UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended: March 31, 2015
Commission file number: 1-10853
BB&T CORPORATION
(Exact name of registrant as specified in its charter)
| North Carolina | 56-0939887 |
| (State of Incorporation) |
(I.R.S. Employer Identification No.) |
| 200 West Second Street | 27101 |
|
Winston-Salem, North Carolina (Address of Principal Executive Offices) |
(Zip Code) |
(336) 733-2000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | X | Accelerated filer | ||
| Non-accelerated filer | (Do not check if a smaller reporting company) | Smaller reporting company |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
At March 31, 2015, 723,159,499 shares of the Registrant’s common stock, $5 par value, were outstanding.
Glossary of Defined Terms
The following terms may be used throughout this Report, including the consolidated financial statements and related notes.
| Term | Definition | |
| 2006 Repurchase Plan | Plan for the repurchase of up to 50 million shares of BB&T’s common stock | |
| ACL | Allowance for credit losses | |
| Acquired from FDIC | Assets of Colonial Bank acquired from the Federal Deposit Insurance Corporation during 2009, which are currently covered or were formerly covered under loss sharing agreements | |
| AFS | Available-for-sale | |
| ALLL | Allowance for loan and lease losses | |
| AOCI | Accumulated other comprehensive income (loss) | |
| BankAtlantic | BankAtlantic, a federal savings association acquired by BB&T from BankAtlantic Bancorp, Inc. | |
| Basel III | Global regulatory standards on bank capital adequacy and liquidity published by the BCBS | |
| BB&T | BB&T Corporation and subsidiaries | |
| BCBS | Basel Committee on Bank Supervision | |
| BHC | Bank holding company | |
| BHCA | Bank Holding Company Act of 1956, as amended | |
| Branch Bank | Branch Banking and Trust Company | |
| CCAR | Comprehensive Capital Analysis and Review | |
| CD | Certificate of deposit | |
| CDI | Core deposit intangible assets | |
| CFPB | Consumer Financial Protection Bureau | |
| CEO | Chief Executive Officer | |
| CRO | Chief Risk Officer | |
| CMO | Collateralized mortgage obligation | |
| Colonial | Collectively, certain assets and liabilities of Colonial Bank acquired by BB&T in 2009 | |
| Company | BB&T Corporation and subsidiaries (interchangeable with "BB&T" above) | |
| Council | Financial Stability Oversight Council | |
| CRA | Community Reinvestment Act of 1977 | |
| CRE | Commercial real estate | |
| CRMC | Credit Risk Management Committee | |
| CROC | Compliance Risk Oversight Committee | |
| Crump Insurance | The life and property and casualty insurance operations acquired from the Crump Group | |
| DIF | Deposit Insurance Fund administered by the FDIC | |
| Directors’ Plan | Non-Employee Directors’ Stock Option Plan | |
| Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act | |
| EITSC | Enterprise IT Steering Committee | |
| EPS | Earnings per common share | |
| ERP | Enterprise resource planning | |
| EU | European Union | |
| EVE | Economic value of equity | |
| Exchange Act | Securities Exchange Act of 1934, as amended | |
| FASB | Financial Accounting Standards Board | |
| FATCA | Foreign Account Tax Compliance Act | |
| FDIC | Federal Deposit Insurance Corporation | |
| FHA | Federal Housing Administration | |
| FHC | Financial Holding Company | |
| FHLB | Federal Home Loan Bank | |
| FHLMC | Federal Home Loan Mortgage Corporation | |
| FINRA | Financial Industry Regulatory Authority | |
| FNMA | Federal National Mortgage Association | |
| FRB | Board of Governors of the Federal Reserve System | |
| FTE | Fully taxable-equivalent | |
| FTP | Funds transfer pricing | |
| GAAP | Accounting principles generally accepted in the United States of America | |
| GNMA | Government National Mortgage Association |
| 1 |
| Term | Definition | |
| Grandbridge | Grandbridge Real Estate Capital, LLC | |
| GSE | U.S. government-sponsored enterprise | |
| HFI | Held for investment | |
| HMDA | Home Mortgage Disclosure Act | |
| HTM | Held-to-maturity | |
| HUD-OIG | Office of Inspector General, U.S. Department of Housing and Urban Development | |
| IDI | Insured depository institution | |
| IMLAFA | International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 | |
| IPV | Independent price verification | |
| IRA | Individual retirement account | |
| IRC | Internal Revenue Code | |
| IRS | Internal Revenue Service | |
| ISDA | International Swaps and Derivatives Association, Inc. | |
| LCR | Liquidity Coverage Ratio | |
| LHFS | Loans held for sale | |
| LIBOR | London Interbank Offered Rate | |
| LOB | Line of business | |
| MBS | Mortgage-backed securities | |
| MRLCC | Market Risk, Liquidity and Capital Committee | |
| MSR | Mortgage servicing right | |
| MSRB | Municipal Securities Rulemaking Board | |
| NIM | Net interest margin | |
| NPA | Nonperforming asset | |
| NPL | Nonperforming loan | |
| NPR | Notice of Proposed Rulemaking | |
| NYSE | NYSE Euronext, Inc. | |
| OAS | Option adjusted spread | |
| OCC | Office of the Comptroller of the Currency | |
| OCI | Other comprehensive income (loss) | |
| OREO | Other real estate owned | |
| ORMC | Operational Risk Management Committee | |
| OTTI | Other-than-temporary impairment | |
| Parent Company | BB&T Corporation, the parent company of Branch Bank and other subsidiaries | |
| Patriot Act | Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 | |
| Peer Group | Financial holding companies included in the industry peer group index | |
| Reform Act | Federal Deposit Insurance Reform Act of 2005 | |
| RMC | Risk Management Committee | |
| RMO | Risk Management Organization | |
| RSU | Restricted stock unit | |
| RUFC | Reserve for unfunded lending commitments | |
| S&P | Standard & Poor's | |
| SBIC | Small Business Investment Company | |
| SCAP | Supervisory Capital Assessment Program | |
| SEC | Securities and Exchange Commission | |
| Short-Term Borrowings | Federal funds purchased, securities sold under repurchase agreements and other short-term borrowed funds with original maturities of less than one year | |
| Simulation | Interest sensitivity simulation analysis | |
| TBA | To be announced | |
| TDR | Troubled debt restructuring | |
| U.S. | United States of America | |
| U.S. Treasury | United States Department of the Treasury | |
| UPB | Unpaid principal balance | |
| VA | U.S. Department of Veterans Affairs | |
| VaR | Value-at-risk | |
| VIE | Variable interest entity |
| 2 |
The accompanying notes are an integral part of these consolidated financial statements.
| 3 |
The accompanying notes are an integral part of these consolidated financial statements.
| 4 |
The accompanying notes are an integral part of these consolidated financial statements.
| 5 |
The accompanying notes are an integral part of these consolidated financial statements.
| 6 |
The accompanying notes are an integral part of these consolidated financial statements.
| 7 |
See the Glossary of Defined Terms at the beginning of this Report for terms used throughout the consolidated financial statements and related notes of this Form 10-Q.
General
These consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with GAAP. In the opinion of management, all normal recurring adjustments necessary for a fair statement of the consolidated financial position and consolidated results of operations have been made. The year-end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. The information contained in the financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2014 should be referred to in connection with these unaudited interim consolidated financial statements.
Reclassifications
Certain amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation. Such reclassifications had no effect on previously reported cash flows, shareholders’ equity or net income.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change include the determination of the ACL, determination of fair value for financial instruments, valuation of goodwill, intangible assets and other purchase accounting related adjustments, benefit plan obligations and expenses, and tax assets, liabilities and expense.
Changes in Accounting Principles and Effects of New Accounting Pronouncements
In April 2015, the FASB issued new guidance related to Internal-Use Software . Under the new guidance, if a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.
In April 2015, the FASB issued new guidance related to Debt Issuance Costs . The new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This guidance is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.
In February 2015, the FASB issued new guidance related to Consolidation . The new guidance provides an additional requirement for a limited partnership or similar entity to qualify as a voting interest entity, amending the criteria for consolidating such an entity and eliminating the deferral provided under previous guidance for investment companies. In addition, the new guidance amends the criteria for evaluating fees paid to a decision maker or service provider as a variable interest and amends the criteria for evaluating the effect of fee arrangements and related parties on a VIE primary beneficiary determination. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.
In May 2014, the FASB issued new guidance related to Revenue from Contracts with Customers . This guidance supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition , and most industry-specific guidance throughout the Accounting Standards Codification. The guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.
| 8 |
Effective January 1, 2015, the Company adopted new guidance related to Receivables . The new guidance requires that a government guaranteed mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. The adoption of this guidance was not material to the consolidated financial statements.
Effective January 1, 2015, the Company adopted new guidance related to Repurchase-to-Maturity Transactions and Repurchase Financings . The new guidance changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting. The guidance also requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which results in secured borrowing accounting for the repurchase agreement. The adoption of this guidance was not material to the consolidated financial statements.
Effective January 1, 2015, the Company adopted new guidance related to Investments in Qualified Affordable Housing Projects. The Company used the retrospective method of adoption and has elected the proportional amortization method to account for these investments. The proportional amortization method allows an entity to amortize the initial cost of the investment in proportion to the amount of tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of the provision for income taxes. See Note 12 “Commitments and Contingencies” for the impact of the adoption of this guidance.
During the first quarter of 2015, BB&T purchased 41 bank branches in Texas from Citigroup, Inc., resulting in the acquisition of $1.9 billion in deposits, $61 million in loans and $1.7 billion in cash and net other assets/liabilities. Goodwill of $77 million and CDI of $46 million were preliminarily recognized in connection with the transaction.
During the second quarter of 2014, BB&T purchased 21 bank branches in Texas from Citigroup, Inc., resulting in the acquisition of $1.2 billion in deposits, $112 million in loans and $1.1 billion in cash and other assets. Goodwill of $29 million and CDI of $20 million were preliminarily recognized in connection with the transaction.
BB&T has reached agreements to acquire Susquehanna Bancshares, Inc. and The Bank of Kentucky Financial Corporation. BB&T also announced an agreement to increase its partnership interest in AmRisc, LP and to sell American Coastal Insurance Company. The pending transactions are subject to regulatory approval.
| Amortized | Gross Unrealized | Fair | ||||||||||||||
| March 31, 2015 | Cost | Gains | Losses | Value | ||||||||||||
| (Dollars in millions) | ||||||||||||||||
| AFS securities: | ||||||||||||||||
| U.S. Treasury | $ | 1,326 | $ | 8 | $ | — | $ | 1,334 | ||||||||
| MBS issued by GSE | 16,954 | 116 | 201 | 16,869 | ||||||||||||
| States and political subdivisions | 1,924 | 117 | 71 | 1,970 | ||||||||||||
| Non-agency MBS | 226 | 28 | — | 254 | ||||||||||||
| Other | 40 | 1 | — | 41 | ||||||||||||
| Securities acquired from FDIC | 866 | 340 | — | 1,206 | ||||||||||||
| Total AFS securities | $ | 21,336 | $ | 610 | $ | 272 | $ | 21,674 | ||||||||
| HTM securities: | ||||||||||||||||
| U.S. Treasury | $ | 1,097 | $ | 41 | $ | — | $ | 1,138 | ||||||||
| GSE | 5,394 | 33 | 39 | 5,388 | ||||||||||||
| MBS issued by GSE | 13,302 | 197 | 3 | 13,496 | ||||||||||||
| States and political subdivisions | 22 | 1 | — | 23 | ||||||||||||
| Other | 600 | 13 | — | 613 | ||||||||||||
| Total HTM securities | $ | 20,415 | $ | 285 | $ | 42 | $ | 20,658 | ||||||||
| 9 |
| Amortized | Gross Unrealized | Fair | ||||||||||||||
| December 31, 2014 | Cost | Gains | Losses | Value | ||||||||||||
| (Dollars in millions) | ||||||||||||||||
| AFS securities: | ||||||||||||||||
| U.S. Treasury | $ | 1,230 | $ | 1 | $ | — | $ | 1,231 | ||||||||
| MBS issued by GSE | 16,358 | 93 | 297 | 16,154 | ||||||||||||
| States and political subdivisions | 1,913 | 120 | 59 | 1,974 | ||||||||||||
| Non-agency MBS | 232 | 32 | — | 264 | ||||||||||||
| Other | 41 | — | — | 41 | ||||||||||||
| Securities acquired from FDIC | 886 | 357 | — | 1,243 | ||||||||||||
| Total AFS securities | $ | 20,660 | $ | 603 | $ | 356 | $ | 20,907 | ||||||||
| HTM securities: | ||||||||||||||||
| U.S. Treasury | $ | 1,096 | $ | 23 | $ | — | $ | 1,119 | ||||||||
| GSE | 5,394 | 17 | 108 | 5,303 | ||||||||||||
| MBS issued by GSE | 13,120 | 137 | 12 | 13,245 | ||||||||||||
| States and political subdivisions | 22 | 2 | — | 24 | ||||||||||||
| Other | 608 | 14 | — | 622 | ||||||||||||
| Total HTM securities | $ | 20,240 | $ | 193 | $ | 120 | $ | 20,313 | ||||||||
The fair value of securities acquired from the FDIC included non-agency MBS of $895 million and $931 million as of March 31, 2015 and December 31, 2014, respectively, and states and political subdivisions securities of $311 million and $312 million as of March 31, 2015 and December 31, 2014. Effective October 1, 2014, securities subject to the commercial loss sharing agreement with the FDIC related to the Colonial acquisition were no longer covered by loss sharing; however, any gains on the sale of these securities through September 30, 2017 would be shared with the FDIC. Since these securities are in a significant unrealized gain position, they continue to be effectively covered as any declines in the unrealized gains of the securities down to a contractually specified amount would reduce the liability to the FDIC at the applicable percentage. The contractually-specified amount is the acquisition date fair value less any paydowns, redemptions or maturities and OTTI and totaled approximately $592 million at March 31, 2015. Any further declines below the contractually-specified amount would not be covered.
Certain investments in marketable debt securities and MBS issued by FNMA and FHLMC exceeded ten percent of shareholders’ equity at March 31, 2015. The FNMA investments had total amortized cost and fair value of $13.6 billion and $13.5 billion, respectively. The FHLMC investments had total amortized cost and fair value of $5.9 billion and $5.8 billion respectively.
The following table reflects changes in credit losses on securities with OTTI (excluding securities acquired from the FDIC) where a portion of the unrealized loss was recognized in OCI:
| Three Months Ended | ||||||||||
| March 31, | ||||||||||
| 2015 | 2014 | |||||||||
| (Dollars in millions) | ||||||||||
| Balance at beginning of period | $ | 64 | $ | 78 | ||||||
| Credit losses on securities without previous OTTI | ― | 1 | ||||||||
| Reductions for securities sold/settled during the period | (2) | (3) | ||||||||
| Credit recoveries through yield | (1) | ― | ||||||||
| Balance at end of period | $ | 61 | $ | 76 | ||||||
The amortized cost and estimated fair value of the securities portfolio by contractual maturity are shown in the following table. The expected life of MBS may differ from contractual maturities because borrowers have the right to prepay the underlying mortgage loans with or without prepayment penalties.
| 10 |
| AFS | HTM | |||||||||||||||
| Amortized | Fair | Amortized | Fair | |||||||||||||
| March 31, 2015 | Cost | Value | Cost | Value | ||||||||||||
| (Dollars in millions) | ||||||||||||||||
| Due in one year or less | $ | 528 | $ | 528 | $ | ― | $ | ― | ||||||||
| Due after one year through five years | 1,045 | 1,064 | 751 | 745 | ||||||||||||
| Due after five years through ten years | 573 | 597 | 6,007 | 6,052 | ||||||||||||
| Due after ten years | 19,190 | 19,485 | 13,657 | 13,861 | ||||||||||||
| Total debt securities | $ | 21,336 | $ | 21,674 | $ | 20,415 | $ | 20,658 | ||||||||
| Less than 12 months | 12 months or more | Total | |||||||||||||||||||||
| Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
| December 31, 2014 | Value | Losses | Value | Losses | Value | Losses | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||
| AFS securities: | |||||||||||||||||||||||
| MBS issued by GSE | $ | 2,285 | $ | 19 | $ | 6,878 | $ | 278 | $ | 9,163 | $ | 297 | |||||||||||
| States and political subdivisions | 13 | ― | 449 | 59 | 462 | 59 | |||||||||||||||||
| Total | $ | 2,298 | $ | 19 | $ | 7,327 | $ | 337 | $ | 9,625 | $ | 356 | |||||||||||
| HTM securities: | |||||||||||||||||||||||
| GSE | $ | 896 | $ | 5 | $ | 3,968 | $ | 103 | $ | 4,864 | $ | 108 | |||||||||||
| MBS issued by GSE | 1,329 | 5 | 800 | 7 | 2,129 | 12 | |||||||||||||||||
| Total | $ | 2,225 | $ | 10 | $ | 4,768 | $ | 110 | $ | 6,993 | $ | 120 | |||||||||||
The unrealized losses on GSE securities and MBS issued by GSE were the result of increases in market interest rates compared to the date the securities were acquired rather than the credit quality of the issuers or underlying loans.
At March 31, 2015, $68 million of the unrealized loss on states and political subdivisions securities was the result of fair value hedge basis adjustments that are a component of amortized cost. These securities in an unrealized loss position are evaluated for credit impairment through a qualitative analysis of issuer performance and the primary source of repayment. None of these securities had other than temporary credit impairment as a result of the evaluation.
| 11 |
During the first quarter of 2014, approximately $8.3 billion of nonguaranteed, closed-end, first and second lien position residential mortgage loans, along with the related allowance, were transferred from direct retail lending to residential mortgage to facilitate compliance with a series of new rules related to mortgage servicing associated with first and second lien position mortgages collateralized by real estate.
During the third quarter of 2014, approximately $550 million of loans, which were primarily performing residential mortgage TDRs, with a related ALLL of $57 million were sold for a gain of $42 million. During the fourth quarter of 2014, approximately $140 million of loans, which were primarily residential mortgage NPLs, with a related ALLL of $19 million were sold for a gain of $24 million. Both gains were recognized as reductions to the provision for credit losses.
Effective October 1, 2014, loans subject to the commercial loss sharing agreement with the FDIC related to the Colonial acquisition were no longer covered by loss sharing. At March 31, 2015, these loans had a carrying value of $476 million, a UPB of $730 million and an allowance of $38 million and are included in acquired from FDIC loans. Loans with a carrying value of $634 million at March 31, 2015 continue to be covered by loss sharing and are included in the acquired from FDIC balance.
| Accruing | |||||||||||||||||||
| 90 Days Or | |||||||||||||||||||
| 30-89 Days | More Past | ||||||||||||||||||
| March 31, 2015 | Current | Past Due | Due | Nonaccrual | Total | ||||||||||||||
| (Dollars in millions) | |||||||||||||||||||
| Commercial: | |||||||||||||||||||
| Commercial and industrial | $ | 42,044 | $ | 20 | $ | ― | $ | 230 | $ | 42,294 | |||||||||
| CRE-income producing properties | 10,649 | 7 | ― | 63 | 10,719 | ||||||||||||||
| CRE-construction and development | 2,635 | 2 | ― | 18 | 2,655 | ||||||||||||||
| Other lending subsidiaries | 5,149 | 13 | ― | 5 | 5,167 | ||||||||||||||
| Retail: | |||||||||||||||||||
| Direct retail lending | 8,192 | 40 | 9 | 47 | 8,288 | ||||||||||||||
| Revolving credit | 2,361 | 19 | 10 | ― | 2,390 | ||||||||||||||
| Residential mortgage-nonguaranteed | 29,078 | 356 | 59 | 183 | 29,676 | ||||||||||||||
| Residential mortgage-government guaranteed | 269 | 70 | 518 | ― | 857 | ||||||||||||||
| Sales finance | 10,554 | 49 | 3 | 7 | 10,613 | ||||||||||||||
| Other lending subsidiaries | 5,953 | 138 | ― | 46 | 6,137 | ||||||||||||||
| Acquired from FDIC | 909 | 47 | 154 | ― | 1,110 | ||||||||||||||
| Total | $ | 117,793 | $ | 761 | $ | 753 | $ | 599 | $ | 119,906 | |||||||||
| Accruing | ||||||||||||||||||||
| 90 Days Or | ||||||||||||||||||||
| 30-89 Days | More Past | |||||||||||||||||||
| December 31, 2014 | Current | Past Due | Due | Nonaccrual | Total | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
| Commercial: | ||||||||||||||||||||
| Commercial and industrial | $ | 41,192 | $ | 23 | $ | ― | $ | 239 | $ | 41,454 | ||||||||||
| CRE-income producing properties | 10,644 | 4 | ― | 74 | 10,722 | |||||||||||||||
| CRE-construction and development | 2,708 | 1 | ― | 26 | 2,735 | |||||||||||||||
| Other lending subsidiaries | 5,337 | 15 | ― | 4 | 5,356 | |||||||||||||||
| Retail: | ||||||||||||||||||||
| Direct retail lending | 8,045 | 41 | 12 | 48 | 8,146 | |||||||||||||||
| Revolving credit | 2,428 | 23 | 9 | ― | 2,460 | |||||||||||||||
| Residential mortgage-nonguaranteed | 29,468 | 392 | 83 | 164 | 30,107 | |||||||||||||||
| Residential mortgage-government guaranteed | 251 | 82 | 648 | 2 | 983 | |||||||||||||||
| Sales finance | 10,528 | 62 | 5 | 5 | 10,600 | |||||||||||||||
| Other lending subsidiaries | 5,830 | 222 | ― | 54 | 6,106 | |||||||||||||||
| Acquired from FDIC | 994 | 33 | 188 | ― | 1,215 | |||||||||||||||
| Total | $ | 117,425 | $ | 898 | $ | 945 | $ | 616 | $ | 119,884 | ||||||||||
| 12 |
| Direct Retail | Revolving | Residential | Sales | Other Lending | |||||||||||||||
| Lending | Credit | Mortgage | Finance | Subsidiaries | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||||
| Retail: | |||||||||||||||||||
| Performing | $ | 8,241 | $ | 2,390 | $ | 30,350 | $ | 10,606 | $ | 6,091 | |||||||||
| Nonperforming | 47 | ― | 183 | 7 | 46 | ||||||||||||||
| Total | $ | 8,288 | $ | 2,390 | $ | 30,533 | $ | 10,613 | $ | 6,137 | |||||||||
| CRE - | CRE - | |||||||||||||||
| Commercial | Income Producing | Construction and | Other Lending | |||||||||||||
| December 31, 2014 | & Industrial | Properties | Development | Subsidiaries | ||||||||||||
| (Dollars in millions) | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Pass | $ | 40,055 | $ | 10,253 | $ | 2,615 | $ | 5,317 | ||||||||
| Special mention | 163 | 67 | 7 | 10 | ||||||||||||
| Substandard-performing | 997 | 328 | 87 | 25 | ||||||||||||
| Nonperforming | 239 | 74 | 26 | 4 | ||||||||||||
| Total | $ | 41,454 | $ | 10,722 | $ | 2,735 | $ | 5,356 | ||||||||
| Direct Retail | Revolving | Residential | Sales | Other Lending | ||||||||||||||||
| Lending | Credit | Mortgage | Finance | Subsidiaries | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
| Retail: | ||||||||||||||||||||
| Performing | $ | 8,098 | $ | 2,460 | $ | 30,924 | $ | 10,595 | $ | 6,052 | ||||||||||
| Nonperforming | 48 | ― | 166 | 5 | 54 | |||||||||||||||
| Total | $ | 8,146 | $ | 2,460 | $ | 31,090 | $ | 10,600 | $ | 6,106 | ||||||||||
| 13 |
| ACL Rollforward | ||||||||||||||||||
| Beginning | Charge- | Provision | Ending | |||||||||||||||
| Three Months Ended March 31, 2015 | Balance | Offs | Recoveries | (Benefit) | Balance | |||||||||||||
| (Dollars in millions) | ||||||||||||||||||
| Commercial: | ||||||||||||||||||
| Commercial and industrial | $ | 421 | $ | (14) | $ | 8 | $ | 33 | $ | 448 | ||||||||
| CRE-income producing properties | 162 | (9) | 2 | (2) | 153 | |||||||||||||
| CRE-construction and development | 48 | (2) | 4 | (8) | 42 | |||||||||||||
| Other lending subsidiaries | 21 | (3) | 1 | 3 | 22 | |||||||||||||
| Retail: | ||||||||||||||||||
| Direct retail lending | 110 | (12) | 8 | 5 | 111 | |||||||||||||
| Revolving credit | 110 | (18) | 5 | 9 | 106 | |||||||||||||
| Residential mortgage-nonguaranteed | 217 | (11) | ― | (6) | 200 | |||||||||||||
| Residential mortgage-government guaranteed | 36 | ― | ― | (6) | 30 | |||||||||||||
| Sales finance | 50 | (6) | 3 | 11 | 58 | |||||||||||||
| Other lending subsidiaries | 235 | (64) | 8 | 58 | 237 | |||||||||||||
| Acquired from FDIC | 64 | (1) | ― | (6) | 57 | |||||||||||||
| ALLL | 1,474 | (140) | 39 | 91 | 1,464 | |||||||||||||
| RUFC | 60 | ― | ― | 8 | 68 | |||||||||||||
| ACL | $ | 1,534 | $ | (140) | $ | 39 | $ | 99 | $ | 1,532 | ||||||||
| ACL Rollforward | |||||||||||||||||||||
| Beginning | Charge- | Provision | Ending | ||||||||||||||||||
| Three Months Ended March 31, 2014 | Balance | Offs | Recoveries | (Benefit) | Other | Balance | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||
| Commercial: | |||||||||||||||||||||
| Commercial and industrial | $ | 454 | $ | (33) | $ | 9 | $ | (7) | $ | ― | $ | 423 | |||||||||
| CRE-income producing properties | 149 | (8) | 2 | (7) | ― | 136 | |||||||||||||||
| CRE-construction and development | 76 | (4) | 3 | (10) | ― | 65 | |||||||||||||||
| Other lending subsidiaries | 15 | (1) | ― | 2 | ― | 16 | |||||||||||||||
| Retail: | |||||||||||||||||||||
| Direct retail lending | 209 | (19) | 8 | 7 | (85) | 120 | |||||||||||||||
| Revolving credit | 115 | (18) | 5 | 13 | ― | 115 | |||||||||||||||
| Residential mortgage-nonguaranteed | 269 | (21) | 1 | (7) | 85 | 327 | |||||||||||||||
| Residential mortgage-government guaranteed | 62 | ― | ― | 7 | ― | 69 | |||||||||||||||
| Sales finance | 45 | (7) | 3 | 4 | ― | 45 | |||||||||||||||
| Other lending subsidiaries | 224 | (84) | 8 | 74 | ― | 222 | |||||||||||||||
| Acquired from FDIC | 114 | (3) | ― | (7) | ― | 104 | |||||||||||||||
| ALLL | 1,732 | (198) | 39 | 69 | ― | 1,642 | |||||||||||||||
| RUFC | 89 | ― | ― | (9) | ― | 80 | |||||||||||||||
| ACL | $ | 1,821 | $ | (198) | $ | 39 | $ | 60 | $ | ― | $ | 1,722 | |||||||||
| 14 |
| 15 |
| Average | Interest | |||||||||||||||||||
| Recorded | Related | Recorded | Income | |||||||||||||||||
| As Of / For The Year Ended December 31, 2014 | Investment | UPB | ALLL | Investment | Recognized | |||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||
| With no related ALLL recorded: | ||||||||||||||||||||
| Commercial: | ||||||||||||||||||||
| Commercial and industrial | $ | 87 | $ | 136 | $ | ― | $ | 138 | $ | 2 | ||||||||||
| CRE-income producing properties | 18 | 25 | ― | 36 | ― | |||||||||||||||
| CRE-construction and development | 14 | 21 | ― | 20 | ― | |||||||||||||||
| Other lending subsidiaries | ― | 1 | ― | ― | ― | |||||||||||||||
| Retail: | ||||||||||||||||||||
| Direct retail lending | 13 | 49 | ― | 14 | 1 | |||||||||||||||
| Residential mortgage-nonguaranteed | 87 | 141 | ― | 147 | 5 | |||||||||||||||
| Residential mortgage-government guaranteed | 3 | 4 | ― | 7 | ― | |||||||||||||||
| Sales finance | 1 | 2 | ― | 1 | ― | |||||||||||||||
| Other lending subsidiaries | 3 | 7 | ― | 3 | ― | |||||||||||||||
| With an ALLL recorded: | ||||||||||||||||||||
| Commercial: | ||||||||||||||||||||
| Commercial and industrial | 247 | 254 | 42 | 279 | 5 | |||||||||||||||
| CRE-income producing properties | 121 | 123 | 15 | 133 | 4 | |||||||||||||||
| CRE-construction and development | 51 | 52 | 9 | 65 | 2 | |||||||||||||||
| Other lending subsidiaries | 5 | 5 | 1 | 4 | ― | |||||||||||||||
| Retail: | ||||||||||||||||||||
| Direct retail lending | 85 | 87 | 24 | 95 | 5 | |||||||||||||||
| Revolving credit | 41 | 41 | 16 | 45 | 2 | |||||||||||||||
| Residential mortgage-nonguaranteed | 360 | 370 | 36 | 700 | 31 | |||||||||||||||
| Residential mortgage-government guaranteed | 358 | 358 | 32 | 402 | 17 | |||||||||||||||
| Sales finance | 20 | 21 | 4 | 20 | 1 | |||||||||||||||
| Other lending subsidiaries | 173 | 175 | 31 | 148 | 22 | |||||||||||||||
| Total | $ | 1,687 | $ | 1,872 | $ | 210 | $ | 2,257 | $ | 97 | ||||||||||
| 16 |
The following table summarizes the primary reason loan modifications were classified as TDRs and includes newly designated TDRs as well as modifications made to existing TDRs. Balances represent the recorded investment at the end of the quarter in which the modification was made. Rate modifications in this table include TDRs made with below market interest rates that also include modifications of loan structures.
The pre-default balance for modifications that experienced a payment default that had been classified as TDRs during the previous 12 months was $20 million and $21 million for the three months ended March 31, 2015 and 2014, respectively. Payment default is defined as movement of the TDR to nonaccrual status, foreclosure or charge-off, whichever occurs first.
| 17 |
Residential Mortgage Banking Activities
The following tables summarize residential mortgage banking activities. Mortgage and home equity loans managed exclude loans serviced for others with no other continuing involvement.
| March 31, | December 31, | ||||||||
| 2015 | 2014 | ||||||||
| (Dollars in millions) | |||||||||
| Mortgage and home equity loans managed | $ | 33,538 | $ | 33,742 | |||||
| Less: | |||||||||
| LHFS | 1,694 | 1,317 | |||||||
| Mortgage loans acquired from FDIC | 662 | 668 | |||||||
| Mortgage loans sold with recourse | 649 | 667 | |||||||
| Mortgage loans held for investment | $ | 30,533 | $ | 31,090 | |||||
| UPB of mortgage loan servicing portfolio | $ | 114,658 | $ | 115,476 | |||||
| UPB of home equity loan servicing portfolio | 6,421 | 6,781 | |||||||
| UPB of residential mortgage and home equity loan servicing portfolio | $ | 121,079 | $ | 122,257 | |||||
| UPB of residential mortgage loans serviced for others (primarily agency | |||||||||
| conforming fixed rate) | $ | 89,192 | $ | 90,230 | |||||
| Maximum recourse exposure from mortgage loans sold with recourse liability | 346 | 344 | |||||||
| Indemnification, recourse and repurchase reserves | 88 | 94 | |||||||
| FHA-insured mortgage loan reserve | 85 | 85 | |||||||
The potential exposure related to losses incurred by the FHA on defaulted loans ranges from $25 million to $105 million.
| As Of / For The | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2015 | 2014 | ||||||||||
| (Dollars in millions) | |||||||||||
| UPB of residential mortgage loans sold from the LHFS portfolio | $ | 2,790 | $ | 2,875 | |||||||
| Pre-tax gains recognized on mortgage loans sold and held for sale | 38 | 15 | |||||||||
| Servicing fees recognized from mortgage loans serviced for others | 68 | 69 | |||||||||
| Approximate weighted average servicing fee on the outstanding balance of | |||||||||||
| residential mortgage loans serviced for others | 0.29 | % | 0.30 | % | |||||||
| Weighted average interest rate on mortgage loans serviced for others | 4.19 | 4.23 | |||||||||
| Three Months Ended March 31, | ||||||||||
| 2015 | 2014 | |||||||||
| (Dollars in millions) | ||||||||||
| Residential MSRs, carrying value, January 1, | $ | 844 | $ | 1,047 | ||||||
| Additions | 26 | 33 | ||||||||
| Change in fair value due to changes in valuation inputs or assumptions: | ||||||||||
| Prepayment speeds | (76) | (34) | ||||||||
| Weighted average OAS | 5 | (9) | ||||||||
| Realization of expected net servicing cash flows, passage of time and other | (35) | (29) | ||||||||
| Residential MSRs, carrying value, March 31, | $ | 764 | $ | 1,008 | ||||||
| Gains (losses) on derivative financial instruments used to mitigate the | ||||||||||
| income statement effect of changes in fair value | $ | 81 | $ | 45 | ||||||
| 18 |
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the above table, the effect of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another, which may magnify or counteract the effect of the change.
Commercial Mortgage Banking Activities
CRE mortgage loans serviced for others are not included in loans and leases on the accompanying Consolidated Balance Sheets. The following table summarizes commercial mortgage banking activities for the periods presented:
| March 31, | December 31, | |||||||||
| 2015 | 2014 | |||||||||
| (Dollars in millions) | ||||||||||
| UPB of CRE mortgages serviced for others | $ | 27,805 | $ | 27,599 | ||||||
| CRE mortgages serviced for others covered by recourse provisions | 4,235 | 4,264 | ||||||||
| Maximum recourse exposure from CRE mortgages | ||||||||||
| sold with recourse liability | 1,267 | 1,278 | ||||||||
| Recorded reserves related to recourse exposure | 7 | 7 | ||||||||
| Originated CRE mortgages during the year | 1,304 | 5,265 | ||||||||
| 19 |
| A summary of deposits is presented in the accompanying table: | ||||||||||
| March 31, | December 31, | |||||||||
| 2015 | 2014 | |||||||||
| (Dollars in millions) | ||||||||||
| Noninterest-bearing deposits | $ | 41,414 | $ | 38,786 | ||||||
| Interest checking | 21,070 | 20,262 | ||||||||
| Money market and savings | 53,198 | 50,604 | ||||||||
| Time deposits | 15,547 | 19,388 | ||||||||
| Total deposits | $ | 131,229 | $ | 129,040 | ||||||
| Time deposits $100,000 and greater | $ | 6,469 | $ | 9,782 | ||||||
| Time deposits $250,000 and greater | 2,531 | 5,753 | ||||||||
| March 31, | December 31, | ||||||||||
| 2015 | 2014 | ||||||||||
| (Dollars in millions) | |||||||||||
| BB&T Corporation: | |||||||||||
| 3.95% senior notes due 2016 | $ | 500 | $ | 500 | |||||||
| 3.20% senior notes due 2016 | 1,000 | 1,000 | |||||||||
| 2.15% senior notes due 2017 | 749 | 749 | |||||||||
| 1.60% senior notes due 2017 | 749 | 749 | |||||||||
| 1.45% senior notes due 2018 | 500 | 500 | |||||||||
| Floating rate senior notes due 2018 (LIBOR-based, 1.13% at March 31, 2015) | 400 | 400 | |||||||||
| 2.05% senior notes due 2018 | 599 | 599 | |||||||||
| 6.85% senior notes due 2019 | 539 | 539 | |||||||||
| 2.25% senior notes due 2019 | 648 | 648 | |||||||||
| Floating rate senior notes due 2019 (LIBOR-based, 0.91% at March 31, 2015) | 450 | 450 | |||||||||
| 2.45% senior notes due 2020 | 1,298 | 1,298 | |||||||||
| Floating rate senior notes due 2020 (LIBOR-based, 0.95% at March 31, 2015) | 200 | 200 | |||||||||
| 5.20% subordinated notes due 2015 | 934 | 933 | |||||||||
| 4.90% subordinated notes due 2017 | 354 | 353 | |||||||||
| 5.25% subordinated notes due 2019 | 586 | 586 | |||||||||
| 3.95% subordinated notes due 2022 | 298 | 298 | |||||||||
| Branch Bank: | |||||||||||
| 1.45% senior notes due 2016 | 750 | 750 | |||||||||
| Floating rate senior notes due 2016 (LIBOR-based, 0.69% at March 31, 2015) | 500 | 500 | |||||||||
| 1.05% senior notes due 2016 | 500 | 500 | |||||||||
| 1.00% senior notes due 2017 | 599 | 599 | |||||||||
| 1.35% senior notes due 2017 | 750 | 750 | |||||||||
| 2.30% senior notes due 2018 | 750 | 750 | |||||||||
| 2.85% senior notes due 2021 | 699 | 699 | |||||||||
| 5.63% subordinated notes due 2016 | 386 | 386 | |||||||||
| Floating rate subordinated notes due 2016 (LIBOR-based, 0.59% at March 31, 2015) | 350 | 350 | |||||||||
| Floating rate subordinated note due 2017 (LIBOR-based, 0.56% at March 31, 2015) | 262 | 262 | |||||||||
| 3.80% subordinated notes due 2026 | 848 | 848 | |||||||||
| FHLB advances to Branch Bank: | |||||||||||
| Varying maturities to 2034 | 6,498 | 6,496 | |||||||||
| Other long-term debt | 136 | 119 | |||||||||
| Fair value hedge-related basis adjustments | 605 | 501 | |||||||||
| Total long-term debt | $ | 23,437 | $ | 23,312 | |||||||
| 20 |
The effective rates above reflect the impact of cash flow and fair value hedges, as applicable. Subordinated notes with a remaining maturity of one year or greater qualify under the risk-based capital guidelines as Tier 2 supplementary capital, subject to certain limitations.
The activity relating to options and RSUs during the period are presented in the following tables:
| Wtd. Avg. | |||||||
| Exercise | |||||||
| Options | Price | ||||||
| (Shares in thousands) | |||||||
| Outstanding at January 1, 2015 | 28,374 | $ | 35.09 | ||||
| Granted | 434 | 38.22 | |||||
| Exercised | (824) | 29.10 | |||||
| Forfeited or expired | (5,585) | 38.65 | |||||
| Outstanding at March 31, 2015 | 22,399 | 34.48 | |||||
| Exercisable at March 31, 2015 | 20,664 | 34.62 | |||||
| Exercisable and expected to vest at March 31, 2015 | 22,277 | $ | 34.50 | ||||
| Wtd. Avg. | |||||||
| Restricted | Grant Date | ||||||
| Shares/Units | Fair Value | ||||||
| (Shares in thousands) | |||||||
| Nonvested at January 1, 2015 | 12,075 | $ | 27.38 | ||||
| Granted | 3,621 | 33.28 | |||||
| Vested | (2,450) | 25.33 | |||||
| Forfeited | (79) | 29.26 | |||||
| Nonvested at March 31, 2015 | 13,167 | 29.37 | |||||
| Expected to vest at March 31, 2015 | 12,045 | 29.40 | |||||
| 21 |
| Three Months Ended March 31, 2015 | Unrecognized Net Pension and Postretirement Costs | Unrealized Net Gains (Losses) on Cash Flow Hedges | Unrealized Net Gains (Losses) on AFS Securities | FDIC's Share of Unrealized (Gains) Losses on AFS Securities | Other, net | Total | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||
| AOCI balance, January 1, 2015 | $ | (626) | $ | (54) | $ | 152 | $ | (207) | $ | (16) | $ | (751) | ||||||||||
| OCI before reclassifications, net of tax | 2 | (67) | 67 | 2 | (5) | (1) | ||||||||||||||||
| Amounts reclassified from AOCI: | ||||||||||||||||||||||
| Personnel expense | 12 | ― | ― | ― | ― | 12 | ||||||||||||||||
| Interest income | ― | ― | (16) | ― | 1 | (15) | ||||||||||||||||
| Interest expense | ― | 21 | ― | ― | ― | 21 | ||||||||||||||||
| FDIC loss share income, net | ― | ― | ― | 13 | ― | 13 | ||||||||||||||||
| Total before income taxes | 12 | 21 | (16) | 13 | 1 | 31 | ||||||||||||||||
| Less: Income taxes | 5 | 8 | (6) | 5 | ― | 12 | ||||||||||||||||
| Net of income taxes | 7 | 13 | (10) | 8 | 1 | 19 | ||||||||||||||||
| Net change in AOCI | 9 | (54) | 57 | 10 | (4) | 18 | ||||||||||||||||
| AOCI balance, March 31, 2015 | $ | (617) | $ | (108) | $ | 209 | $ | (197) | $ | (20) | $ | (733) | ||||||||||
| Three Months Ended March 31, 2014 | Unrecognized Net Pension and Postretirement Costs | Unrealized Net Gains (Losses) on Cash Flow Hedges | Unrealized Net Gains (Losses) on AFS Securities | FDIC's Share of Unrealized (Gains) Losses on AFS Securities | Other, net | Total | ||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||
| AOCI balance, January 1, 2014 | $ | (303) | $ | 2 | $ | (42) | $ | (235) | $ | (15) | $ | (593) | ||||||||||
| OCI before reclassifications, net of tax | 1 | (2) | 85 | ― | (5) | 79 | ||||||||||||||||
| Amounts reclassified from AOCI: | ||||||||||||||||||||||
| Interest income | ― | ― | (8) | ― | 1 | (7) | ||||||||||||||||
| Interest expense | ― | 21 | ― | ― | ― | 21 | ||||||||||||||||
| FDIC loss share income, net | ― | ― | ― | 10 | ― | 10 | ||||||||||||||||
| Securities (gains) losses, net | ― | ― | (2) | ― | ― | (2) | ||||||||||||||||
| Total before income taxes | ― | 21 | (10) | 10 | 1 | 22 | ||||||||||||||||
| Less: Income taxes | ― | 8 | (4) | 4 | ― | 8 | ||||||||||||||||
| Net of income taxes | ― | 13 | (6) | 6 | 1 | 14 | ||||||||||||||||
| Net change in AOCI | 1 | 11 | 79 | 6 | (4) | 93 | ||||||||||||||||
| AOCI balance, March 31, 2014 | $ | (302) | $ | 13 | $ | 37 | $ | (229) | $ | (19) | $ | (500) | ||||||||||
The effective tax rates for the three months ended March 31, 2015 and 2014 were 30.6% and 30.9%, respectively. Effective January 1, 2015, the Company adopted new accounting guidance related to investments in qualified affordable housing projects. See Note 12 “Commitments and Contingencies” for additional information.
In February 2010, BB&T received an IRS statutory notice of deficiency for tax years 2002-2007 asserting a liability for taxes, penalties and interest of approximately $892 million related to the disallowance of foreign tax credits and other deductions claimed by a subsidiary in connection with a financing transaction. BB&T paid the disputed tax, penalties and interest in March 2010 and filed a lawsuit seeking a refund in the U.S. Court of Federal Claims. On September 20, 2013, the court denied the refund claim. BB&T appealed the decision to the U.S. Court of Appeals for the Federal Circuit. Oral arguments were heard in the appeal on January 7, 2015; however, no decision has been rendered. As of March 31, 2015, the exposure for this financing transaction is fully reserved.
It is reasonably possible that the litigation associated with the financing transaction may conclude within the next twelve months; however, further proceedings could delay a final resolution. Changes in the amount of unrecognized tax benefits, penalties and interest could result in a benefit of up to approximately $700 million. The ultimate resolution of these matters may take longer.
| 22 |
| Qualified Plan | Nonqualified Plans | |||||||||||||||
| Three Months Ended March 31, | 2015 | 2014 | 2015 | 2014 | ||||||||||||
| (Dollars in millions) | ||||||||||||||||
| Service cost | $ | 43 | $ | 33 | $ | 3 | $ | 3 | ||||||||
| Interest cost | 34 | 31 | 4 | 4 | ||||||||||||
| Estimated return on plan assets | (81) | (74) | ― | ― | ||||||||||||
| Amortization and other | 12 | ― | 4 | 3 | ||||||||||||
| Net periodic benefit cost | $ | 8 | $ | (10) | $ | 11 | $ | 10 | ||||||||
BB&T makes contributions to the qualified pension plan in amounts between the minimum required for funding and the maximum amount deductible for federal income tax purposes. Discretionary contributions totaling $117 million were made during the three months ended March 31, 2015. There are no required contributions for the remainder of 2015, though BB&T may elect to make additional contributions.
NOTE 12. Commitments and Contingencies
| As Of / For the Year-To-Date Period Ended | |||||||||
| March 31, 2015 | December 31, 2014 | ||||||||
| (Dollars in millions) | |||||||||
| Letters of credit and financial guarantees | $ | 3,422 | $ | 3,462 | |||||
| Carrying amount of the liability for letter of credit guarantees | 24 | 22 | |||||||
| Investments in affordable housing and historic building rehabilitation projects: | |||||||||
| Carrying amount | 1,515 | 1,416 | |||||||
| Amount of future funding commitments included in carrying amount | 536 | 459 | |||||||
| Lending exposure | 178 | 169 | |||||||
| Tax credits subject to recapture | 297 | 300 | |||||||
| Amortization recognized in the provision for income taxes | 46 | 161 | |||||||
| Tax credits and other tax benefits recognized in the provision for income taxes | 65 | 222 | |||||||
| Investments in private equity and similar investments | 366 | 329 | |||||||
| Future funding commitments to consolidated private equity funds | 184 | 202 | |||||||
Effective January 1, 2015, BB&T adopted new guidance related to investments in qualified affordable housing projects and elected the proportional amortization method to account for these investments. The following table summarizes the impact to certain previously reported amounts.
| Three Months Ended March 31, 2014 | ||||||||||||
| (Dollars in millions) | ||||||||||||
| Increase in other income | $ | 34 | ||||||||||
| Increase in provision for income taxes | (39) | |||||||||||
| Decrease in net income and net income available to common shareholders | $ | (5) | ||||||||||
| Decrease in diluted EPS | $ | (0.01) | ||||||||||
| January 1, | ||||||||||||
| 2015 | 2014 | |||||||||||
| (Dollars in millions) | ||||||||||||
| Decrease to retained earnings | $ | (49) | $ | (29) | ||||||||
| 23 |
Legal Proceedings
The nature of BB&T’s business ordinarily results in a certain amount of claims, litigation, investigations and legal and administrative cases and proceedings, all of which are considered incidental to the normal conduct of business. BB&T believes it has meritorious defenses to the claims asserted against it in its currently outstanding legal proceedings and, with respect to such legal proceedings, intends to continue to defend itself vigorously, litigating or settling cases according to management’s judgment as to what is in the best interests of BB&T and its shareholders.
On at least a quarterly basis, liabilities and contingencies in connection with outstanding legal proceedings are assessed utilizing the latest information available. For those matters where it is probable that BB&T will incur a loss and the amount of the loss can be reasonably estimated, a liability is recorded in the consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments on at least a quarterly basis. For other matters, where a loss is not probable or the amount of the loss is not estimable, legal reserves are not accrued. While the outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel and available insurance coverage, management believes that the established legal reserves are adequate and the liabilities arising from legal proceedings will not have a material adverse effect on the consolidated financial position, consolidated results of operations or consolidated cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the consolidated financial position, consolidated results of operations or consolidated cash flows of BB&T.
Pledged Assets
Certain assets were pledged to secure municipal deposits, securities sold under agreements to repurchase, borrowings, and borrowing capacity, subject to certain limits, at the FHLB and FRB as well as for other purposes as required or permitted by law. The following table provides the total carrying amount of pledged assets by asset type, of which the majority are pursuant to agreements that do not permit the other party to sell or repledge the collateral. Assets related to employee benefit plans have been excluded from the following table.
| March 31, | December 31, | ||||||||
| 2015 | 2014 | ||||||||
| (Dollars in millions) | |||||||||
| Pledged securities | $ | 14,859 | $ | 14,636 | |||||
| Pledged loans | 67,312 | 67,248 | |||||||
| 24 |
NOTE 13. Fair Value Disclosures
Accounting standards define fair value as the exchange price that would be received on the measurement date to sell an asset or the price paid to transfer a liability in the principal or most advantageous market available to the entity in an orderly transaction between market participants, with a three level valuation input hierarchy.
| 25 |
| December 31, 2014 | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| (Dollars in millions) | ||||||||||||||||
| Assets: | ||||||||||||||||
| Trading securities | $ | 482 | $ | 289 | $ | 193 | $ | ― | ||||||||
| AFS securities: | ||||||||||||||||
| U.S. Treasury | 1,231 | ― | 1,231 | ― | ||||||||||||
| MBS issued by GSE | 16,154 | ― | 16,154 | ― | ||||||||||||
| States and political subdivisions | 1,974 | ― | 1,974 | ― | ||||||||||||
| Non-agency MBS | 264 | ― | 264 | ― | ||||||||||||
| Other | 41 | 6 | 35 | ― | ||||||||||||
| Acquired from FDIC | 1,243 | ― | 498 | 745 | ||||||||||||
| LHFS | 1,423 | ― | 1,423 | ― | ||||||||||||
| Residential MSRs | 844 | ― | ― | 844 | ||||||||||||
| Derivative assets: | ||||||||||||||||
| Interest rate contracts | 1,114 | ― | 1,094 | 20 | ||||||||||||
| Foreign exchange contracts | 8 | ― | 8 | ― | ||||||||||||
| Private equity and similar investments | 329 | ― | ― | 329 | ||||||||||||
| Total assets | $ | 25,107 | $ | 295 | $ | 22,874 | $ | 1,938 | ||||||||
| Liabilities: | ||||||||||||||||
| Derivative liabilities: | ||||||||||||||||
| Interest rate contracts | $ | 1,007 | $ | ― | $ | 1,004 | $ | 3 | ||||||||
| Foreign exchange contracts | 6 | ― | 6 | ― | ||||||||||||
| Short-term borrowings | 148 | ― | 148 | ― | ||||||||||||
| Total liabilities | $ | 1,161 | $ | ― | $ | 1,158 | $ | 3 | ||||||||
The following discussion focuses on the valuation techniques and significant inputs for Level 2 and Level 3 assets and liabilities.
A third-party pricing service is generally utilized in determining the fair value of the securities portfolio. Management independently evaluates the fair values provided by the pricing service through comparisons to other third party pricing sources, review of additional information provided by the third party pricing service and other third party sources for selected securities and back-testing to compare the price realized on any security sales to the daily pricing information received from the pricing service. Fair value measurements are derived from market-based pricing matrices that were developed using observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads and broker quotes. As described by security type below, additional inputs may be used, or some inputs may not be applicable. In the event that market observable data was not available, which would generally occur due to the lack of an active market for a given security, the valuation of the security would be subjective and may involve substantial judgment by management.
Trading securities: Trading securities include various types of debt and equity securities, primarily consisting of debt securities issued by the U.S. Treasury, GSEs, or states and political subdivisions. The valuation techniques used for these investments are more fully discussed below.
U.S. Treasury securities: Treasury securities are valued using quoted prices in active over the counter markets.
GSE securities and MBS issued by GSE: GSE pass-through securities are valued using market-based pricing matrices that are based on observable inputs including benchmark TBA security pricing and yield curves that were estimated based on U.S. Treasury yields and certain floating rate indices. The pricing matrices for these securities may also give consideration to pool-specific data supplied directly by the GSE. GSE CMOs are valued using market-based pricing matrices that are based on observable inputs including offers, bids, reported trades, dealer quotes and market research reports, the characteristics of a specific tranche, market convention prepayment speeds and benchmark yield curves as described above.
States and political subdivisions: These securities are valued using market-based pricing matrices that are based on observable inputs including MSRB reported trades, issuer spreads, material event notices and benchmark yield curves.
Non-agency MBS: Pricing matrices for these securities are based on observable inputs including offers, bids, reported trades, dealer quotes and market research reports, the characteristics of a specific tranche, market convention prepayment speeds and benchmark yield curves as described above.
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Other securities: These securities consist primarily of mutual funds and corporate bonds. These securities are valued based on a review of quoted market prices for assets as well as through the various other inputs discussed previously.
Acquired from FDIC securities: Securities acquired from the FDIC consist of re-remic non-agency MBS, municipal securities and non-agency MBS. State and political subdivision securities and certain non-agency MBS acquired from the FDIC are valued in a manner similar to the approach described above for those asset classes. The re-remic non-agency MBS, which are categorized as Level 3, are valued based on broker dealer quotes that reflected certain unobservable market inputs.
LHFS: Certain mortgage loans are originated to be sold to investors, which are carried at fair value. The fair value is primarily based on quoted market prices for securities backed by similar types of loans. The changes in fair value of these assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage LHFS.
Residential MSRs: Residential MSRs are valued using an OAS valuation model to project cash flows over multiple interest rate scenarios, which are then discounted at risk-adjusted rates. The model considers portfolio characteristics, contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. Fair value estimates and assumptions are compared to industry surveys, recent market activity, actual portfolio experience and, when available, other observable market data.
Derivative assets and liabilities: The fair values of derivatives are determined based on quoted market prices and internal pricing models that are primarily sensitive to market observable data. The fair values of interest rate lock commitments, which are related to mortgage loan commitments and are categorized as Level 3, are based on quoted market prices adjusted for commitments that are not expected to fund and include the value attributable to the net servicing fees.
Private equity and similar investments: Private equity and similar investments are measured at fair value based on the investment’s net asset value. In many cases there are no observable market values for these investments and therefore management must estimate the fair value based on a comparison of the operating performance of the company to multiples in the marketplace for similar entities. This analysis requires significant judgment, and actual values in a sale could differ materially from those estimated.
Short-term borrowings: Short-term borrowings represent debt securities sold short that are entered into as a hedging strategy for the purposes of supporting institutional and retail client trading activities.
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| Three Months Ended March 31, 2014 | Acquired from FDIC Securities | Residential MSRs | Net Derivatives | Private Equity and Similar Investments | |||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Balance at January 1, 2014 | $ | 861 | $ | 1,047 | $ | (11) | $ | 291 | |||||||||
| Total realized and unrealized gains (losses): | |||||||||||||||||
| Included in earnings: | |||||||||||||||||
| Interest income | 15 | ― | ― | ― | |||||||||||||
| Mortgage banking income | ― | (43) | 15 | ― | |||||||||||||
| Other noninterest income | ― | ― | ― | 3 | |||||||||||||
| Included in unrealized net holding gains (losses) in OCI | (18) | ― | ― | ― | |||||||||||||
| Purchases | ― | ― | ― | 38 | |||||||||||||
| Issuances | ― | 33 | 12 | ― | |||||||||||||
| Sales | ― | ― | ― | (1) | |||||||||||||
| Settlements | (26) | (29) | (12) | (3) | |||||||||||||
| Balance at March 31, 2014 | $ | 832 | $ | 1,008 | $ | 4 | $ | 328 | |||||||||
| Change in unrealized gains (losses) included in earnings for the period, | |||||||||||||||||
| attributable to assets and liabilities still held at March 31, 2014 | $ | 15 | $ | (43) | $ | 4 | $ | 2 | |||||||||
BB&T’s policy is to recognize transfers between fair value levels as of the end of a reporting period. There were no transfers between fair value levels during the quarters ended March 31, 2015 and March 31, 2014.
The majority of BB&T’s private equity and similar investments are in SBIC qualified funds, which primarily focus on equity and subordinated debt investments in privately-held middle market companies. The majority of these investments are not redeemable and distributions are received as the underlying assets of the funds liquidate. The timing of distributions, which are expected to occur on various dates through 2025, is uncertain and dependent on various events such as recapitalizations, refinance transactions and ownership changes, among others. Excluding the investment of future funds, BB&T estimates these investments have a weighted average remaining life of approximately two years; however, the timing and amount of distributions may vary significantly. As of March 31, 2015, restrictions on the ability to sell the investments include, but are not limited to, consent of a majority member or general partner’s approval for transfer of ownership. BB&T’s investments are spread over numerous privately-held middle market companies, and thus the sensitivity to a change in fair value for any single investment is limited. The significant unobservable inputs for these investments are EBITDA multiples that ranged from 5x to 11x, with a weighted average of 8x, at March 31, 2015.
Excluding government guaranteed, LHFS that were nonaccrual or 90 days or more past due and still accruing interest were not material at March 31, 2015.
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For financial instruments not recorded at fair value, estimates of fair value are based on relevant market data and information about the instrument and are based on the value of one trading unit without regard to any premium or discount that may result from concentrations of ownership, possible tax ramifications, estimated transaction costs that may result from bulk sales or the relationship between various instruments.
An active market does not exist for certain financial instruments. Fair value estimates for these instruments are based on current economic conditions, currency and interest rate risk characteristics, loss experience and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. In addition, changes in assumptions could significantly affect these fair value estimates. The following assumptions were used to estimate the fair value of these financial instruments.
Cash and cash equivalents and restricted cash : For these short-term instruments, the carrying amounts are a reasonable estimate of fair values.
HTM securities: The fair values of HTM securities are based on a market approach using observable inputs such as benchmark yields and securities, TBA prices, reported trades, issuer spreads, current bids and offers, monthly payment information and collateral performance.
Loans receivable : The fair values for loans are estimated using discounted cash flow analyses, applying interest rates currently being offered for loans with similar terms and credit quality, which are deemed to be indicative of orderly transactions in the current market. For commercial loans and leases, discount rates may be adjusted to address additional credit risk on lower risk grade instruments. For residential mortgage and other consumer loans, internal prepayment risk models are used to adjust contractual cash flows. Loans are aggregated into pools of similar terms and credit quality and discounted using a LIBOR based rate. The carrying amounts of accrued interest approximate fair values.
FDIC loss share receivable and payable : The fair values of the receivable and payable are estimated using discounted cash flow analyses, applying a risk free interest rate that is adjusted for the uncertainty in the timing and amount of the cash flows. The expected cash flows to/from the FDIC related to loans were estimated using the same assumptions that were used in determining the accounting values for the related loans. The expected cash flows to/from the FDIC related to securities are based upon the fair value of the related securities and the payment that would be required if the securities were sold for that amount. The loss share agreements are not transferrable and, accordingly, there is no market for the receivable or payable.
Deposit liabilities : The fair values for demand deposits are equal to the amount payable on demand. Fair values for CDs are estimated using a discounted cash flow calculation that applies current interest rates to aggregate expected maturities. BB&T has developed long-term relationships with its deposit customers, commonly referred to as CDIs, that have not been considered in the determination of the deposit liabilities’ fair value.
Short-term borrowings : The carrying amounts of short-term borrowings approximate their fair values.
Long-term debt : The fair values of long-term debt instruments are estimated based on quoted market prices for the instrument if available, or for similar instruments if not available, or by using discounted cash flow analyses, based on current incremental borrowing rates for similar types of instruments.
Contractual commitments : The fair values of commitments are estimated using the fees charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The fair values of guarantees and letters of credit are estimated based on the counterparties’ creditworthiness and average default rates for loan products with similar risks. These respective fair value measurements are categorized within Level 3 of the fair value hierarchy. Retail lending commitments are assigned no fair value as BB&T typically has the ability to cancel such commitments by providing notice to the borrower.
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| Carrying | Total | |||||||||||||||
| December 31, 2014 | Amount | Fair Value | Level 2 | Level 3 | ||||||||||||
| (Dollars in millions) | ||||||||||||||||
| Financial assets: | ||||||||||||||||
| HTM securities | $ | 20,240 | $ | 20,313 | $ | 20,313 | $ | ― | ||||||||
| Loans and leases, net of ALLL excluding acquired from FDIC | 117,259 | 117,268 | ― | 117,268 | ||||||||||||
| Acquired from FDIC loans, net of ALLL | 1,151 | 1,337 | ― | 1,337 | ||||||||||||
| FDIC loss share receivable | 534 | 123 | ― | 123 | ||||||||||||
| Financial liabilities: | ||||||||||||||||
| Deposits | 129,040 | 129,259 | 129,259 | ― | ||||||||||||
| FDIC loss share payable | 697 | 696 | ― | 696 | ||||||||||||
| Long-term debt | 23,312 | 24,063 | 24,063 | ― | ||||||||||||
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NOTE 14. Derivative Financial Instruments
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Assets and liabilities related to derivatives are presented on a gross basis in the Consolidated Balance Sheets. The fair value of derivatives in a gain or loss position is included in other assets or liabilities, respectively, on the Consolidated Balance Sheets. Cash collateral posted for derivatives in a loss position is reported as restricted cash. Derivatives with dealer counterparties at both the bank and the parent company are governed by the terms of ISDA Master netting agreements and Credit Support Annexes. The ISDA Master agreements allow counterparties to offset trades in a gain against trades in a loss to determine net exposure and allows for the right of setoff in the event of either a default or an additional termination event. Credit Support Annexes govern the terms of daily collateral posting practices. Collateral practices mitigate the potential loss impact to affected parties by requiring liquid collateral to be posted on a scheduled basis to secure the aggregate net unsecured exposure. In addition to collateral, the right of setoff allows counterparties to offset net derivative values with a defaulting party against certain other contractual receivables from or obligations due to the defaulting party in determining the net termination amount. No portion of the change in fair value of derivatives designated as hedges has been excluded from effectiveness testing. The ineffective portion was immaterial for all periods presented.
| The Effect of Derivative Instruments on the Consolidated Statements of Income | |||||||||||||||||||
| Three Months Ended March 31, 2015 and 2014 | |||||||||||||||||||
| Effective Portion | |||||||||||||||||||
| Pre-tax Gain | Pre-tax Gain (Loss) | ||||||||||||||||||
| (Loss) Recognized | Reclassified from | ||||||||||||||||||
| in AOCI | Location of Amounts | AOCI into Income | |||||||||||||||||
| 2015 | 2014 | Reclassified from AOCI into Income | 2015 | 2014 | |||||||||||||||
| (Dollars in millions) | |||||||||||||||||||
| Cash flow hedges: | |||||||||||||||||||
| Interest rate contracts | $ | (107) | $ | (3) | Total interest expense | $ | (21) | $ | (21) | ||||||||||
| Pre-tax Gain | |||||||||||||||||||
| (Loss) Recognized | |||||||||||||||||||
| Location of Amounts | in Income | ||||||||||||||||||
| Recognized in Income | 2015 | 2014 | |||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||
| Fair value hedges: | |||||||||||||||||||
| Interest rate contracts | Total interest income | $ | (5) | $ | (5) | ||||||||||||||
| Interest rate contracts | Total interest expense | 68 | 53 | ||||||||||||||||
| Total | $ | 63 | $ | 48 | |||||||||||||||
| Not designated as hedges: | |||||||||||||||||||
| Client-related and other risk management: | |||||||||||||||||||
| Interest rate contracts | Other noninterest income | $ | 1 | $ | 5 | ||||||||||||||
| Foreign exchange contracts | Other noninterest income | 8 | 4 | ||||||||||||||||
| Mortgage banking: | |||||||||||||||||||
| Interest rate contracts | Mortgage banking income | 7 | (10) | ||||||||||||||||
| MSRs: | |||||||||||||||||||
| Interest rate contracts | Mortgage banking income | 81 | 45 | ||||||||||||||||
| Total | $ | 97 | $ | 44 | |||||||||||||||
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Derivatives Credit Risk – Dealer Counterparties
Credit risk related to derivatives arises when amounts receivable from a counterparty exceed those payable to the same counterparty. The risk of loss is addressed by subjecting dealer counterparties to credit reviews and approvals similar to those used in making loans or other extensions of credit and by requiring collateral. Dealer counterparties operate under agreements to provide cash and/or liquid collateral when unsecured loss positions exceed negotiated limits.
Derivative contracts with dealer counterparties settle on a monthly, quarterly or semiannual basis, with daily movement of collateral between counterparties required within established netting agreements. BB&T only transacts with dealer counterparties that are national market makers with strong credit standings.
Derivatives Credit Risk – Central Clearing Parties
Certain derivatives are cleared through central clearing parties that require initial margin collateral, as well as collateral for trades in a net loss position. Initial margin collateral requirements are established by central clearing parties on varying bases, with such amounts generally designed to offset the risk of non-payment. Initial margin is generally calculated by applying the maximum loss experienced in value over a specified time horizon to the portfolio of existing trades. The central clearing party used for TBA transactions does not post variation margin to the bank.
| March 31, | December 31, | ||||||||||||||
| 2015 | 2014 | ||||||||||||||
| (Dollars in millions) | |||||||||||||||
| Cash collateral received from dealer counterparties | $ | 308 | $ | 191 | |||||||||||
| Derivatives in a net gain position secured by that collateral | 316 | 201 | |||||||||||||
| Unsecured positions in a net gain with dealer counterparties after collateral postings | 8 | 10 | |||||||||||||
| Cash collateral posted to dealer counterparties | 219 | 227 | |||||||||||||
| Derivatives in a net loss position secured by that collateral | 221 | 231 | |||||||||||||
| Additional collateral that would have been posted had BB&T's credit ratings | |||||||||||||||
| dropped below investment grade | 3 | 3 | |||||||||||||
| Cash collateral, including initial margin, posted to central clearing parties | 201 | 114 | |||||||||||||
| Derivatives in a net loss position secured by that collateral | 223 | 129 | |||||||||||||
| Securities pledged to central clearing parties | 205 | 116 | |||||||||||||
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| BB&T’s basic and diluted EPS calculations are presented in the following table: | ||||||||||
| Three Months Ended March 31, | ||||||||||
| 2015 | 2014 | |||||||||
| (Dollars in millions, except per | ||||||||||
| share data, shares in thousands) | ||||||||||
| Net income available to common shareholders | $ | 488 | $ | 496 | ||||||
| Weighted average number of common shares | 721,639 | 712,842 | ||||||||
| Effect of dilutive outstanding equity-based awards | 9,872 | 11,441 | ||||||||
| Weighted average number of diluted common shares | 731,511 | 724,283 | ||||||||
| Basic EPS | $ | 0.68 | $ | 0.70 | ||||||
| Diluted EPS | $ | 0.67 | $ | 0.68 | ||||||
| Anti-dilutive awards | 11,543 | 15,255 | ||||||||
As a result of new qualified mortgage regulations, during January 2014 approximately $8.3 billion of closed-end, first and second lien position residential mortgage loans were transferred from Community Banking to Residential Mortgage Banking based on a change in how these loans are managed. In connection with this transfer, $319 million of goodwill was transferred from Community Banking to Residential Mortgage Banking.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BB&T is a financial holding company organized under the laws of North Carolina. BB&T conducts operations through its principal bank subsidiary, Branch Bank, and its nonbank subsidiaries.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the financial condition, results of operations, business plans and the future performance of BB&T that are based on the beliefs and assumptions of the management of BB&T and the information available to management at the time that these disclosures were prepared. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “projects,” “may,” “will,” “should,” “could,” and other similar expressions are intended to identify these forward-looking statements. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. Such factors include, but are not limited to, the following:
| · | general economic or business conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit, insurance or other services; |
| · | disruptions to the national or global financial markets, including the impact of a downgrade of U.S. government obligations by one of the credit ratings agencies and the adverse effects of recessionary conditions in Europe; |
| · | changes in the interest rate environment and cash flow reassessments may reduce NIM and/or the volumes and values of loans made or held as well as the value of other financial assets held; |
| · | competitive pressures among depository and other financial institutions may increase significantly; |
| · | legislative, regulatory or accounting changes, including changes resulting from the adoption and implementation of the Dodd-Frank Act may adversely affect the businesses in which BB&T is engaged; |
| · | local, state or federal taxing authorities may take tax positions that are adverse to BB&T; |
| · | a reduction may occur in BB&T’s credit ratings; |
| · | adverse changes may occur in the securities markets; |
| · | competitors of BB&T may have greater financial resources and develop products that enable them to compete more successfully than BB&T and may be subject to different regulatory standards than BB&T; |
| · | cyber-security risks, including “denial of service,” “hacking” and “identity theft,” could adversely affect our business and financial performance, or our reputation; |
| · | 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 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; |
| · | significant litigation could have a material adverse effect on BB&T; |
| · | deposit attrition, customer loss and/or revenue loss following completed mergers and acquisitions may be greater than expected; |
| · | failure to correctly implement or properly utilize the remaining components of the Company’s new ERP system could result in impairment charges that adversely impact BB&T’s financial condition and results of operations and could result in significant additional costs; and |
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| · | failure to execute on strategic or operational plans, including the ability to successfully complete and/or integrate mergers and acquisitions, could adversely impact BB&T’s financial condition and results of operations. |
These and other risk factors are more fully described in this report and in BB&T’s Annual Report on Form 10-K for the year ended December 31, 2014 under the sections entitled “Item 1A. Risk Factors” and from time to time, in other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Actual results may differ materially from those expressed in or implied by any forward-looking statements. Except to the extent required by applicable law or regulation, BB&T undertakes no obligation to revise or update publicly any forward-looking statements for any reason.
Regulatory Considerations
BB&T and its affiliates are subject to numerous examinations by federal and state banking regulators, as well as the SEC, FINRA, and various state insurance and securities regulators. BB&T has from time to time received requests for information from regulatory authorities in various states, including state insurance commissions and state attorneys general, securities regulators and other regulatory authorities, concerning their business practices. Such requests are considered incidental to the normal conduct of business. Refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2014 for additional disclosures with respect to laws and regulations affecting BB&T.
Amendments to the Capital Plan and Stress Test Rules
During 2014, the FRB amended the start date of the capital plan and stress test cycles from October 1 to January 1 of the following calendar year. The FRB also amended the capital plan rule to limit a BHC’s ability to make capital distributions to the extent the BHC’s actual capital issuances are less than the amount indicated in its capital plan under baseline conditions, measured on a quarterly basis.
The FDIC revised the annual stress testing requirements for state non-member banks and state savings associations with total consolidated assets of more than $10 billion. FDIC regulations require covered banks to conduct annual stress tests, report the results of such stress tests to the FDIC and the FRB and publicly disclose a summary of the results. The FDIC modified the “as-of” dates for financial data that covered banks will use to perform their stress tests as well as the reporting dates and public disclosure dates of the annual stress tests. The revisions to the regulations will become effective January 1, 2016.
Home Mortgage Disclosure (Regulation C)
During 2015, the CFPB published proposed amendments to Regulation C to implement changes to HMDA made by section 1094 of the Dodd-Frank Act. Specifically, the CFPB proposed several changes to revise the tests for determining which financial institutions and housing-related credit transactions are covered under HMDA. The CFPB also proposes to require financial institutions to report new data points identified in the Dodd-Frank Act, as well as other data points the CFPB believes may be necessary to carry out the purposes of HMDA. Further, the CFPB proposes to better align the requirements of Regulation C to existing industry standards where practicable. To improve the quality and timeliness of HMDA data, the CFPB proposed to require financial institutions with large numbers of reported transactions to submit their HMDA data on a quarterly, rather than an annual, basis. A final rule is expected to be issued during 2015.
Liquidity Coverage Ratio: Liquidity Risk Measurement Standards
The OCC, the FRB, and the FDIC have adopted a final rule that implements a quantitative liquidity requirement consistent with the liquidity coverage ratio standard established by the BCBS. Refer to “Market Risk Management” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section herein for additional information.
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Foreign Account Tax Compliance Act and Conforming Regulations
During 2014, the IRS issued Notice 2014-33 (the “Notice”) regarding FATCA and its related withholding provisions. The Notice announces that calendar years 2014 and 2015 will be regarded as a transition period for purposes of IRS enforcement and administration with respect to the implementation of FATCA by withholding agents, foreign financial institutions and other entities with IRC chapter 4 responsibilities. The Notice also announces the IRS’s intention to further amend the regulations under Sections 1441, 1442, 1471, and 1472 of the IRC. Prior to the IRS issuing these amendments, taxpayers may rely on the provisions of the Notice regarding the proposed amendments to the regulations. The transition period and other guidance described in the Notice are intended to facilitate an orderly transition for withholding agent and foreign financial institution compliance with FATCA’s requirements and respond to comments regarding certain aspects of the regulations under chapters 3 and 4 of the IRC. BB&T expects to be in compliance with FATCA and its related provisions by the applicable effective dates.
U.S. Implementation of Basel III
The Basel III capital requirements became effective on January 1, 2015. As a result, capital information presented for the quarter ended March 31, 2015 is based on the Basel III requirements, while prior period capital data is based on the former requirements under Basel I. See the section titled “Capital” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information.
Executive Summary
Consolidated net income available to common shareholders for the first quarter of 2015 was $488 million, a decrease of $8 million compared to the same quarter of 2014. On a diluted per common share basis, earnings for the first quarter of 2015 were $0.67 compared to $0.68 for the first quarter of 2014.
Effective January 1, 2015, BB&T adopted new guidance related to the accounting for investments in qualified affordable housing projects. For prior periods, amortization expense related to qualifying investments in low income housing tax credits was reclassified from other income to provision for income taxes, and the amount of amortization and tax benefits recognized was revised as a result of the adoption of the proportional amortization method. See Note 12 “Commitments and Contingencies” for additional information.
BB&T’s results of operations for the first quarter of 2015 produced an annualized return on average assets of 1.18%, an annualized return on average risk-weighted assets of 1.48%, and an annualized return on average common shareholders’ equity of 9.05%, compared to ratios in the first quarter of 2014 of 1.27%, 1.69% and 9.77%, respectively.
Total revenues were $2.3 billion for the first quarter of 2015, up $34 million compared to the first quarter of 2014 as a $70 million increase in noninterest income was partially offset by a $36 million decrease in taxable-equivalent net interest income.
Net interest margin was 3.33%, compared to 3.52% for the first quarter of 2014. Average earning assets increased $5.0 billion, or 3.2%, while average interest-bearing liabilities decreased $667 million, or 0.6%. The annualized yield on the total loan portfolio for the first quarter was 4.23%, a decrease of 35 basis points compared to the earlier quarter, which primarily reflects lower yields on new loans and continued runoff of higher yielding loans acquired from the FDIC. The annualized fully taxable-equivalent yield on the average securities portfolio for the first quarter was 2.47%, one basis point lower than the earlier period.
The average annualized cost of interest-bearing deposits was 0.25%, a decline of two basis points compared to the first quarter of 2014. The average annualized rate paid on long-term debt was 2.18%, a decrease of 31 basis points compared to the earlier quarter. This decrease was the result of lower rates on new issues during the last twelve months and the early extinguishment of higher cost FHLB advances during the third quarter of 2014.
The $70 million increase in noninterest income was primarily driven by higher mortgage banking income and insurance income, which increased $36 million and $13 million, respectively.
The provision for credit losses increased $39 million compared to the first quarter of 2014 primarily due to a reserve release in the earlier quarter. Net charge-offs for the first quarter of 2015, excluding loans acquired from the FDIC, totaled $100 million, down $56 million compared to the earlier quarter.
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Noninterest expense was $1.4 billion for the first quarter of 2015, an increase of $37 million compared to the first quarter of 2014. This increase was driven by a $48 million increase in personnel expense and a $15 million increase in other expense, partially offset by a $13 million decrease in loan-related expense and other smaller decreases.
The provision for income taxes was $241 million for the first quarter of 2015, compared to $256 million for the first quarter of 2014. This produced an effective tax rate for the first quarter of 2015 of 30.6%, compared to 30.9% for the first quarter of 2014.
The Company released the results of its annual company-run stress tests and announced that the FRB accepted its capital plan and did not object to the Company’s proposed capital actions. The proposed capital actions include an increase in the quarterly dividend from $0.24 to $0.27 and the authorization of cumulative share buybacks of up to $820 million beginning during the third quarter of 2015. The plan also incorporates the previously announced acquisitions.
The Company completed the acquisition of 41 branches in Texas, which added approximately $1.9 billion in deposits. The Company also announced an agreement to increase its partnership interest in AmRisc, LP and to sell American Coastal Insurance Company, which is expected to result in a loss upon sale of approximately $30 million to $40 million as a result of allocating goodwill upon disposal.
During the first quarter of 2015, the Company completed the implementation of certain components of the general ledger portion of its new ERP system.
Refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2014 for additional information with respect to BB&T’s recent accomplishments and significant challenges.
Analysis Of Results Of Operations
Net Interest Income and NIM
First Quarter 2015 compared to First Quarter 2014
Net interest income on a FTE basis was $1.3 billion for the first quarter of 2015, a decrease of 2.6% compared to the same period in 2014. The decrease in net interest income was driven by a $54 million decrease in interest income, partially offset by an $18 million decrease in funding costs compared to the same quarter of the prior year. Average earning assets increased $5.0 billion, while average interest-bearing liabilities decreased $667 million. Net interest margin was 3.33%, compared to 3.52% for the earlier quarter. The decline in NIM was primarily driven by lower earning asset yields and continued runoff of assets acquired from the FDIC, partially offset by improved funding costs.
The annualized FTE yield on the average securities portfolio for the first quarter was 2.47%, which was one basis point lower than the earlier period.
The annualized FTE yield on the total loan portfolio for the first quarter was 4.23%, a decrease of 35 basis points compared to the earlier quarter, which primarily reflects lower yields on new loans and the continued runoff of higher yielding loans acquired from the FDIC.
The average annualized cost of interest-bearing deposits was 0.25%, a decline of two basis points compared to the earlier quarter. This decrease was primarily due to improvement in deposit mix, as lower-cost interest checking balances increased while higher-cost time deposits declined. The average annualized FTE rate paid on short-term borrowings was 0.11% for the first quarter of 2015, flat compared to the same period of the prior year. The average annualized rate paid on long-term debt was 2.18%, a decrease of 31 basis points compared to the earlier quarter. This decrease was the result of lower rates on new issues during the last twelve months and the early extinguishment of higher cost FHLB advances during the third quarter of 2014.
The following table sets forth the major components of net interest income and the related annualized yields and rates 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.
| 39 |
| 40 |
Provision for Credit Losses
First Quarter 2015 compared to First Quarter 2014
The provision for credit losses totaled $99 million for the first quarter of 2015, an increase of $39 million compared to the same period of the prior year. This increase is primarily driven by the commercial and industrial portfolio, which had a provision of $33 million compared to an earlier quarter benefit of $7 million. This change reflects stabilization in the rate of credit improvement related to the commercial and industrial portfolio.
The provision related to reserve for unfunded lending commitments increased $17 million primarily due to changes in mix, while the provision for the other lending subsidiaries portfolio declined $16 million due to continued strong credit quality.
Net charge-offs were $101 million for the first quarter of 2015 and $159 million for the first quarter of 2014. Net charge-offs were 0.34% of average loans and leases on an annualized basis for the first quarter of 2015, compared to 0.56% of average loans and leases for the same period in 2014.
Noninterest Income
First Quarter 2015 compared to First Quarter 2014
Noninterest income for the first quarter of 2015 increased $70 million, or 7.6%, compared to the earlier quarter. This increase was primarily driven by higher mortgage banking income and insurance income.
Mortgage banking income totaled $110 million for the first quarter of 2015, compared to $74 million for the first quarter of 2014. This increase reflects higher gains on sales of loans, favorable mortgage servicing rights valuation adjustments and improvement in commercial mortgage fee income due to higher loan volume.
Insurance income was a record $440 million for the quarter, an increase of $13 million compared to the earlier period. This was the result of higher property and casualty insurance commissions and continued strength across the various insurance businesses.
The remaining categories of noninterest income totaled $447 million for the current quarter, compared to $426 million for the first quarter of 2014. The net increase was primarily due to higher transaction volumes.
Noninterest Expense
First Quarter 2015 compared to First Quarter 2014
Noninterest expense totaled $1.4 billion for the first quarter of 2015, an increase of $37 million compared to the same period of 2014. The increase was primarily driven by higher personnel expense and other expense, partially offset by lower loan-related expense.
The increase in personnel expense of $48 million reflects an $18 million increase in qualified pension plan expense that was driven by higher amortization of net actuarial losses and higher service cost. Personnel expense also increased due to higher production-related incentives due to strong performance at fee income-generating businesses and an increase in employee health costs, partially offset by approximately 1,600 fewer full-time equivalent employees.
Other expense was $15 million higher than the earlier quarter primarily due to current period charges associated with vacated property, prior period gains on sales of property and higher current period depreciation on property held under operating leases due to an increase in the size of the portfolio.
The decrease in loan-related expense of $13 million was primarily due to a reduction in residential mortgage reserves compared to the prior period.
Other categories of noninterest expense totaled $335 million for the current quarter, compared to $348 million for the same period of 2014. This decline reflects continued expense control and a lower volume of projects.
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Provision for Income Taxes
First Quarter 2015 compared to First Quarter 2014
The provision for income taxes was $241 million for the first quarter of 2015, compared to $256 million for the earlier quarter. This produced an effective tax rate for the first quarter of 2015 of 30.6%, compared to 30.9% for the earlier quarter.
Segment Results
See Note 16 “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, 2014, for additional disclosures related to BB&T’s reportable business segments. Fluctuations in noninterest income and noninterest expense incurred directly by the segments are more fully discussed in the “Noninterest Income” and “Noninterest Expense” sections above.
| Table 2 | |||||||||||||
| BB&T Corporation | |||||||||||||
| Net Income by Reportable Segments | |||||||||||||
| Three Months Ended March 31, | |||||||||||||
| 2015 | 2014 | ||||||||||||
| (Dollars in millions) | |||||||||||||
| Community Banking | $ | 210 | $ | 215 | |||||||||
| Residential Mortgage Banking | 64 | 63 | |||||||||||
| Dealer Financial Services | 43 | 35 | |||||||||||
| Specialized Lending | 57 | 59 | |||||||||||
| Insurance Services | 72 | 75 | |||||||||||
| Financial Services | 66 | 67 | |||||||||||
| Other, Treasury and Corporate | 35 | 59 | |||||||||||
| BB&T Corporation | $ | 547 | $ | 573 | |||||||||
First Quarter 2015 compared to First Quarter 2014
Community Banking
Community Banking serves individual and business clients by offering a variety of loan and deposit products and other financial services. The segment is primarily responsible for acquiring and maintaining client relationships.
Community Banking net income was $210 million for the first quarter of 2015, a decrease of $5 million compared to the earlier quarter. Segment net interest income decreased $14 million, primarily driven by lower rates on new loans and lower funding spreads on deposits, partially offset by growth in commercial real estate and direct retail loans. Noninterest income decreased $8 million, primarily due to lower service charges on deposits, international factoring commissions and letter of credit fees. The allocated provision for credit losses decreased $3 million as the result of lower commercial and retail loan net charge-offs. Noninterest expense decreased $11 million driven by lower personnel, professional services, regulatory and loan processing expense, partially offset by higher franchise taxes.
Residential Mortgage Banking
Residential Mortgage Banking retains and services mortgage loans originated by BB&T as well as those purchased from various correspondent originators. Mortgage loan products include fixed and adjustable-rate government guaranteed and conventional loans for the purpose of constructing, purchasing or refinancing residential properties. Substantially all of the properties are owner-occupied.
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Residential Mortgage Banking net income was $64 million for the first quarter of 2015, an increase of $1 million over the earlier quarter. Segment net interest income decreased $18 million, primarily the result of strategic loan sales during 2014, lower rates on new loans and a current strategy of selling substantially all conforming mortgage loan production. Noninterest income increased $24 million, driven by higher gains on residential mortgage loan production and sales and an increase in net mortgage servicing rights valuation adjustments. The allocated provision for credit losses reflected a benefit of $12 million in the first quarter of 2015, compared to a benefit of $20 million in the earlier quarter, primarily due to a moderation in the rate of improvement in loss severity trends. Noninterest expense decreased $6 million, driven by lower loan processing and personnel expense.
Dealer Financial Services
Dealer Financial Services primarily originates loans to consumers for the purchase of automobiles. These loans are originated on an indirect basis through approved franchised and independent automobile dealers throughout BB&T’s market area through BB&T Dealer Finance, and on a national basis through Regional Acceptance Corporation. Dealer Financial Services also originates loans for the purchase of recreational and marine vehicles and, in conjunction with the Community Bank, provides financing and servicing to dealers for their inventories.
Dealer Financial Services net income was $43 million for the first quarter of 2015, an increase of $8 million over the earlier quarter. Segment net interest income increased $11 million, primarily driven by growth in the Dealer Finance and Regional Acceptance loan portfolios and the inclusion of dealer floor plan loans in the segment during the current quarter. The allocated provision for credit losses decreased $9 million, primarily due to lower charge-offs related to the non-prime automobile loan portfolio.
Specialized Lending
Specialized Lending consists of businesses that provide specialty finance alternatives to commercial and consumer clients including: commercial finance, mortgage warehouse lending, tax-exempt financing for local governments and special-purpose districts, equipment leasing, full-service commercial mortgage banking, commercial and retail insurance premium finance, dealer-based financing of equipment for consumers and small businesses, and direct consumer finance.
Specialized Lending net income was $57 million for the first quarter of 2015, a decrease of $2 million compared to the earlier quarter. Noninterest income increased $15 million, driven by higher commercial mortgage and operating lease income. The allocated provision for credit losses increased $10 million as the rate of improvement in credit trends has stabilized and the commercial finance loan portfolio experienced higher charge-offs. Noninterest expense increased $8 million, primarily due to higher personnel expense, depreciation of property under operating leases and operating charge-offs.
Insurance Services
BB&T’s insurance agency / brokerage network is the fifth largest in the United States and sixth largest in the world. Insurance Services provides property and casualty, life and health insurance to business and individual clients. It also provides small business and corporate products, such as workers compensation and professional liability, as well as surety coverage and title insurance. In addition, Insurance Services underwrites a limited amount of property and casualty coverage. On April 1, BB&T announced an agreement to increase its partnership interest in AmRisc and to sell American Coastal Insurance Company, subject to regulatory approval.
Insurance Services net income was $72 million in the first quarter of 2015, a decrease of $3 million compared to the earlier quarter. Insurance Service’s noninterest income increased $11 million, which primarily reflects higher new and renewal commercial property and casualty insurance business and higher employee benefit commissions. Allocated corporate expenses increased $8 million primarily due to the centralization of certain corporate support functions during mid-2014. The resulting decrease in salary expense was partially offset by higher incentive and fringe benefit expense.
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Financial Services
Financial Services provides personal trust administration, estate planning, investment counseling, wealth management, asset management, employee benefits services, corporate banking and corporate trust services to individuals, corporations, institutions, foundations and government entities. In addition, Financial Services offers clients investment alternatives, including discount brokerage services, equities, fixed-rate and variable-rate annuities, mutual funds and governmental and municipal bonds through BB&T Investment Services, Inc. The segment also includes BB&T Securities, a full-service brokerage and investment banking firm, the Corporate Banking Division, which originates and services large corporate relationships, syndicated lending relationships and client derivatives, and BB&T Capital Partners, which manages the company’s private equity investments.
Financial Services net income was $66 million in the first quarter of 2015, a decrease of $1 million compared to the earlier quarter. Segment net interest income increased $16 million, driven by Corporate Banking and BB&T Wealth loan and deposit growth. Noninterest income increased $21 million as the result of higher investment commissions, investment banking revenue and income from private equity investments. The allocated provision for credit losses increased $24 million as the result of portfolio mix and a stabilization in the rate of improvement in credit trends in the Corporate Banking portfolio. Noninterest expense increased $15 million compared to the earlier quarter, driven by higher incentive expense.
Other, Treasury & Corporate
Net income in Other, Treasury & Corporate can vary due to the 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 net income was $35 million, a decrease of $24 million compared to the earlier quarter. Segment net interest income decreased $33 million driven by runoff in loans acquired from the FDIC. Noninterest income increased $8 million, primarily due to higher FDIC loss share income. The allocated provision for credit losses reflected a benefit of $9 million in the first quarter of 2015, compared to a benefit of $18 million in the earlier quarter, primarily due to a release in the reserve for unfunded lending commitments in the earlier period driven by improvements related to the mix of lines of credit, letters of credit, and bankers’ acceptances. Noninterest expense increased $31 million, primarily due to higher salary, employee insurance, and pension expense and merger-related charges. Allocated corporate expense decreased by $19 million compared to the earlier quarter as the result of higher expense allocations to the other segments related to internal business initiatives and the continued centralization of certain support functions into the respective corporate centers.
Analysis Of Financial Condition
Investment Activities
The total securities portfolio was $42.1 billion at March 31, 2015, compared to $41.1 billion at December 31, 2014. As of March 31, 2015, the securities portfolio included $21.7 billion of AFS securities (at fair value) and $20.4 billion of HTM securities (at amortized cost).
The effective duration of the securities portfolio decreased to 3.4 years at March 31, 2015, compared to 3.9 years at December 31, 2014, primarily the result of lower interest rates. The duration of the securities portfolio excludes equity securities, auction rate securities and certain non-agency residential MBS that were acquired in the Colonial acquisition.
See Note 3 “Securities” in the “Notes to Consolidated Financial Statements” herein for additional disclosures related to BB&T’s evaluation of securities for OTTI.
Lending Activities
Average loans HFI were $118.8 billion for the first quarter of 2015, compared to $118.3 billion for the fourth quarter of 2014.
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The $536 million increase in average loans HFI during the first quarter of 2015 was driven by growth in the commercial and industrial and sales finance portfolios, partially offset by a decrease in residential mortgage loans.
Average commercial and industrial loans increased $1.1 billion, or 10.7% annualized, which reflects growth from large corporate clients and increased mortgage warehouse lending due to refinance activity. This portfolio has also experienced growth due to expansion into new markets and strong production over the last several quarters. Average sales finance loans were up an annualized 9.9% primarily due to portfolio purchases.
The decrease of $619 million, or 8.1% annualized, in the average balance of the residential mortgage portfolio reflects the continued strategy to sell all conforming residential mortgage loan production, continued runoff of certain closed-end, first and second lien home equity loans and the $140 million loan sale that occurred late in the fourth quarter of 2014.
The average balance of loans acquired from the FDIC was $1.2 billion for the first quarter of 2015, a decrease of $153 million compared to the prior quarter. This decline reflects continued runoff of these loans during the period.
Average LHFS for the first quarter of 2015 decreased $213 million compared to the prior quarter. This decrease reflects a decline of $242 million for residential LHFS and an increase of $29 million for commercial LHFS. The decrease in residential LHFS was primarily due to faster turnover during the quarter.
Asset Quality
Asset quality continued to improve during the first quarter of 2015. NPAs, which include foreclosed real estate, repossessions, NPLs and nonperforming TDRs, totaled $765 million at March 31, 2015, compared to $782 million at December 31, 2014. The decrease in NPAs was due to a decline in NPLs of $17 million. NPAs as a percentage of loans and leases HFI plus foreclosed property were 0.64% at March 31, 2015, compared with 0.65% at December 31, 2014.
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The following tables summarize asset quality information for the past five years. As more fully described below, this information has been adjusted to exclude certain components:
| · | BB&T has recorded certain amounts related to government guaranteed GNMA mortgage loans that BB&T has the option, but not the obligation, to repurchase and has effectively regained control. These amounts are reported in the Consolidated Balance Sheets but have been excluded from the asset quality disclosures, as management believes they result in distortion of the reported metrics. The amount of government guaranteed GNMA mortgage loans that have been excluded are noted in the footnotes to Table 5. |
| · | In addition, BB&T has concluded that the inclusion of loans acquired from the FDIC in “Loans 90 days or more past due and still accruing as a percentage of total loans and leases” may result in significant distortion to this ratio. The inclusion of these loans 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 this asset quality measure excluding loans acquired from the FDIC provides additional perspective into underlying trends related to the quality of its loan portfolio. Accordingly, the asset quality measures in Table 6 present asset quality information on a consolidated basis as well as “Loans 90 days or more past due and still accruing as a percentage of total loans and leases” excluding loans acquired from the FDIC. |
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| Table 5 | |||||||||||||||||
| Asset Quality | |||||||||||||||||
| Three Months Ended | |||||||||||||||||
| 3/31/2015 | 12/31/2014 | 9/30/2014 | 6/30/2014 | 3/31/2014 | |||||||||||||
| (Dollars in millions) | |||||||||||||||||
| NPAs (1) | |||||||||||||||||
| NPLs: | |||||||||||||||||
| Commercial and industrial | $ | 230 | $ | 239 | $ | 259 | $ | 298 | $ | 334 | |||||||
| CRE-income producing properties | 63 | 74 | 81 | 84 | 98 | ||||||||||||
| CRE-construction and development | 18 | 26 | 37 | 38 | 49 | ||||||||||||
| Direct retail lending | 47 | 48 | 50 | 49 | 52 | ||||||||||||
| Sales finance | 7 | 5 | 5 | 5 | 4 | ||||||||||||
| Residential mortgage-nonguaranteed (2) | 183 | 166 | 298 | 320 | 319 | ||||||||||||
| Other lending subsidiaries | 51 | 58 | 54 | 47 | 47 | ||||||||||||
| Total nonaccrual loans and leases HFI (2) | 599 | 616 | 784 | 841 | 903 | ||||||||||||
| Foreclosed real estate | 90 | 87 | 75 | 56 | 59 | ||||||||||||
| Foreclosed real estate-acquired from FDIC | 53 | 56 | 56 | 56 | 98 | ||||||||||||
| Other foreclosed property | 23 | 23 | 24 | 19 | 24 | ||||||||||||
| Total NPAs (2) | $ | 765 | $ | 782 | $ | 939 | $ | 972 | $ | 1,084 | |||||||
| Performing TDRs (3) | |||||||||||||||||
| Commercial and industrial | $ | 54 | $ | 64 | $ | 90 | $ | 86 | $ | 76 | |||||||
| CRE-income producing properties | 15 | 27 | 25 | 27 | 42 | ||||||||||||
| CRE-construction and development | 25 | 30 | 28 | 30 | 32 | ||||||||||||
| Direct retail lending | 84 | 84 | 89 | 91 | 93 | ||||||||||||
| Sales finance | 18 | 19 | 20 | 18 | 19 | ||||||||||||
| Revolving credit | 38 | 41 | 44 | 46 | 47 | ||||||||||||
| Residential mortgage-nonguaranteed (4) | 269 | 261 | 254 | 814 | 836 | ||||||||||||
| Residential mortgage-government guaranteed | 325 | 360 | 437 | 433 | 387 | ||||||||||||
| Other lending subsidiaries | 168 | 164 | 151 | 141 | 132 | ||||||||||||
| Total Performing TDRs (4) | $ | 996 | $ | 1,050 | $ | 1,138 | $ | 1,686 | $ | 1,664 | |||||||
| Loans 90 days or more past due and still accruing | |||||||||||||||||
| Direct retail lending | $ | 9 | $ | 12 | $ | 13 | $ | 11 | $ | 10 | |||||||
| Sales finance | 3 | 5 | 5 | 3 | 4 | ||||||||||||
| Revolving credit | 10 | 9 | 10 | 8 | 9 | ||||||||||||
| Residential mortgage-nonguaranteed | 59 | 83 | 79 | 80 | 76 | ||||||||||||
| Residential mortgage-government guaranteed (5) | 157 | 238 | 232 | 254 | 305 | ||||||||||||
| Other lending subsidiaries | ― | ― | ― | ― | 4 | ||||||||||||
| Acquired from FDIC | 154 | 188 | 229 | 249 | 258 | ||||||||||||
| Total loans 90 days or more past due and still accruing (5) | $ | 392 | $ | 535 | $ | 568 | $ | 605 | $ | 666 | |||||||
| Loans 30-89 days past due | |||||||||||||||||
| Commercial and industrial | $ | 20 | $ | 23 | $ | 19 | $ | 21 | $ | 26 | |||||||
| CRE-income producing properties | 7 | 4 | 5 | 7 | 14 | ||||||||||||
| CRE-construction and development | 2 | 1 | 1 | 2 | 3 | ||||||||||||
| Direct retail lending | 40 | 41 | 40 | 41 | 50 | ||||||||||||
| Sales finance | 49 | 62 | 55 | 49 | 45 | ||||||||||||
| Revolving credit | 19 | 23 | 22 | 20 | 21 | ||||||||||||
| Residential mortgage-nonguaranteed | 356 | 392 | 424 | 513 | 485 | ||||||||||||
| Residential mortgage-government guaranteed (6) | 68 | 80 | 95 | 87 | 73 | ||||||||||||
| Other lending subsidiaries | 151 | 237 | 217 | 197 | 133 | ||||||||||||
| Acquired from FDIC | 47 | 33 | 41 | 84 | 85 | ||||||||||||
| Total loans 30-89 days past due (6) | $ | 759 | $ | 896 | $ | 919 | $ | 1,021 | $ | 935 | |||||||
Excludes loans held for sale.
| (1) | Loans acquired from the FDIC are considered to be performing due to the application of the accretion method. |
| (2) | During the fourth quarter of 2014, approximately $121 million of residential mortgage NPLs were sold. |
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| (3) | Excludes TDRs that are nonperforming totaling $127 million, $126 million, $207 million, $192 million, and $213 million at March 31, 2015, December 31, 2014, September 30, 2014, June 30, 2014 and March 31, 2014, respectively. These amounts are included in total NPAs. |
| (4) | During the third quarter of 2014, approximately $540 million of performing residential mortgage TDRs were sold. |
| (5) | Excludes government guaranteed GNMA mortgage loans that BB&T does not have the obligation to repurchase that are 90 days or more past due totaling $361 million, $410 million, $395 million, $423 million and $486 million at March 31, 2015, December 31, 2014, September 30, 2014, June 30, 2014, and March 31, 2014, respectively. |
| (6) | Excludes government guaranteed GNMA mortgage loans that BB&T has the right but not the obligation to repurchase that are past due 30-89 days totaling $2 million, $2 million, $4 million, $3 million and $2 million at March 31, 2015, December 31, 2014, September 30, 2014, June 30, 2014, and March 31, 2014, respectively. |
| Table 6 | |||||||||||||||||
| Asset Quality Ratios | |||||||||||||||||
| As of / For the Three Months Ended | |||||||||||||||||
| 3/31/2015 | 12/31/2014 | 9/30/2014 | 6/30/2014 | 3/31/2014 | |||||||||||||
| Asset Quality Ratios (including assets acquired from FDIC) | |||||||||||||||||
| Loans 30-89 days past due and still accruing as a | |||||||||||||||||
| percentage of loans and leases HFI (1) | 0.63 | % | 0.75 | % | 0.77 | % | 0.85 | % | 0.80 | % | |||||||
| Loans 90 days or more past due and still accruing as a | |||||||||||||||||
| percentage of loans and leases HFI (1) | 0.33 | 0.45 | 0.48 | 0.51 | 0.57 | ||||||||||||
| NPLs as a percentage of loans and leases HFI | 0.50 | 0.51 | 0.66 | 0.70 | 0.78 | ||||||||||||
| NPAs as a percentage of: | |||||||||||||||||
| Total assets | 0.40 | 0.42 | 0.50 | 0.52 | 0.59 | ||||||||||||
| Loans and leases HFI plus foreclosed property | 0.64 | 0.65 | 0.79 | 0.81 | 0.93 | ||||||||||||
| Net charge-offs as a percentage of average loans and leases HFI | 0.34 | 0.39 | 0.48 | 0.41 | 0.56 | ||||||||||||
| ALLL as a percentage of loans and leases HFI | 1.22 | 1.23 | 1.27 | 1.33 | 1.41 | ||||||||||||
| Ratio of ALLL to: | |||||||||||||||||
| Net charge-offs | 3.60 | x | 3.21 | x | 2.67 | x | 3.28 | x | 2.54 | x | |||||||
| NPLs | 2.45 | 2.39 | 1.92 | 1.89 | 1.82 | ||||||||||||
| Asset Quality Ratios (excluding assets acquired from FDIC) (2) | |||||||||||||||||
| Loans 90 days or more past due and still accruing as a | |||||||||||||||||
| percentage of loans and leases HFI (1) | 0.20 | % | 0.29 | % | 0.29 | % | 0.30 | % | 0.36 | % | |||||||
Applicable ratios are annualized.
| (1) | Excludes government guaranteed GNMA mortgage loans that BB&T has the right but not the obligation to repurchase. Refer to the footnotes of Table 5 for amounts related to these loans. |
| (2) | These asset quality ratios have been adjusted to remove the impact of assets acquired from the FDIC. Appropriate adjustments to the numerator and denominator have been reflected in the calculation of these ratios. Management believes the inclusion of assets acquired from the FDIC 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 loss share accounting. |
Problem loans include loans on nonaccrual status or loans that are 90 days or more past due and still accruing as disclosed in Table 5. In addition, for the 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 “Loans and ACL” in the “Notes to Consolidated Financial Statements” herein for additional disclosures related to these potential problem loans.
Certain residential mortgage loans have an initial period where the borrower is only required to pay the periodic interest. After the interest-only period, the loan will require the payment of both interest and principal over the remaining term. At March 31, 2015, approximately 4.7% of the outstanding balances of residential mortgage loans were in the interest-only phase, compared to 5.3% at December 31, 2014. Approximately 85.5% of the interest-only balances will begin amortizing within the next three years. Approximately 2.9% of interest-only loans are 30 days or more past due and still accruing and 1.4% are on nonaccrual status.
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Home equity lines, which are a component of the direct retail portfolio, generally require interest-only payments 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 March 31, 2015, approximately 67.7%% of the outstanding balances of home equity lines were in the interest-only phase. Approximately 9.3% of these balances will begin amortizing within the next three years. The delinquency rate of interest-only lines is similar to amortizing lines.
TDRs occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term and a concession has been granted to the borrower. As a result, BB&T will work with the borrower to prevent further difficulties and ultimately 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 TDR. 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, 2014 for additional policy information regarding TDRs.
Performing TDRs totaled $996 billion at March 31, 2015, a decrease of $54 million compared to December 31, 2014. The following table provides a summary of performing TDR activity:
| Table 7 | ||||||||||||
| Rollforward of Performing TDRs | ||||||||||||
| Three Months Ended March 31, | ||||||||||||
| 2015 | 2014 | |||||||||||
| (Dollars in millions) | ||||||||||||
| Beginning balance | $ | 1,050 | $ | 1,705 | ||||||||
| Inflows | 112 | 130 | ||||||||||
| Payments and payoffs | (75) | (61) | ||||||||||
| Charge-offs | (12) | (14) | ||||||||||
| Transfers to nonperforming TDRs, net | (20) | (25) | ||||||||||
| Removal due to the passage of time | (9) | (65) | ||||||||||
| Sold and transferred to held for sale | (50) | ― | ||||||||||
| Other | ― | (6) | ||||||||||
| Ending balance | $ | 996 | $ | 1,664 | ||||||||
| (1) | Past due performing TDRs are included in past due disclosures. |
| (2) | Nonperforming TDRs are included in NPL disclosures. |
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ACL
The ACL, which consists of the ALLL and the RUFC, totaled $1.5 billion at March 31, 2015, a decline of $2 million compared to December 31, 2014.
The ALLL amounted to 1.22% of loans and leases held for investment at March 31, 2015, compared to 1.23% at year-end 2014. The decrease in the ALLL reflects continued improvement in loss estimate factors related to most loan portfolios. The ratio of the ALLL to NPLs held for investment was 2.45x at March 31, 2015 compared to 2.39x at December 31, 2014.
Net charge-offs totaled $101 million for the first quarter of 2015 and amounted to 0.34% of average loans and leases HFI, compared to $116 million or 0.39% of average loans and leases HFI for the fourth quarter of 2014. The decrease in net charge-offs reflects continued improvements in credit quality.
Refer to Note 4 “Loans and ACL” in the “Notes to Consolidated Financial Statements” for additional disclosures.
The following table presents an allocation of the ALLL at March 31, 2015 and December 31, 2014. This allocation of the ALLL 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 9 | ||||||||||||||
| Allocation of ALLL by Category | ||||||||||||||
| March 31, 2015 | December 31, 2014 | |||||||||||||
| % Loans | % Loans | |||||||||||||
| in each | in each | |||||||||||||
| Amount | category | Amount | category | |||||||||||
| (Dollars in millions) | ||||||||||||||
| Commercial and industrial | $ | 448 | 35.3 | % | $ | 422 | 34.6 | % | ||||||
| CRE-income producing properties | 153 | 8.9 | 162 | 8.9 | ||||||||||
| CRE-construction and development | 42 | 2.2 | 48 | 2.3 | ||||||||||
| Direct retail lending | 111 | 6.9 | 110 | 6.8 | ||||||||||
| Sales finance | 58 | 8.9 | 50 | 8.8 | ||||||||||
| Revolving credit | 106 | 2.0 | 110 | 2.1 | ||||||||||
| Residential mortgage-nonguaranteed | 200 | 24.8 | 217 | 25.1 | ||||||||||
| Residential mortgage-government guaranteed | 30 | 0.7 | 36 | 0.8 | ||||||||||
| Other lending subsidiaries | 259 | 9.4 | 255 | 9.6 | ||||||||||
| Acquired from FDIC | 57 | 0.9 | 64 | 1.0 | ||||||||||
| Total ALLL | 1,464 | 100.0 | % | 1,474 | 100.0 | % | ||||||||
| RUFC | 68 | 60 | ||||||||||||
| Total ACL | $ | 1,532 | $ | 1,534 | ||||||||||
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FDIC Loss Share Receivable and Assets Acquired from the FDIC
In connection with the Colonial acquisition, Branch Bank entered into loss sharing agreements with the FDIC that outline the terms and conditions under which the FDIC will reimburse Branch Bank for a portion of the losses incurred on certain loans, OREO, investment securities and other assets. Refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2014 for additional information regarding the loss sharing agreements and a summary of the accounting treatment for related assets and liabilities. The following table presents the carrying amount of assets by loss share agreement:
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| Table 11 | |||||||||||||||||||||
| Assets Acquired from the FDIC by Loss Share Agreement | |||||||||||||||||||||
| March 31, 2015 | December 31, 2014 | ||||||||||||||||||||
| Commercial | Single Family | Total | Commercial | Single Family | Total | ||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||
| Loans and leases | $ | 476 | $ | 634 | $ | 1,110 | $ | 561 | $ | 654 | $ | 1,215 | |||||||||
| AFS securities | 1,206 | ― | 1,206 | 1,243 | ― | 1,243 | |||||||||||||||
| Other assets | 55 | 36 | 91 | 58 | 38 | 96 | |||||||||||||||
| Total assets acquired from the FDIC | $ | 1,737 | $ | 670 | $ | 2,407 | $ | 1,862 | $ | 692 | $ | 2,554 | |||||||||
| UPB of loans and leases | $ | 730 | $ | 855 | $ | 1,585 | $ | 836 | $ | 888 | $ | 1,724 | |||||||||
As of October 1, 2014, the loss provisions of the commercial loss sharing agreement expired; however, gains on the disposition of assets subject to this agreement will be shared with the FDIC through September 30, 2017. Any gains realized after September 30, 2017 would not be shared with the FDIC. Assets subject to the single family loss sharing agreement are indemnified through August 31, 2019.
The gain/loss sharing coverage related to the acquired AFS securities is based on a contractually-specified value of the securities as of the date of the loss sharing agreement, adjusted to reflect subsequent pay-downs, redemptions or maturities on the underlying securities. The contractually-specified value of these securities totaled approximately $592 million and $626 million at March 31, 2015 and December 31, 2014, respectively. During the period of gain sharing (October 1, 2014 through September 30, 2017), any decline in the fair value of the acquired AFS securities down to the contractually-specified value would reduce BB&T’s liability to the FDIC at the applicable loss sharing percentage. BB&T is not indemnified for declines in the fair value of the acquired securities below the contractually-specified amount.
The following table provides information related to the carrying amounts and fair values of the components of the FDIC loss share receivable (payable):
| Table 12 | ||||||||||||||||
| FDIC Loss Share Receivable (Payable) | ||||||||||||||||
| March 31, 2015 | December 31, 2014 | |||||||||||||||
| Attributable to: | Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||||
| (Dollars in millions) | ||||||||||||||||
| Loans | $ | 444 | $ | 72 | $ | 534 | $ | 123 | ||||||||
| Securities | (563) | (535) | (565) | (535) | ||||||||||||
| Aggregate loss calculation | (137) | (162) | (132) | (161) | ||||||||||||
| Total | $ | (256) | $ | (625) | $ | (163) | $ | (573) | ||||||||
The decrease in the carrying amount attributable to loans acquired from the FDIC was due to the receipt of cash from the FDIC, negative accretion due to credit loss improvement and the offset to the provision for loans acquired from the FDIC, which was a benefit for the current year. The change in the carrying amount attributable to the aggregate loss calculation is primarily due to accretion of the expected payment, which is included in “Accretion due to credit loss improvement” below. The fair values are based upon a discounted cash flow methodology that is consistent with the acquisition date methodology. The fair value attributable to acquired loans and the aggregate loss calculation changes over time due to the receipt of cash from the FDIC, updated credit loss assumptions and the passage of time. The fair value attributable to securities acquired from the FDIC is based upon the timing and amount that would be payable to the FDIC should they settle at the current fair value at the conclusion of the gain sharing period.
The cumulative amount recognized through earnings related to securities acquired from the FDIC resulted in a liability of $248 million as of March 31, 2015. Securities acquired from the FDIC are classified as AFS and carried at fair market value, and the changes in unrealized gains/losses are offset by the applicable loss share percentage in AOCI, which resulted in a pre-tax liability of $315 million as of March 31, 2015. BB&T would only owe these amounts to the FDIC if BB&T were to sell these securities prior to October 1, 2017. BB&T does not currently intend to dispose of the acquired securities.
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Following the conclusion of the 10 year loss share period in 2019, should actual aggregate losses, excluding securities, be less than an amount determined in accordance with these agreements, BB&T will pay the FDIC a portion of the difference. As of March 31, 2015, BB&T projects that in 2019 Branch Bank would owe the FDIC approximately $177 million under the aggregate loss calculation. This liability is expensed over time and BB&T has recognized total expense of approximately $137 million through March 31, 2015.
Deposits
The following table presents the composition of average deposits for the last five quarters:
| Table 13 | |||||||||||||||||
| Composition of Average Deposits | |||||||||||||||||
| For the Three Months Ended | |||||||||||||||||
| 3/31/15 | 12/31/14 | 9/30/14 | 6/30/14 | 3/31/14 | |||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Noninterest-bearing deposits | $ | 39,701 | $ | 39,130 | $ | 38,103 | $ | 36,634 | $ | 35,392 | |||||||
| Interest checking | 20,623 | 19,308 | 18,588 | 18,406 | 18,615 | ||||||||||||
| Money market and savings | 51,644 | 51,176 | 49,974 | 48,965 | 48,767 | ||||||||||||
| Time deposits | 17,000 | 20,041 | 23,304 | 25,010 | 21,935 | ||||||||||||
| Foreign office deposits - interest-bearing | 563 | 660 | 639 | 584 | 1,009 | ||||||||||||
| Total average deposits | $ | 129,531 | $ | 130,315 | $ | 130,608 | $ | 129,599 | $ | 125,718 | |||||||
Average deposits for the first quarter of 2015 were $129.5 billion, a decrease of $784 million or 2.4% annualized compared to the prior quarter. The change in average deposits reflects improved mix, with noninterest-bearing deposits up $571 million, or 5.9% annualized, while interest-bearing balances were down $1.4 billion, or 6.0% annualized. The acquisition of 41 branches in Texas had an estimated $55 million favorable impact on average noninterest-bearing deposits and a $180 million impact on average interest-bearing deposits. Noninterest-bearing deposits represented 30.6% of total average deposits for the first quarter, compared to 30.0% for the prior quarter and 28.2% a year ago.
The growth in average noninterest-bearing deposits includes an increase in average consumer accounts totaling $485 million and an increase in average public funds accounts totaling $381 million, partially offset by a decrease in average commercial accounts totaling $297 million.
The decline in interest-bearing accounts was driven by a $3.0 billion decline in time deposits, partially offset by a $1.3 billion increase in interest checking and a $468 million increase in money markets and savings.
Borrowings
At March 31, 2015, short-term borrowings totaled $3.1 billion, a decrease of $587 million compared to December 31, 2014. The decrease in short-term borrowings is primarily due to deposit growth in the current quarter, which reduced the need for other funding sources. Long-term debt totaled $23.4 billion at March 31, 2015, an increase of $125 million from the balance at December 31, 2014.
Shareholders’ Equity
Total shareholders’ equity at March 31, 2015 was $24.7 billion, an increase of $361 million compared to December 31, 2014. The increase in total shareholders’ equity was driven by earnings of $547 million, the net change in AOCI of $18 million and equity based compensation expense of $23 million, partially offset by common and preferred dividends totaling $210 million and other net decreases totaling $17 million. BB&T’s common equity per common share at March 31, 2015 was $30.48, compared to $30.09 at December 31, 2014.
Merger-Related and Restructuring Activities
At March 31, 2015 and December 31, 2014, merger-related and restructuring accruals totaled $40 million and $31 million, respectively. Merger-related and restructuring accruals are re-evaluated periodically and adjusted as necessary. The remaining accruals at March 31, 2015 are expected to be utilized within one year, unless they relate to specific contracts that expire later.
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Critical Accounting Policies
The accounting and reporting policies of BB&T are in accordance with GAAP and conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. BB&T’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Different assumptions in the application of these policies could result in material changes in the consolidated financial position and/or consolidated results of operations and related disclosures. The more critical accounting and reporting policies include accounting for the ACL, determining fair value of financial instruments, intangible assets, costs and benefit obligations associated with pension and postretirement benefit plans, and income taxes. Understanding BB&T’s accounting policies is fundamental to understanding the consolidated financial position and consolidated results of operations. Accordingly, the critical accounting policies are discussed in detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in BB&T’s Annual Report on Form 10-K for the year ended December 31, 2014. 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, 2014. There have been no changes to the significant accounting policies during 2015. Additional disclosures regarding the effects of new accounting pronouncements are included in Note 1 “Basis of Presentation” included herein.
Risk Management
BB&T has a strong and consistent risk culture, based on established risk values, which promotes predictable and consistent performance within an environment of open communication and effective challenge. The strong culture influences all associates in the organization daily and helps them evaluate whether risks are acceptable or unacceptable while making decisions that balance quality, profitability and growth appropriately. BB&T’s effective risk management framework establishes an environment which enables it to achieve superior performance relative to peers, ensures that BB&T is viewed among the safest of banks and assures the operational freedom to act on opportunities.
BB&T ensures that there is an appropriate return for the amount of risk taken, and that the expected return is in line with its strategic objectives and business plan. Risk-taking activities are evaluated and prioritized to identify those that present attractive risk-adjusted returns while preserving asset value. BB&T only undertakes risks that are understood and can be managed effectively. By managing risk well, BB&T ensures sufficient capital is available to maintain and grow core business operations in a safe and sound manner.
Regardless of financial gain or loss to the Company, associates are held accountable if they do not follow the established risk management policies and procedures. Compensation decisions take into account an associate’s adherence to, and successful implementation of, BB&T’s risk values. The compensation structure supports the Company’s core values and sound risk management practices in an effort to promote judicious risk-taking behavior.
BB&T’s risk culture encourages transparency and open dialogue between all levels in the performance of organizational functions, such as the development, marketing and implementation of a product or service.
The principal types of inherent risk include compliance, 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, 2014 for disclosures related to each of these risks under the section titled “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 LOBs. 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, net income and capital and to offset the risk of price changes for certain assets recorded at fair value. At BB&T, market risk management also includes the enterprise-wide IPV function.
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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 reasonably 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 NIM 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 a combination of market data and internal historical prepayment experience 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 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 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 MRLCC 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 MRLCC also sets policy guidelines and establishes long-term strategies with respect to interest rate risk exposure and liquidity. The MRLCC 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 impacts on earnings and liquidity as a result of fluctuations in interest rates are within acceptable tolerance guidelines.
BB&T uses derivatives primarily to manage economic risk related to securities, commercial loans, MSRs and 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 March 31, 2015, BB&T had derivative financial instruments outstanding with notional amounts totaling $77.6 billion, with a net fair value gain of $185 million. See Note 14 “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 FRB 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 MRLCC, management believes that BB&T is positioned to respond to changing needs for liquidity, changes in interest rates and inflationary trends.
Management uses the Simulation to measure the sensitivity of projected earnings to changes in interest rates. The Simulation projects net interest income and interest rate risk for a rolling two-year period of time. The 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 that include 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 the Simulation, BB&T uses EVE analysis to focus on projected 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. The EVE model is a discounted cash flow of the portfolio of assets, liabilities, and derivative instruments. The difference in the present value of assets minus the present value of liabilities is defined as the economic value of equity.
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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 net interest income reflects the level of interest rate sensitivity that income has in relation to the investment, loan and deposit portfolios.
| Table 14 | ||||||||||||||||||
| Interest Sensitivity Simulation Analysis | ||||||||||||||||||
| Annualized Hypothetical | ||||||||||||||||||
| Interest Rate Scenario | Percentage Change in | |||||||||||||||||
| Linear | Prime Rate | Net Interest Income | ||||||||||||||||
| Change in | March 31, | March 31, | ||||||||||||||||
| Prime Rate | 2015 | 2014 | 2015 | 2014 | ||||||||||||||
| Up 200 | bps | 5.25 | % | 5.25 | % | 2.55 | % | 1.70 | % | |||||||||
| Up 100 | 4.25 | 4.25 | 1.90 | 1.10 | ||||||||||||||
| No Change | 3.25 | 3.25 | ― | ― | ||||||||||||||
| Down 25 | 3.00 | 3.00 | (0.18) | 0.43 | ||||||||||||||
The MRLCC has established parameters related to interest sensitivity that prescribe a maximum negative impact on net interest income under different interest rate scenarios. In the event the results of the Simulation model fall outside the established parameters, management will make recommendations to the MRLCC on the most appropriate response given the current economic forecast. The following parameters and interest rate scenarios are considered BB&T’s primary measures of interest rate risk:
| · | Maximum negative impact on net interest income of 2% for the next 12 months assuming a linear change in interest rates totaling 100 basis points over four months followed by a flat interest rate scenario for the remaining eight month period. |
| · | Maximum negative impact on net interest income of 4% for the next 12 months assuming a linear change of 200 basis points over eight months followed by a flat interest rate scenario for the remaining four month period. |
If a rate change of 200 basis points cannot be modeled due to a low level of rates, a proportional limit applies. Management currently only models a negative 25 basis point decline because larger declines would have resulted in a Federal funds rate of less than zero. In a situation such as this, the maximum negative impact on net interest income is adjusted on a proportional basis. Regardless of the proportional limit, the negative risk exposure limit will be the greater of 1% or the proportional limit.
Management has also established a maximum negative impact on net interest income of 4% for an immediate 100 basis points change in rates and 8% for an immediate 200 basis points change in rates. These “interest rate shock” limits are designed to create an outer band of acceptable risk based upon a significant and immediate change in rates.
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 cycle. 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.
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Beta represents the correlation between overall market interest rates and the rates paid by BB&T on interest-bearing deposits. 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 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 incremental beta for the replacement of the lost demand deposits at 100%.
If rates increased 200 basis points, BB&T could absorb the loss of $9.7 billion, or 23.3%, of noninterest bearing deposits and replace them with managed rate deposits with a beta of 100% before becoming neutral to interest rate changes.
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. During the third quarter of 2014, BB&T implemented assumption changes that impacted the reported EVE sensitivity. The primary change was a reduction to the assumed duration of indeterminate deposits, which resulted in an increase in reported liability sensitivity in EVE rate shocks. The estimated impact on the “Hypothetical Percentage Change in EVE” was approximately 375 basis points in the “up 200 basis points” scenario.
| Table 16 | ||||||||||||||||||
| EVE Simulation Analysis | ||||||||||||||||||
| Hypothetical Percentage | ||||||||||||||||||
| EVE/Assets | Change in EVE | |||||||||||||||||
| Change in | March 31, | March 31, | ||||||||||||||||
| Interest Rates | 2015 | 2014 | 2015 | 2014 | ||||||||||||||
| Up 200 | bps | 10.8 | % | 10.6 | % | 2.4 | % | (4.5) | % | |||||||||
| Up 100 | 10.8 | 11.0 | 2.9 | (1.4) | ||||||||||||||
| No Change | 10.5 | 11.1 | ― | ― | ||||||||||||||
| Down 25 | 10.4 | 11.1 | (1.7) | (0.3) | ||||||||||||||
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. BB&T utilizes a historical VaR methodology to measure and aggregate risks across its covered trading LOBs. This methodology uses two years of historical data to estimate economic outcomes for a one-day time horizon at a 99% confidence level. The average 99% one-day VaR and the maximum daily VaR for the three months ended March 31, 2015 and 2014 were each less than $1 million. Market risk disclosures under Basel II.5 are available in the Additional Disclosures section of the Investor Relations site on www.bbt.com .
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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, 2014 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 12 “Commitments and Contingencies” and Note 13 “Fair Value Disclosures” in the “Notes to Consolidated Financial Statements.”
Liquidity
Liquidity represents the 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 AFS securities, many other factors affect the 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.
BB&T 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 March 31, 2015 and December 31, 2014, BB&T’s liquid asset buffer was 13.7% and 13.6%, respectively, of total assets.
During 2013, the FDIC, FRB and OCC released a joint statement providing a NPR concerning the U.S. implementation of the Basel III LCR rule. This rule became final on September 3, 2014. Under the final rule, BB&T will be considered a “modified LCR” holding company. BB&T would be subject to full LCR requirements if its operations were to fall under the “internationally active” rules, which would generally be triggered if BB&T’s assets were to increase above $250 billion. BB&T implemented balance sheet changes to support its compliance with the rule and to optimize its balance sheet based on the final rule. These actions included changing the mix of the investment portfolio to include more GNMA and U.S. Treasury securities, which qualify as Level 1 under the rule, and changing its deposit mix to increase retail and commercial deposits. Based on management’s interpretation of the final rule that will be effective January 1, 2016, BB&T’s LCR was approximately 130% at March 31, 2015, compared to the regulatory minimum of 90%, which puts BB&T in full compliance with the rule. The regulatory minimum will increase to 100% on January 1, 2017. The final rule requires each financial institution to have a method for determining “operational deposits” as defined by the rule. The number above includes an estimate of operational deposits; however, BB&T continues to evaluate its method to identify and measure operational deposits.
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Parent Company
The purpose of the Parent Company is to serve as the primary capital financing vehicle for the operating subsidiaries. The assets of the Parent Company primarily consist of cash on deposit with Branch Bank, equity investments in subsidiaries, advances to subsidiaries, accounts receivable from subsidiaries, and other miscellaneous assets. The principal obligations of the Parent Company are principal and interest payments on long-term debt. The main sources of funds for the Parent Company are dividends and management fees from subsidiaries, repayments of advances to subsidiaries, and proceeds from the issuance of equity and long-term debt. The primary uses of funds by the Parent Company are for investments in subsidiaries, advances to subsidiaries, dividend payments to common and preferred shareholders, retirement of common stock and interest and principal payments due on long-term debt.
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 requirements for common and preferred dividends, unfunded commitments to affiliates, being a source of strength to its banking subsidiaries and being able to withstand sustained market disruptions that could limit access to the capital markets. As of March 31, 2015 and December 31, 2014, the Parent Company had 28 months and 31 months, respectively, of cash on hand to satisfy projected contractual cash outflows as described above.
Branch Bank
BB&T carefully manages liquidity risk at Branch Bank. Branch Bank’s primary source of funding is customer deposits. Continued access to customer deposits is highly dependent on the confidence the public has in the stability of the bank and its ability to return funds to the client when requested. BB&T maintains a strong focus on its reputation in the market to ensure continued access to client deposits. BB&T integrates its risk appetite into its overall risk management framework to ensure the bank does not exceed its risk tolerance through its lending and other risk taking functions and thus risk becoming undercapitalized. BB&T believes that sufficient capital is paramount to maintaining the confidence of its depositors and other funds providers. BB&T has extensive capital management processes in place to ensure it maintains sufficient capital to absorb losses and maintain a highly capitalized position that will instill confidence in the bank and allow continued access to deposits and other funding sources. Branch Bank monitors many liquidity metrics at the bank including funding concentrations, diversification, maturity distribution, contingent funding needs and ability to meet liquidity requirements under times of stress.
Branch Bank has several major sources of funding to meet its liquidity requirements, including access to capital markets through issuance of senior or subordinated bank notes and institutional CDs, access to the FHLB system, dealer repurchase agreements and repurchase agreements with commercial clients, access to the overnight and term Federal funds markets, use of a Cayman branch facility, access to retail brokered CDs and a borrower in custody program with the FRB for the discount window. As of March 31, 2015, BB&T has approximately $69.5 billion of secured borrowing capacity, which represents approximately 9.7 times the amount of one year wholesale funding maturities.
Capital
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.
Management regularly monitors the capital position of BB&T on both a consolidated and bank level basis. 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 implemented stressed capital ratio minimum guidelines to evaluate whether capital ratios calculated with planned capital actions are likely to remain above minimums specified by the FRB for the annual CCAR. Breaches of stressed minimum guidelines prompt a review of the planned capital actions included in BB&T’s capital plan.
During March 2015, BB&T released the results of its annual company-run stress tests and announced that the FRB accepted its capital plan and did not object to the Company’s proposed capital actions. The proposed capital actions include an increase in the quarterly dividend from $0.24 to $0.27 and the authorization of cumulative share buybacks of up to $820 million beginning during the third quarter of 2015. The plan also incorporates the previously announced acquisitions.
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| Table 18 | |||||||
| BB&T's Internal Capital Guidelines | |||||||
| Operating | Stressed | ||||||
| Tier 1 Capital Ratio | 10.0 | % | 7.5 | % | |||
| Total Capital Ratio | 12.0 | 9.5 | |||||
| Tier 1 Leverage Capital Ratio | 7.0 | 5.0 | |||||
| Tangible Common Equity Ratio | 6.0 | 4.0 | |||||
| Common Equity Tier 1 Ratio | 8.5 | 6.0 | |||||
While nonrecurring events or management decisions may result in the Company temporarily falling below its operating minimum guidelines for one or more of these ratios, it is management’s intent through capital planning to return to these targeted operating minimums within a reasonable period of time. Such temporary decreases below the operating minimums shown above are not considered an infringement of BB&T’s overall capital policy provided the Company and Branch Bank remain “well-capitalized.”
Basel III capital requirements became effective on January 1, 2015. Risk-based capital ratios, which include common equity tier 1, Tier 1 capital, total capital and leverage capital, are calculated based on Basel III regulatory transitional guidance related to the measurement of capital, risk-weighted assets and average assets.
| Table 19 | ||||||||||||
| Capital Ratios (1) | ||||||||||||
| March 31, 2015 | December 31, 2014 | |||||||||||
| Basel III | Basel I | |||||||||||
| (Dollars in millions, except per share data, shares in thousands) | ||||||||||||
| Risk-based: | ||||||||||||
| Common equity Tier 1 | 10.5 | % | N/A | % | ||||||||
| Tier 1 | 12.2 | 12.4 | ||||||||||
| Total | 14.5 | 14.9 | ||||||||||
| Leverage capital | 10.1 | 9.9 | ||||||||||
| Non-GAAP capital measures (2): | ||||||||||||
| Tangible common equity as a percentage of tangible assets | 8.0 | % | 8.0 | % | ||||||||
| Tangible common equity per common share | $ | 20.13 | $ | 19.86 | ||||||||
| Calculations of tangible common equity and tangible assets (2): | ||||||||||||
| Total shareholders' equity | $ | 24,738 | $ | 24,377 | ||||||||
| Less: | ||||||||||||
| Preferred stock | 2,603 | 2,603 | ||||||||||
| Noncontrolling interests | 96 | 88 | ||||||||||
| Intangible assets | 7,480 | 7,374 | ||||||||||
| Tangible common equity | $ | 14,559 | $ | 14,312 | ||||||||
| Total assets | $ | 189,228 | $ | 186,834 | ||||||||
| Less: | ||||||||||||
| Intangible assets | 7,480 | 7,374 | ||||||||||
| Tangible assets | $ | 181,748 | $ | 179,460 | ||||||||
| Risk-weighted assets (3) | $ | 149,727 | $ | 143,675 | ||||||||
| Common shares outstanding at end of period | 723,159 | 720,698 | ||||||||||
| (1) | Current quarter regulatory capital information is preliminary and based on transitional approach. |
| (2) | Tangible common equity and related ratios are non-GAAP measures. Management uses these measures to assess the quality of capital and believes that investors may find them useful in their analysis of the Company. 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 the regulatory capital requirements in effect for the periods presented. |
The Company’s estimated common equity tier 1 ratio using the Basel III standardized approach on a fully phased-in basis was 10.3% at March 31, 2015.
| 60 |
Share Repurchase Activity
No shares were repurchased in connection with the 2006 Repurchase Plan during 2015.
| Table 21 | ||||||||||||
| 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) | ||||||||||||
| January 2015 | 38 | $ | 38.96 | ― | 44,139 | |||||||
| February 2015 | 859 | 38.16 | ― | 44,139 | ||||||||
| March 2015 | 11 | 38.67 | ― | 44,139 | ||||||||
| Total | 908 | 38.20 | ― | 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. |
| 61 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to “Market Risk Management” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section herein.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the management of the Company, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
During the first quarter of 2015, BB&T implemented components of SAP’s ERP software solution to enhance the business information and accounting systems. The implementation included a new general ledger, consolidation system and reporting tools, which support both operating and accounting activities. Internal controls and processes have been appropriately modified to address changes in key business applications and financial processes as a result of this implementation.
There were no other changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| 62 |
PART II. OTHER INFORMATION
Refer to the “Commitments and Contingencies” and “Income Taxes” notes in the “Notes to Consolidated Financial Statements.”
There have been no material changes to the risk factors disclosed in BB&T’s Annual Report on Form 10-K for the year ended December 31, 2014. Additional risks and uncertainties not currently known to BB&T or that management has deemed to be immaterial also may materially adversely affect BB&T’s business, financial condition, and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Refer to “Share Repurchase Activity” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section herein.
| 63 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
BB&T CORPORATION (Registrant) |
|||
| Date: April 27, 2015 | By: | /s/ Daryl N. Bible | |
|
Daryl N. Bible, Senior Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
|||
| Date: April 27, 2015 | By: | /s/ Cynthia B. Powell | |
|
Cynthia B. Powell, Executive Vice President
and
(Principal Accounting Officer) |
|||
| 64 |
65
Exhibit 10.1
BB&T CORPORATION
2012 INCENTIVE PLAN
Restricted Stock Unit Agreement
(Non-Employee Directors)
| Grant Date: | ________________ |
| Date Vested (Subject to Section 3): | ________________ |
THIS AGREEMENT (the “ Agreement ”), made effective as of February 24, 2015 (the “ Grant Date ”), between BB&T CORPORATION, a North Carolina corporation (“ BB&T ”) for itself and its Affiliates, and the Non-Employee Director (the “ Participant ”) specified in the above Notice of Grant and Agreement (the “ Notice of Grant ”), is made pursuant to and subject to the provisions of the BB&T Corporation 2012 Incentive Plan, as it may be amended and/or restated from time to time (the “ Plan ”).
RECITALS :
BB&T desires to carry out the purposes of the Plan by affording the Participant an opportunity to acquire shares of BB&T Common Stock, $5.00 par value per share (the “ Common Stock ”), as hereinafter provided.
In consideration of the foregoing, of the mutual promises set forth below and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:
1. Incorporation of Plan . The rights and duties of BB&T and the Participant under this Agreement shall in all respects be subject to and governed by the provisions of the Plan, the terms of which are incorporated herein by reference. In the event of any conflict between the provisions in this Agreement and those of the Plan, the provisions of the Plan shall govern. Unless otherwise provided herein, capitalized terms in this Agreement shall have the same definitions as set forth in the Plan.
2. Grant of Restricted Stock Unit . Subject to the terms of this Agreement and the Plan, BB&T hereby grants the Participant a Restricted Stock Unit (the “ Award ”) for the number of whole shares of Common Stock (the “ Shares ”) specified in the Notice of Grant. The “ Restriction Period ” is the period beginning on the Grant Date and ending on such date or dates, and satisfaction of such conditions, as described in Section 3 and Section 4 herein. For the purposes herein, the Shares subject to the Award are units that will be reflected in a book account maintained by BB&T and that will be settled in whole shares of Common Stock, if and to the extent permitted pursuant to this Agreement and the Plan. Prior to distribution of the Shares upon vesting of the Award, the Award shall represent an unsecured obligation of BB&T, payable (if at all) only from BB&T’s general assets.
3. Vesting of Award . Subject to the terms of the Plan and this Agreement (including but not limited to the provisions of Section 4 and Section 5 herein), the Award shall become fully
vested and earned on December 31, 2015. The Administrator has sole authority to determine whether and to what degree the Award has vested and is payable, and to interpret the terms and conditions of this Agreement and the Plan.
4. Termination of Service; Forfeiture of Award; Effect of Change of Control .
(a) Except as may be otherwise provided in the Plan or Section 4(b) of this Agreement, in the event that the service of the Participant as a Director terminates for any reason and the Award has not vested pursuant to Section 3, then the Award, to the extent not vested as of the Participant’s termination of service date, shall be forfeited immediately upon such termination of service, and the Participant shall have no further rights with respect to the Award or the Shares underlying the Award. The Administrator (or its designee, to the extent permitted under the Plan) shall have sole discretion to determine if a Participant’s rights have terminated pursuant to the Plan and this Agreement, including but not limited to the authority to determine the basis for the Participant’s termination of service. The Participant expressly acknowledges and agrees that, except as otherwise provided herein, the termination of the Participant’s service as a Director shall result in forfeiture of the Award and the underlying Shares to the extent the Award has not vested as of the Participant’s termination of service date. As used in this Agreement, the phrase “termination of service” means a “separation from service,” within the meaning of Section 409A, as a Director.
(b) Notwithstanding the provisions of Section 3 and Section 4(a), the following provisions shall apply if any of the following shall occur prior to December 31, 2015:
| (i) | Death . In the event that the Participant remains in the continuous service of BB&T or an Affiliate as a Director from the Grant Date until the Participant’s death, the Award shall become fully vested as of the date of death without regard to the vesting schedule set forth in Section 3 herein. |
| (ii) | Disability . In the event that the Participant remains in the continuous service of BB&T or an Affiliate as a Director from the Grant Date until the date of the Participant’s disability (as determined by the Administrator or its designee in accordance with the Plan and, if applicable, Section 409A), the Award shall become fully vested as of the Participant’s date of termination of service as a Director on account of disability without regard to the vesting schedule set forth in Section 3 herein. |
| (iii) | Change of Control . |
| (A) | In the event that there is “Change of Control,” as defined in Section 4(b)(iii)(B), of BB&T subsequent to the date hereof, the Award shall be payable in accordance with this Agreement and become fully vested as of the effective date of such event without regard to the vesting schedule set forth in Section 3 herein. |
| - 2 - |
| (B) | For purposes of this Section 4(b)(iii), a “ Change of Control ” will be deemed to have occurred on the earliest of the following dates: (i) the date any person or group of persons (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)), together with its affiliates, excluding employee benefit plans of BB&T and its Affiliates, is or becomes, directly or indirectly, the “beneficial owner” (as defined in Rule 13d-3 promulgated under the Exchange Act) of securities of BB&T representing thirty percent (30%) or more of the combined voting power of BB&T’s then outstanding securities; or (ii) the date when, as a result of a tender offer or exchange offer for the purchase of securities of BB&T (other than such an offer by BB&T for its own securities), or as a result of a proxy contest, merger, consolidation or sale of assets, or as a result of any combination of the foregoing, individuals who at the beginning of any consecutive twelve- (12-) month period during the Restriction Period of the Award constituted BB&T’s Board, plus new directors whose election or nomination for election by BB&T’s shareholders is approved by a vote of at least two-thirds of the directors still in office who were directors at the beginning of such twelve- (12-) month period (collectively, the “ Continuing Directors ”), cease for any reason during such twelve- (12-) month period to constitute at least two-thirds of the members of such board of directors; (iii) the date the shareholders of BB&T approve an agreement for the sale or disposition by BB&T of all or substantially all of BB&T’s assets within the meaning of Section 409A; or (iv) the date that any one person, or more than one person acting as a group, acquires ownership of stock of BB&T that, together with stock held by such person or group constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of BB&T within the meaning of Section 409A. |
5. Settlement of Award and Distribution of Shares .
(a) Upon vesting, the Award shall be payable in a lump sum in whole shares of Common Stock. Fractional Shares shall not be issuable hereunder, and unless the Administrator determines otherwise, any such fractional Share shall be disregarded.
(b) Shares of Common Stock subject to the Award shall, upon vesting of the Award, be issued and distributed to the Participant (or, if the Participant is deceased, to the Participant’s beneficiary or beneficiaries) in a lump sum within ninety (90) calendar days after the end of the Restriction Period (provided that if such ninety- (90-) day period begins in one calendar
| - 3 - |
year and ends in another, the Participant (or the Participant’s beneficiary or beneficiaries) shall not have the right to designate the calendar year of payment).
6. No Right to Continued Service . Neither the Plan, the grant of the Award, nor any other action related to the Plan shall confer upon the Participant any right to continue in the service of BB&T or an Affiliate as a Director or in any other capacity or affect in any way with the right of BB&T or an Affiliate to terminate the Participant’s service at any time. Except as otherwise expressly provided in the Plan or this Agreement or as determined by the Administrator, all rights of the Participant with respect to the Award shall terminate upon termination of the service of the Participant with BB&T or an Affiliate. The grant of the Award does not create any obligation on the part of BB&T to grant any further Awards.
7. Nontransferability of Award and Shares . The Award shall not be transferable (including by sale, assignment, pledge or hypothecation) other than by will or the laws of intestate succession. The designation of a beneficiary in accordance with Plan procedures does not constitute a transfer; provided, however, that unless disclaimer provisions are specifically included in a beneficiary designation form accepted by the Administrator, no beneficiary of the Participant may disclaim the Award. The Participant shall not sell, transfer, assign, pledge or otherwise encumber the Shares subject to the Award until the Restriction Period has expired and all conditions to vesting and distribution have been met.
8. Superseding Agreement; Binding Effect . This Agreement supersedes any statements, representations or agreements of BB&T with respect to the grant of the Award or any related rights, and the Participant hereby waives any rights or claims related to any such statements, representations or agreements. This Agreement does not supersede or amend any existing confidentiality agreement, nonsolicitation agreement, noncompetition agreement, service agreement, or any other similar agreement between the Participant and BB&T or an Affiliate, including, but not limited to, any restrictive covenants contained in such agreements.
9. Governing Law . This Agreement shall be governed by and construed in accordance with the laws of the State of North Carolina, without regard to the principles of conflicts of law, and in accordance with applicable United States federal laws.
10. Amendment and Termination; Waiver . Subject to the terms of the Plan, this Agreement may be amended or terminated only by the written agreement of the parties hereto. The waiver by BB&T of a breach of any provision of this Agreement by the Participant shall not operate or be construed as a waiver of any subsequent breach by the Participant. Notwithstanding the foregoing, the Administrator shall have unilateral authority to amend the Plan and this Agreement (without Participant consent) to the extent necessary to comply with applicable law or changes to applicable law (including but in no way limited to Section 409A and federal securities laws), and the Participant hereby consents to any such amendments to the Plan and this Agreement.
11. Issuance of Shares; Rights as Shareholder . The Participant and the Participant’s legal representatives, legatees or distributees shall not be deemed to be the holder of any Shares subject to the Award and shall not have any voting rights, dividend rights or other rights of a shareholder unless and until such Shares have been issued to the Participant or them. No Shares
| - 4 - |
subject to the Award shall be issued at the time of grant of the Award. Shares subject to the Award shall be issued in the name of the Participant (or, if the Participant is deceased, in the name of the Participant’s beneficiary or beneficiaries) as soon as practicable after, and only to the extent that, the Award has vested and if such distribution is otherwise permitted under the terms of Section 5 herein. Neither dividends nor dividend equivalent rights shall be granted in connection with the Award, and the Award shall not be adjusted to reflect the distribution of any dividends on the Common Stock (except as may be otherwise provided under the Plan). No dividends on the Shares shall be payable prior to both (i) the vesting of the Award and (ii) the issuance and distribution of Shares to the Participant .
12. Withholding; Tax Matters; Fees .
(a) BB&T shall report all income and prior to the delivery or transfer of Shares or any other benefit conferred under the Plan, BB&T or its agent shall withhold all required local, state, federal, foreign and other income tax obligations and any other amount required to be withheld by any governmental authority or law and paid over by BB&T to such authority for the account of such recipient. In accordance with procedures established by the Administrator, the Participant may arrange to pay all applicable taxes in cash. In the event the Participant does not make such arrangements, such tax obligations shall be satisfied by the withholding of Shares to which the Participant is entitled. The number of Shares to be withheld shall have a Fair Market Value as of the date that the amount of tax to be withheld is determined as nearly equal as possible to the amount of such obligations being satisfied.
(b) BB&T has made no warranties or representations to the Participant with respect to the tax consequences (including but not limited to income tax consequences) related to the Award or issuance, transfer or disposition of Shares (or any other benefit) pursuant to the Award, and the Participant is in no manner relying on BB&T or its representatives for an assessment of such tax consequences. The Participant acknowledges that there may be adverse tax consequences with respect to the Award (including but not limited to the acquisition or disposition of the Shares subject to the Award) and that the Participant should consult a tax advisor prior to such acquisition or disposition. The Participant acknowledges that the Participant has been advised that the Participant should consult with the Participant’s own attorney, accountant, and/or tax advisor regarding the decision to enter into this Agreement and the consequences thereof. The Participant also acknowledges that BB&T has no responsibility to take or refrain from taking any actions in order to achieve a certain tax result for the Participant.
(c) All third party fees relating to the release, delivery, or transfer of any Award or Shares shall be paid by the Participant or other recipient. To the extent the Participant or other recipient is entitled to any cash payment from BB&T or any of its Affiliates, the Participant hereby authorizes the deduction of such fees from such payment(s) without further action or authorization of the Participant or other recipient; and to the extent the Participant or other recipient is not entitled to any such payments, the Participant or other recipient shall pay BB&T or its designee an amount equal to such fees immediately upon the third party’s charge of such fees.
13. Administration . The authority to construe and interpret this Agreement and the Plan, and to administer all aspects of the Plan, shall be vested in the Administrator, and the Administrator shall have all powers with respect to this Agreement as are provided in the Plan.
| - 5 - |
Any interpretation of this Agreement by the Administrator and any decision made by it with respect to this Agreement is final and binding on the parties hereto.
14. Notices . Any and all notices under this Agreement shall be in writing and sent by hand delivery or by certified or registered mail (return receipt requested and first-class postage prepaid), in the case of BB&T, to its Human Systems Division, 200 West Second Street (27101), PO Box 1215, Winston-Salem, NC 27102, attention: Human Systems Division Manager, and in the case of the Participant, to the last known address of the Participant as reflected in BB&T’s records.
15. Severability . The provisions of this Agreement are severable, and if any one or more provisions may be determined to be illegal or otherwise unenforceable, in whole or in part, the remaining provisions shall nevertheless be binding and enforceable.
16. Compliance with Laws; Restrictions on Award and Shares . BB&T may impose such restrictions on the Award and the Shares or other benefits underlying the Award as it may deem advisable, including without limitation restrictions under the federal securities laws, federal tax laws, the requirements of any stock exchange or similar organization and any blue sky, state or foreign securities laws applicable to such Award or Shares. Notwithstanding any other provision in the Plan or this Agreement to the contrary, BB&T shall not be obligated to issue, deliver or transfer any shares of Common Stock, make any other distribution of benefits under the Plan, or take any other action, unless such delivery, distribution or action is in compliance with all applicable laws, rules and regulations (including but not limited to the requirements of the Securities Act). BB&T may cause a restrictive legend or legends to be placed on any Shares issued pursuant to the Award in such form as may be prescribed from time to time by applicable laws and regulations or as may be advised by legal counsel.
17. Successors and Assigns . Subject to the limitations stated herein and in the Plan, this Agreement shall be binding upon and inure to the benefit of the Participant and the Participant’s executors, administrators and permitted transferees and beneficiaries and BB&T and its successors and assigns.
18. Counterparts; Further Instruments . This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. The parties hereto agree to execute such further instruments and to take such further action as may be reasonably necessary to carry out the purposes and intent of this Agreement.
19. Right of Offset . Notwithstanding any other provision of the Plan or this Agreement, subject to any applicable laws to the contrary, BB&T may reduce the amount of any benefit or payment otherwise payable to or on behalf of the Participant by the amount of any obligation of the Participant to BB&T or an Affiliate that is or becomes due and payable, and the Participant shall be deemed to have consented to such reduction; provided, however, that to the extent Section 409A is applicable, such offset shall not exceed the greater of Five Thousand Dollars ($5,000) or the maximum offset amount then permitted under Section 409A.
| - 6 - |
20. Adjustment of Award . The Administrator shall have authority to make adjustments to the terms and conditions of the Award in recognition of unusual or nonrecurring events affecting BB&T or any Affiliate, or the financial statements of BB&T or any Affiliate, or of changes in applicable laws, regulations or accounting principles, if the Administrator determines that such adjustments are appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan or necessary or appropriate to comply with applicable laws, rules or regulations.
IN WITNESS WHEREOF , BB&T and the Participant have entered into this Agreement effective as of the Grant Date. Should the Participant fail to acknowledge his or her electronic acceptance of this Agreement, this Agreement may become null and void as of the Grant Date and the Participant may forfeit any and all rights hereunder at the discretion of the Administrator.
Exhibit 31.1
CERTIFICATIONS
I, Kelly S. King, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of BB&T Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: April 27, 2015
| /s/ Kelly S. King | |
| Kelly S. King | |
| Chairman and Chief Executive Officer |
Exhibit 31.2
CERTIFICATIONS
I, Daryl N. Bible, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of BB&T Corporation; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: April 27, 2015
| /s/ Daryl N. Bible | |
| Daryl N. Bible | |
| Senior Executive Vice President and | |
| Chief Financial Officer |
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned, Chief Executive Officer and Chief Financial Officer of BB&T Corporation (the “Company”), do hereby certify that
| 1. | The Quarterly Report on Form 10-Q for the fiscal period ended March 31, 2015 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: April 27, 2015
| /s/ Kelly S. King | |
| Kelly S. King | |
| Chairman and Chief Executive Officer | |
| /s/ Daryl N. Bible | |
| Daryl N. Bible | |
| Senior Executive Vice President and | |
| Chief Financial Officer |
A signed original of this written statement required by Section 906 has been provided to BB&T Corporation and will be retained by BB&T Corporation and furnished to the Securities and Exchange Commission or its staff upon request.