million, $219 million,
$263 million, $280 million and $319 million at September 30, 2012, June 30,
2012, March 31, 2012, December 31, 2011, and September 30, 2011,
respectively. These amounts are included in total nonperforming assets.
(4) Excludes loans 90 days or more past due that are covered by FDIC loss sharing
agreements totaling $476 million, $613 million, $677 million, $736 million
and $872 million at September 30, 2012, June 30, 2012, March 31, 2012,
December 31, 2011, and September 30, 2011, respectively.
(5) Excludes loans past due 30-89 days that are covered by FDIC loss sharing
agreements totaling $173 million, $199 million, $258 million, $222 million
and $211 million at September 30, 2012, June 30, 2012, March 31, 2012,
December 31, 2011, and September 30, 2011, respectively.
(6) Excludes restructured mortgage loans that are government guaranteed totaling
$275 million, $266 million, $242 million, $236 million and $214 million at
September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, and
September 30, 2011, respectively. Includes restructured mortgage loans held
for sale.
(7) Excludes mortgage loans 90 days or more past due that are government
guaranteed totaling $233 million, $217 million, $218 million, $206 million
and $185 million at September 30, 2012, June 30, 2012, March 31, 2012,
December 31, 2011, and September 30, 2011, respectively. Includes past due
mortgage loans held for sale.
(8) Excludes mortgage loans past due 30-89 days that are government guaranteed
totaling $95 million, $94 million, $82 million, $91 million and $82 million
at September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, and
September 30, 2011, respectively. Includes past due mortgage loans held for
sale.
(9) Excludes mortgage loans guaranteed by GNMA that BB&T does not have the
obligation to repurchase that are 90 days or more past due totaling $499
million, $453 million, $439 million, $426 million and $389 million at
September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, and
September 30, 2011, respectively.
(10) Excludes mortgage loans guaranteed by GNMA that BB&T does not have the
obligation to repurchase that are past due 30-89 days totaling $6 million,
$5 million, $5 million, $7 million and $7 million at September 30, 2012,
June 30, 2012, March 31, 2012, December 31, 2011, and September 30, 2011,
respectively.
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Table 7
Asset Quality Ratios
Asof / For the Three Months Ended
9/30/2012 6/30/2012 3/31/2012 12/31/2011 9/30/2011
Asset Quality Ratios (including covered assets)
Loans 30 - 89 days past due and still accruing as a
percentage of total loans and leases (1)(2) 1.02 % 0.97 % 1.02 % 1.22 % 1.18 %
Loans 90 days or more past due and still accruing as
a
percentage of total loans and leases (1)(2) 0.53 0.67 0.75 0.84 0.99
Nonperforming loans and leases as a percentage of
total
loans and leases 1.31 1.45 1.67 1.68 1.85
Nonperforming assets as a percentage of:
Total assets 1.10 1.24 1.50 1.62 1.98
Loans and leases plus foreclosed property 1.70 1.93 2.35 2.52 3.05
Net charge-offs as a percentage of average loans and
leases 1.05 1.21 1.28 1.44 1.57
Allowance for loan and lease losses as a percentage
of loans
and leases held for investment 1.80 1.91 2.02 2.10 2.25
Ratio of allowance for loan and lease losses to:
Net charge-offs 1.69 x 1.57 x 1.54 x 1.45 x 1.42 x
Nonperforming loans and leases held for
investment 1.33 1.29 1.18 1.21 1.20
Asset Quality Ratios (excluding covered assets) (3)
Loans 30 - 89 days past due and still accruing as a
percentage of total loans and leases (1)(2) 0.90 % 0.83 % 0.82 % 1.06 % 1.03 %
Loans 90 days or more past due and still accruing as
a
percentage of total loans and leases (1)(2) 0.13 0.13 0.15 0.19 0.18
Nonperforming loans and leases as a percentage of
total
loans and leases 1.35 1.50 1.74 1.76 1.94
Nonperforming assets as a percentage of:
Total assets 0.97 1.09 1.33 1.45 1.83
Loans and leases plus foreclosed property 1.51 1.72 2.12 2.29 2.88
Net charge-offs as a percentage of average loans and
leases 1.08 1.22 1.28 1.46 1.44
Allowance for loan and lease losses as a percentage
of loans
and leases held for investment 1.73 1.86 1.97 2.05 2.25
Ratio of allowance for loan and lease losses to:
Net charge-offs 1.59 x 1.52 x 1.51 x 1.40 x 1.55 x
Nonperforming loans and leases held for
investment 1.24 1.21 1.11 1.13 1.15
As of/For the
Nine Months Ended
September 30,
2012 2011Asset Quality Ratios
Including covered loans:
Net charge-offs as a percentage of average loans and leases 1.18 % 1.61 %
Ratio of allowance for loan and lease losses to net charge-offs 1.54 x 1.39 x
Excluding covered loans:
Net charge-offs as a percentage of average loans and leases (4) 1.19 % 1.63 %
Ratio of allowance for loan and lease losses to net charge-offs 1.49 x 1.38 x
Applicable ratios are annualized.
(1) Excludes mortgage loans guaranteed by GNMA that BB&T does not have the
obligation to repurchase. Refer to the footnotes of Table 6 for amounts
related to these loans.
(2) Excludes mortgage loans guaranteed by the government. Refer to the footnotes
of Table 6 for amounts related to these loans.
(3) These asset quality ratios have been adjusted to remove the impact of covered
loans and covered foreclosed property. Appropriate adjustments to the
numerator and denominator have been reflected in the calculation of these
ratios.
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Management believes the inclusion of covered loans in certain asset quality
ratios that include nonperforming assets, past due loans or net charge-offs
in the numerator or denominator results in distortion of these ratios and
they may not be comparable to other periods presented or to other portfolios
that were not impacted by purchase accounting.
(4) Excluding the impact of losses and balances associated with BB&T's NPA
disposition strategy, the adjusted net charge-offs ratio would have been
1.52% for the nine months ended September 30, 2011.
Certain of BB&T's residential mortgage loans have an initial period where the
borrower is only required to pay the periodic interest. After the interest
period, the loan will require both the payment of interest and principal over
the remaining term. As of September 30, 2012, approximately 8.8% of the
outstanding balance of residential mortgage loans is in the interest-only phase,
compared to 11.2% at December 31, 2011. Approximately 36.4% of the interest only
balances at September 30, 2012, will begin amortizing within the next three
years. As of September 30, 2012, 4.2% of these interest-only loans are 30 days
or more past due and still accruing and 2.6% are on nonaccrual status, compared
to 4.3% and 2.8%, respectively, at December 31, 2011.
BB&T's home equity lines, which are a component of the direct retail portfolio,
generally require the payment of interest only during the first 15 years after
origination. After this initial period, the outstanding balance begins
amortizing and requires the payment of both interest and principal. At September
30, 2012 and December 31, 2011, approximately 65.9% of the outstanding balance
of home equity lines is currently in the interest-only phase and less than 5% of
these balances will begin amortizing within the next three years. The
delinquency rate of interest-only lines is similar to amortizing lines.
The following table presents the changes in nonperforming assets, excluding
covered foreclosed property, during the nine months ended 2012 and 2011.
Table 8
Rollforward of Nonperforming Assets
Nine Months Ended September
30,
2012 2011
(Dollars in millions)
Balance at January 1, $ 2,450 $ 3,971
New nonperforming assets 1,904 2,511
Advances and principal increases 115 72
Acquired in BankAtlantic purchase 29
Disposals of foreclosed assets (611) (755)
Disposals of nonperforming loans (1) (574) (920)
Charge-offs and losses (783) (1,214)
Payments (492) (477)
Transfers to performing status (321) (225)
Other, net 1 6
Balance at September 30, $ 1,718 $ 2,969
(1) Includes charge-offs and losses recorded upon sale of $169 million and $162 million for the nine
months ended September 30, 2012 and 2011, respectively.
Restructurings generally occur when a borrower is experiencing, or is expected
to experience, financial difficulties in the near-term. As a result, BB&T will
work with the borrower to prevent further difficulties, and ultimately to
improve the likelihood of recovery on the loan. To facilitate this process, a
concessionary modification that would not otherwise be considered may be granted
resulting in classification of the loan as a restructuring. Refer to Note 1
"Summary of Significant Accounting Policies" in the "Notes to Consolidated
Financial Statements" in the Annual Report on Form 10-K for the year ended
December 31, 2011 for additional policy information regarding restructurings.
BB&T's performing restructured loans, excluding government guaranteed mortgage
loans, totaled $1.1 billion at September 30, 2012, a decrease of $35 million, or
3.2%, compared with December 31, 2011. The decline was primarily related to
commercial performing restructurings and direct retail restructurings. The
decline in direct retail restructurings was largely due to the removal of
restructurings due to sustained performance under the modified terms.
Residential mortgage loans represent 60.1% of performing restructurings at
September 30, 2012. The increase during the third quarter of 2012 in residential
mortgage performing restructurings was primarily related to nonperforming
restructurings that were returned to accrual status due to meeting the
performance criteria for the required time period. The following table provides
a summary of commercial performing restructuring activity during the nine months
ended September 30, 2012 and 2011.
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Table 9
Rollforward of Commercial Performing Restructured Loans
Nine Months Ended September 30,
2012 2011
(Dollars in millions)
Balance at January 1, $ 235 $ 657
Inflows 106 96
Payments and payoffs (32) (213)
Transfers to nonperforming restructurings, net (52) (147)
Removal due to the passage of time (53) (78)
Non-concessionary re-modifications (38) (72)
Balance at September 30, $ 166 $ 243
Payments and payoffs represent cash received from borrowers in connection with
scheduled principal payments, prepayments and payoffs of amounts outstanding at
the maturity date of the loan. Transfers to nonperforming restructurings
represent loans that no longer meet the requirements necessary to reflect the
loan in accruing status and as a result are subsequently classified as a
nonperforming restructuring.
Restructurings may be removed due to the passage of time if they: (1) did not
include a forgiveness of principal or interest, (2) have performed in accordance
with the modified terms (generally a minimum of six months), (3) were reported
as a restructuring over a year end reporting period, and (4) reflected an
interest rate on the modified loan that was a market rate at the date of
modification. These loans were previously considered restructurings as a result
of structural concessions such as extended interest-only terms or an
amortization period that did not otherwise conform to normal underwriting
guidelines.
In addition, certain transactions may be removed from classification as a
restructuring as a result of a subsequent non-concessionary re-modification.
Non-concessionary re-modifications represent restructurings that did not contain
concessionary terms at the date of a subsequent renewal/modification and there
was a reasonable expectation that the borrower would continue to comply with the
terms of the loan subsequent to the date of the re-modification. A
re-modification may be considered for such a re-classification if the loan has
not had a forgiveness of principal or interest and the modified terms qualify as
more than minor such that the re-modified loan is considered a new loan.
Alternatively, such loans may be considered for reclassification in years
subsequent to the date of the re-modification based on the passage of time as
described in the preceding paragraph.
In connection with consumer loan restructurings, a nonperforming loan will be
returned to accruing status when current as to principal and interest and upon a
sustained historical repayment performance (generally a minimum of six months).
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The following table provides further details regarding the payment status of restructurings outstanding at September 30, 2012:
Table 10
Troubled Debt Restructurings
September 30, 2012
Past Due Past Due
Current Status 30-89 Days (1) 90 Days Or More (1) Total
(Dollars in millions)
Performing restructurings:
Commercial loans:
Commercial and industrial $ 66 100.0 % $ % $ % $ 66
Commercial real estate - other 74 98.7 1 1.3 75
Commercial real estate -
residential ADC 24 96.0 1 4.0 25
Direct retail lending 114 95.0 5 4.2 1 0.8 120
Sales finance 6 85.7 1 14.3 7
Revolving credit 46 79.4 6 10.3 6 10.3 58
Residential mortgage (2) 543 84.1 93 14.4 10 1.5 646
Other lending subsidiaries 68 88.3 9 11.7 77
Total performing restructurings (2) 941 87.6 115 10.7 18 1.7 1,074Nonperforming restructurings (3) 71 31.5 31 13.8 123 54.7 225
Total restructurings (2) $ 1,012 77.9 $ 146 11.2 $ 141 10.9 $ 1,299
(1) Past due performing restructurings are included in past due disclosures.
(2) Excludes restructured mortgage loans that are government guaranteed totaling
$275 million.
(3) Nonperforming restructurings are included in nonaccrual loan disclosures.
Allowance for Credit Losses
The allowance for credit losses, which consists of the allowance for loan and
lease losses and the reserve for unfunded lending commitments, totaled $2.1
billion and $2.3 billion at September 30, 2012 and December 31, 2011,
respectively. The allowance for loan and lease losses amounted to 1.80% of loans
and leases held for investment at September 30, 2012 (or 1.73% excluding covered
loans), compared to 2.10% (or 2.05% excluding covered loans) at year-end 2011.
The decline in the allowance for loan and lease losses, including the
unallocated portion, reflects continued improvement in the credit quality of the
loan portfolio. The decrease in the overall allowance reflects reductions in
commercial real estate, residential mortgage and revolving credit due to updates
to loss estimate factors, which were partially offset by increases for
commercial and industrial, direct retail, and other lending subsidiaries loans.
The percentage of the allowance for impaired loans to their recorded investment
decreased from 15.4% at December 31, 2011 to 14.2% at September 30, 2012,
primarily due to declines for residential mortgage and commercial real estate -
ADC loans. The ratio of the allowance for loan and lease losses to nonperforming
loans held for investment, excluding covered loans, was 1.24x at September 30,
2012 compared to 1.13x at December 31, 2011.
BB&T monitors the performance of its home equity loans and lines secured by
second liens similar to other consumer loans and utilizes assumptions specific
to these loans in determining the necessary allowance. BB&T also receives
notification when the first lien holder, whether BB&T or another financial
institution, has initiated foreclosure proceedings against the borrower. When
notified that the first lien holder is in the process of foreclosure, BB&T
obtains valuations to determine if any additional charge-offs or reserves are
warranted. These valuations are updated at least annually thereafter.
BB&T has limited ability to monitor the delinquency status of the first lien
unless the first lien is held or serviced by BB&T. As a result, using migration
assumptions that are based on historical experience adjusted for current trends,
BB&T estimates the volume of second lien positions where the first lien is
delinquent and appropriately adjusts the allowance to reflect the increased risk
of loss on these credits. Finally, BB&T also provides additional reserves to
second lien positions when the estimated combined current loan to value ratio
exceeds 100%. As of September 30, 2012, BB&T held or serviced the first lien on
39% of its second lien positions.
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BB&T's net charge-offs totaled $305 million for the third quarter of 2012 and
amounted to 1.05% of average loans and leases (or 1.08% excluding covered
loans), compared to $419 million, or 1.57% of average loans and leases (or 1.44%
excluding covered loans), in the third quarter of 2011. For the nine months
ended September 30, 2012, net charge-offs were $994 million and amounted to
1.18% of average loans and leases (or 1.19% excluding covered loans), compared
to $1.3 billion, or 1.61% of average loans and leases (or 1.63% excluding
covered loans), in the same period of 2011. Net charge-offs for the first nine
months of 2011 included $87 million related to the sale of problem residential
mortgage loans. Management expects that the level of net charge-offs in the
fourth quarter of 2012 will be in a range similar to the third quarter and trend
lower thereafter, excluding any impact arising from the evaluation of the bank
regulatory guidance related to loans that have been discharged in bankruptcy and
not reaffirmed by the borrower.
Charge-offs related to covered loans represent realized losses in certain
acquired loan pools that exceed the amounts originally estimated at the
acquisition date. This impairment, which is subject to the loss sharing
agreements, was provided for in prior quarters and therefore the charge-offs
have no income statement impact.
Refer to Note 4 "Allowance for Credit Losses" in the "Notes to Consolidated
Financial Statements" for additional disclosures.
The following table presents an allocation of the allowance for loan and lease
losses at September 30, 2012 and December 31, 2011. This allocation of the
allowance for loan and lease losses is calculated on an approximate basis and is
not necessarily indicative of future losses or allocations. The entire amount of
the allowance is available to absorb losses occurring in any category of loans
and leases.
Table 11
Allocation of Allowance for Loan and Lease Losses by Category
September 30, 2012 December 31, 2011
% Loans % Loans
in each in each
Amount category Amount category
(Dollars in millions) Balances at end of period applicable to:
Commercial:
Commercial and industrial $ 541 33.2 % $ 433 33.9 %
Commercial real estate - other 238 9.6 334 9.9
Commercial real estate - residential ADC 101 1.3 286 1.9
Direct retail lending 281 13.8 232 13.5
Sales finance 28 6.8 38 6.9
Revolving credit 99 2.0 112 2.1
Residential mortgage 299 21.3 365 19.2
Other lending subsidiaries 247 8.8 197 8.1
Covered 137 3.2 149 4.5
Unallocated 80 110
Total allowance for loan and lease losses 2,051 100.0 % 2,256 100.0 %
Reserve for unfunded lending commitments 45 29
Total allowance for credit losses $ 2,096 $ 2,285
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Information related to BB&T's allowance for loan and lease losses for the last
five quarters is presented in the following table.
Table 12
Analysis of Allowance for Credit Losses
Three Months Ended
9/30/2012 6/30/2012 3/31/2012 12/31/2011 9/30/2011
(Dollars in millions)
Allowance For Credit Losses
Beginning balance $ 2,157 $ 2,221 $ 2,285 $ 2,406 $ 2,575
Provision for credit losses (excluding
covered loans) 244 259 285 223 243
Provision for covered loans 14 3 49 7
Charge-offs:
Commercial loans and leases
Commercial and industrial (84) (92) (63) (81) (102)
Commercial real estate - other (40) (51) (73) (60) (64)
Commercial real estate -
residential ADC (35) (74) (54) (92) (61)
Direct retail lending (57) (56) (57) (58) (74)
Sales finance (5) (7) (7) (8) (7)
Revolving credit (20) (20) (22) (21) (23)
Residential mortgage (35) (30) (42) (45) (41)
Other lending subsidiaries (58) (47) (60) (53) (42)
Covered loans (2) (12) (15) (13) (53)
Total charge-offs (336) (389) (393) (431) (467)
Recoveries:
Commercial loans and leases
Commercial and industrial 4 4 4 6 9
Commercial real estate - other 3 3 3 3 6
Commercial real estate -
residential ADC 2 23 8 5 9
Direct retail lending 9 8 10 10 10
Sales finance 2 2 3 2 2
Revolving credit 5 4 5 5 4
Residential mortgage 1 1 2 1
Other lending subsidiaries 6 7 7 5 7
Total recoveries 31 52 41 38 48
Net charge-offs (305) (337) (352) (393) (419)
Ending balance $ 2,096 $ 2,157 $ 2,221 $ 2,285 $ 2,406
Allowance For Credit Losses:
Allowance for loan and lease losses
(excluding covered loans) $ 1,914 $ 1,987 $ 2,044 $ 2,107 $ 2,242
Allowance for covered loans 137 139 137 149 113
Reserve for unfunded lending commitments 45 31 40 29 51
Total allowance for credit losses $ 2,096 $ 2,157 $ 2,221 $ 2,285 $ 2,406
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Nine Months Ended
September 30,
2012 2011
(Dollars in millions)
Allowance For Credit Losses
Beginning balance $ 2,285 $ 2,755
Provision for credit losses (excluding covered loans) 788 896
Provision for covered loans 17 22
Charge-offs:
Commercial loans and leases
Commercial and industrial (239) (242)
Commercial real estate - other (164) (213)
Commercial real estate - residential ADC (163) (210)
Direct retail lending (170) (218)
Sales finance (19) (24)
Revolving credit (62) (74)
Residential mortgage (1) (107) (224)
Other lending subsidiaries (165) (137)
Covered loans (29) (53)
Total charge-offs (1) (1,118) (1,395)
Recoveries:
Commercial loans and leases
Commercial and industrial 12 22
Commercial real estate - other 9 15
Commercial real estate - residential ADC 33 20
Direct retail lending 27 27
Sales finance 7 7
Revolving credit 14 14
Residential mortgage 2 3
Other lending subsidiaries 20 20
Total recoveries 124 128
Net charge-offs (1) (994) (1,267)
Ending balance $ 2,096 $ 2,406
(1) Includes net charge-offs of $87 million in mortgage loans during 2011 in connection with BB&T's
NPA disposition strategy.
Deposits
The following table presents the composition of average deposits for the three
and nine months ended September 30, 2012 and 2011:
Table 13
Composition of Average Deposits
Three Months Ended September 30,
2012 2011
Balance % of total Balance % of total
(Dollars in millions)
Noninterest-bearing deposits $ 29,990 23.3 % $ 23,370 20.3 %
Interest checking 20,157 15.7 19,004 16.5
Money market and savings 47,500 36.9 42,174 36.7
Certificates and other time deposits 30,727 23.9 30,140 26.2
Foreign office deposits - interest-bearing 321 0.2
368 0.3
Total average deposits $ 128,695 100.0 % $ 115,056 100.0 %
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Nine Months Ended September 30,
2012 2011
Balance % of total Balance % of total
(Dollars in millions)
Noninterest-bearing deposits $ 27,943 22.1 % $ 22,179 20.3 %
Interest checking 19,928 15.8 18,326 16.8
Money market and savings 46,578 36.9 40,108 36.8
Certificates and other time deposits 31,620 25.1 27,657 25.4
Foreign office deposits - interest-bearing 156 0.1
810 0.7
Total average deposits $ 126,225 100.0 % $ 109,080 100.0 %
The acquisition of BankAtlantic on July 31, 2012 resulted in an increase to
average deposits for the third quarter and first nine months of 2012 of $2.3
billion and $770 million, respectively. Average deposits for the third quarter
of 2012 increased $13.6 billion, or 11.9%, compared to the same period in 2011.
The mix of the portfolio has continued to improve with growth of $6.6 billion in
noninterest-bearing and $6.5 billion in lower-cost interest-bearing deposits.
Certificates and other time deposits also increased $587 million, while the cost
for these products declined 48 basis points. The growth in certificates and
other time deposits was primarily due to the strategy executed in the latter
half of 2011 to attract high-quality corporate clients in connection with
meeting the proposed Basel III liquidity guidelines. Partially offsetting the
growth in these categories was a decline of $47 million in foreign-office
deposits as the strong deposit growth reduced the need for these types of
funding sources. Growth in noninterest-bearing deposits was led by commercial
accounts, which contributed $4.5 billion of the growth in this category.
Noninterest-bearing deposits for retail accounts and public funds grew $1.1
billion and $929 million, respectively. The increase in interest checking and
money market and savings accounts was evenly split between retail and commercial
accounts, with retail and commercial accounts increasing $3.7 billion and $3.6
billion, respectively. Partially offsetting the growth in these accounts was a
decrease in public funds, which declined $886 million. The cost of
interest-bearing deposits was 0.42% for the third quarter of 2012, a decrease of
23 basis points compared to the same period of 2011.
Average deposits for the nine months ended 2012 increased $17.1 billion, or
15.7%, compared to the same period in 2011. The mix of the portfolio has
continued to improve with growth of $5.8 billion in noninterest-bearing and $8.1
billion in lower-cost interest-bearing deposits. Certificates and other time
deposits also increased $4.0 billion, while the cost for these products declined
63 basis points. Partially offsetting the growth in these categories was a
decline of $654 million in average foreign-office deposits, as the strong
deposit growth reduced the need for these types of funding sources.
Management expects more modest growth in deposits in the fourth quarter of 2012
compared to that achieved in the third quarter of 2012, but with continuing
improvement in mix and lower deposit costs.
Borrowings
At September 30, 2012, short-term borrowings totaled $3.1 billion, a decrease of
$473 million, or 13.3%, compared to December 31, 2011. Long-term debt totaled
$19.2 billion at September 30, 2012, a decrease of $2.6 billion, or 11.8%, from
the balance at December 31, 2011. The decrease in long-term debt reflects the
redemption of $3.3 billion of junior subordinated debt and the maturity of $1.0
billion in senior debt. The redemption of the junior subordinated debt was
initiated based on the early redemption provisions of the related trust
preferred securities due to the fact that they will no longer qualify for Tier 1
capital treatment.
These decreases in long-term debt were partially offset by the issuance of $750
million of senior notes in August 2012, with an interest rate of 1.60% due
August 2017, $750 million of senior notes in March 2012, with an interest rate
of 2.15% due March 2017, and $300 million in subordinated notes in March 2012,
with an interest rate of 3.95% due March 2022.
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Shareholders' Equity
Total shareholders' equity at September 30, 2012 was $20.5 billion, an increase
of 17.5% compared to December 31, 2011. The increase was driven by net proceeds
of $1.7 billion of Tier 1 qualifying non-cumulative perpetual preferred stock
and earnings in excess of dividends declared. BB&T's book value per common share
at September 30, 2012 was $26.88, compared to $24.98 at December 31, 2011.
Shareholders' equity increased $989 million due to earnings available to common
shareholders in excess of dividends declared. In addition, accumulated other
comprehensive income improved $304 million, primarily as a result of an increase
in the fair value of the available-for-sale securities portfolio.
On October 31, 2012, BB&T issued $450 million of the Company's Series F
Non-Cumulative Perpetual Preferred Stock. Dividends on the Series F Preferred
Stock, if declared, accrue and are payable quarterly, in arrears, at a rate of
5.20% per annum.
BB&T's Tier 1 common equity was $11.9 billion at September 30, 2012, an increase
of $243 million compared to December 31, 2011. Growth resulting from earnings
during the first nine months of 2012 was partially offset by an increase in
intangible assets added in the Crump Insurance and Bank Atlantic acquisitions.
BB&T's tangible book value per common share at September 30, 2012 was $17.02
compared to $16.73 at December 31, 2011. As of September 30, 2012, 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.
Merger-Related and Restructuring Activities
At September 30, 2012 and December 31, 2011, there were $44 million and $20
million, respectively, of merger-related and restructuring accruals. Merger and
restructuring accruals are re-evaluated periodically and adjusted as necessary.
The remaining accruals at September 30, 2012 are expected to be utilized within
one year, unless they relate to specific contracts that expire later.
Risk Management
In the normal course of business BB&T encounters inherent risk in its business
activities. Risk is managed on a decentralized basis with risk decisions made as
closely as possible to where the risk occurs. Centrally, risk oversight is
managed at the corporate level through oversight, policies and reporting. The
principal types of inherent risk include regulatory, credit, liquidity, market,
operational, reputation and strategic risks. Refer to BB&T's Annual Report on
Form 10-K for the year ended December 31, 2011 for disclosures related to each
of these risks under the section titled "Risk Management."
Market Risk Management
The effective management of market risk is essential to achieving BB&T's
strategic financial objectives. As a financial institution, BB&T's most
significant market risk exposure is interest rate risk in its balance sheet;
however, market risk also includes product liquidity risk, price risk and
volatility risk in BB&T's lines of business. The primary objectives of market
risk management are to minimize any adverse effect that changes in market risk
factors may have on net interest income, and to offset the risk of price changes
for certain assets recorded at fair value.
Interest Rate Market Risk (Other than Trading)
BB&T actively manages market risk associated with asset and liability portfolios
with a focus on the strategic pricing of asset and liability accounts and
management of appropriate maturity mixes of assets and liabilities. The goal of
these activities is the development of appropriate maturity and repricing
opportunities in BB&T's portfolios of assets and liabilities that will produce
consistent net interest income during periods of changing interest rates. These
portfolios are analyzed for proper fixed-rate and variable-rate mixes under
various interest rate scenarios.
The asset/liability management process is designed to achieve relatively stable
net interest margins and assure liquidity by coordinating the volumes,
maturities or repricing opportunities of earning assets, deposits and borrowed
funds. Among other things, this process gives consideration to prepayment trends
related to securities, loans and leases and certain deposits that have no stated
maturity. Prepayment assumptions are developed using market data for residential
mortgage-related loans and securities, and internal historical prepayment
experience for client deposits with no stated maturity and loans that are not
residential mortgage related. These assumptions are subject to monthly
back-testing, and are adjusted as deemed necessary to
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reflect changes in interest rates relative to the reference rate of the
underlying assets or liabilities. On a monthly basis, BB&T evaluates the
accuracy of its interest rate forecast simulation model, which includes an
evaluation of its prepayment assumptions, to ensure that all significant
assumptions inherent in the model appropriately reflect changes in the interest
rate environment and related trends in prepayment activity. It is the
responsibility of the Market Risk, Liquidity and Capital Committee to determine
and achieve the most appropriate volume and mix of earning assets and
interest-bearing liabilities, as well as to ensure an adequate level of
liquidity and capital, within the context of corporate performance goals. The
Market Risk, Liquidity and Capital Committee also sets policy guidelines and
establishes long-term strategies with respect to interest rate risk exposure and
liquidity. The Market Risk, Liquidity and Capital Committee meets regularly to
review BB&T's interest rate risk and liquidity positions in relation to present
and prospective market and business conditions, and adopts funding and balance
sheet management strategies that are intended to ensure that the potential
impact on earnings and liquidity as a result of fluctuations in interest rates
is within acceptable standards.
BB&T uses derivatives primarily to manage economic risk related to securities,
commercial loans, mortgage servicing rights, mortgage banking operations,
long-term debt and other funding sources. BB&T also uses derivatives to
facilitate transactions on behalf of its clients. As of September 30, 2012, BB&T
had derivative financial instruments outstanding with notional amounts totaling
$81.4 billion. The estimated net fair value of open contracts was a loss of $47
million at September 30, 2012. See Note 15 "Derivative Financial Instruments" in
the "Notes to Consolidated Financial Statements" herein for additional
disclosures.
The majority of BB&T's assets and liabilities are monetary in nature and,
therefore, differ greatly from most commercial and industrial companies that
have significant investments in fixed assets or inventories. Fluctuations in
interest rates and actions of the Federal Reserve Board to regulate the
availability and cost of credit have a greater effect on a financial
institution's profitability than do the effects of higher costs for goods and
services. Through its balance sheet management function, which is monitored by
the Market Risk, Liquidity and Capital Committee, management believes that BB&T
is positioned to respond to changing needs for liquidity, changes in interest
rates and inflationary trends.
Management uses Interest Sensitivity Simulation Analysis ("Simulation") to
measure the sensitivity of projected earnings to changes in interest rates. The
Simulation model projects net interest income and interest rate risk for a
rolling two-year period of time. Simulation takes into account the current
contractual agreements that BB&T has made with its customers on deposits,
borrowings, loans, investments and commitments to enter into those transactions.
Furthermore, the Simulation considers the impact of expected customer behavior.
Management monitors BB&T's interest sensitivity by means of a model that
incorporates the current volumes, average rates earned and paid, and scheduled
maturities and payments of asset and liability portfolios, together with
multiple scenarios of projected prepayments, repricing opportunities and
anticipated volume growth. Using this information, the model projects earnings
based on projected portfolio balances under multiple interest rate scenarios.
This level of detail is needed to simulate the effect that changes in interest
rates and portfolio balances may have on the earnings of BB&T. This method is
subject to the accuracy of the assumptions that underlie the process, but
management believes that it provides a better illustration of the sensitivity of
earnings to changes in interest rates than other analyses such as static or
dynamic gap. In addition to Simulation analysis, BB&T uses Economic Value of
Equity ("EVE") analysis to focus on changes in capital given potential changes
in interest rates. This measure also allows BB&T to analyze interest rate risk
that falls outside the analysis window contained in the Simulation model. The
EVE model is a discounted cash flow of the entire portfolio of BB&T's assets,
liabilities, and derivatives instruments. The difference in the present value of
assets minus the present value of liabilities is defined as the economic value
of BB&T's equity.
The asset/liability management process requires a number of key assumptions.
Management determines the most likely outlook for the economy and interest rates
by analyzing external factors, including published economic projections and
data, the effects of likely monetary and fiscal policies, as well as any enacted
or prospective regulatory changes. BB&T's current and prospective liquidity
position, current balance sheet volumes and projected growth, accessibility of
funds for short-term needs and capital maintenance are also considered. This
data is combined with various interest rate scenarios to provide management with
the information necessary to analyze interest sensitivity and to aid in the
development of strategies to reach performance goals.
The following table shows the effect that the indicated changes in interest
rates would have on net interest income as projected for the next twelve months
assuming a gradual change in interest rates as described below. Key assumptions
in the preparation of the table include prepayment speeds of mortgage-related
and other assets, cash flows and maturities of derivative financial instruments,
loan volumes and pricing, deposit sensitivity, customer preferences and capital
plans. The resulting change in interest sensitive income reflects the level of
sensitivity that interest sensitive income has in relation to changing interest
rates.
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Table 14
Interest Sensitivity Simulation Analysis
Annualized Hypothetical
Interest Rate Scenario Percentage Change in
Linear Prime Rate Net Interest Income
Change in September 30, September 30,
Prime Rate 2012 2011 2012 2011
2.00 % 5.25 % 5.25 % 3.66 % 2.68 %
1.00 4.25 4.25 2.23 1.14
No Change 3.25 3.25
(0.25) 3.00 3.00 (0.26) 0.22
The Market Risk, Liquidity and Capital Committee has established parameters
measuring interest sensitivity that prescribe a maximum negative impact on net
interest income of 2% for the next 12 months for a linear change of 100 basis
points over four months followed by a flat interest rate scenario for the
remaining eight month period, and a maximum negative impact of 4% for a linear
change of 200 basis points over eight months followed by a flat interest rate
scenario for the remaining four month period. Regardless of the proportional
limit, the negative risk exposure limit will be the greater of 1% or the
proportional limit. In the event that the results of the Simulation model fall
outside the established parameters, management will make recommendations to the
Market Risk, Liquidity and Capital Committee on the most appropriate response
given the current economic forecast. Management currently only modeled a
negative 25 basis point decline because larger declines would have resulted in a
Federal funds rate of less than zero.
Management must also consider how the balance sheet and interest rate risk
position could be impacted by changes in balance sheet mix. Liquidity in the
banking industry has been very strong during the current economic downturn. Much
of this liquidity increase has been due to a significant increase in
noninterest-bearing demand deposits. Consistent with the industry, Branch Bank
has seen a significant increase in this funding source. The behavior of these
deposits is one of the most important assumptions used in determining the
interest rate risk position of BB&T. A loss of these deposits in the future
would reduce the asset sensitivity of BB&T's balance sheet as the company
increases interest-bearing funds to offset the loss of this advantageous funding
source.
BB&T applies an average beta of approximately 80% to its managed rate deposits
for determining its interest rate sensitivity. Managed rate deposits are high
beta, premium money market and interest checking accounts, which attract
significant client funds when needed to support balance sheet growth. BB&T
regularly conducts sensitivity on other key variables to determine the impact
they could have on the interest rate risk position. This discipline informs
management judgment and allows BB&T to evaluate the likely impact on its balance
sheet management strategies due to a more extreme variation in a key assumption
than expected.
The following table shows the effect that the loss of demand deposits and an
associated increase in managed rate deposits would have on BB&T's interest-rate
sensitivity position. For purposes of this analysis, BB&T modeled the betaat
100%.
Table 15
Deposit Mix Sensitivity Analysis
Results Assuming a Decrease
in
Noninterest Bearing Demand
Increase in Base Scenario Deposits
at September 30,
Rates 2012 (1) $1 Billion $5 Billion
2.00 % 3.66 % 3.41 % 2.43 %
1.00 2.23 2.08 1.48
(1) The base scenario is equal to the annualized hypothetical percentage change in net interest
income at September 30, 2012 as presented in Table 14.
The following table shows the effect that the indicated changes in interest
rates would have on EVE. Key assumptions in the preparation of the table include
prepayment speeds of mortgage-related and other assets, cash flows and
maturities of derivative financial instruments, loan volumes and pricing and
deposit sensitivity. The resulting change in the economic value of equity
reflects the level of sensitivity that EVE has in relation to changing interest
rates.
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Table 16
Economic Value of Equity ("EVE") Simulation Analysis
Hypothetical Percentage
EVE/Assets Change in EVE
Change in September 30, September 30,
Rates 2012 2011 2012 2011
2.00 % 7.0 % 7.2 % 17.9 % 23.5 %
1.00 6.7 % 6.7 12.5 15.0
No Change 5.9 % 5.8
(0.25) 5.7 % 5.5 (4.5) (5.4)
Market Risk from Trading Activities
BB&T also manages market risk from trading activities which consists of acting
as a financial intermediary to provide its customers access to derivatives,
foreign exchange and securities markets. Trading market risk is managed through
the use of statistical and non-statistical risk measures and limits, with
overall established limits. BB&T utilizes a historical value-at-risk ("VaR")
methodology to measure and aggregate risks across its covered trading lines of
business. This methodology uses one year of historical data to estimate economic
outcomes for a one-day time horizon at a 99% confidence level.
The average VaR for the three months ended September 30, 2012 was approximately
$240 thousand. Maximum daily VaR was approximately $400 thousand, and the low
daily VaR was approximately $100 thousand during this same period, respectively.
Contractual Obligations, Commitments, Contingent Liabilities, Off-Balance Sheet
Arrangements and Related Party Transactions
Refer to BB&T's Annual Report on Form 10-K for the year ended December 31, 2011
for discussion with respect to BB&T's quantitative and qualitative disclosures
about its fixed and determinable contractual obligations. Additional disclosures
about BB&T's contractual obligations, commitments and derivative financial
instruments are included in Note 13 "Commitments and Contingencies" and Note 14
"Fair Value Disclosures" in the "Notes to Consolidated Financial Statements."
Liquidity
Liquidity represents BB&T's continuing ability to meet funding needs, including
deposit withdrawals, timely repayment of borrowings and other liabilities, and
funding of loan commitments. In addition to the level of liquid assets, such as
cash, cash equivalents and securities available for sale, many other factors
affect BB&T's ability to meet liquidity needs, including access to a variety of
funding sources, maintaining borrowing capacity in national money markets,
growing core deposits, the repayment of loans and the ability to securitize or
package loans for sale. The ability to raise funding at competitive prices is
affected by the rating agencies' views of BB&T's and Branch Bank's credit
quality, liquidity, capital and earnings. Management meets with the rating
agencies on a routine basis to discuss the current outlook for BB&T and Branch
Bank. Refer to BB&T's Annual Report on Form 10-K for the year ended December 31,
2011 for disclosures related to BB&T's and Branch Bank's credit ratings and
liquidity.
BB&T monitors key liquidity metrics at both the Parent Company and Branch Bank.
Liquidity at the Parent Company is more susceptible to market disruptions. BB&T
prudently manages cash levels at the Parent Company to cover a minimum of one
year of projected contractual cash outflows which includes unfunded external
commitments, debt service, preferred dividends and scheduled debt maturities
without the benefit of any new cash infusions. Generally, BB&T maintains a
significant buffer above the projected one year of contractual cash outflows. In
determining the buffer, BB&T considers cash for common dividends, unfunded
commitments to affiliates, being a source of strength to its banking
subsidiaries, and being able to withstand sustained market disruptions which may
limit access to the credit markets. As of September 30, 2012, and December 31,
2011, the Parent Company had 25 months and 23 months, respectively, of cash on
hand to satisfy projected contractual cash outflows as described above.
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BB&T also monitors the ability to meet customer demand for funds under both
normal and stressed market conditions. In considering its liquidity position,
management evaluates BB&T's funding mix based on client core funding, client
rate-sensitive funding and non-client rate-sensitive funding. In addition,
management also evaluates exposure to rate-sensitive funding sources that mature
in one year or less. Management also measures liquidity needs against 30 days of
stressed cash outflows for Branch Bank. To ensure a strong liquidity position,
management maintains a liquid asset buffer of cash on hand and highly liquid
unpledged securities. The Company has established a policy that the liquid asset
buffer would be a minimum of 5% of total assets, but intends to maintain the
ratio well in excess of this level. As of September 30, 2012, and December 31,
2011, BB&T's liquid asset buffer was 12.9% and 13.5%, respectively, of total
assets.
BB&T, Branch Bank and BB&T FSB have Contingency Funding Plans ("CFPs") designed
to ensure that liquidity sources are sufficient to meet their ongoing
obligations and commitments, particularly in the event of a liquidity
contraction. The CFPs are designed to simulate extreme liquidity demands under
stressed market conditions and provide a framework for management to meet those
demands using all available options. The CFPs address authority for activation
and decision making, liquidity options and the responsibilities of key
departments in the event of a liquidity contraction. The liquidity options
available to management could include seeking secured funding, asset sales, and
under the most extreme scenarios, curtailing new loan originations.
BB&T has strong liquidity reserves including access to the Federal Reserve
Discount Window, the Federal Home Loan Bank, and unpledged securities held on
the balance sheet. Additionally, BB&T's strong profitability, credit ratings,
and positive reputation in the credit markets provide BB&T with access to
unsecured national market funding.
Capital Adequacy and Resources
The maintenance of appropriate levels of capital is a management priority and is
monitored on a regular basis. BB&T's principal goals related to the maintenance
of capital are to provide adequate capital to support BB&T's risk profile
consistent with the Board-approved risk appetite, provide financial flexibility
to support future growth and client needs, comply with relevant laws,
regulations, and supervisory guidance, achieve optimal credit ratings for BB&T
and its subsidiaries and provide a competitive return to shareholders. Refer to
the section titled "Capital" in BB&T's Annual Report on Form 10-K for the year
ended December 31, 2011 for additional information with regard to BB&T's capital
requirements.
Management regularly monitors the capital position of BB&T on both a
consolidated and bank level basis. Capital ratios are determined using operating
forecasts and plans as well as stressed scenarios. In this regard, management's
overriding policy is to maintain capital at levels that are in excess of the
operating capital guidelines, which are above the regulatory "well capitalized"
levels. Management has recently implemented stressed capital ratio minimum
guidelines to evaluate whether capital levels are sufficient to withstand the
impact of plausible, severe economic downturns or bank-specific events. The
following table presents the minimum capital ratios:
Table 17
BB&T's Internal Capital Guidelines
Operating Stressed
Tier 1 Capital Ratio 9.50 % 7.50 %
Total Capital Ratio 11.50 9.50
Tier 1 Leverage Capital Ratio 6.50 5.00
Tangible Capital Ratio 5.50 4.00
Tier 1 Common Equity Ratio 8.00 6.00
While nonrecurring events or management decisions may result in the Corporation
temporarily falling below its minimum guidelines for one or more of these
ratios, it is management's intent through capital planning to return to these
targeted minimums within a reasonable period of time. Such temporary decreases
below these minimums are not considered an infringement of BB&T's overall
capital policy provided the Corporation and Branch Bank remain
"well-capitalized."
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BB&T's regulatory and tangible capital ratios for the last five calendar quarters are set forth in Table 18.
Table 18
Capital Ratios (1)
As of / For the Three Months Ended
9/30/12 6/30/12 3/31/12 12/31/11 9/30/11
(Dollars in millions, shares in thousands)
Risk-based:
Tier 1 10.9 % 10.2 % 12.8 % 12.5 % 12.6 %
Total 14.0 13.5 16.2 15.7 16.1
Leverage capital 7.9 7.3 9.1 9.0 9.2
Non-GAAP capital measures (2)
Tangible common equity as a percentage
of
tangible assets 6.8 6.9 7.1 6.9 7.1
Tier 1 common equity as a percentage of
risk-weighted assets 9.5 9.7 10.0 9.7 9.8
Calculations of Tier 1 common equity and
tangible assets and related measures:
Tier 1 equity $ 13,590 $ 12,383 $ 15,207 $ 14,913 $ 14,696
Less:
Preferred stock 1,679 559
Qualifying restricted core capital
elements 5 3,250 3,250 3,249
Tier 1 common equity $ 11,906 $ 11,824 $ 11,957 $ 11,663 $ 11,447
Total assets $ 182,021 $ 178,529 $ 174,752 $ 174,579 $ 167,677
Less:
Intangible assets, net of deferred
taxes 7,239 6,950 6,402 6,406 6,330
Plus:
Regulatory adjustments, net of
deferred taxes 81 239 327 421 99
Tangible assets $ 174,863 $ 171,818 $ 168,677 $ 168,594 $ 161,446
Total risk-weighted assets (3) $ 125,164 $ 121,922 $ 119,042 $ 119,725 $ 117,020
Tangible common equity as a percentage of
tangible assets 6.8 % 6.9 % 7.1 % 6.9 % 7.1 %
Tier 1 common equity as a percentage of
risk-
weighted assets 9.5 9.7 10.0 9.7 9.8
Tier 1 common equity $ 11,906 $ 11,824 $ 11,957 $ 11,663 $ 11,447
Outstanding shares at end of period 699,541 698,795 698,454 697,143 697,101
Tangible book value per common share $ 17.02 $
16.92 $ 17.12 $ 16.73 $ 16.42
(1) Current quarter regulatory capital information is preliminary.
(2) Tangible common equity and Tier 1 common equity ratios are non-GAAP measures.
BB&T uses the Tier 1 common equity definition used in the SCAP assessment to
calculate these ratios. BB&T's management uses these measures to assess the
quality of capital and believes that investors may find them useful in their
analysis of the Corporation. These capital measures are not necessarily
comparable to similar capital measures that may be presented by other
companies.
(3) Risk-weighted assets are determined based on regulatory capital requirements.
Under the regulatory framework for determining risk-weighted assets each
asset class is assigned a risk-weighting of 0%, 20%, 50% or 100% based on the
underlying risk of the specific asset class. In addition, off-balance sheet
exposures are first converted to a balance sheet equivalent amount and
subsequently assigned to one of the four risk-weightings.
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Table 19
Estimated Basel III Capital Ratios (1)
September December
30, 31,
2012 2011 (2)
(Dollars in millions)
Tier 1 common equity under Basel I definition $ 11,906 $ 11,663
Adjustments:
Other comprehensive income related to AFS securities, defined benefit
pension and other postretirement employee benefit plans (226) (553)
Deduction for net defined benefit pension asset (423)
Other adjustments (54) 57
Estimated Tier 1 common equity under Basel III definition $ 11,626 $ 10,744
Estimated risk-weighted assets under Basel III definition - U.S. $ 145,848 Estimated risk-weighted assets under Basel III definition - International 126,572
$ 122,600
Estimated Tier 1 common equity as a percentage of risk-weighted assets
Basel III definition - U.S. 8.0 %
Basel III definition - International 9.2 8.8 %
(1) The Basel III calculations are non-GAAP measures and reflect adjustments for the related elements as proposed by
regulatory authorities, which are subject to change. BB&T management uses these measures to assess the quality of
capital and believes that investors may find them useful in their analysis of the Corporation. These capital
measures are not necessarily comparable to similar capital measures that may be presented by other companies.
(2) Tier 1 common equity ratio using Basel III proposals prior to the Notice of Proposed Rulemaking that was published
June 7, 2012 for U.S.-based institutions.
The Tier 1 common equity ratio was 9.5% at September 30, 2012. The decrease in
this measure compared to the second quarter of 2012 was primarily due to the
BankAtlantic acquisition, as a result of the intangible assets associated with
that acquisition. As of September 30, 2012, management currently estimates the
Tier 1 common ratio under the currently proposed U.S. and international Basel
III standards to be 8.0% and 9.2%, respectively. The proposed U.S. Basel III
standards incorporate changes to the risk-weighting of loans secured by
residential properties, requiring consideration of loan-to-value ratios in
determining risk-weighting. In addition, the credit conversion factor for
unfunded lending commitments was increased. Management's estimate of the Tier 1
common ratio under the proposed U.S. Basel III standards does not include any
mitigation strategies to improve capital levels, which management believes will
have a significant positive impact on this measure. Refer to Table 19 for a
reconciliation of how BB&T calculates the Tier 1 common equity ratio under the
proposed Basel III capital guidelines.
The increase in BB&T's regulatory risk-based capital ratios compared to the
second quarter of 2012 was primarily due to the issuance of Tier 1 qualifying
non-cumulative preferred stock during the third quarter of 2012. The preferred
stock issued has no stated maturity and redemption is solely at the option of
the Company. Under current rules, any redemption of the preferred stock is
subject to prior approval of the Board of Governors of the Federal Reserve
System. Dividends, if declared, accrue and are payable quarterly, in arrears, at
a rate of 5.625% per annum.
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Share Repurchase Activity
BB&T has periodically repurchased shares of its own common stock. In accordance
with North Carolina law, repurchased shares cannot be held as treasury stock,
but revert to the status of authorized and unissued shares upon repurchase.
On June 27, 2006, BB&T's Board of Directors granted authority under a plan (the
"2006 Plan") for the repurchase of up to 50 million shares of BB&T's common
stock as needed for general corporate purposes. The 2006 Plan also authorizes
the repurchase of the remaining shares from the previous authorization. The 2006
Plan remains in effect until all the authorized shares are repurchased unless
modified by the Board of Directors. No shares were repurchased in connection
with the 2006 Plan during 2012.
Table 20
Share Repurchase Activity
Maximum Remaining
Number of Shares
Total Average Total Shares Purchased Available for Repurchase
Shares Price Paid Pursuant to Pursuant to
Repurchased (1) Per Share (2) Publicly-Announced Plan Publicly-Announced Plan
(Shares in thousands)
July 1-31, 2012 18 $ 30.44 44,139
August 1-31, 2012 2 31.59 44,139
September 1-30, 2012 12 31.86 44,139
Total 32 $ 31.06 44,139
(1) Repurchases reflect shares exchanged or surrendered in connection with the
exercise of equity-based awards under BB&T's equity-based compensation plans.
(2) Excludes commissions.
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