10-Q 1 form10q2q16.htm 10-Q Document
 
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: June 30, 2016
Commission File Number: 1-10853
_____________________________
BB&T CORPORATION
(Exact name of registrant as specified in its charter)
_____________________________
North Carolina
56-0939887
(State or Other Jurisdiction of Incorporation)
(I.R.S. Employer Identification No.)
200 West Second Street
Winston-Salem, North Carolina
27101
(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 June 30, 2016, 814,500,215 shares of the Registrant's common stock, $5 par value, were outstanding.
 



BB&T CORPORATION
FORM 10-Q
June 30, 2016
INDEX
 
 
 
 
 
Page No.
PART I
Item 1.
Financial Statements
 
 
 
 
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
 
 
 
 
Note 3. Securities
 
 
Note 5. Goodwill
 
 
Note 7. Deposits
 
 
 
Note 10. AOCI
 
Note 11. Income Taxes
 
Note 12. Benefit Plans
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 2.
Item 3.
Defaults Upon Senior Securities - (not applicable.)
 
Item 4.
Mine Safety Disclosures - (not applicable.)
 
Item 5.
Other Information - (none to be reported.)
 
Item 6.



Glossary of Defined Terms
The following terms may be used throughout this Report, including the consolidated financial statements and related notes. 
Term
 
Definition
2015 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
Agency MBS
 
Mortgage-backed securities issued by a U.S. government agency or GSE
ALLL
 
Allowance for loan and lease losses
American Coastal
 
American Coastal Insurance Company
AOCI
 
Accumulated other comprehensive income (loss)
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
BU
 
Business Unit
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)
CRA
 
Community Reinvestment Act of 1977
CRE
 
Commercial real estate
CRMC
 
Credit Risk Management Committee
CROC
 
Compliance Risk Oversight Committee
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
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
Grandbridge
 
Grandbridge Real Estate Capital, LLC
GSE
 
U.S. government-sponsored enterprise
HFI
 
Held for investment

1


Term
 
Definition
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
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
MBS
 
Mortgage-backed securities
MRLCC
 
Market Risk, Liquidity and Capital Committee
MSR
 
Mortgage servicing right
MSRB
 
Municipal Securities Rulemaking Board
National Penn
 
National Penn Bancshares, Inc., acquired by BB&T effective April 1, 2016
NIM
 
Net interest margin
NPA
 
Nonperforming asset
NPL
 
Nonperforming loan
NSFR
 
Net stable funding ratio
NYSE
 
NYSE Euronext, Inc.
OAS
 
Option adjusted spread
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
PCI
 
Purchased credit impaired loans as well as assets of Colonial Bank acquired from the FDIC during 2009, which are currently covered or were formerly covered under loss sharing agreements
Peer Group
 
Financial holding companies included in the industry peer group index
RMC
 
Risk Management Committee
RMO
 
Risk Management Organization
RSU
 
Restricted stock unit
RUFC
 
Reserve for unfunded lending commitments
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
Susquehanna
 
Susquehanna Bancshares, Inc., acquired by BB&T effective August 1, 2015
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


BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions, except per share data, shares in thousands)
 
June 30,
 
December 31,
 
2016
 
2015
Assets
 
 
 
Cash and due from banks
$
1,958

 
$
2,123

Interest-bearing deposits with banks
510

 
1,435

Federal funds sold and securities purchased under resale agreements or similar arrangements
145

 
153

Restricted cash
846

 
456

AFS securities at fair value
28,244

 
25,297

HTM securities (fair value of $19,157 and $18,519 at June 30, 2016 and December 31, 2015, respectively)
18,762

 
18,530

LHFS at fair value
2,485

 
1,035

Loans and leases
142,226

 
135,951

ALLL
(1,507
)
 
(1,460
)
Loans and leases, net of ALLL
140,719

 
134,491

 
 
 
 
Premises and equipment
2,088

 
2,007

Goodwill
9,621

 
8,548

CDI and other intangible assets
946

 
686

MSRs at fair value
785

 
880

Other assets
14,750

 
14,306

Total assets
$
221,859

 
$
209,947

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Deposits:
 
 
 
Noninterest-bearing deposits
$
49,180

 
$
45,695

Interest-bearing deposits
110,058

 
103,429

Total deposits
159,238

 
149,124

 
 
 
 
Short-term borrowings
1,472

 
3,593

Long-term debt
24,435

 
23,769

Accounts payable and other liabilities
6,971

 
6,121

Total liabilities
192,116

 
182,607

 
 
 
 
Commitments and contingencies (Note 13)

 

Shareholders' equity:
 
 
 
Preferred stock, $5 par, liquidation preference of $25,000 per share
3,053

 
2,603

Common stock, $5 par
4,073

 
3,902

Additional paid-in capital
9,311

 
8,365

Retained earnings
14,104

 
13,464

AOCI, net of deferred income taxes
(837
)
 
(1,028
)
Noncontrolling interests
39

 
34

Total shareholders' equity
29,743

 
27,340

Total liabilities and shareholders' equity
$
221,859

 
$
209,947

 
 
 
 
Common shares outstanding
814,500

 
780,337

Common shares authorized
2,000,000

 
2,000,000

Preferred shares outstanding
126

 
107

Preferred shares authorized
5,000

 
5,000


The accompanying notes are an integral part of these consolidated financial statements.

3


BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in millions, except per share data, shares in thousands)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2016
 
2015
 
2016
 
2015
Interest Income
 
 
 
 
 
 
 
 
Interest and fees on loans and leases
 
$
1,509

 
$
1,249

 
$
2,951

 
$
2,486

Interest and dividends on securities
 
286

 
232

 
541

 
472

Interest on other earning assets
 
10

 
8

 
34

 
24

Total interest income
 
1,805

 
1,489

 
3,526

 
2,982

Interest Expense
 
 
 
 
 
 
 
 
Interest on deposits
 
64

 
55

 
128

 
110

Interest on short-term borrowings
 
3

 
1

 
5

 
2

Interest on long-term debt
 
121

 
121

 
247

 
246

Total interest expense
 
188

 
177

 
380

 
358

Net Interest Income
 
1,617

 
1,312

 
3,146

 
2,624

Provision for credit losses
 
111

 
97

 
295

 
196

Net Interest Income After Provision for Credit Losses
 
1,506

 
1,215

 
2,851

 
2,428

Noninterest Income
 
 
 
 
 
 
 
 
Insurance income
 
465

 
422

 
884

 
862

Service charges on deposits
 
166

 
154

 
320

 
299

Mortgage banking income
 
111

 
130

 
202

 
240

Investment banking and brokerage fees and commissions
 
102

 
108

 
199

 
202

Trust and investment advisory revenues
 
67

 
57

 
129

 
113

Bankcard fees and merchant discounts
 
60

 
55

 
116

 
105

Checkcard fees
 
50

 
43

 
95

 
82

Operating lease income
 
35

 
30

 
69

 
59

Income from bank-owned life insurance
 
31

 
27

 
62

 
57

FDIC loss share income, net
 
(64
)
 
(64
)
 
(124
)
 
(143
)
Other income
 
107

 
58

 
149

 
141

Securities gains (losses), net
 
 
 
 
 
 
 
 
Gross realized gains
 

 
2

 
45

 
2

Gross realized losses
 

 

 

 

OTTI charges
 

 
(2
)
 

 
(2
)
Non-credit portion recognized in OCI
 

 
(1
)
 

 
(1
)
Total securities gains (losses), net
 

 
(1
)
 
45

 
(1
)
Total noninterest income
 
1,130

 
1,019

 
2,146

 
2,016

Noninterest Expense
 
 
 
 
 
 
 
 
Personnel expense
 
1,039

 
864

 
1,954

 
1,694

Occupancy and equipment expense
 
194

 
166

 
385

 
333

Software expense
 
53

 
46

 
104

 
90

Loan-related expense
 
36

 
37

 
68

 
75

Outside IT services
 
44

 
29

 
85

 
59

Professional services
 
26

 
35

 
48

 
59

Amortization of intangibles
 
42

 
23

 
74

 
44

Regulatory charges
 
32

 
25

 
62

 
48

Foreclosed property expense
 
8

 
14

 
19

 
27

Merger-related and restructuring charges, net
 
92

 
25

 
115

 
38

(Gain) loss on early extinguishment of debt
 

 
172

 
(1
)
 
172

Other expense
 
231

 
217

 
429

 
436

Total noninterest expense
 
1,797

 
1,653

 
3,342

 
3,075

Earnings
 
 
 
 
 
 
 
 
Income before income taxes
 
839

 
581

 
1,655

 
1,369

Provision for income taxes
 
252

 
80

 
498

 
321

Net income
 
587

 
501

 
1,157

 
1,048

Noncontrolling interests
 
3

 
10

 
9

 
32

Dividends on preferred stock
 
43

 
37

 
80

 
74

Net income available to common shareholders
 
$
541

 
$
454

 
$
1,068

 
$
942

Basic EPS
 
$
0.67

 
$
0.63

 
$
1.34

 
$
1.30

Diluted EPS
 
$
0.66

 
$
0.62

 
$
1.32

 
$
1.29

Cash dividends declared per share
 
$
0.28

 
$
0.27

 
$
0.55

 
$
0.51

Basic weighted average shares outstanding
 
814,261

 
724,880

 
797,727

 
723,268

Diluted weighted average shares outstanding
 
823,682

 
734,527

 
806,839

 
733,002


The accompanying notes are an integral part of these consolidated financial statements.

4


BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in millions)
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2016
 
2015
 
2016
 
2015
Net Income
 
$
587

 
$
501

 
$
1,157

 
$
1,048

OCI, net of tax:
 
 

 
 

 
 

 
 

Change in unrecognized net pension and postretirement costs
 
11

 
9

 
22

 
18

Change in unrealized net gains (losses) on cash flow hedges
 
(49
)
 
73

 
(164
)
 
19

Change in unrealized net gains (losses) on AFS securities
 
100

 
(107
)
 
297

 
(50
)
Change in FDIC's share of unrealized gains/losses on AFS securities
 
17

 
9

 
32

 
19

Other, net
 
1

 
1

 
4

 
(3
)
Total OCI
 
80

 
(15
)
 
191

 
3

Total comprehensive income
 
$
667

 
$
486

 
$
1,348

 
$
1,051

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Tax Effect of Items Included in OCI:
 
 
 
 
 
 
 
 
Change in unrecognized net pension and postretirement costs
 
$
7

 
$
5

 
$
14

 
$
11

Change in unrealized net gains (losses) on cash flow hedges
 
(30
)
 
43

 
(98
)
 
11

Change in unrealized net gains (losses) on AFS securities
 
60

 
(65
)
 
178

 
(31
)
Change in FDIC's share of unrealized gains/losses on AFS securities
 
10

 
9

 
18

 
14


The accompanying notes are an integral part of these consolidated financial statements.


5


BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Six Months Ended June 30, 2016 and 2015
(Dollars in millions, shares in thousands)
 
 
Shares of
Common
Stock
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
AOCI
 
Noncontrolling
Interests
 
Total
Shareholders'
Equity
Balance, January 1, 2015
 
720,698

 
$
2,603

 
$
3,603

 
$
6,517

 
$
12,317

 
$
(751
)
 
$
88

 
$
24,377

Add (Deduct):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 

 
1,016

 

 
32

 
1,048

Net change in AOCI
 

 

 

 

 

 
3

 

 
3

Stock transactions:
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
Issued in business combinations
 
7,847

 

 
39

 
283

 

 

 

 
322

Issued in connection with equity awards
 
6,249

 

 
31

 
64

 

 

 

 
95

Shares repurchased in connection with equity awards
 
(1,313
)
 

 
(6
)
 
(45
)
 

 

 

 
(51
)
Excess tax benefits in connection with equity awards
 

 

 

 
9

 

 

 

 
9

Purchase of additional ownership interest in AmRisc, LP
 

 

 

 
(219
)
 

 

 
(3
)
 
(222
)
Cash dividends declared on common stock
 

 

 

 

 
(368
)
 

 

 
(368
)
Cash dividends declared on preferred stock
 

 

 

 

 
(74
)
 

 

 
(74
)
Equity-based compensation expense
 

 

 

 
58

 

 

 

 
58

Other, net
 

 

 

 

 

 

 
(65
)
 
(65
)
Balance, June 30, 2015
 
733,481

 
$
2,603

 
$
3,667

 
$
6,667

 
$
12,891

 
$
(748
)
 
$
52

 
$
25,132

 
 
Balance, January 1, 2016
 
780,337

 
$
2,603

 
$
3,902

 
$
8,365

 
$
13,464

 
$
(1,028
)
 
$
34

 
$
27,340

Add (Deduct):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 

 
1,148

 

 
9

 
1,157

Net change in AOCI
 

 

 

 

 

 
191

 

 
191

Stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued in business combinations
 
31,666

 

 
158

 
905

 

 

 

 
1,063

Issued in connection with equity awards
 
3,479

 

 
18

 
6

 

 

 

 
24

Shares repurchased in connection with equity awards
 
(982
)
 

 
(5
)
 
(28
)
 

 

 

 
(33
)
Issued in connection with preferred stock offerings
 

 
450

 

 

 

 

 

 
450

Cash dividends declared on common stock
 

 

 

 

 
(439
)
 

 

 
(439
)
Cash dividends declared on preferred stock
 

 

 

 

 
(80
)
 

 

 
(80
)
Equity-based compensation expense
 

 

 

 
65

 

 

 

 
65

Other, net
 

 

 

 
(2
)
 
11

 

 
(4
)
 
5

Balance, June 30, 2016
 
814,500

 
$
3,053

 
$
4,073

 
$
9,311

 
$
14,104

 
$
(837
)
 
$
39

 
$
29,743

 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

6


BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
 
 
Six Months Ended
 
 
June 30,
 
 
2016
 
2015
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
1,157

 
$
1,048

Adjustments to reconcile net income to net cash from operating activities:
 
 

 
 
Provision for credit losses
 
295

 
196

Adjustment to income tax provision
 
(13
)
 
(107
)
Depreciation
 
195

 
173

(Gain) loss on early extinguishment of debt
 
(1
)
 
172

Amortization of intangibles
 
74

 
44

Equity-based compensation expense
 
65

 
58

(Gain) loss on securities, net
 
(45
)
 
1

Net change in operating assets and liabilities:
 
 

 
 
LHFS
 
(1,413
)
 
(1,044
)
Trading securities
 
595

 
(239
)
Other assets
 
(438
)
 
(524
)
Accounts payable and other liabilities
 
282

 
180

Other, net
 
108

 
64

Net cash from operating activities
 
861

 
22

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 
Proceeds from sales of AFS securities
 
4,480

 
754

Proceeds from maturities, calls and paydowns of AFS securities
 
2,466

 
2,708

Purchases of AFS securities
 
(6,912
)
 
(3,486
)
Proceeds from maturities, calls and paydowns of HTM securities
 
2,964

 
1,733

Purchases of HTM securities
 
(3,122
)
 
(945
)
Originations and purchases of loans and leases, net of principal collected
 
(1,103
)
 
(1,704
)
Net cash received (paid) for acquisitions and divestitures
 
(789
)
 
1,742

Other, net
 
(38
)
 
29

Net cash from investing activities
 
(2,054
)
 
831

 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 
Net change in deposits
 
3,499

 
277

Net change in short-term borrowings
 
(3,515
)
 
143

Proceeds from issuance of long-term debt
 
3,028

 
1,017

Repayment of long-term debt
 
(3,008
)
 
(1,266
)
Net proceeds from preferred stock issued
 
450

 

Cash dividends paid on common stock
 
(439
)
 
(368
)
Cash dividends paid on preferred stock
 
(80
)
 
(74
)
Other, net
 
160

 
(286
)
Net cash from financing activities
 
95

 
(557
)
Net Change in Cash and Cash Equivalents
 
(1,098
)
 
296

Cash and Cash Equivalents at Beginning of Period
 
3,711

 
2,325

Cash and Cash Equivalents at End of Period
 
$
2,613

 
$
2,621

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
395

 
$
360

Income taxes
 
263

 
440

Noncash investing activities:
 
 

 
 
Transfers of loans to foreclosed assets
 
229

 
249

Purchase of additional interest in AmRisc, LP
 

 
216

Stock issued in business combinations
 
1,063

 
322


The accompanying notes are an integral part of these consolidated financial statements.

7


NOTE 1. Basis of Presentation
 
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, 2015 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

During June 2016, the FASB issued new guidance related to Credit Losses. The new guidance replaces the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit impaired loans will receive an allowance account at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses, with such allowance limited to the amount by which fair value is below amortized cost. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

During March 2016, the FASB issued new guidance related to Stock Compensation. The new guidance eliminates the concept of APIC pools for stock-based awards and requires that the related excess tax benefits and tax deficiencies be classified as an operating activity in the statement of cash flows. The new guidance also allows entities to make a one-time policy election to account for forfeitures when they occur, instead of accruing compensation cost based on the number of awards expected to vest. Additionally, the new guidance changes the requirement for an award to qualify for equity classification by permitting tax withholding up to the maximum statutory tax rate instead of the minimum statutory tax rate. Cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity in the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.

During March 2016, the FASB issued new guidance related to    Investments. The new guidance eliminates the requirement to retroactively adjust the financial statements when a change in ownership or influence causes an existing investment to qualify for the equity method of accounting. The new guidance requires the investor to add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. This guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.

8



During March 2016, the FASB issued new guidance related to Derivatives and Hedging. The new guidance clarifies the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts, which is used to determine whether the embedded derivative should be separated from the host contract and accounted for separately as a derivative. An entity performing the assessment will be required to assess the embedded call or put options solely in accordance with the pre-existing four-step decision sequence. This guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.

During March 2016, the FASB issued new guidance related to Liabilities. The new guidance requires companies to recognize breakage on prepaid stored-value products in accordance with the recently issued guidance on Revenue from Contracts with Customers. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.

During March 2016, the FASB issued new guidance related to Derivatives and Hedging. The new guidance clarifies that derivative instrument novations do not require dedesignation of the related hedging relationship provided that all other hedge accounting criteria continue to be met. BB&T adopted this guidance upon issuance. The adoption of this guidance was not material to the consolidated financial statements.

During February 2016, the FASB issued new guidance related to Leases. The new guidance requires lessees to recognize assets and liabilities related to certain operating leases on the balance sheet. The new guidance also requires additional disclosures by lessees and contains targeted changes to accounting by lessors. This guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

During January 2016, the FASB issued new guidance related to Financial Instruments. The new guidance requires the majority of equity investments to be measured at fair value with changes in fair value recognized in net income, excluding equity investments that are consolidated or accounted for under the equity method of accounting. The new guidance allows equity investments without readily determinable fair values to be measured at cost minus impairment, with a qualitative assessment required to identify impairment. For financial instruments recorded at amortized cost, the new guidance requires public companies to use exit prices to measure the fair value for disclosure purposes, eliminates the disclosure requirements related to measurement assumptions and requires separate presentation of financial assets and liabilities based on form and measurement category. In addition, for liabilities measured at fair value under the fair value option, the changes in fair value due to changes in instrument-specific credit risk should be recognized in OCI. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

During May 2015, the FASB issued new guidance related to Insurance. The new guidance requires insurance companies to provide additional disclosures about the liability for unpaid claims and claim adjustment expenses. This guidance is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016. BB&T's insurance operations primarily consist of agency/broker transactions; therefore, the adoption of this guidance is not expected to be material to the consolidated financial statements.

During 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. During August 2015, the FASB provided a one-year deferral of the effective date; therefore, the guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The FASB has also issued clarification guidance as it relates to principal versus agent considerations for revenue recognition purposes and clarification guidance on other various considerations related to the new revenue recognition guidance. Additionally, during April 2016, the FASB issued further clarification guidance related to identifying performance obligations and licensing. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

Effective January 1, 2016, BB&T adopted new guidance related to Fair Value Measurement. The new guidance eliminates the requirement to classify in the fair value hierarchy any investments for which fair value is measured at net asset value per share using the practical expedient. The adoption of this guidance was not material to the consolidated financial statements.


9


Effective January 1, 2016, BB&T adopted 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. The adoption of this guidance was not material to the consolidated financial statements.

Effective January 1, 2016, BB&T adopted 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. The adoption of this guidance was not material to the consolidated financial statements, therefore, it was adopted on a prospective basis.

Effective January 1, 2016, BB&T adopted 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. The adoption of this guidance was not material to the consolidated financial statements.
  
NOTE 2. Acquisitions and Divestitures
 
On April 1, 2016, BB&T acquired all of the outstanding stock of National Penn, a Pennsylvania incorporated BHC. National Penn conducted its business operations primarily through its bank subsidiary, National Penn Bank, which was merged into Branch Bank. National Penn operated other subsidiaries in Pennsylvania, New Jersey and Maryland to provide a wide range of retail and commercial banking and financial products and services. National Penn also operated a trust and investment company, an asset management company and a property and casualty insurance brokerage company. National Penn had 126 banking offices as of the acquisition date. BB&T acquired National Penn in order to increase BB&T’s market share in these areas.

The acquisition of National Penn constituted a business combination. Accordingly, the assets acquired and liabilities assumed are presented at their fair values in the table below. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. These fair value estimates are considered preliminary and are subject to change for up to one year after the closing date of the acquisition as additional information becomes available. Immaterial amounts of the intangible assets recognized are deductible for income tax purposes.


10


 
 
National Penn
 
 
UPB
 
Fair Value
 
 
(Dollars in millions)
Assets acquired:
 
 
 
 
Cash, due from banks and federal funds sold
 
 

 
$
216

Securities
 
 

 
2,496

Loans and leases:
 
 
Commercial and industrial
 
$
2,817

 
2,596

CRE-income producing properties
 
1,450

 
1,202

CRE-construction and development
 
165

 
127

Direct retail lending
 
801

 
767

Revolving credit
 
7

 
7

Residential mortgage
 
1,217

 
1,000

Sales finance
 
166

 
162

PCI
 
181

 
124

Total loans and leases
 
$
6,804

 
5,985

Goodwill
 
 

 
802

CDI
 
 

 
67

Other assets
 
 

 
501

Total assets acquired
 
 

 
10,067

Liabilities assumed:
 
 

 
 

Deposits:
 
 

 
 

Noninterest-bearing deposits
 
 

 
1,209

Interest-bearing deposits
 
 

 
5,420

Total deposits
 
 

 
6,629

Debt
 
 

 
1,756

Other liabilities
 
 

 
64

Total liabilities assumed
 
 

 
8,449

Consideration paid
 
 
 
$
1,618

 
 
 
 
 
Cash paid
 
 

 
$
555

Fair value of common stock issued, including replacement equity awards
 
 

 
1,063


The purchase price allocation for this acquisition has not been finalized. The following is a description of the methods used to determine the fair values of significant assets and liabilities.
 
Cash, due from banks and federal funds sold: The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets.
 
Securities: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair value estimates are based on observable inputs including quoted market prices for similar instruments, quoted market prices that are not in an active market or other inputs that are observable in the market. In the absence of observable inputs, fair value is estimated based on pricing models and/or discounted cash flow methodologies.
 
Loans and leases: Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan, amortization status and current discount rates. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included as a reduction to the estimated cash flows.
 
CDI: This intangible asset represents the value of the relationships with deposit customers. The fair value was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, reserve requirements and the net maintenance cost attributable to customer deposits. The CDI is being amortized over 10 years based upon the estimated economic benefits received.
 

11


Deposits: The fair values used for the demand and savings deposits by definition equal the amount payable on demand at the acquisition date. The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered to the contractual interest rates on such time deposits.
 
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.

Other Acquisitions and Divestitures

On April 1, 2016, BB&T purchased insurance broker CGSC North America Holdings Corporation ("Swett & Crawford") from Cooper Gay Swett & Crawford for $465 million in cash. The purchase price allocation for this acquisition has not been finalized.
 
See BB&T's Annual Report on Form 10-K for the year ended December 31, 2015 for additional information related to the following transactions.

During the third quarter of 2015, BB&T acquired Susquehanna Bancshares, Inc., resulting in the addition of $18.3 billion in assets and $14.1 billion in deposits. Susquehanna had 245 financial centers in Pennsylvania, Maryland, New Jersey and West Virginia. The purchase price allocation for this acquisition will be finalized within the next quarter.

During the second quarter of 2015, BB&T acquired The Bank of Kentucky, which provided $2.0 billion in assets, $1.6 billion in deposits and 32 financial centers.

During the second quarter of 2015, BB&T purchased additional ownership interest in AmRisc, LP from the noncontrolling owners in exchange for cash and full ownership of American Coastal, which resulted in a net charge to equity.

During the first quarter of 2015, BB&T acquired 41 financial centers in Texas, which provided $238 million in assets and $1.9 billion in deposits.

NOTE 3. Securities
 
 
Amortized
 
Gross Unrealized
 
Fair
June 30, 2016
 
Cost
 
Gains
 
Losses
 
Value
 
 
(Dollars in millions)
AFS securities:
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
1,159

 
$
14

 
$

 
$
1,173

Agency MBS
 
23,727

 
199

 
87

 
23,839

States and political subdivisions
 
2,153

 
101

 
43

 
2,211

Non-agency MBS
 
68

 

 

 
68

Other
 
7

 
3

 

 
10

Acquired from FDIC
 
706

 
237

 

 
943

Total AFS securities
 
$
27,820

 
$
554

 
$
130

 
$
28,244

 
 
 
 
 
 
 
 
 
HTM securities:
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
1,097

 
$
59

 
$

 
$
1,156

GSE
 
3,946

 
89

 

 
4,035

Agency MBS
 
13,531

 
255

 
9

 
13,777

States and political subdivisions
 
134

 

 

 
134

Other
 
54

 
2

 
1

 
55

Total HTM securities
 
$
18,762

 
$
405

 
$
10

 
$
19,157

 

12


 
 
Amortized
 
Gross Unrealized
 
Fair
December 31, 2015
 
Cost
 
Gains
 
Losses
 
Value
 
 
(Dollars in millions)
AFS securities:
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
1,836

 
$
2

 
$
6

 
$
1,832

GSE
 
51

 

 

 
51

Agency MBS
 
20,463

 
22

 
439

 
20,046

States and political subdivisions
 
2,025

 
94

 
40

 
2,079

Non-agency MBS
 
198

 
23

 

 
221

Other
 
4

 

 

 
4

Acquired from FDIC
 
772

 
292

 

 
1,064

Total AFS securities
 
$
25,349

 
$
433

 
$
485

 
$
25,297

 
 
 
 
 
 
 
 
 
HTM securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
$
1,097

 
$
22

 
$

 
$
1,119

GSE
 
5,045

 
16

 
98

 
4,963

Agency MBS
 
12,267

 
70

 
22

 
12,315

States and political subdivisions
 
63

 

 

 
63

Other
 
58

 
2

 
1

 
59

Total HTM securities
 
$
18,530

 
$
110

 
$
121

 
$
18,519

 
The fair value of securities acquired from the FDIC included non-agency MBS of $680 million and $768 million as of June 30, 2016 and December 31, 2015, respectively, and states and political subdivisions securities of $263 million and $296 million as of June 30, 2016 and December 31, 2015, respectively. 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 $449 million at June 30, 2016. 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 10% of shareholders' equity at June 30, 2016. The FNMA investments had total amortized cost and fair value of $15.7 billion and $15.8 billion, respectively. The FHLMC investments had total amortized cost and fair value of $7.6 billion.
 
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 June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in millions)
Balance at beginning of period
$
18

 
$
61

 
$
42

 
$
64

Credit losses on securities with previously recognized OTTI

 
3

 

 
3

Securities sold/settled during the period
2

 
(4
)
 
(21
)
 
(7
)
Credit recoveries through yield

 
(1
)
 
(1
)
 
(1
)
Balance at end of period
$
20

 
$
59

 
$
20

 
$
59

 
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.
 

13


 
 
AFS
 
HTM
June 30, 2016
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
 
(Dollars in millions)
Due in one year or less
 
$
228

 
$
228

 
$

 
$

Due after one year through five years
 
1,040

 
1,059

 
2,162

 
2,222

Due after five years through ten years
 
987

 
1,009

 
2,953

 
3,042

Due after ten years
 
25,565

 
25,948

 
13,647

 
13,893

Total debt securities
 
$
27,820

 
$
28,244

 
$
18,762

 
$
19,157

 
The following tables present the fair values and gross unrealized losses of investments based on the length of time that individual securities have been in a continuous unrealized loss position:
 
 
Less than 12 months
 
12 months or more
 
Total
June 30, 2016
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
(Dollars in millions)
AFS securities:
 
 
 
 
 
 
 
 
 
 
 
 
Agency MBS
 
$
1,889

 
$
12

 
$
5,061

 
$
75

 
$
6,950

 
$
87

States and political subdivisions
 
180

 
1

 
367

 
42

 
547

 
43

Total
 
$
2,069

 
$
13

 
$
5,428

 
$
117

 
$
7,497

 
$
130

 
 
 
 
 
 
 
 
 
 
 
 
 
HTM securities:
 
 

 
 

 
 

 
 

 
 

 
 

Agency MBS
 
$
1,046

 
$
8

 
$
94

 
$
1

 
$
1,140

 
$
9

Other
 
52

 
1

 

 

 
52

 
1

Total
 
$
1,098

 
$
9

 
$
94

 
$
1

 
$
1,192

 
$
10


 
 
Less than 12 months
 
12 months or more
 
Total
December 31, 2015
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
(Dollars in millions)
AFS securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
 
$
1,211

 
$
6

 
$

 
$

 
$
1,211

 
$
6

Agency MBS
 
12,052

 
199

 
5,576

 
240

 
17,628

 
439

States and political subdivisions
 
64

 
1

 
329

 
39

 
393

 
40

Total
 
$
13,327

 
$
206

 
$
5,905

 
$
279

 
$
19,232

 
$
485

 
 
 
 
 
 
 
 
 
 
 
 
 
HTM securities:
 
 

 
 

 
 

 
 

 
 

 
 

GSE
 
$
2,307

 
$
41

 
$
1,743

 
$
57

 
$
4,050

 
$
98

Agency MBS
 
3,992

 
21

 
124

 
1

 
4,116

 
22

Other
 
56

 
1

 

 

 
56

 
1

Total
 
$
6,355

 
$
63

 
$
1,867

 
$
58

 
$
8,222

 
$
121

 
The unrealized losses on GSE securities and agency MBS 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 June 30, 2016, $41 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. At June 30, 2016, none of these securities had credit impairment.
 

14


NOTE 4. Loans and ACL
 
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 June 30, 2016, these loans had a carrying value of $240 million, a UPB of $377 million and an ALLL of $45 million and are included in PCI. Loans with a carrying value of $482 million at June 30, 2016 continue to be covered by loss sharing and are included in PCI.

 
 
Accruing
 
 
 
 
June 30, 2016
 
Current
 
30-89 Days
Past Due
 
90 Days Or
More Past
Due
 
Nonaccrual
 
Total
 
 
(Dollars in millions)
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
51,631

 
$
20

 
$

 
$
452

 
$
52,103

CRE-income producing properties
 
14,828

 
8

 

 
36

 
14,872

CRE-construction and development
 
3,674

 
2

 

 
14

 
3,690

Dealer floor plan
 
1,308

 

 

 

 
1,308

Other lending subsidiaries
 
7,190

 
14

 

 
11

 
7,215

Retail:
 
 
 
 
 
 
 
 
 


Direct retail lending
 
11,915

 
53

 
5

 
52

 
12,025

Revolving credit
 
2,485

 
19

 
8

 

 
2,512

Residential mortgage-nonguaranteed
 
29,248

 
361

 
56

 
171

 
29,836

Residential mortgage-government guaranteed
 
317

 
81

 
415

 
1

 
814

Sales finance
 
9,359

 
61

 
4

 
5

 
9,429

Other lending subsidiaries
 
7,015

 
247

 

 
51

 
7,313

PCI
 
939

 
48

 
122

 

 
1,109

Total
 
$
139,909

 
$
914

 
$
610

 
$
793

 
$
142,226

 
 
Accruing
 
 
 
 
December 31, 2015
 
Current
 
30-89 Days
Past Due
 
90 Days Or
More Past
Due
 
Nonaccrual
 
Total
 
 
(Dollars in millions)
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
48,157

 
$
36

 
$

 
$
237

 
$
48,430

CRE-income producing properties
 
13,370

 
13

 

 
38

 
13,421

CRE-construction and development
 
3,710

 
9

 

 
13

 
3,732

Dealer floor plan
 
1,215

 

 

 

 
1,215

Other lending subsidiaries
 
6,771

 
18

 

 
6

 
6,795

Retail:
 
 

 
 

 
 

 
 

 
 
Direct retail lending
 
11,032

 
58

 
7

 
43

 
11,140

Revolving credit
 
2,478

 
22

 
10

 

 
2,510

Residential mortgage-nonguaranteed
 
29,038

 
397

 
55

 
173

 
29,663

Residential mortgage-government guaranteed
 
306

 
78

 
486

 

 
870

Sales finance
 
10,243

 
72

 
5

 
7

 
10,327

Other lending subsidiaries
 
6,381

 
286

 

 
59

 
6,726

PCI
 
966

 
42

 
114

 

 
1,122

Total
 
$
133,667

 
$
1,031

 
$
677

 
$
576

 
$
135,951



15


The following tables present the carrying amount of loans by risk rating. PCI loans are excluded because their related ALLL is determined by loan pool performance.
June 30, 2016
 
Commercial & Industrial
 
CRE -
Income Producing
Properties
 
CRE -
Construction and
Development
 
Dealer
Floor Plan
 
Other Lending
Subsidiaries
 
 
(Dollars in millions)
Commercial:
 
 
 
 
 
 
 
 
 
 
Pass
 
$
49,976

 
$
14,382

 
$
3,586

 
$
1,294

 
$
7,160

Special mention
 
466

 
167

 
24

 

 
6

Substandard - performing
 
1,209

 
287

 
66

 
14

 
38

Nonperforming
 
452

 
36

 
14

 

 
11

Total
 
$
52,103

 
$
14,872

 
$
3,690

 
$
1,308

 
$
7,215

 
 
 
Direct Retail
Lending
 
Revolving
Credit
 
Residential
Mortgage
 
Sales
Finance
 
Other Lending
Subsidiaries
 
 
(Dollars in millions)
Retail:
 
 
 
 
 
 
 
 
 
 
Performing
 
$
11,973

 
$
2,512

 
$
30,478

 
$
9,424

 
$
7,262

Nonperforming
 
52

 

 
172

 
5

 
51

Total
 
$
12,025

 
$
2,512

 
$
30,650

 
$
9,429

 
$
7,313


December 31, 2015
 
Commercial & Industrial
 
CRE -
Income Producing
Properties
 
CRE -
Construction and
Development
 
Dealer
Floor Plan
 
Other Lending
Subsidiaries
 
 
(Dollars in millions)
Commercial:
 
 
 
 
 
 
 
 
 
 
Pass
 
$
46,760

 
$
12,940

 
$
3,619

 
$
1,195

 
$
6,757

Special mention
 
305

 
166

 
29

 
6

 
3

Substandard-performing
 
1,128

 
277

 
71

 
14

 
29

Nonperforming
 
237

 
38

 
13

 

 
6

Total
 
$
48,430

 
$
13,421

 
$
3,732

 
$
1,215

 
$
6,795

 
 
 
Direct Retail
Lending
 
Revolving
Credit
 
Residential
Mortgage
 
Sales
Finance
 
Other Lending
Subsidiaries
 
 
(Dollars in millions)
Retail:
 
 
 
 
 
 
 
 
 
 
Performing
 
$
11,097

 
$
2,510

 
$
30,360

 
$
10,320

 
$
6,667

Nonperforming
 
43

 

 
173

 
7

 
59

Total
 
$
11,140

 
$
2,510

 
$
30,533

 
$
10,327

 
$
6,726



16


The following tables represent activity in the ACL for the periods presented:
 
 
ACL Rollforward
Three Months Ended June 30, 2016
 
Beginning
Balance
 
Charge-
Offs
 
Recoveries
 
Provision
(Benefit)
 
Acquisition
 
Ending
Balance
 
 
(Dollars in millions)
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
499

 
$
(26
)
 
$
12

 
$
34

 
$

 
$
519

CRE-income producing properties
 
125

 

 
1

 
(10
)
 

 
116

CRE-construction and development
 
32

 

 
5

 
(9
)
 

 
28

Dealer floor plan
 
10

 

 

 

 

 
10

Other lending subsidiaries
 
26

 
(4
)
 
2

 
3

 

 
27

Retail:
 
 
 
 
 
 
 
 
 
 
 


Direct retail lending
 
103

 
(12
)
 
6

 
8

 

 
105

Revolving credit
 
100

 
(16
)
 
5

 
9

 

 
98

Residential mortgage-nonguaranteed
 
197

 
(8
)
 
1

 
4

 

 
194

Residential mortgage-government guaranteed
 
24

 
(1
)
 

 
7

 

 
30

Sales finance
 
39

 
(6
)
 
3

 

 

 
36

Other lending subsidiaries
 
270

 
(69
)
 
10

 
68

 

 
279

PCI
 
63

 

 

 
2

 

 
65

ALLL
 
1,488

 
(142
)
 
45

 
116

 

 
1,507

RUFC
 
92

 

 

 
(5
)
 
9

 
96

ACL
 
$
1,580

 
$
(142
)
 
$
45

 
$
111

 
$
9

 
$
1,603


 
 
ACL Rollforward
Three Months Ended June 30, 2015
 
Beginning
Balance
 
Charge-
Offs
 
Recoveries
 
Provision
(Benefit)
 
Acquisition
 
Ending
Balance
 
 
(Dollars in millions)
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
448

 
$
(32
)
 
$
13

 
$
28

 
$

 
$
457

CRE-income producing properties
 
153

 
(4
)
 
1

 
(9
)
 

 
141

CRE-construction and development
 
42

 

 
2

 
(6
)
 

 
38

Dealer floor plan
 
10

 

 

 

 

 
10

Other lending subsidiaries
 
22

 
(2
)
 
1

 

 

 
21

Retail:
 
 

 
 

 
 

 
 

 
 
 


Direct retail lending
 
111

 
(13
)
 
7

 
8

 

 
113

Revolving credit
 
106

 
(19
)
 
5

 
10

 

 
102

Residential mortgage-nonguaranteed
 
200

 
(8
)
 
1

 
4

 

 
197

Residential mortgage-government guaranteed
 
30

 
(1
)
 

 
(1
)
 

 
28

Sales finance
 
48

 
(5
)
 
2

 
(1
)
 

 
44

Other lending subsidiaries
 
237

 
(55
)
 
9

 
58

 

 
249

PCI
 
57

 

 

 

 

 
57

ALLL
 
1,464

 
(139
)
 
41

 
91

 

 
1,457

RUFC
 
68

 

 

 
6

 
4

 
78

ACL
 
$
1,532

 
$
(139
)
 
$
41

 
$
97

 
$
4

 
$
1,535



17


 
 
ACL Rollforward
Six Months Ended June 30, 2016
 
Beginning Balance
 
Charge-Offs
 
Recoveries
 
Provision (Benefit)
 
Acquisition
 
Ending Balance
 
 
(Dollars in millions)
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
466

 
$
(82
)
 
$
24

 
$
111

 
$

 
$
519

CRE-income producing properties
 
135

 
(2
)
 
4

 
(21
)
 

 
116

CRE-construction and development
 
37

 

 
6

 
(15
)
 

 
28

Dealer floor plan
 
8

 

 

 
2

 

 
10

Other lending subsidiaries
 
22

 
(12
)
 
4

 
13

 

 
27

Retail:
 
 

 
 

 
 

 
 

 
 

 


Direct retail lending
 
105

 
(25
)
 
13

 
12

 

 
105

Revolving credit
 
104

 
(35
)
 
10

 
19

 

 
98

Residential mortgage-nonguaranteed
 
194

 
(15
)
 
2

 
13

 

 
194

Residential mortgage-government guaranteed
 
23

 
(2
)
 

 
9

 

 
30

Sales finance
 
40

 
(14
)
 
6

 
4

 

 
36

Other lending subsidiaries
 
265

 
(153
)
 
20

 
147

 

 
279

PCI
 
61

 

 

 
4

 

 
65

ALLL
 
1,460

 
(340
)
 
89

 
298

 

 
1,507

RUFC
 
90

 

 

 
(3
)
 
9

 
96

ACL
 
$
1,550

 
$
(340
)
 
$
89

 
$
295

 
$
9

 
$
1,603


 
 
ACL Rollforward
Six Months Ended June 30, 2015
 
Beginning Balance
 
Charge-Offs
 
Recoveries
 
Provision (Benefit)
 
Acquisition
 
Ending Balance
 
 
(Dollars in millions)
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
421

 
$
(46
)
 
$
21

 
$
61

 
$

 
$
457

CRE-income producing properties
 
162

 
(13
)
 
3

 
(11
)
 

 
141

CRE-construction and development
 
48

 
(2
)
 
6

 
(14
)
 

 
38

Dealer floor plan
 
10

 

 

 

 

 
10

Other lending subsidiaries
 
21

 
(5
)
 
2

 
3

 

 
21

Retail:
 
 

 
 

 
 

 
 

 
 

 


Direct retail lending
 
110

 
(25
)
 
15

 
13

 

 
113

Revolving credit
 
110

 
(37
)
 
10

 
19

 

 
102

Residential mortgage-nonguaranteed
 
217

 
(19
)
 
1

 
(2
)
 

 
197

Residential mortgage-government guaranteed
 
36

 
(1
)
 

 
(7
)
 

 
28

Sales finance
 
40

 
(11
)
 
5

 
10

 

 
44

Other lending subsidiaries
 
235

 
(119
)
 
17

 
116

 

 
249

PCI
 
64

 
(1
)
 

 
(6
)
 

 
57

ALLL
 
1,474

 
(279
)
 
80

 
182

 

 
1,457

RUFC
 
60

 

 

 
14

 
4

 
78

ACL
 
$
1,534

 
$
(279
)
 
$
80

 
$
196

 
$
4

 
$
1,535



18


The following table provides a summary of loans that are collectively evaluated for impairment.
 
 
June 30, 2016
 
December 31, 2015
 
 
Recorded Investment
 
Related ALLL
 
Recorded Investment
 
Related ALLL
 
 
(Dollars in millions)
Commercial:
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
51,567

 
$
478

 
$
48,110

 
$
439

CRE-income producing properties
 
14,793

 
109

 
13,339

 
127

CRE-construction and development
 
3,659

 
24

 
3,697

 
32

Dealer floor plan
 
1,308

 
10

 
1,215

 
8

Other lending subsidiaries
 
7,200

 
26

 
6,789

 
21

Retail:
 
 
 
 
 
 
 
 
Direct retail lending
 
11,943

 
95

 
11,055

 
93

Revolving credit
 
2,481

 
86

 
2,477

 
91

Residential mortgage-nonguaranteed
 
29,399

 
151

 
29,228

 
153

Residential mortgage-government guaranteed
 
466

 
5

 
553

 
1

Sales finance
 
9,412

 
35

 
10,308

 
39

Other lending subsidiaries
 
7,105

 
245

 
6,534

 
235

PCI
 
1,109

 
65

 
1,122

 
61

Total
 
$
140,442

 
$
1,329

 
$
134,427

 
$
1,300


The following tables set forth certain information regarding impaired loans, excluding PCI and LHFS, that were individually evaluated for impairment.
As of / For The Six Months Ended June 30, 2016
 
Recorded
Investment
 
UPB
 
Related
ALLL
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
 
(Dollars in millions)
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
245

 
$
273

 
$

 
$
195

 
$

CRE-income producing properties
 
11

 
17

 

 
16

 

CRE-construction and development
 
6

 
8

 

 
7

 

Other lending subsidiaries
 
10

 
11

 

 
5

 

Retail:
 
 
 
 
 
 
 
 
 
 
Direct retail lending
 
12

 
39

 

 
12

 

Residential mortgage-nonguaranteed
 
68

 
132

 

 
78

 
2

Residential mortgage-government guaranteed
 
3

 
3

 

 
4

 

Sales finance
 
1

 
2

 

 
1

 

Other lending subsidiaries
 
4

 
8

 

 
4

 

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
291

 
311

 
41

 
240

 
2

CRE-income producing properties
 
68

 
68

 
7

 
73

 
1

CRE-construction and development
 
25

 
25

 
4

 
24

 

Other lending subsidiaries
 
5

 
6

 
1

 
3

 

Retail:
 
 
 
 
 
 
 
 
 
 
Direct retail lending
 
70

 
72

 
10

 
72

 
2

Revolving credit
 
31

 
31

 
12

 
32

 
1

Residential mortgage-nonguaranteed
 
369

 
388

 
43

 
355

 
8

Residential mortgage-government guaranteed
 
345

 
345

 
25

 
314

 
6

Sales finance
 
16

 
16

 
1

 
17

 

Other lending subsidiaries
 
204

 
206

 
34

 
193

 
15

Total
 
$
1,784

 
$
1,961

 
$
178

 
$
1,645

 
$
37


19


As Of / For The Year Ended December 31, 2015
 
Recorded
Investment
 
UPB
 
Related
ALLL
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
 
(Dollars in millions)
With no related ALLL recorded:
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
129

 
$
164

 
$

 
$
95

 
$
1

CRE-income producing properties
 
8

 
13

 

 
17

 

CRE-construction and development
 
8

 
11

 

 
10

 

Dealer floor plan
 

 

 

 
2

 

Other lending subsidiaries
 
2

 
3

 

 

 

Retail:
 
 

 
 

 
 

 
 

 
 

Direct retail lending
 
11

 
40

 

 
12

 
1

Residential mortgage-nonguaranteed
 
84

 
153

 

 
97

 
4

Residential mortgage-government guaranteed
 
5

 
5

 

 
3

 

Sales finance
 
1

 
2

 

 
1

 

Other lending subsidiaries
 
4

 
8

 

 
3

 

With an ALLL recorded:
 
 

 
 

 
 

 
 

 
 

Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
191

 
194

 
27

 
223

 
5

CRE-income producing properties
 
74

 
77

 
8

 
96

 
3

CRE-construction and development
 
27

 
27

 
5

 
36

 
1

Dealer floor plan
 

 

 

 
1

 

Other lending subsidiaries
 
4

 
5

 
1

 
6

 

Retail:
 
 

 
 

 
 

 
 

 
 

Direct retail lending
 
74

 
75

 
12

 
79

 
4

Revolving credit
 
33

 
33

 
13

 
36

 
1

Residential mortgage-nonguaranteed
 
351

 
368

 
41

 
354

 
15

Residential mortgage-government guaranteed
 
312

 
312

 
22

 
323

 
13

Sales finance
 
18

 
18

 
1

 
19

 
1

Other lending subsidiaries
 
188

 
190

 
30

 
179

 
28

Total
 
$
1,524

 
$
1,698

 
$
160

 
$
1,592

 
$
77


Trial modifications are excluded from the following disclosures because the specific types and amounts of concessions offered to borrowers frequently change between the trial modification and the permanent modification. The following table provides a summary of TDRs, all of which are considered impaired.
 
 
June 30, 2016
 
December 31, 2015
 
 
(Dollars in millions)
Performing TDRs:
 
 
 
 
Commercial:
 
 
 
 
Commercial and industrial
 
$
39

 
$
49

CRE-income producing properties
 
16

 
13

CRE-construction and development
 
10

 
16

Direct retail lending
 
69

 
72

Sales finance
 
16

 
17

Revolving credit
 
31

 
33

Residential mortgage-nonguaranteed
 
276

 
288

Residential mortgage-government guaranteed
 
348

 
316

Other lending subsidiaries
 
198

 
178

Total performing TDRs
 
1,003

 
982

Nonperforming TDRs (also included in NPL disclosures)
 
146

 
146

Total TDRs
 
$
1,149

 
$
1,128

 
 
 
 
 
ALLL attributable to TDRs
 
$
125

 
$
126



20


The following tables summarize 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 include TDRs made with below market interest rates that also include modifications of loan structures.
 
 
Three Months Ended June 30,
 
 
2016
 
2015
 
 
Types of
Modifications
 
Impact To ALLL
 
Types of
Modifications
 
Impact To ALLL
 
 
Rate
 
Structure
 
 
Rate
 
Structure
 
 
 
(Dollars in millions)
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
33

 
$
14

 
$
1

 
$
40

 
$
10

 
$
1

CRE-income producing properties
 
3

 
1

 

 
2

 
10

 

CRE-construction and development
 
1

 
3

 

 

 
9

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Retail:
 
 

 
 

 
 

 
 

 
 

 
 

Direct retail lending
 
4

 

 

 
3

 

 
1

Revolving credit
 
4

 

 
1

 
4

 

 
1

Residential mortgage-nonguaranteed
 
21

 
6

 
2

 
21

 
10

 
2

Residential mortgage-government guaranteed
 
69

 

 
3

 
49

 

 
2

Sales finance
 

 
1

 

 

 
3

 

Other lending subsidiaries
 
42

 

 
5

 
29

 

 
4


 
 
Six Months Ended June 30,
 
 
2016
 
2015
 
 
Types of
Modifications
 
Impact To ALLL
 
Types of
Modifications
 
Impact To ALLL
 
 
Rate
 
Structure
 
 
Rate
 
Structure
 
 
 
(Dollars in millions)
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
95

 
$
23

 
$
2

 
$
49

 
$
24

 
$
2

CRE-income producing properties
 
11

 
8

 

 
4

 
13

 

CRE-construction and development
 
4

 
3

 

 

 
12

 

Retail:
 
 

 
 

 
 

 
 

 
 

 
 

Direct retail lending
 
8

 
1

 

 
6

 

 
2

Revolving credit
 
9

 

 
2

 
8

 

 
2

Residential mortgage-nonguaranteed
 
38

 
14

 
3

 
44

 
22

 
5

Residential mortgage-government guaranteed
 
108

 

 
5

 
109

 

 
4

Sales finance
 

 
3

 

 

 
5

 

Other lending subsidiaries
 
74

 

 
10

 
60

 

 
8


Charge-offs and forgiveness of principal and interest for TDRs were immaterial for all periods presented.
 
The pre-default balance for modifications that experienced a payment default that had been classified as TDRs during the previous 12 months was $16 million and $15 million for the three months ended June 30, 2016 and 2015, respectively, and $33 million and $35 million for the six months ended June 30, 2016 and 2015, respectively. Payment default is defined as movement of the TDR to nonaccrual status, foreclosure or charge-off, whichever occurs first.


21


Changes in the carrying value and accretable yield of PCI loans are presented in the following table:
 
 
Six Months Ended June 30, 2016
 
Year Ended December 31, 2015
 
 
Purchased Impaired
 
Purchased Nonimpaired
 
Purchased Impaired
 
Purchased Nonimpaired
 
 
Accretable
Yield
 
Carrying
Value
 
Accretable
Yield
 
Carrying
Value
 
Accretable
Yield
 
Carrying
Value
 
Accretable
Yield
 
Carrying
Value
 
 
(Dollars in millions)
Balance at beginning of period
 
$
189

 
$
700

 
$
176

 
$
422

 
$
134

 
$
579

 
$
244

 
$
636

Additions
 
36

 
124

 

 

 
98

 
402

 

 

Accretion
 
(66
)
 
66

 
(41
)
 
41

 
(89
)
 
89

 
(89
)
 
89

Payments received, net
 

 
(155
)
 

 
(89
)
 

 
(370
)
 

 
(303
)
Other, net
 
131

 

 
28

 

 
46

 

 
21

 

Balance at end of period
 
$
290

 
$
735

 
$
163

 
$
374

 
$
189

 
$
700

 
$
176

 
$
422

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Outstanding UPB at end of period
 
 
 
$
1,106

 
 
 
$
501

 
 
 
$
1,063

 
 
 
$
587


The following table presents additional information about BB&T's loans and leases:
 
 
June 30, 2016
 
December 31, 2015
 
 
(Dollars in millions)
Unearned income, discounts and net deferred loan fees and costs, excluding PCI
 
$
610

 
$
598

Residential mortgage loans in process of foreclosure
 
361

 
229


NOTE 5. Goodwill and Other Intangible Assets
 
The changes in the carrying amounts of goodwill attributable to BB&T's operating segments are reflected in the table below.
 
 
Community
Banking
 
Residential
Mortgage
Banking
 
Dealer
Financial
Services
 
Specialized
Lending
 
Insurance
Holdings
 
Financial
Services
 
Other, Treasury & Corporate
 
Total
 
 
(Dollars in millions)
Goodwill, January 1, 2016
 
$
6,187

 
$
326

 
$
111

 
$
243

 
$
1,482

 
$
199

 
$

 
$
8,548

Acquisitions
 
6

 

 

 
2

 
270

 

 
802

 
1,080

Other adjustments
 
105

 

 

 
(134
)
 

 
22

 

 
(7
)
Goodwill, June 30, 2016
 
$
6,298

 
$
326

 
$
111

 
$
111

 
$
1,752

 
$
221

 
$
802

 
$
9,621

 
The other adjustments to goodwill were primarily the result of updating the purchase price allocation for Susquehanna. Goodwill acquired in connection with the acquisition of National Penn is included in the Other, Treasury & Corporate segment for the second quarter of 2016 and will be presented in the other segments following the systems conversion date in July 2016.

The acquisition of Swett & Crawford provided goodwill of $269 million and identifiable intangible assets of $240 million. The intangible assets are being amortized over 15 years based upon the estimated economic benefits received. Approximately $135 million of the goodwill and identifiable intangible assets is deductible for tax purposes.

The following table presents information for identifiable intangible assets subject to amortization:
 
 
June 30, 2016
 
December 31, 2015
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
 
(Dollars in millions)
CDI
 
$
970

 
$
(674
)
 
$
296

 
$
903

 
$
(634
)
 
$
269

Other, primarily customer relationship intangibles
 
1,432

 
(782
)
 
650

 
1,164

 
(747
)
 
417

Total
 
$
2,402

 
$
(1,456
)
 
$
946

 
$
2,067

 
$
(1,381
)
 
$
686



22


NOTE 6. Loan Servicing
 
Residential Mortgage Banking Activities
 
The following tables summarize residential mortgage banking activities. Mortgage and home equity loans managed by BB&T exclude loans serviced for others with no other continuing involvement.
 
 
June 30, 2016
 
December 31, 2015
 
 
(Dollars in millions)
UPB of mortgage loan servicing portfolio
 
$
117,880

 
$
116,817

UPB of home equity loan servicing portfolio
 
4,737

 
5,352

UPB of residential mortgage and home equity loan servicing portfolio
 
$
122,617

 
$
122,169

 
 
 
 
 
UPB of residential mortgage loans serviced for others (primarily agency conforming fixed rate)
 
$
89,970

 
$
91,132

Mortgage loans sold with recourse
 
644

 
702

Maximum recourse exposure from mortgage loans sold with recourse liability
 
306

 
326

Indemnification, recourse and repurchase reserves
 
80

 
79

FHA-insured mortgage loan reserve
 
85

 
85

 
As previously disclosed, during June 2014, BB&T received notice from the HUD-OIG that BB&T had been selected for an audit/survey to assess BB&T's compliance with FHA loan origination and quality control requirements. In late 2014 and in 2015, BB&T received subpoenas from the HUD-OIG and the Department of Justice seeking additional information regarding its lending practices in connection with loans insured by the FHA. BB&T is cooperating with the investigation. While the final outcome of the investigation has not been determined and neither the Department of Justice nor the HUD-OIG has formally asserted any claims, similar reviews and related matters with other financial institutions have resulted in cash settlements and other remedial actions. The estimated potential net exposure related to losses incurred by the FHA on defaulted loans ranges from $25 million to $105 million, and BB&T recognized an $85 million charge during 2014 that was included in other expense on the Consolidated Statements of Income.
 
 
As of / For The
Six Months Ended June 30,
 
 
2016
 
2015
 
 
(Dollars in millions)
UPB of residential mortgage loans sold from LHFS
 
$
6,183

 
$
6,804

Pre-tax gains recognized on mortgage loans sold and held for sale
 
59

 
74

Servicing fees recognized from mortgage loans serviced for others
 
134

 
136

Approximate weighted average servicing fee on the outstanding balance of residential mortgage loans serviced for others
 
0.28
%
 
0.29
%
Weighted average interest rate on mortgage loans serviced for others
 
4.09

 
4.16

 
 
Six Months Ended June 30,
 
 
2016
 
2015
 
 
(Dollars in millions)
Residential MSRs, carrying value, beginning of period
 
$
880

 
$
844

Additions
 
56

 
68

Change in fair value due to changes in valuation inputs or assumptions:
 
 
 
 
Prepayment speeds
 
(209
)
 
166

OAS
 
9

 
(70
)
Servicing costs
 
2

 
(25
)
Realization of expected net servicing cash flows, passage of time and other
 
(69
)
 
(71
)
Residential MSRs, carrying value, end of period
 
$
669

 
$
912

 
 
 
 
 
Gains (losses) on derivative financial instruments used to mitigate the income statement effect of changes in fair value
 
$
229

 
$
(38
)
 

23


The sensitivity of the fair value of the residential MSRs to changes in key assumptions is included in the accompanying table:
 
 
June 30, 2016
 
December 31, 2015
 
 
Range
 
Weighted
Average
 
Range
 
Weighted
Average
 
 
Min
 
Max
 
 
Min
 
Max
 
 
 
(Dollars in millions)
Prepayment speed
 
12.9
%
 
14.8
%
 
14.2
%
 
8.1
%
 
9.0
%
 
8.7
%
Effect on fair value of a 10% increase
 
 
 
 
 
$
(33
)
 
 
 
 
 
$
(28
)
Effect on fair value of a 20% increase
 
 
 
 
 
(62
)
 
 
 
 
 
(54
)
 
 
 
 
 
 
 
 
 
 
 
 
 
OAS
 
9.9
%
 
10.2
%
 
10.0
%
 
10.3
%
 
10.6
%
 
10.4
%
Effect on fair value of a 10% increase
 
 
 
 
 
$
(21
)
 
 
 
 
 
$
(32
)
Effect on fair value of a 20% increase
 
 
 
 
 
(41
)
 
 
 
 
 
(61
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Composition of loans serviced for others:
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate residential mortgage loans
 
 
 
 
 
99.2
%
 
 
 
 
 
99.2
%
Adjustable-rate residential mortgage loans
 
 
 
 
 
0.8

 
 
 
 
 
0.8

Total
 
 

 
 

 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average life (in years)
 
 

 
 

 
4.9

 
 
 
 
 
6.8


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 one 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

The following table summarizes commercial mortgage banking activities for the periods presented:
 
June 30, 2016
 
December 31, 2015
 
(Dollars in millions)
UPB of CRE mortgages serviced for others
$
28,455

 
$
28,163

CRE mortgages serviced for others covered by recourse provisions
4,022

 
4,198

Maximum recourse exposure from CRE mortgages sold with recourse liability
1,221

 
1,259

Recorded reserves related to recourse exposure
7

 
7

Originated CRE mortgages during the year
2,981

 
7,012

Commercial MSRs at fair value
116

 

 
Effective January 1, 2016, the Company adopted the fair value option for commercial MSRs to facilitate hedging against the MSR asset. The impact of such adoption was immaterial.

NOTE 7. Deposits
 
A summary of deposits is presented in the accompanying table:
 
 
June 30, 2016
 
December 31, 2015
 
 
(Dollars in millions)
Noninterest-bearing deposits
 
$
49,180

 
$
45,695

Interest checking
 
28,528

 
25,410

Money market and savings
 
64,064

 
60,461

Time deposits
 
17,466

 
17,558

Total deposits
 
$
159,238

 
$
149,124

 
 
 
 
 
Time deposits $100,000 and greater
 
$
7,466

 
$
7,562

Time deposits $250,000 and greater
 
3,649

 
3,497

 

24


NOTE 8. Long-Term Debt
 
 
June 30,
2016
 
December 31,
2015
 
 
(Dollars in millions)
BB&T Corporation:
 
 
 
 
3.95% senior notes due 2016
 
$

 
$
500

3.20% senior notes due 2016
 

 
1,000

2.15% senior notes due 2017
 
750

 
749

1.60% senior notes due 2017
 
750

 
749

1.45% senior notes due 2018
 
465

 
500

Floating rate senior notes due 2018 (LIBOR-based, 1.51% at June 30, 2016)
 
400

 
400

2.05% senior notes due 2018
 
600

 
600

6.85% senior notes due 2019
 
540

 
540

2.25% senior notes due 2019
 
648

 
648

Floating rate senior notes due 2019 (LIBOR-based, 1.30% at June 30, 2016)
 
450

 
450

2.45% senior notes due 2020
 
1,298

 
1,298

2.63% senior notes due 2020
 
999

 
999

Floating rate senior notes due 2020 (LIBOR-based, 1.34% at June 30, 2016)
 
200

 
200

2.05% senior notes due 2021
 
1,249

 

5.38% senior notes due 2022
 
165

 
166

4.25% senior notes due 2024
 
130

 

4.90% subordinated notes due 2017
 
358

 
356

5.25% subordinated notes due 2019
 
586

 
586

3.95% subordinated notes due 2022
 
299

 
299

 
 
 
 
 
Branch Bank:
 
 
 
 
1.45% senior notes due 2016
 
750

 
750

Floating rate senior notes due 2016 (LIBOR-based, 1.10% at June 30, 2016)
 
375

 
375

1.05% senior notes due 2016
 
500

 
500

1.00% senior notes due 2017
 
599

 
599

1.35% senior notes due 2017
 
660

 
750

2.30% senior notes due 2018
 
750

 
750

1.45% senior notes due 2019
 
1,499

 

Floating rate senior notes due 2019 (LIBOR-based, 1.16% at June 30, 2016)
 
250

 

2.85% senior notes due 2021
 
700

 
700

5.63% subordinated notes due 2016
 
386

 
386

Floating rate subordinated notes due 2016 (LIBOR-based, 0.98% at June 30, 2016)
 
350

 
350

Floating rate subordinated notes due 2017 (LIBOR-based, 0.95% at June 30, 2016)
 
262

 
262

3.63% subordinated notes due 2025
 
1,249

 
1,249

3.80% subordinated notes due 2026
 
848

 
848

 
 
 
 
 
FHLB advances to Branch Bank:
 
 
 
 
Varying maturities to 2034
 
4,387

 
5,582

 
 
 
 
 
Other long-term debt
 
232

 
154

 
 
 
 
 
Basis adjustments
 
751

 
474

Total long-term debt
 
$
24,435

 
$
23,769

 

25


Basis adjustments include fair value hedge-related basis adjustments as well as debt issuance costs. The following table reflects the carrying amounts and effective interest rates for long-term debt:
 
 
June 30, 2016
 
December 31, 2015
 
 
Carrying
Amount
 
Effective
Rate
 
Carrying
Amount
 
Effective
Rate
 
 
(Dollars in millions)
BB&T Corporation fixed rate senior notes
 
$
7,724

 
1.86
%
 
$
7,831

 
2.35
%
BB&T Corporation floating rate senior notes
 
1,049

 
1.43

 
1,050

 
1.20

BB&T Corporation fixed rate subordinated notes
 
1,388

 
0.90

 
1,382

 
1.52

Branch Bank fixed rate senior notes
 
5,520

 
1.30

 
4,071

 
1.62

Branch Bank floating rate senior notes
 
625

 
1.18

 
375

 
0.92

Branch Bank fixed rate subordinated notes
 
2,689

 
2.39

 
2,562

 
3.13

Branch Bank floating rate subordinated notes
 
612

 
3.45

 
612

 
3.24

FHLB advances (weighted average maturity of 5.5 years at June 30, 2016)
 
4,596

 
3.98

 
5,732

 
4.02

Other long-term debt
 
232

 
 

 
154

 
 
Total long-term debt
 
$
24,435

 
 

 
$
23,769

 
 
 
The effective rates above reflect the impact of hedges and issuance costs, 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.
 
NOTE 9. Shareholders' Equity
 
On March 9, 2016, BB&T issued $465 million of series H non-cumulative perpetual preferred stock with a stated dividend rate of 5.625% per annum for net proceeds of $450 million. Dividends, if declared by the Board of Directors, are payable quarterly in arrears. BB&T issued depositary shares, each of which represents a fractional ownership interest in a share of the 18,600 shares of the Company’s series H preferred stock. The preferred stock has no stated maturity and redemption is solely at the option of the Company in whole, but not in part, upon the occurrence of a regulatory capital treatment event, as defined. In addition, the preferred stock may be redeemed in whole or in part, on any dividend payment date after June 1, 2021. Under current rules, any redemption of the preferred stock is subject to prior approval of the FRB. The preferred stock is not subject to any sinking fund or other obligations of the Corporation.

The activity relating to options and restricted shares/units during the period is presented in the following tables:
 
 
Options
 
Wtd. Avg.
Exercise
Price
 
 
(Shares in thousands)
Outstanding at January 1, 2016
 
20,577

 
$
34.89

Granted
 
610

 
32.10

Replacement awards issued in connection with business combination
 
566

 
36.12

Exercised
 
(516
)
 
28.08

Forfeited or expired
 
(2,809
)
 
40.58

Outstanding at June 30, 2016
 
18,428

 
34.16

Exercisable at June 30, 2016
 
17,478

 
34.15

Exercisable and expected to vest at June 30, 2016
 
18,378

 
34.16

 
 
Restricted
Shares/Units
 
Wtd. Avg.
Grant Date
Fair Value
 
 
(Shares in thousands)
Nonvested at January 1, 2016
 
11,824

 
$
29.81

Granted
 
5,224

 
27.48

Vested
 
(2,735
)
 
27.45

Forfeited
 
(209
)
 
29.44

Nonvested at June 30, 2016
 
14,104

 
29.41

Expected to vest at June 30, 2016
 
12,930

 
29.41



26


NOTE 10. AOCI
Three Months Ended June 30, 2016
 
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, April 1, 2016
 
$
(712
)
 
$
(198
)
 
$
163

 
$
(154
)
 
$
(16
)
 
$
(917
)
OCI before reclassifications, net of tax
 
1


(51
)

110

 
6

 
1

 
67

Amounts reclassified from AOCI:
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
16

 

 

 

 

 
16

Interest income
 

 

 
(16
)
 

 

 
(16
)
Interest expense
 

 
4

 

 

 

 
4

FDIC loss share income, net
 

 

 

 
17

 

 
17

Securities (gains) losses, net
 

 

 

 

 

 

Total before income taxes
 
16

 
4

 
(16
)
 
17

 

 
21

Less: Income taxes
 
6

 
2

 
(6
)
 
6

 

 
8

Net of income taxes
 
10

 
2

 
(10
)
 
11

 

 
13

Net change in AOCI
 
11

 
(49
)
 
100

 
17

 
1

 
80

AOCI balance, June 30, 2016
 
$
(701
)
 
$
(247
)
 
$
263

 
$
(137
)
 
$
(15
)
 
$
(837
)
 
Three Months Ended June 30, 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, April 1, 2015
 
$
(617
)
 
$
(108
)
 
$
209

 
$
(197
)
 
$
(20
)
 
$
(733
)
OCI before reclassifications, net of tax
 
1


60


(121
)

5


1


(54
)
Amounts reclassified from AOCI:
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
12

 

 

 

 

 
12

Interest income
 

 

 
22

 

 

 
22

Interest expense
 

 
21

 

 

 

 
21

FDIC loss share income, net
 

 

 

 
6

 

 
6

Securities (gains) losses, net
 

 

 
1

 

 

 
1

Total before income taxes
 
12

 
21

 
23

 
6

 

 
62

Less: Income taxes
 
4

 
8

 
9

 
2

 

 
23

Net of income taxes
 
8

 
13

 
14

 
4

 

 
39

Net change in AOCI
 
9


73


(107
)

9


1


(15
)
AOCI balance, June 30, 2015
 
$
(608
)
 
$
(35
)
 
$
102

 
$
(188
)
 
$
(19
)
 
$
(748
)
 

27


Six Months Ended June 30, 2016
 
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, 2016
 
$
(723
)
 
$
(83
)
 
$
(34
)
 
$
(169
)
 
$
(19
)
 
$
(1,028
)
OCI before reclassifications, net of tax
 
1

 
(177
)
 
352

 
11

 
3

 
190

Amounts reclassified from AOCI:
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
33

 

 

 

 

 
33

Interest income
 

 

 
(43
)
 

 
1

 
(42
)
Interest expense
 

 
21

 

 

 

 
21

FDIC loss share income, net
 

 

 

 
33

 

 
33

Securities (gains) losses, net
 

 

 
(45
)
 

 

 
(45
)
Total before income taxes
 
33

 
21

 
(88
)
 
33

 
1

 

Less: Income taxes
 
12

 
8

 
(33
)
 
12

 

 
(1
)
Net of income taxes
 
21

 
13

 
(55
)
 
21

 
1

 
1

Net change in AOCI
 
22

 
(164
)
 
297

 
32

 
4

 
191

AOCI balance, June 30, 2016
 
$
(701
)
 
$
(247
)
 
$
263

 
$
(137
)
 
$
(15
)
 
$
(837
)
 
Six Months Ended June 30, 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
 
3

 
(7
)
 
(54
)
 
7

 
(4
)
 
(55
)
Amounts reclassified from AOCI:
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
24

 

 

 

 

 
24

Interest income
 

 

 
6

 

 
1

 
7

Interest expense
 

 
42

 

 

 

 
42

FDIC loss share income, net
 

 

 

 
19

 

 
19

Securities (gains) losses, net
 

 

 
1

 

 

 
1

Total before income taxes
 
24

 
42

 
7

 
19

 
1

 
93

Less: Income taxes
 
9

 
16

 
3

 
7

 

 
35

Net of income taxes
 
15

 
26

 
4

 
12

 
1

 
58

Net change in AOCI
 
18

 
19

 
(50
)
 
19

 
(3
)
 
3

AOCI balance, June 30, 2015
 
$
(608
)
 
$
(35
)
 
$
102

 
$
(188
)
 
$
(19
)
 
$
(748
)
 
NOTE 11. Income Taxes
 
The effective tax rates for the three months ended June 30, 2016 and 2015 were 30.0% and 13.8%, respectively. The effective tax rates for the six months ended June 30, 2016 and 2015 were 30.1% and 23.4%, respectively. The effective tax rates for the three and six months ended June 30, 2016 were higher than the corresponding periods of 2015 primarily due to changes in unrecognized tax benefits as described below. In addition, the second quarter of 2016 includes a $13 million tax benefit related to specific tax-advantaged assets.
 
In February 2010, BB&T received an IRS statutory notice of deficiency for tax years 2002-2007 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 during 2010 and filed a lawsuit seeking a refund in the U.S. Court of Federal Claims. During 2013, the court denied the refund claim and BB&T appealed the decision to the U.S. Court of Appeals for the Federal Circuit. During May 2015, the appeals court rendered a decision overturning a portion of the earlier ruling and affirming the remainder, resulting in the recognition of income tax benefits, including the reversal of interest and penalties, of $107 million during the second quarter of 2015. During September 2015, BB&T filed a petition requesting the case be heard by the U.S. Supreme Court. During March 2016, the U.S. Supreme Court declined to hear the case, which preserves the earlier ruling and effectively concludes this matter.


28


The following table presents changes in unrecognized tax benefits:
 
As of/For the Year-to-Date Period Ended
 
June 30, 2016
 
December 31, 2015
 
(Dollars in millions)
Beginning balance of unrecognized tax benefits
$
426

 
$
503

Additions (reductions) for tax positions of prior years
(5
)
 
(76
)
Settlements
(418
)
 
(1
)
Lapse of statute of limitations

 
(1
)
Unrecognized deferred tax benefits from acquisitions

 
1

Ending balance of unrecognized tax benefits
$
3

 
$
426

 
 
 
 
Unrecognized tax benefits that would have impacted effective rate if recognized
 
 
 
Federal
$

 
$
422

State
2

 
3


At June 30, 2016, the liabilities for tax-related interest and penalties recorded on the Consolidated Balance Sheets were immaterial, compared to $181 million at December 31, 2015.

NOTE 12. Benefit Plans
 
 
Qualified Plan
 
Nonqualified Plans
Three Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
(Dollars in millions)
Service cost
 
$
44

 
$
42

 
$
3

 
$
3

Interest cost
 
41

 
34

 
4

 
4

Estimated return on plan assets
 
(81
)
 
(81
)
 

 

Amortization and other
 
16

 
12

 
3

 
3

Net periodic benefit cost
 
$
20

 
$
7

 
$
10

 
$
10

 
 
Qualified Plan
 
Nonqualified Plans
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
 
(Dollars in millions)
Service cost
 
$
86

 
$
85

 
$
6

 
$
6

Interest cost
 
81

 
68

 
9

 
8

Estimated return on plan assets
 
(162
)
 
(162
)
 

 

Amortization and other
 
33

 
24

 
6

 
7

Net periodic benefit cost
 
$
38

 
$
15

 
$
21

 
$
21


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 $280 million were made during the six months ended June 30, 2016. There are no required contributions for the remainder of 2016, though BB&T may elect to make additional contributions.
 

29


NOTE 13. Commitments and Contingencies
 
 
June 30, 2016
 
December 31, 2015
 
 
(Dollars in millions)
Letters of credit
 
$
3,072

 
$
3,033

Carrying amount of the liability for letters of credit
 
29

 
27

 
 
 
 
 
Investments in affordable housing and historic building rehabilitation projects:
 
 
 
 
Carrying amount
 
1,725

 
1,629

Amount of future funding commitments included in carrying amount
 
749

 
654

Lending exposure
 
338

 
292

Tax credits subject to recapture
 
374

 
355

 
 
 
 
 
Private equity and similar investments
 
353

 
289

Future funding commitments to consolidated private equity funds
 
212

 
231

 
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 any applicable asset discount, 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.
 
 
June 30, 2016
 
December 31, 2015
 
 
(Dollars in millions)
Pledged securities
 
$
14,523

 
$
14,063

Pledged loans
 
74,248

 
69,070


NOTE 14. 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.


30


The following tables present fair value information for assets and liabilities measured at fair value on a recurring basis:
June 30, 2016
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(Dollars in millions)
Assets:
 
 

 
 

 
 

 
 

Trading securities
 
$
585

 
$
320

 
$
265

 
$

AFS securities:
 
 

 
 
 
 
 
 
U.S. Treasury
 
1,173

 

 
1,173

 

Agency MBS
 
23,839

 

 
23,839

 

States and political subdivisions
 
2,211

 

 
2,211

 

Non-agency MBS
 
68

 

 
68

 

Other
 
10

 
10

 

 

Acquired from FDIC
 
943

 

 
384

 
559

LHFS
 
2,485

 

 
2,466

 
19

MSRs
 
785

 

 

 
785

Derivative assets:
 


 
 
 
 
 
 
Interest rate contracts
 
1,596

 
1

 
1,561

 
34

Foreign exchange contracts
 
10

 

 
10

 

Private equity and similar investments
 
353

 

 

 
353

Total assets
 
$
34,058

 
$
331

 
$
31,977

 
$
1,750

 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

Derivative liabilities:
 
 

 
 

 
 

 
 

Interest rate contracts
 
$
1,423

 
$

 
$
1,422

 
$
1

Foreign exchange contracts
 
3

 

 
3

 

Securities sold short
 
125

 

 
125

 

Total liabilities
 
$
1,551

 
$

 
$
1,550

 
$
1


December 31, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
 
 
(Dollars in millions)
Assets:
 
 
 
 
 
 
 
 
Trading securities
 
$
1,180

 
$
311

 
$
869

 
$

AFS securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
1,832

 

 
1,832

 

GSE
 
51

 

 
51

 

Agency MBS
 
20,046

 

 
20,046

 

States and political subdivisions
 
2,079

 

 
2,079

 

Non-agency MBS
 
221

 

 
221

 

Other
 
4

 
4

 

 

Acquired from FDIC
 
1,064

 

 
438

 
626

LHFS
 
1,035

 

 
1,035

 

MSRs
 
880

 

 

 
880

Derivative assets:
 
 
 
 
 
 
 
 
Interest rate contracts
 
964

 

 
956

 
8

Foreign exchange contracts
 
6

 

 
6

 

Private equity and similar investments
 
289

 

 

 
289

Total assets
 
$
29,651

 
$
315

 
$
27,533

 
$
1,803

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
788

 
$

 
$
784

 
$
4

Foreign exchange contracts
 
4

 

 
4

 

Securities sold short
 
147

 

 
147

 

Total liabilities
 
$
939

 
$

 
$
935

 
$
4

 

31


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 external pricing sources, review of additional information provided by the 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.
 
Agency MBS: GSE pass-through securities are valued using market-based pricing matrices that reference 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 reference 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.
 
Other securities: These securities include mutual funds, corporate bonds and equities. 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.
 
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. Commercial MSRs are valued using a cash flow valuation model that calculates the present value of estimated future net servicing cash flows. BB&T considers actual and expected loan prepayment rates, discount rates, servicing costs and other economic factors that are determined based on current market conditions.
 
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.

32


 
Private equity and similar investments: 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.
 
Securities sold short: Securities sold short represent debt securities sold short that are entered into as a hedging strategy for the purposes of supporting institutional and retail client trading activities.

The following tables summarize activity for Level 3 assets and liabilities:
Three Months Ended June 30, 2016
 
Acquired from FDIC Securities
 
MSRs
 
Net Derivatives
 
Private Equity and Similar Investments
 
 
(Dollars in millions)
Balance at April 1, 2016
 
$
600

 
$
860

 
$
21

 
$
301

Total realized and unrealized gains (losses):
 
 
 
 
 
 
 
 
Included in earnings:
 
 
 
 
 
 
 
 
Interest income
 
17

 

 

 

Mortgage banking income
 

 
(69
)
 
24

 

Included in unrealized net holding gains (losses) in OCI
 
(25
)
 

 

 

Purchases
 

 

 

 
55

Issuances
 

 
34

 
23

 

Settlements
 
(33
)
 
(40
)
 
(35
)
 
(3
)
Balance at June 30, 2016
 
$
559

 
$
785

 
$
33

 
$
353

 
 
 
 
 
 
 
 
 
Change in unrealized gains (losses) included in earnings for the period, attributable to assets and liabilities still held at June 30, 2016
 
$
17

 
$
(69
)
 
$
33

 
$
(2
)

Three Months Ended June 30, 2015
 
Acquired from FDIC Securities
 
MSRs
 
Net Derivatives
 
Private Equity and Similar Investments
 
 
(Dollars in millions)
Balance at April 1, 2015
 
$
719

 
$
764

 
$
23

 
$
366

Total realized and unrealized gains (losses):
 
 
 
 
 
 
 
 
Included in earnings:
 
 

 
 

 
 

 
 

Interest income
 
5

 

 

 

Mortgage banking income
 

 
140

 
20

 

Other noninterest income
 

 

 
2

 
3

Included in unrealized net holding gains (losses) in OCI
 
(11
)
 

 

 

Purchases
 

 

 

 
13

Issuances
 

 
42

 
3

 

Sales
 

 

 

 
(10
)
Settlements
 
(25
)
 
(34
)
 
(50
)
 
(13
)
Balance at June 30, 2015
 
$
688

 
$
912

 
$
(2
)
 
$
359

 
 
 
 
 
 
 
 
 
Change in unrealized gains (losses) included in earnings for the period, attributable to assets and liabilities still held at June 30, 2015
 
$
5

 
$
140

 
$
4

 
$
(1
)

33


 
Six Months Ended June 30, 2016
 
Acquired from FDIC Securities
 
MSRs
 
Net Derivatives
 
Private Equity and Similar Investments
 
 
(Dollars in millions)
Balance at January 1, 2016
 
$
626

 
$
880

 
$
4

 
$
289

Total realized and unrealized gains (losses):
 
 
 
 
 
 
 
 
Included in earnings:
 
 

 
 

 
 

 
 

Interest income
 
32

 

 

 

Mortgage banking income
 

 
(196
)
 
56

 

Other noninterest income
 

 

 

 
3

Included in unrealized net holding gains (losses) in OCI
 
(45
)
 

 

 

Purchases
 

 

 

 
74

Issuances
 

 
56

 
63

 

Sales
 

 

 

 
(8
)
Settlements
 
(54
)
 
(78
)
 
(90
)
 
(5
)
Other
 

 
123

 

 

Balance at June 30, 2016
 
$
559

 
$
785

 
$
33

 
$
353

 
 
 
 
 
 
 
 
 
Change in unrealized gains (losses) included in earnings for the period, attributable to assets and liabilities still held at June 30, 2016
 
$
32

 
$
(196
)
 
$
33

 
$


Other represents the adoption of the fair value method for commercial MSRs as of January 1, 2016.
Six Months Ended June 30, 2015
 
Acquired from FDIC Securities
 
MSRs
 
Net Derivatives
 
Private Equity and Similar Investments
 
 
(Dollars in millions)
Balance at January 1, 2015
 
$
745

 
$
844

 
$
17

 
$
329

Total realized and unrealized gains (losses):
 
 
 
 
 
 
 
 
Included in earnings:
 
 

 
 

 
 

 
 

Interest income
 
16

 

 

 

Mortgage banking income
 

 
69

 
48

 

Other noninterest income
 

 

 
(2
)
 
19

Included in unrealized net holding gains (losses) in OCI
 
(25
)
 

 

 

Purchases
 

 

 

 
55

Issuances
 

 
68

 
41

 

Sales
 

 

 

 
(29
)
Settlements
 
(48
)
 
(69
)
 
(106
)
 
(15
)
Balance at June 30, 2015
 
$
688

 
$
912

 
$
(2
)
 
$
359

 
 
 
 
 
 
 
 
 
Change in unrealized gains (losses) included in earnings for the period, attributable to assets and liabilities still held at June 30, 2015
 
$
16

 
$
69

 
$

 
$
15


BB&T's policy is to recognize transfers in and transfers out of Levels 1, 2 and 3 as of the end of a reporting period. Transfers involving Level 3, if any, are presented in the preceding tables. There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2016 or 2015.
 

34


The majority of 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 VIE 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 2026, is uncertain and dependent on various events such as recapitalizations, refinance transactions and ownership changes among others. Excluding the investment of future funds, these investments have an estimated weighted average remaining life of approximately three years; however, the timing and amount of distributions may vary significantly. As of June 30, 2016, restrictions on the ability to sell the investments include, but are not limited to, consent of a majority member or general partner approval for transfer of ownership. These 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 4x to 11x, with a weighted average of 8x, at June 30, 2016.
 
The following table details the fair value and UPB of LHFS that were elected to be carried at fair value:
 
 
June 30, 2016
 
December 31, 2015
 
 
Fair
Value
 
Aggregate
UPB
 
Difference
 
Fair
Value
 
Aggregate
UPB
 
Difference
 
 
(Dollars in millions)
LHFS reported at fair value
 
$
2,485

 
2,427

 
58

 
$
1,035

 
$
1,023

 
$
12

 
Excluding government guaranteed, LHFS that were nonaccrual or 90 days or more past due and still accruing interest were not material at June 30, 2016.

The following table provides information about certain financial assets measured at fair value on a nonrecurring basis, which are primarily collateral dependent and may be subject to liquidity adjustments. The carrying values represent end of period values, which approximate the fair value measurements that occurred on the various measurement dates throughout the period. The valuation adjustments represent the amounts recorded during the period regardless of whether the asset is still held at period end. These assets are considered to be Level 3 assets (excludes PCI).
 
 
June 30, 2016
 
June 30, 2015
 
 
Carrying Value
 
Valuation Adjustments
 
Carrying Value
 
Valuation Adjustments
 
 
 
Three Months Ended
 
Six Months Ended
 
 
Three Months Ended
 
Six Months Ended
 
 
(Dollars in millions)
Impaired loans
 
$
358

 
(16
)
 
$
(54
)
 
$
114

 
(1
)
 
$
(13
)
Foreclosed real estate
 
53

 
(44
)
 
(98
)
 
86

 
(43
)
 
(83
)
 
For financial instruments not recorded at fair value, estimates of fair value are based on relevant market data and information about the instrument. Values obtained relate to 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.
 

35


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 transferable 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, excluding securities sold short, 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.
 
Financial assets and liabilities not recorded at fair value are summarized below:
June 30, 2016
 
Carrying
Amount
 
Total
Fair Value
 
Level 2
 
Level 3
 
 
(Dollars in millions)
Financial assets:
 
 
 
 
 
 
 
 
HTM securities
 
$
18,762

 
$
19,157

 
$
19,157

 
$

Loans and leases HFI, net of ALLL
 
140,719

 
142,005

 

 
142,005

FDIC loss share receivable
 
218

 
47

 

 
47

 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 

 
 

 
 

 
 

Deposits
 
159,238

 
159,291

 
159,291

 

FDIC loss share payable
 
673

 
666

 

 
666

Long-term debt
 
24,435

 
25,072

 
25,072

 

 

36


December 31, 2015
 
Carrying
Amount
 
Total
Fair Value
 
Level 2
 
Level 3
 
 
(Dollars in millions)
Financial assets:
 
 
 
 
 
 
 
 
HTM securities
 
$
18,530

 
$
18,519

 
$
18,519

 
$

Loans and leases HFI, net of ALLL
 
134,491

 
134,728

 

 
134,728

FDIC loss share receivable
 
285

 
11

 

 
11

 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
Deposits
 
149,124

 
149,300

 
149,300

 

FDIC loss share payable
 
685

 
676

 

 
676

Long-term debt
 
23,769

 
24,206

 
24,206

 

 
The following is a summary of selected information pertaining to off-balance sheet financial instruments:
 
 
June 30, 2016
 
December 31, 2015
 
 
Notional/
Contract
Amount
 
Fair Value
 
Notional/
Contract
Amount
 
Fair Value
 
 
(Dollars in millions)
Commitments to extend, originate or purchase credit
 
$
62,695

 
$
257

 
$
59,019

 
$
253

Residential mortgage loans sold with recourse
 
644

 
9

 
702

 
8

Other loans sold with recourse
 
4,022

 
7

 
4,198

 
7

Letters of credit
 
3,072

 
29

 
3,033

 
27



37


NOTE 15. Derivative Financial Instruments

Derivative Classifications and Hedging Relationships
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
 
 
Hedged Item or
Transaction
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
 
 
 
 
Gain
 
Loss
 
 
Gain
 
Loss
 
 
 
 
(Dollars in millions)
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed swaps
 
3 mo. LIBOR funding
 
$
7,800

 
$

 
$
(461
)
 
$
9,300

 
$

 
$
(214
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Receive fixed swaps
 
Long-term debt
 
14,709

 
588

 

 
13,092

 
329

 
(1
)
Pay fixed swaps
 
Commercial loans
 
220

 

 
(5
)
 
207

 

 
(2
)
Pay fixed swaps
 
Municipal securities
 
240

 

 
(121
)
 
244

 

 
(94
)
Total
 
 
 
15,169

 
588

 
(126
)
 
13,543

 
329

 
(97
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Not designated as hedges:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Client-related and other risk management:
 
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Receive fixed swaps
 
 
 
9,768

 
568

 

 
8,827

 
337

 
(1
)
Pay fixed swaps
 
 
 
9,956

 

 
(606
)
 
8,984

 
1

 
(363
)
Other swaps
 
 
 
1,170

 
4

 
(7
)
 
1,005

 
3

 
(6
)
Other
 
 
 
642

 
1

 
(1
)
 
601

 
1

 
(2
)
Forward commitments
 
 
 
8,901

 
27

 
(26
)
 
4,403

 
5

 
(4
)
Foreign exchange contracts
 
 
 
568

 
10

 
(3
)
 
513

 
6

 
(4
)
Total
 
 
 
31,005

 
610

 
(643
)
 
24,333

 
353

 
(380
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage banking:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Interest rate lock commitments
 
3,089

 
34

 
(1
)
 
1,828

 
8

 
(4
)
When issued securities, forward rate agreements and forward commitments
 
4,978

 
11

 
(62
)
 
2,725

 
9

 
(5
)
Other
 
 
 
527

 
7

 

 
677

 
4

 

Total
 
 
 
8,594

 
52

 
(63
)
 
5,230

 
21

 
(9
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MSRs:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Receive fixed swaps
 
 
 
4,989

 
177

 

 
2,343

 
79

 
(7
)
Pay fixed swaps
 
 
 
2,641

 

 
(75
)
 
2,329

 
4

 
(56
)
Option trades
 
 
 
6,010

 
164

 
(58
)
 
7,765

 
184

 
(24
)
When issued securities, forward rate agreements and forward commitments
 
2,860

 
15

 

 
2,682

 

 
(5
)
Total
 
 
 
16,500

 
356

 
(133
)
 
15,119

 
267

 
(92
)
Total derivatives not designated as hedges
 
56,099

 
1,018

 
(839
)
 
44,682

 
641

 
(481
)
Total derivatives
 
 
 
$
79,068

 
1,606

 
(1,426
)
 
$
67,525

 
970

 
(792
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross amounts not offset in the Consolidated Balance Sheets:
 
 

 
 

 
 

 
 

 
 

 
 

Amounts subject to master netting arrangements not offset due to policy election
 
 
 
(670
)
 
670

 
 

 
(391
)
 
391

Cash collateral (received) posted
 
 
 
 

 
(398
)
 
691

 
 

 
(283
)
 
368

Net amount
 
 
 
 

 
$
538

 
$
(65
)
 
 

 
$
296

 
$
(33
)
 

38


The fair values of derivatives in a gain or loss position are presented on a gross basis in other assets or other liabilities, respectively, in 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 June 30, 2016 and 2015
 
 
 
Effective Portion
 
Pre-tax Gain
 
 
 
Pre-tax Gain (Loss)
 
(Loss) Recognized
 
 
 
Reclassified from
 
in AOCI
 
Location of Amounts
 
AOCI into Income
 
2016
 
2015
 
Reclassified from AOCI into Income
 
2016
 
2015
 
(Dollars in millions)
Cash flow hedges:
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
(83
)
 
$
95

 
Total interest expense
 
$
(4
)
 
$
(21
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax Gain
 
 
 
 
 
 
 
(Loss) Recognized
 
 
 
 
 
Location of Amounts
 
in Income
 
 
 
 
 
Recognized in Income
 
2016
 
2015
 
 
 
 
 
 
 
(Dollars in millions)
Fair value hedges:
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
Total interest income
 
$
(4
)
 
$
(5
)
Interest rate contracts
 
 
 
 
Total interest expense
 
59

 
68

Total
 
 
 
 
 
 
$
55

 
$
63

 
 
 
 
 
 
 
 
 
 
Not designated as hedges:
 
 
 
 
 
 
 

 
 

Client-related and other risk management:
 
 
 
 

 
 

Interest rate contracts
 
 
 
 
Other noninterest income
 
$
9

 
$
11

Foreign exchange contracts
 
 
 
Other noninterest income
 
13

 
(1
)
Mortgage banking:
 
 
 
 
 
 
 

 
 

Interest rate contracts
 
 
 
 
Mortgage banking income
 
(13
)
 
13

MSRs:
 
 
 
 
 
 
 

 
 

Interest rate contracts
 
 
 
 
Mortgage banking income
 
86

 
(119
)
Total
 
 
 
 
 
 
$
95

 
$
(96
)

 

39


The Effect of Derivative Instruments on the Consolidated Statements of Income
Six Months Ended June 30, 2016 and 2015
 
 
 
 
 
Effective Portion
 
 
Pre-tax Gain
 
 
 
Pre-tax Gain (Loss)
 
 
(Loss) Recognized
 
 
 
Reclassified from
 
 
in AOCI
 
Location of Amounts
 
AOCI into Income
 
 
2016
 
2015
 
Reclassified from AOCI into Income
 
2016
 
2015
 
 
(Dollars in millions)
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
(283
)
 
$
(12
)
 
Total interest expense
 
$
(21
)
 
$
(42
)
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
Pre-tax Gain
 
 
 
 
 
 
 
 
(Loss) Recognized
 
 
 
 
 
 
Location of Amounts
 
in Income
 
 
 
 
 
 
Recognized in Income
 
2016
 
2015
 
 
 
 
 
 
 
 
(Dollars in millions)
Fair Value Hedges:
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
Total interest income
 
$
(8
)
 
$
(10
)
Interest rate contracts
 
 
 
 
 
Total interest expense
 
119

 
136

Total
 
 
 
 
 
 
 
$
111

 
$
126

 
 
 
 
 
 
 
 
 
 
 
Not Designated as Hedges:
 
 
 
 
 
 
 
 

 
 

Client-related and other risk management:
 
 
 
 

 
 

Interest rate contracts
 
 
 
 
 
Other noninterest income
 
$
8

 
$
12

Foreign exchange contracts
 
 
 
Other noninterest income
 
5

 
9

Mortgage Banking:
 
 
 
 
 
 
 
 

 
 

Interest rate contracts
 
 
 
 
 
Mortgage banking income
 
(19
)
 
20

MSRs:
 
 
 
 
 
 
 
 

 
 

Interest rate contracts
 
 
 
 
 
Mortgage banking income
 
229

 
(38
)
Total
 
 
 
 
 
 
 
$
223

 
$
3

 


40


The following table provides a summary of derivative strategies and the related accounting treatment:
 
 
Cash Flow Hedges
 
Fair Value Hedges
 
Derivatives Not Designated as Hedges
 
 
 
 
 
 
 
Risk exposure
 
Variability in cash flows of interest payments on floating rate business loans, overnight funding and various LIBOR funding instruments.
 
Changes in value on fixed rate long-term debt, CDs, FHLB advances, loans and state and political subdivision securities due to changes in interest rates.
 
Risk associated with an asset or liability, including mortgage banking operations and MSRs, or for client needs. Includes exposure to changes in market rates and conditions subsequent to the interest rate lock and funding date for mortgage loans originated for sale.
 
 
 
 
 
 
 
Risk management objective
 
Hedge the variability in the interest payments and receipts on future cash flows for forecasted transactions related to the first unhedged payments and receipts of variable interest.
 
Convert the fixed rate paid or received to a floating rate, primarily through the use of swaps.
 
For interest rate lock commitment derivatives and LHFS, use mortgage-based derivatives such as forward commitments and options to mitigate market risk. For MSRs, mitigate the income statement effect of changes in the fair value of the MSRs.
 
 
 
 
 
 
 
Treatment for portion that is highly effective
 
Recognized in AOCI until the related cash flows from the hedged item are recognized in earnings.
 
Recognized in current period income along with the corresponding changes in the fair value of the designated hedged item attributable to the risk being hedged.
 
Entire change in fair value recognized in current period income.
 
 
 
 
 
 
 
Treatment for portion that is ineffective
 
Recognized in current period income.
 
Recognized in current period income.
 
Not applicable
 
 
 
 
 
 
 
Treatment if hedge ceases to be highly effective or is terminated
 
Hedge is dedesignated. Effective changes in value that are recorded in AOCI before dedesignation are amortized to yield over the period the forecasted hedged transactions impact earnings.
 
If hedged item remains outstanding, termination proceeds are included in cash flows from financing activities and effective changes in value are reflected as part of the carrying value of the financial instrument and amortized to earnings over its estimated remaining life.
 
Not applicable
 
 
 
 
 
 
 
Treatment if transaction is no longer probable of occurring during forecast period or within a short period thereafter
 
Hedge accounting is ceased and any gain or loss in AOCI is reported in earnings immediately.
 
Not applicable
 
Not applicable
 

41


The following table presents information about BB&T's cash flow and fair value hedges:
 
 
June 30, 2016
 
December 31, 2015
 
 
(Dollars in millions)
Cash flow hedges:
 
 
 
 
 

 
Net unrecognized after-tax loss on active hedges recorded in AOCI
 
$
(289
)
 
 
$
(134
)
 
Net unrecognized after-tax gain on terminated hedges recorded in AOCI (to be recognized in earnings through 2022)
 
41

 
 
50

 
Estimated portion of net after-tax loss on active and terminated hedges to be reclassified from AOCI into earnings during the next 12 months
 
14

 
 
(7
)
 
Maximum time period over which BB&T has hedged a portion of the variability in future cash flows for forecasted transactions excluding those transactions relating to the payment of variable interest on existing instruments
 
6

yrs
 
7

yrs
 
 
 
 
 
 
 
Fair value hedges:
 
 

 
 
 
 
Unrecognized pre-tax net gain on terminated hedges (to be recognized as interest primarily through 2019)
 
$
186

 
 
$
138

 
Portion of pre-tax net gain on terminated hedges to be recognized as a change in interest during the next 12 months
 
59

 
 
57

 
 
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 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.
 
 
June 30, 2016
 
December 31, 2015
 
(Dollars in millions)
Dealer Counterparties:
 
 
 
Cash collateral received from dealer counterparties
$
402

 
$
283

Derivatives in a net gain position secured by that collateral
396

 
301

Unsecured positions in a net gain with dealer counterparties after collateral postings

 
18

 
 
 
 
Cash collateral posted to dealer counterparties
190

 
156

Derivatives in a net loss position secured by that collateral
189

 
161

Additional collateral that would have been posted had BB&T's credit ratings dropped below investment grade
2

 
6

 
 
 
 
Central Clearing Parties:
 

 
 
Cash collateral, including initial margin, posted to central clearing parties
505

 
223

Derivatives in a net loss position secured by that collateral
531

 
227

Securities pledged to central clearing parties
229

 
207

 

42


NOTE 16. Computation of EPS
 
Basic and diluted EPS calculations are presented in the following table:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(Dollars in millions, except per share data, shares in thousands)
Net income available to common shareholders
 
$
541

 
$
454

 
$
1,068

 
$
942

 
 
 
 
 
 
 
 
 
Weighted average number of common shares
 
814,261

 
724,880

 
797,727

 
723,268

Effect of dilutive outstanding equity-based awards
 
9,421

 
9,647

 
9,112

 
9,734

Weighted average number of diluted common shares
 
823,682

 
734,527

 
806,839

 
733,002

 
 
 
 
 
 
 
 
 
Basic EPS
 
$
0.67

 
$
0.63

 
$
1.34

 
$
1.30

 
 
 
 
 
 
 
 
 
Diluted EPS
 
$
0.66

 
$
0.62

 
$
1.32

 
$
1.29

 
 
 
 
 
 
 
 
 
Anti-dilutive awards
 
5,755

 
8,344

 
9,958

 
9,938

 

43


NOTE 17. Operating Segments
 
The financial information related to National Penn's operations is included in the Other, Treasury & Corporate segment for the second quarter of 2016 and will be presented in certain other segments following the systems conversion date in July 2016.

Intangible assets and related amortization resulting from other recent bank acquisitions have been reclassified from Other, Treasury and Corporate to Community Banking.

The following tables disclose selected financial information with respect to reportable segments for the periods indicated:
 
Reportable Segments
Three Months Ended June 30, 2016 and 2015
 
 
 
 
 
 
 
 
 
Community
Banking
 
Residential
Mortgage Banking
 
Dealer
Financial Services
 
Specialized
Lending
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
(Dollars in millions)
Net interest income (expense)
$
532

 
$
431

 
$
333

 
$
343

 
$
226

 
$
216

 
$
186

 
$
153

Net intersegment interest income (expense)
391

 
304

 
(223
)
 
(227
)
 
(39
)
 
(38
)
 
(69
)
 
(56
)
Segment net interest income
923

 
735

 
110

 
116

 
187

 
178

 
117

 
97

Allocated provision for credit losses
23

 
11

 
10

 
3

 
58

 
48

 
17

 
11

Noninterest income
305

 
290

 
82

 
100

 

 

 
73

 
71

Intersegment net referral fees (expense)
40

 
39

 
1

 
(1
)
 

 

 

 

Noninterest expense
435

 
373

 
87

 
78

 
36

 
41

 
72

 
64

Amortization of intangibles
18

 
9

 

 

 

 

 
1

 
1

Allocated corporate expenses
330

 
307

 
25

 
23

 
11

 
10

 
19

 
15

Income (loss) before income taxes
462

 
364

 
71

 
111

 
82

 
79

 
81

 
77

Provision (benefit) for income taxes
168

 
133

 
27

 
42

 
31

 
30

 
20

 
19

Segment net income (loss)
$
294

 
$
231

 
$
44

 
$
69

 
$
51

 
$
49

 
$
61

 
$
58

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Identifiable assets (period end)
$
67,952

 
$
56,803

 
$
33,651

 
$
34,218

 
$
14,463

 
$
13,906

 
$
19,739

 
$
17,067

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance Holdings
 
Financial Services
 
Other, Treasury & Corporate (1)
 
Total BB&T
Corporation
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
(Dollars in millions)
Net interest income (expense)
$
1

 
$

 
$
68

 
$
54

 
$
271

 
$
115

 
$
1,617

 
$
1,312

Net intersegment interest income (expense)
1

 
1

 
91

 
76

 
(152
)
 
(60
)
 

 

Segment net interest income
2

 
1

 
159

 
130

 
119

 
55

 
1,617

 
1,312

Allocated provision for credit losses

 

 
6

 
23

 
(3
)
 
1

 
111

 
97

Noninterest income
465

 
425

 
210

 
212

 
(5
)
 
(79
)
 
1,130

 
1,019

Intersegment net referral fees (expense)

 

 
5

 
4

 
(46
)
 
(42
)
 

 

Noninterest expense
350

 
310

 
190

 
177

 
585

 
587

 
1,755

 
1,630

Amortization of intangibles
18

 
11

 
1

 

 
4

 
2

 
42

 
23

Allocated corporate expenses
28

 
25

 
37

 
34

 
(450
)
 
(414
)
 

 

Income (loss) before income taxes
71

 
80

 
140

 
112

 
(68
)
 
(242
)
 
839

 
581

Provision (benefit) for income taxes
27

 
27

 
53

 
42

 
(74
)
 
(213
)
 
252

 
80

Segment net income (loss)
$
44

 
$
53

 
$
87

 
$
70

 
$
6

 
$
(29
)
 
$
587

 
$
501

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Identifiable assets (period end)
$
3,590

 
$
2,907

 
$
17,577

 
$
14,715

 
$
64,887

 
$
51,401

 
$
221,859

 
$
191,017


44


Reportable Segments
Six Months Ended June 30, 2016 and 2015
 
 
 
 
 
 
 
 
 
Community
Banking
 
Residential
Mortgage Banking
 
Dealer   
Financial Services
 
Specialized
Lending
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
(Dollars in millions)
Net interest income (expense)
$
1,061

 
$
857

 
$
665

 
$
684

 
$
455

 
$
429

 
$
364

 
$
299

Net intersegment interest income (expense)
780

 
587

 
(450
)
 
(459
)
 
(79
)
 
(76
)
 
(137
)
 
(110
)
Segment net interest income
1,841

 
1,444

 
215

 
225

 
376

 
353

 
227

 
189

Allocated provision for credit losses
13

 
24

 
21

 
(9
)
 
134

 
109

 
35

 
23

Noninterest income
593

 
561

 
153

 
184

 
1

 

 
138

 
132

Intersegment net referral fees (expense)
70

 
70

 
1

 

 

 

 

 

Noninterest expense
857

 
731

 
163

 
158

 
71

 
73

 
137

 
121

Amortization of intangibles
37

 
17

 

 

 

 

 
2

 
2

Allocated corporate expenses
662

 
612

 
51

 
46

 
22

 
19

 
37

 
30

Income (loss) before income taxes
935

 
691

 
134

 
214

 
150

 
152

 
154

 
145

Provision (benefit) for income taxes
340

 
252

 
51

 
81

 
57

 
58

 
37

 
34

Segment net income (loss)
$
595

 
$
439

 
$
83

 
$
133

 
$
93

 
$
94

 
$
117

 
$
111

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Identifiable assets (period end)
$
67,952


$
56,803

 
$
33,651

 
$
34,218

 
$
14,463

 
$
13,906

 
$
19,739

 
$
17,067

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance Holdings
 
Financial Services
 
Other, Treasury & Corporate (1)
 
Total BB&T
Corporation
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
(Dollars in millions)
Net interest income (expense)
$
1

 
$
1

 
$
131

 
$
105

 
$
469

 
$
249

 
$
3,146

 
$
2,624

Net intersegment interest income (expense)
2

 
3

 
179

 
147

 
(295
)
 
(92
)
 

 

Segment net interest income
3

 
4

 
310

 
252

 
174

 
157

 
3,146

 
2,624

Allocated provision for credit losses

 

 
96

 
47

 
(4
)
 
2

 
295

 
196

Noninterest income
886

 
867

 
407

 
414

 
(32
)
 
(142
)
 
2,146

 
2,016

Intersegment net referral fees (expense)

 

 
8

 
7

 
(79
)
 
(77
)
 

 

Noninterest expense
649

 
612

 
371

 
339

 
1,020

 
997

 
3,268

 
3,031

Amortization of intangibles
29

 
23

 
2

 
1

 
4

 
1

 
74

 
44

Allocated corporate expenses
56

 
50

 
74

 
68

 
(902
)
 
(825
)
 

 

Income (loss) before income taxes
155

 
186

 
182

 
218

 
(55
)
 
(237
)
 
1,655

 
1,369

Provision (benefit) for income taxes
58

 
61

 
68

 
82

 
(113
)
 
(247
)
 
498

 
321

Segment net income (loss)
$
97

 
$
125

 
$
114

 
$
136

 
$
58

 
$
10

 
$
1,157

 
$
1,048

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Identifiable assets (period end)
$
3,590

 
$
2,907

 
$
17,577

 
$
14,715

 
$
64,887

 
$
51,401

 
$
221,859

 
$
191,017


 
 
(1) Includes financial data from business units below the quantitative and qualitative thresholds requiring disclosure.


45


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. Forward-looking statements are not based on historical facts but instead represent management’s expectations and assumptions regarding BB&T’s business, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. BB&T’s actual results may differ materially from those contemplated by the forward-looking statements. 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. While there is no assurance that any list of risks and uncertainties or risk factors is complete, important factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation:
 
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, the adverse effects of economic instability and recessionary conditions in Europe and the impact of market disruptions in China;
changes in the interest rate environment, including interest rate changes made by the Federal Reserve or the possibility of a negative interest rate scenario, as well as 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 or 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 BB&T's business and financial performance or reputation, and BB&T could be liable for financial losses incurred by third parties due to breaches of data shared between financial institutions;
natural or other disasters, including acts of domestic or foreign terrorism, 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;
failure to execute on strategic or operational plans, including the ability to successfully complete and/or integrate mergers and acquisitions or fully achieve expected cost savings or revenue growth associated with mergers and acquisitions within the expected time frames could adversely impact financial condition and results of operations;
significant litigation could have a material adverse effect on BB&T;
unfavorable resolution of legal proceedings or other claims and regulatory and other governmental investigations or other inquiries could result in negative publicity, protests, fines, penalties, restrictions on BB&T's operations or ability to expand its business and other negative consequences, all of which could cause reputational damage and adversely impact BB&T's financial conditions and results of operations;
deposit attrition, customer loss and/or revenue loss following completed mergers and acquisitions may be greater than expected;
higher than expected costs related to information technology infrastructure or a failure to successfully implement future system enhancements could adversely impact BB&T's financial condition and results of operations and could result in significant additional costs to BB&T; and
widespread system outages, caused by the failure of critical internal systems or critical services provided by third parties, could adversely impact BB&T's financial conditions and results of operations.

46



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, 2015 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, 2015 for additional disclosures with respect to laws and regulations affecting BB&T.
 
DIF Assessment
 
The FDIC has adopted a final rule that imposes a surcharge of 4.5 cents per $100 of the assessment base, after making certain adjustments, for banks with total assets of at least $10 billion. The surcharge will last for a period currently estimated by the FDIC to be two years and will begin the first quarter after the reserve ratio reaches 1.15%. BB&T estimates that the net effect of the new surcharge will increase BB&T's total annual assessment by an amount within the range of $40 million to $50 million.

Amendments to Stress Test Rules
 
The FDIC has modified the "as-of" dates for financial data that covered banks with more than $10 billion in assets 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 became effective on January 1, 2016. 

HMDA Regulations
 
The CFPB has issued final rules changing the reporting requirements for lenders under the HMDA. The new rules expand the range of transactions subject to these requirements to include small business lending. The rules also increase the overall amount of data required to be collected and submitted, including additional data points about the applicable loans and expanded data about the borrowers. BB&T will be required to begin collecting the expanded data on January 1, 2018.

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 requirement 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.

U.S. Implementation of Basel III
 
BB&T is currently under the standardized approach for risk weightings. Institutions with greater than $250 billion in assets or $10 billion in foreign assets are considered advanced approaches banking organizations, which results in a more complex calculation of RWA that includes an assessment of the impact of operational risk, among other changes. In addition, advanced approaches institutions have additional reporting requirements and must calculate capital under both the standardized approach and the advanced approaches and use the more conservative result. BB&T is preparing to comply with the advanced approaches requirements as it would become subject to these requirements upon exceeding either of the asset thresholds.

Effective January 1, 2016, Branch Bank became subject to the capital conservation buffer, which requires calculation and public disclosure of the amount of the buffer, the eligible retained income and any limitations on distributions and discretionary bonuses resulting from the buffer, including the maximum payout amount for the quarter. The capital conservation buffer requirements do not currently result in any limitations on distributions or discretionary bonuses for Branch Bank.
 

47


Pay Ratio Disclosure
 
The SEC has adopted amendments to Item 402 of Regulation S-K to require disclosure of: (1) the median compensation amount of the annual total compensation of all employees of a registrant (excluding the CEO), (2) the annual total compensation of that registrant's CEO and (3) the ratio of the median of the annual total compensation of all employees (excluding the CEO) to the annual total compensation of the CEO. The rules will require such pay ratio disclosure information for the first fiscal year beginning on or after January 1, 2017.

Volcker Rule

The Volcker Rule prohibits IDIs from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options for their own account. The rule provides certain exemptions and also clarify that certain activities are not prohibited, including acting as agent, broker, or custodian. Banking entities were required to conform proprietary trading activities to the final rule by July 21, 2015.

The rule also imposes limits on certain relationships with hedge funds or private equity funds. The FRB extended the compliance deadline to July 21, 2017 for purposes of conforming investments in and relationships with certain funds that were in place prior to December 31, 2013. Complying with these requirements is not expected to have a material impact on BB&T's consolidated financial position, results of operations or cash flows.

FDIC Recordkeeping Requirements

The FDIC has released a proposed rule to facilitate prompt payment of FDIC-insured deposits when large IDIs fail. The proposal would require IDIs with two million or more deposit accounts to maintain complete and accurate data on each depositor's ownership interest by right and capacity and to develop the capability to calculate the insured and uninsured amounts for each deposit owner by ownership right and capacity. If enacted, this proposed rule would result in additional costs to BB&T.

Net Stable Funding Ratio: Liquidity Risk Measurement, Standards and Monitoring

The OCC, the FRB and the FDIC have issued a proposed rule that would implement a quantitative liquidity requirement consistent with the net stable funding ratio standard established by the BCBS. Refer to the "Liquidity" section in "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein for additional information.

Incentive-Based Compensation Arrangements

During May 2016, several financial regulators jointly issued a proposed rule designed to prohibit incentive-based compensation arrangements that could encourage inappropriate risks by providing excessive compensation or that could lead to a material financial loss. The proposed rule would require the applicable compensation arrangements to be considered against a number of factors, including a requirement that the arrangements contain both financial and non-financial measures of performance. In addition, the requirements would differ based on the size of the institution, and institutions with assets exceeding $50 billion would be subject to mandatory deferral, forfeiture/adjustment and clawback requirements for employees subject to the rule. BB&T is currently reviewing the proposed rule to determine the potential impact.


48


Executive Summary
 
Consolidated net income available to common shareholders for the second quarter of 2016 was $541 million, an increase of $87 million compared to the same quarter of 2015. On a diluted per common share basis, earnings for the second quarter of 2016 were $0.66, an increase of $0.04 compared to the second quarter of 2015.
 
BB&T's results of operations for the second quarter of 2016 produced an annualized return on average assets of 1.06%, an annualized return on average risk-weighted assets of 1.38% and an annualized return on average common shareholders' equity of 8.21%, compared to earlier quarter ratios of 1.06%, 1.32% and 8.20%, respectively.

On April 1, 2016, BB&T acquired National Penn for total consideration of $1.6 billion, which consisted of approximately $555 million in cash and the remainder in stock. National Penn had 126 financial centers, $10.1 billion of total assets and $6.6 billion of deposits. Also on April 1, 2016, BB&T purchased insurance broker CGSC North America Holdings Corporation ("Swett & Crawford") from Cooper Gay Swett & Crawford for $465 million in cash.

Total revenues on a FTE basis were $2.8 billion for the second quarter of 2016, an increase of $420 million compared to the same period in 2015 largely the result of acquisition activity.
 
Net interest margin was 3.41%, compared to 3.27% for the second quarter of 2015. Average earning assets increased $29.4 billion, or 17.8%, while average interest-bearing liabilities increased $21.7 billion, or 18.7%, both of which were primarily driven by acquisitions. The annualized yield on the total loan portfolio for the second quarter was 4.31%, up 13 basis points compared to the earlier quarter, which was also primarily due to acquisitions. The annualized fully taxable-equivalent yield on the average securities portfolio for the second quarter was 2.47%, up six basis points compared to the earlier quarter primarily due to securities duration adjustments.
 
The average annualized cost of interest-bearing deposits was 0.23%, down one basis point compared to the second quarter of 2015. The average annualized rate paid on long-term debt was 2.10%, down four basis points.

Noninterest income was up $111 million compared to the second quarter of 2015, which reflects higher insurance income due to the Swett & Crawford acquisition and an increase in other income due to the loss on sale of American Coastal recorded in the earlier period.
 
Excluding PCI loans, the provision for credit losses was $109 million, compared to $97 million in the second quarter of 2015. Net charge-offs for the second quarter of 2016, excluding PCI loans, totaled $97 million, essentially flat compared to the earlier quarter.
 
Noninterest expense was $1.8 billion for the second quarter of 2016, was up $144 million compared to the earlier quarter. This increase reflects higher expense in a number of categories primarily resulting from acquisition activity and current quarter restructuring activities, partially offset by a $172 million loss on early extinguishment of debt recorded in the earlier quarter.

The provision for income taxes was $252 million for the second quarter of 2016, compared to $80 million for the earlier quarter. This produced an effective tax rate for the second quarter of 2016 of 30.0%, compared to 13.8% for the second quarter of 2015. The current quarter included a $13 million tax benefit related to specific tax-advantaged assets while the earlier quarter included a $107 million tax benefit in connection with a U.S. Court of Appeals ruling related to previously disallowed deductions in connection with a financing transaction.

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. On July 26, 2016, BB&T's Board of Directors approved an increase in the quarterly dividend from $0.02 to $0.30 and authorized cumulative share buybacks of up to $640 million beginning during the third quarter of 2016. These capital actions were consistent with BB&T's capital plan.

Refer to BB&T's Annual Report on Form 10-K for the year ended December 31, 2015 for additional information with respect to BB&T's recent accomplishments and significant challenges.


49


Analysis of Results of Operations

Net Interest Income and NIM
 
Second Quarter 2016 compared to Second Quarter 2015
 
Net interest income on a FTE basis was $1.7 billion for the second quarter of 2016, an increase of $309 million compared to the same period in 2015. Interest income increased $320 million, which reflects prior year acquisitions and the current quarter acquisition of National Penn. Interest expense was up $11 million, also largely driven by acquisitions.
 
Net interest margin was 3.41%, compared to 3.27% for the earlier quarter. Average earning assets increased $29.4 billion, or 17.8% while average interest-bearing liabilities increased $21.7 billion, or 18.7%, both of which were primarily driven by acquisitions. The annualized yield on the total loan portfolio for the second quarter was 4.31%, up 13 basis points compared to the earlier quarter, which primarily reflects the impact of purchase accounting. The annualized fully taxable-equivalent yield on the average securities portfolio for the second quarter was 2.47%, compared to 2.41% for the earlier period. This increase is primarily due to securities duration adjustments in the second quarter of 2016.
 
The average annualized cost of interest-bearing deposits was 0.23%, down one basis point compared to the earlier quarter. The average annualized rate paid on long-term debt was 2.10%, a decrease of four basis points compared to 2.14% for the second quarter of 2015. This decrease is due to favorable rates on new issuances and the extinguishment of higher cost FHLB advances in the earlier quarter.

Six Months of 2016 compared to Six Months of 2015
 
Net interest income on a FTE basis was $3.2 billion for the six months ended June 30, 2016, an increase of $530 million compared to the same period in 2015. The increase in net interest income reflects a $552 million increase in interest income and a $22 million increase in funding costs. The increase in interest income was driven by an increase in average earning assets of $24.8 billion compared to the same period of 2015, a higher balance of agency MBS and an increase in yields that reflects the impact of purchase accounting. The increase in funding costs was due to a $17.3 billion increase in interest-bearing liabilities, the majority of which were deposits obtained through acquisitions.
 
The NIM was 3.42% for the six months ended June 30, 2016, compared to 3.30% for the same period of 2015. The 12 basis point increase in NIM reflects the impact of purchase accounting and the impact from deposits representing a greater percentage of overall funding.
 
The annualized FTE yield on the average securities portfolio for the six months ended June 30, 2016 was 2.44%, flat compared to the annualized yield earned during the same period of 2015.
 
The annualized FTE yield for the total loan portfolio for the six months ended June 30, 2016 was 4.33%, compared to 4.20% in the corresponding period of 2015. This increase primarily reflects the impact of acquisitions.
 
The average annualized cost of interest-bearing deposits for the six months ended June 30, 2016 was 0.24%, compared to 0.25% for the same period in the prior year, reflecting improvements in mix.
 
The average annualized rate paid on long-term debt for the six months ended June 30, 2016 was 2.15%, compared to 2.16% for the same period in 2015. This decrease reflects the early extinguishments of higher cost FHLB advances during the second quarter of 2015 and the issuance of $3.0 billion of long-term debt at lower rates during the second quarter of 2016, partially offset by higher rates on variable rate debt.

The following tables set 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.


50


Table 1-1
FTE Net Interest Income and Rate / Volume Analysis (1)
Three Months Ended June 30, 2016 and 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Balances (6)
 
Annualized Yield/Rate
 
Income/Expense
 
Increase
 
Change due to
 
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
(Decrease)
 
Rate
 
Volume
 
 
 
(Dollars in millions)
Assets
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total securities, at amortized cost (2)
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
 
$
2,252

 
$
2,561

 
1.76
%
 
1.56
%
 
$
10

 
$
10

 
$

 
$
1

 
$
(1
)
GSE
 
4,199

 
5,400

 
2.06

 
2.13

 
21

 
28

 
(7
)
 
(1
)
 
(6
)
Agency MBS
 
38,911

 
29,245

 
2.09

 
2.05

 
203

 
149

 
54

 
3

 
51

States and political subdivisions
 
2,289

 
1,834

 
5.17

 
5.80

 
30

 
27

 
3

 
(3
)
 
6

Non-agency MBS
 
71

 
220

 
5.14

 
7.88

 
1

 
5

 
(4
)
 
(1
)
 
(3
)
Other
 
67

 
623

 
1.91

 
1.11

 
1

 
2

 
(1
)
 
1

 
(2
)
Acquired from FDIC
 
721

 
844

 
19.03

 
11.36

 
34

 
24

 
10

 
14

 
(4
)
Total securities
 
48,510

 
40,727

 
2.47

 
2.41

 
300

 
245

 
55

 
14

 
41

Other earning assets (3)
 
3,215

 
2,645

 
1.22

 
1.19

 
9

 
7

 
2

 

 
2

Loans and leases, net of unearned income (4)(5)
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial
 
51,646

 
42,541

 
3.37

 
3.15

 
433

 
335

 
98

 
24

 
74

CRE-income producing properties
 
14,786

 
10,730

 
3.79

 
3.37

 
139

 
90

 
49

 
12

 
37

CRE-construction and development
 
3,669

 
2,767

 
3.74

 
3.31

 
34

 
23

 
11

 
3

 
8

Dealer floor plan
 
1,305

 
1,010

 
2.04

 
1.81

 
7

 
5

 
2

 
1

 
1

Direct retail lending
 
12,031

 
8,449

 
4.33

 
4.04

 
127

 
86

 
41

 
6

 
35

Sales finance
 
9,670

 
9,507

 
3.05

 
2.70

 
74

 
64

 
10

 
9

 
1

Revolving credit
 
2,477

 
2,365

 
8.73

 
8.68

 
54

 
51

 
3

 

 
3

Residential mortgage
 
30,471

 
29,862

 
4.09

 
4.14

 
312

 
308

 
4

 
(4
)
 
8

Other lending subsidiaries
 
13,961

 
11,701

 
8.39

 
8.72

 
292

 
255

 
37

 
(10
)
 
47

PCI
 
1,130

 
1,055

 
16.91

 
14.66

 
48

 
38

 
10

 
7

 
3

Total loans and leases HFI
 
141,146

 
119,987

 
4.32

 
4.19

 
1,520

 
1,255

 
265

 
48

 
217

LHFS
 
1,951

 
2,069

 
3.43

 
3.48

 
16

 
18

 
(2
)
 

 
(2
)
Total loans and leases
 
143,097

 
122,056

 
4.31

 
4.18

 
1,536

 
1,273

 
263

 
48

 
215

Total earning assets
 
194,822

 
165,428

 
3.80

 
3.69

 
1,845

 
1,525

 
320

 
62

 
258

Nonearning assets
 
28,577

 
23,605

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total assets
 
$
223,399

 
$
189,033

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-checking
 
$
28,376

 
$
20,950

 
0.15

 
0.08

 
11

 
4

 
7

 
5

 
2

Money market and savings
 
63,195

 
53,852

 
0.19

 
0.18

 
29

 
23

 
6

 
1

 
5

Time deposits
 
18,101

 
14,800

 
0.51

 
0.72

 
23

 
28

 
(5
)
 
(10
)
 
5

Foreign deposits - interest-bearing
 
1,865

 
764

 
0.38

 
0.09

 
1

 

 
1

 
1

 

Total interest-bearing deposits
 
111,537

 
90,366

 
0.23

 
0.24

 
64

 
55

 
9

 
(3
)
 
12

Short-term borrowings
 
2,951

 
3,080

 
0.34

 
0.16

 
3

 
1

 
2

 
2

 

Long-term debt
 
23,272

 
22,616

 
2.10

 
2.14

 
121

 
121

 

 
(2
)
 
2

Total interest-bearing liabilities
 
137,760

 
116,062

 
0.55

 
0.61

 
188

 
177

 
11

 
(3
)
 
14

Noninterest-bearing deposits
 
48,801

 
41,502

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Other liabilities
 
7,228

 
6,581

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Shareholders' equity
 
29,610

 
24,888

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total liabilities and shareholders' equity
 
$
223,399

 
$
189,033

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Average interest rate spread
 
 

 
 
 
3.25
%
 
3.08
%
 
 

 
 

 
 

 
 

 
 

NIM/net interest income
 
 

 
 
 
3.41
%
 
3.27
%
 
$
1,657

 
$
1,348

 
$
309

 
$
65

 
$
244

Taxable-equivalent adjustment
 
 

 
 
 
 
 
 

 
$
40

 
$
36

 
 

 
 

 
 

 
 
(1) Yields are stated on a FTE basis assuming tax rates in effect for the periods presented.
(2) Total securities include AFS securities and HTM securities.
(3) Includes Federal funds sold, securities purchased under resale agreements or similar arrangements, interest-bearing deposits with banks, trading securities, FHLB stock and other earning assets.
(4) Loan fees, which are not material for any of the periods shown, are included for rate calculation purposes.
(5) NPLs are included in the average balances.
(6) Excludes basis adjustments for fair value hedges.


51


Table 1-2
FTE Net Interest Income and Rate / Volume Analysis (1)
Six Months Ended June 30, 2016 and 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Balances (6)
 
Annualized Yield/Rate
 
Income/Expense
 
Increase
 
Change due to
 
 
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
 
(Decrease)
 
Rate
 
Volume
 
 
 
(Dollars in millions)
Assets
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total securities, at amortized cost (2)
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
 
$
2,514

 
$
2,529

 
1.73
%
 
1.53
%
 
$
22

 
$
19

 
$
3

 
$
3

 
$

GSE
 
4,632

 
5,397

 
2.09

 
2.13

 
48

 
57

 
(9
)
 
(1
)
 
(8
)
Agency MBS
 
36,343

 
29,461

 
2.04

 
2.05

 
370

 
302

 
68

 
(1
)
 
69

States and political subdivisions
 
2,139

 
1,828

 
5.23

 
5.80

 
56

 
53

 
3

 
(6
)
 
9

Non-agency MBS
 
119

 
224

 
7.33

 
7.87

 
4

 
9

 
(5
)
 
(1
)
 
(4
)
Other
 
64

 
633

 
1.75

 
1.25

 
1

 
4

 
(3
)
 
1

 
(4
)
Acquired from FDIC
 
734

 
857

 
18.10

 
12.93

 
66

 
55

 
11

 
20

 
(9
)
Total securities
 
46,545

 
40,929

 
2.44

 
2.44

 
567

 
499

 
68

 
15

 
53

Other earning assets (3)
 
3,310

 
2,324

 
2.07

 
2.02

 
34

 
23

 
11

 
1

 
10

Loans and leases, net of unearned income (4)(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
 

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
 

Commercial and industrial
 
49,830

 
41,998

 
3.33

 
3.17

 
825

 
661

 
164

 
35

 
129

CRE-income producing properties
 
14,138

 
10,705

 
3.78

 
3.38

 
266

 
179

 
87

 
23

 
64

CRE-construction and development
 
3,644

 
2,750

 
3.75

 
3.32

 
68

 
45

 
23

 
6

 
17

Dealer floor plan
 
1,272

 
1,025

 
2.03

 
1.80

 
13

 
10

 
3

 
1

 
2

Direct retail lending
 
11,569

 
8,320

 
4.29

 
4.06

 
245

 
168

 
77

 
10

 
67

Sales finance
 
9,859

 
9,483

 
3.03

 
2.71

 
149

 
127

 
22

 
17

 
5

Revolving credit
 
2,470

 
2,375

 
8.78

 
8.76

 
108

 
103

 
5

 

 
5

Residential mortgage
 
30,167

 
30,143

 
4.09

 
4.12

 
617

 
620

 
(3
)
 
(3
)
 

Other lending subsidiaries
 
13,700

 
11,511

 
8.47

 
8.82

 
578

 
504

 
74

 
(21
)
 
95

PCI
 
1,114

 
1,105

 
19.27

 
15.28

 
107

 
83

 
24

 
23

 
1

Total loans and leases HFI
 
137,763

 
119,415

 
4.34

 
4.21

 
2,976

 
2,500

 
476

 
91

 
385

LHFS
 
1,599

 
1,735

 
3.56

 
3.53

 
28

 
31

 
(3
)
 

 
(3
)
Total loans and leases
 
139,362

 
121,150

 
4.33

 
4.20

 
3,004

 
2,531

 
473

 
91

 
382

Total earning assets
 
189,217

 
164,403

 
3.82

 
3.73

 
3,605

 
3,053

 
552

 
107

 
445

Nonearning assets
 
27,534

 
23,767

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total assets
 
$
216,751

 
$
188,170

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-checking
 
$
26,990

 
$
20,787

 
0.14

 
0.08

 
19

 
8

 
11

 
8

 
3

Money market and savings
 
61,809

 
52,754

 
0.20

 
0.17

 
61

 
45

 
16

 
8

 
8

Time deposits
 
17,493

 
15,894

 
0.53

 
0.72

 
46

 
57

 
(11
)
 
(16
)
 
5

Foreign deposits - interest-bearing
 
1,308

 
664

 
0.37

 
0.09

 
2

 

 
2

 
1

 
1

Total interest-bearing deposits
 
107,600

 
90,099

 
0.24

 
0.25

 
128

 
110

 
18

 
1

 
17

Short-term borrowings
 
2,861

 
3,308

 
0.35

 
0.14

 
5

 
2

 
3

 
3

 

Long-term debt
 
23,090

 
22,828

 
2.15

 
2.16

 
247

 
246

 
1

 
(1
)
 
2

Total interest-bearing liabilities
 
133,551

 
116,235

 
0.57

 
0.62

 
380

 
358

 
22

 
3

 
19

Noninterest-bearing deposits
 
47,502

 
40,607

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Other liabilities
 
6,980

 
6,600

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Shareholders' equity
 
28,718

 
24,728

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total liabilities and shareholders' equity
 
$
216,751

 
$
188,170

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Average interest rate spread
 
 

 
 
 
3.25
%
 
3.11
%
 
 

 
 

 
 

 
 

 
 

NIM/net interest income
 
 

 
 
 
3.42
%
 
3.30
%
 
$
3,225

 
$
2,695

 
$
530

 
$
104

 
$
426

Taxable-equivalent adjustment
 
 

 
 
 
 
 
 

 
$
79

 
$
71

 
 

 
 

 
 

 
 
(1) Yields are stated on a FTE basis assuming tax rates in effect for the periods presented.
(2) Total securities include AFS securities and HTM securities.
(3) Includes Federal funds sold, securities purchased under resale agreements or similar arrangements, interest-bearing deposits with banks, trading securities, FHLB stock and other earning assets.
(4) Loan fees, which are not material for any of the periods shown, are included for rate calculation purposes.
(5) NPLs are included in the average balances.
(6) Excludes basis adjustments for fair value hedges.


52


Provision for Credit Losses
 
Second Quarter 2016 compared to Second Quarter 2015
 
The provision for credit losses totaled $111 million for the second quarter of 2016, compared to $97 million for the same period of the prior year.

Net charge-offs were $97 million for the second quarter of 2016 and $98 million for the second quarter of 2015. Net charge-offs were 0.28% of average loans and leases on an annualized basis for the second quarter of 2016, compared to 0.33% of average loans and leases for the same period in 2015.

Six Months of 2016 compared to Six Months of 2015
 
The provision for credit losses totaled $295 million for the six months ended June 30, 2016, compared to $196 million for the same period of 2015. The increase was primarily driven by exposure in the energy lending portfolio, which resulted in approximately $58 million of additional provision recorded during the first quarter of 2016.
 
Net charge-offs for the six months ended June 30, 2016 were $251 million, compared to $199 million for the six months ended June 30, 2015. This increase includes $30 million of net charge-offs recorded during the first quarter of 2016 related to the energy lending portfolio. Net charge-offs in the other lending subsidiaries portfolio increased $36 million, primarily due to lower collateral values in the nonprime auto lending portfolio.

Net charge-offs were 0.37% of average loans and leases on an annualized basis for the six months ended June 30, 2016, compared to 0.33% of average loans and leases for the same period in 2015.

Noninterest Income
 
Second Quarter 2016 compared to Second Quarter 2015
 
Noninterest income for the second quarter of 2016 increased $111 million compared to the earlier quarter. This increase was driven by higher other income, insurance income, service charges on deposits and trust and investment advisory revenues, partially offset by lower mortgage banking income.

Insurance income increased $43 million, due to $57 million in revenues attributable to the Swett & Crawford acquisition, partially offset by the loss of $23 million in revenues from American Coastal, which was sold in the earlier quarter. Service charges on deposits increased $12 million, while trust and investment advisory revenues increased $10 million, both of which were largely the result of acquisition-related volumes.

Other income increased $49 million primarily due to a $26 million loss on sale of American Coastal recorded in the earlier period as well as $18 million of higher income related to assets for certain post-employment benefits (which is offset in personnel expense) during the current period.

Mortgage banking income declined $19 million, driven by net mortgage servicing rights valuation adjustments.

The remaining categories of noninterest income totaled $214 million for the current quarter, compared to $198 million for the second quarter of 2015.

Six Months of 2016 compared to Six Months of 2015
 
Noninterest income for the six months ended June 30, 2016 totaled $2.1 billion, compared to $2.0 billion for the same period in 2015, an increase of $130 million. This change was primarily driven by higher securities gains, insurance income and service charges on deposits, along with smaller increases in a number of other categories, partially offset by lower mortgage banking income.

Securities gains were $45 million for the six months ended June 30, 2016, compared to net securities losses of $1 million for the six months ended June 30, 2015. The current year net gains were the result of first quarter sales activity.


53


Insurance income was $884 million, compared to $862 million for the first six months of 2015. This increase is primarily due to increased revenues across most insurance businesses as the acquisition of Swett & Crawford, which was acquired April 1, 2016 and contributed $57 million, was largely offset by lower revenue due to the sale of American Coastal.

Service charges on deposits were $320 million for the six months ended June 30, 2016, compared to $299 million for the same period of the prior year. This increase primarily reflects higher volume as a result of acquisitions.

FDIC loss share income was $19 million better in the current period due to lower accretion, partially offset by the impact of securities duration adjustments.
 
Trust and investment advisory revenues were $129 million for the first half of 2016, compared to $113 million for the prior year period. This increase primarily reflects organic growth along with a smaller benefit from acquisitions.

Mortgage banking income was $202 million for the six months ended June 30, 2016, down from $240 million for the same period of 2015. The decline was primarily due to lower volume for production and sales, and a $15 million net change in MSR valuation.

The remaining categories of noninterest income totaled $690 million for the first six months of 2016, compared to $646 for the first six months of 2015, which reflects a general increase due to acquisition activity.

Noninterest Expense
 
Second Quarter 2016 compared to Second Quarter 2015
 
Noninterest expense for the second quarter of 2016 was $1.8 billion, an increase of $144 million compared to the earlier quarter. This increase reflects higher expense in a number of categories as a result of acquisitions and restructuring activities, partially offset by a loss on early extinguishment of debt during the earlier quarter.

Personnel expense increased $175 million, driven by a $94 million increase in salaries, which reflects an increase in full time equivalent employees of 5,046 primarily resulting from acquisitions. Personnel expense also reflects a $31 million increase in incentives due to improved performance relative to target measures and the Swett and Crawford acquisition. Additionally, expense related to certain post-employment benefits expense (offset in other income) was higher $18 million, and pension expense increased $13 million primarily due to changes in actuarial assumptions.

Occupancy and equipment expense, amortization of intangibles and merger-related and restructuring charges increased $28 million, $19 million and $67 million, respectively, as a result of acquisition activity. Merger-related and restructuring charges also included $29 million in restructuring charges related to severance and real estate initiated during the quarter.

Outside IT services was up $15 million primarily due to various systems-related initiatives. Other expense increased $14 million primarily due to higher checkcard expense and higher depreciation of property held under operating leases.

The earlier period included a loss on early extinguishment of debt of $172 million related to the termination of higher-cost FHLB advances totaling $931 million. The loss amounts were driven by the difference between market interest rates at the time of extinguishment and the stated rates on the FHLB advances that were extinguished.

The remaining categories of noninterest expense totaled $155 million for the current quarter, compared to $157 million for the second quarter of 2015.

Six Months of 2016 compared to Six Months of 2015
 
Noninterest expense totaled $3.3 billion for the six months ended June 30, 2016, an increase of $267 million, or 8.7%, over the same period of the prior year. Primary drivers for the increase in noninterest expense include higher personnel expense, merger-related and restructuring charges, occupancy and equipment expense, amortization of intangibles and outside IT services. These increases were partially offset by the loss on early extinguishment of debt recorded during the earlier period.
 

54


Personnel expense was $2.0 billion for the six months ended June 30, 2016, an increase of $260 million compared to the six months ended June 30, 2015. Salary expense was $161 million higher as a result of approximately 4,300 additional full time equivalent employees, primarily due to acquisitions. Incentives were $48 million higher due to acquisitions and improved performance relative to target measures. The increase in personnel expense also includes a $24 million increase in pension plan expense that was driven by higher amortization of net actuarial losses and higher interest cost. Other components of personnel expense experienced smaller increases as a result of the overall increase in headcount.

Merger-related and restructuring charges totaled $115 million for the six months ended June 30, 2016, compared to $38 million for the prior year period. This increase is primarily due to activity related to National Penn, as well as $29 million in restructuring charges related to severance and real estate initiated during the second quarter of 2016.
 
Occupancy and equipment expense and amortization of intangibles increased $52 million and $30 million, respectively, as a result of acquisition activity. Outside IT services increased $26 million, primarily due to various systems-related initiatives.

The earlier period included a loss on early extinguishment of debt of $172 million related to the termination of higher-cost FHLB advances totaling $931 million.

Other categories of noninterest expense totaled $730 million for the six months ended June 30, 2016, compared to $735 million for the same period of 2015.

Provision for Income Taxes
 
Second Quarter 2016 compared to Second Quarter 2015
 
The provision for income taxes was $252 million for the second quarter of 2016, compared to $80 million for the earlier quarter. This produced an effective tax rate for the second quarter of 2015 of 30.0%, compared to 13.8% for the earlier quarter. The current quarter includes a $13 million tax benefit related to specific tax-advantaged assets, while the second quarter of 2015 includes a $107 million tax benefit recorded in connection with a U.S. Court of Appeals ruling related to previously disallowed deductions in connection with a financing transaction.

Six Months of 2016 compared to Six Months of 2015
 
The provision for income taxes was $498 million for the six months ended June 30, 2016, compared to $321 million for the same period of the prior year. BB&T's effective income tax rate for the six months ended June 30, 2016 was 30.1%, compared to 23.4% for the same period of the prior year. This reflects the $13 million tax benefit in 2016 and the $107 million tax benefit in 2015 discussed previously.

Refer to Note 11 "Income Taxes" in the "Notes to Consolidated Financial Statements" for a discussion of uncertain tax positions and other tax matters.

Segment Results
 
See the "Operating Segments" Note 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, 2015, 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.
 
The financial information related to National Penn's operations is included in the Other, Treasury & Corporate segment for the second quarter of 2016 and will be presented in certain other segments following the systems conversion date in July 2016.
 

55


Table 2
Net Income by Reportable Segments
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(Dollars in millions)
Community Banking
 
$
294

 
$
231

 
$
595

 
$
439

Residential Mortgage Banking
 
44

 
69

 
83

 
133

Dealer Financial Services
 
51

 
49

 
93

 
94

Specialized Lending
 
61

 
58

 
117

 
111

Insurance Holdings
 
44

 
53

 
97

 
125

Financial Services
 
87

 
70

 
114

 
136

Other, Treasury and Corporate
 
6

 
(29
)
 
58

 
10

BB&T Corporation
 
$
587

 
$
501

 
$
1,157

 
$
1,048

 
Second Quarter 2016 compared to Second Quarter 2015
 
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 $294 million for the second quarter of 2016, an increase of $63 million compared to the earlier quarter. Segment net interest income and noninterest income increased $188 million and $15 million, respectively, primarily driven by prior-year acquisition activity and higher funding spreads on deposits. The allocated provision for credit losses increased $12 million as a result of higher loss estimates in the commercial and industrial loan portfolio, partially offset by lower net charge-offs. Noninterest expense increased $62 million driven by higher personnel and occupancy and equipment expense, primarily attributable to the prior-year acquisitions. Allocated corporate expense increased by $23 million compared to the earlier quarter, primarily driven by acquisitions.
 
Residential Mortgage Banking
 
Residential Mortgage Banking originates and purchases mortgage loans to either hold for investment or sell to third-parties. BB&T generally retains the servicing rights to loans sold. Mortgage products include fixed and adjustable-rate government guaranteed and conventional loans used for the purpose of constructing, purchasing or refinancing residential properties. Substantially all of the properties are owner-occupied.

Residential Mortgage Banking net income was $44 million for the second quarter of 2016, a decrease of $25 million compared to the earlier quarter. Segment net interest income was down slightly, primarily due to lower average loan balances. Noninterest income decreased $18 million, driven by lower net mortgage servicing rights income and production-related revenue. The increase in noninterest expense was driven by higher personnel and loan processing expense, partially offset by lower professional services expense.

Dealer Financial Services
 
Dealer Financial Services 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. In conjunction with Community Banking, Dealer Financial Services provides financing and servicing to dealers for their inventories in Community Banking’s footprint.

Dealer Financial Services net income was $51 million for the second quarter of 2016, an increase of $2 million compared to the earlier quarter. Segment net interest income was up, primarily due to the addition of Susquehanna’s consumer auto leasing business as well as growth in the Regional Acceptance loan portfolio. The allocated provision for credit losses increased $10 million, driven by higher net charge-offs in the Regional Acceptance loan portfolio due to portfolio mix and an increase in loss severity.
 

56


Specialized Lending
 
Specialized Lending consists of businesses that provide specialty finance solutions 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 and dealer-based financing of equipment for consumers and small businesses.

Specialized Lending net income was $61 million for the second quarter of 2016, an increase of $3 million compared to the earlier quarter. Segment net interest income increased $20 million, primarily attributable to the addition of Susquehanna’s small business equipment finance group as well as growth in the small ticket dealer-based finance portfolio, partially offset by lower interest rates on new loans. The allocated provision for credit losses was up slightly, primarily due to mortgage warehouse loan growth and higher net charge-offs in the small business equipment finance portfolio and the small ticket dealer-based finance portfolio. Noninterest expense was up, primarily due to higher personnel expense and depreciation of property held under operating leases related to growth in Equipment Finance’s lease portfolio.
 
Insurance Holdings
 
BB&T's insurance agency / brokerage network is the fifth largest in the United States and sixth largest in the world. Insurance Holdings provides property and casualty, life, and health insurance to businesses 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. The results for wholesale insurance broker Swett & Crawford are included in the segment.

Insurance Holdings net income was $44 million for the second quarter of 2016, a decrease of $9 million compared to the earlier quarter. Noninterest income increased $40 million, which primarily reflects the addition of Swett and Crawford and higher life insurance commissions, partially offset by the sale of American Coastal in the second quarter of 2015. Noninterest expense increased $40 million, primarily due to the Swett & Crawford acquisition that led to higher personnel, occupancy and equipment expense, and amortization of intangibles.

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 a variety of investment services, including discount brokerage services, equities, annuities, mutual funds and government bonds through BB&T Investment Services, Inc. The segment includes BB&T Securities, a full-service brokerage and investment banking firm, and the Corporate Banking Division, which originates and services large corporate relationships, syndicated lending relationships and client derivatives. The segment also includes the company's SBIC private equity investments.

Financial Services net income was $87 million in the second quarter of 2016, an increase of $17 million compared to the earlier quarter. Segment net interest income increased $29 million, primarily driven by higher loan balances and higher funding spreads on deposits for Corporate Banking and BB&T Wealth. The allocated provision for credit losses decreased $17 million, driven by increased loss estimates in the earlier quarter for the Corporate Banking loan portfolio. Noninterest expense increased $13 million compared to the earlier quarter, primarily due to higher personnel expense and restructuring charges.

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 $6 million, an increase of $35 million compared to the earlier quarter. Segment net interest income increased $64 million driven by the addition of National Penn. Noninterest income increased $74 million, primarily attributable to an increase in income related to assets for certain post-employment benefits and the addition of National Penn. In addition, noninterest income in the earlier quarterly included the previously discussed loss on sale of American Coastal. The segment allocated $36 million more of expense to other operating segments compared to the earlier quarter.


57


Six Months of 2016 compared to Six Months of 2015
 
Community Banking
 
Community Banking net income was $595 million for the six months ended June 30, 2016, an increase of $156 million compared to the same period of the prior year. Segment net interest income increased $397 million driven by prior-year acquisition activity and higher funding spreads on deposits. Noninterest income increased $32 million, primarily due to higher service charges on deposits, checkcard fees and bankcard and merchant services fees. The allocated provision for credit losses decreased $11 million as a result of lower net charge-offs. Noninterest expense increased $126 million driven by higher personnel and occupancy and equipment expense, primarily attributable to the prior-year acquisitions. Amortization of intangibles increased $20 million and allocated corporate expense increased by $50 million, also primarily attributable to the prior-year acquisitions.
 
Residential Mortgage Banking
 
Residential Mortgage Banking net income was $83 million for the six months ended June 30, 2016, a decrease of $50 million compared to the same period in the prior year. Segment net interest income decreased $10 million primarily the result of lower average loan balances and lower interest rates on new loans held for investment. Noninterest income decreased $31 million driven by lower net MSR income and production-related revenue. The allocated provision for credit losses increased $30 million as the prior year reflected an improvement in loss severity trends compared to the current year.
 
Dealer Financial Services
 
Dealer Financial Services net income was $93 million for the six months ended June 30, 2016, a decrease of $1 million compared to the same period of the prior year. Segment net interest income increased $23 million, primarily due to the addition of Susquehanna’s consumer auto leasing business and growth in the Regional Acceptance loan portfolio. The allocated provision for credit losses increased $25 million driven by higher net charge-offs in the Regional Acceptance loan portfolio due to portfolio mix and an increase in loss severity.
 
Specialized Lending
 
Specialized Lending net income was $117 million for the six months ended June 30, 2016, an increase of $6 million compared to the same period of the prior year. Segment net interest income increased $38 million, primarily attributable to the addition of Susquehanna’s small business equipment finance group as well as growth in the small ticket dealer-based finance portfolio, partially offset by lower interest rates on new loans. The allocated provision for credit losses increased $12 million driven by higher net charge-offs in the small business equipment finance and small ticket dealer-based finance portfolios. Noninterest expense increased $16 million primarily due to higher personnel expense, loan processing expense and depreciation of property under operating leases related to growth in the lease portfolio.

Insurance Holdings
 
Insurance Holdings net income was $97 million for the six months ended June 30, 2016, a decrease of $28 million compared to the same period of the prior year. Noninterest income increased $19 million, which primarily reflects the addition of Swett and Crawford, higher property and casualty insurance, life insurance and employee benefit commissions, partially offset by the sale of American Coastal in the second quarter of 2015. Noninterest expense increased $37 million driven by higher personnel expense primarily attributable to the addition of Swett and Crawford, partially offset by lower business referral and insurance claims expense driven by the sale of American Coastal.
 
Financial Services
 
Financial Services net income was $114 million for the six months ended June 30, 2016, a decrease of $22 million compared to the same period of the prior year. Segment net interest income increased $58 million, primarily driven by higher loan and deposit balances and higher funding spreads on deposits for Corporate Banking and BB&T Wealth. The allocated provision for credit losses increased $49 million driven by loan growth, higher net charge-offs and increased loss estimates primarily related to energy lending exposure within the Corporate Banking loan portfolio. Noninterest expense increased $32 million compared to the prior year, primarily due to higher personnel expense and restructuring charges.
 

58


Other, Treasury & Corporate
 
Other, Treasury & Corporate net income was $58 million for the six months ended June 30, 2016, an increase of $48 million compared to the same period of the prior year. Segment net interest income increased $17 million driven by the addition of National Penn in the current quarter, partially offset by higher funding credits on deposits allocated to other segments. Noninterest income increased $110 million, primarily attributable to security gains on the investment portfolio, higher FDIC loss share income and the addition of National Penn. Noninterest expense increased $23 million driven by higher personnel and occupancy and equipment expense partially attributable to National Penn, merger-related and restructuring charges, regulatory charges, IT professional services and software expense. These increases were partially offset by the previously discussed loss on early extinguishment of debt in the prior year. Allocated corporate expense decreased by $77 million compared to the prior year, reflecting increases in corporate expense allocated to the operating segments.

Analysis of Financial Condition

Investment Activities
 
The total securities portfolio was $47.0 billion at June 30, 2016, compared to $43.8 billion at December 31, 2015. As of June 30, 2016, the securities portfolio included $28.2 billion of AFS securities (at fair value) and $18.8 billion of HTM securities (at amortized cost).
 
The effective duration of the securities portfolio was 3.1 years at June 30, 2016, compared to 4.0 years at December 31, 2015. 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 the "Securities" Note in the "Notes to Consolidated Financial Statements" herein for additional disclosures related to BB&T's evaluation of securities for OTTI.

Lending Activities
 
Loans HFI totaled $142.2 billion at June 30, 2016, compared to $136.0 billion at December 31, 2015. The increase in loans HFI was primarily due to the acquisition of National Penn, which included $6.0 billion in loans as of the acquisition date.

Commercial and industrial loans increased $3.7 billion or $1.1 billion excluding National Penn, primarily due to growth in large corporate lending and mortgage warehouse lending. CRE-income producing properties loans were up $1.5 billion (up $249 million excluding National Penn) and direct retail lending loans were up $885 million (up $118 million excluding National Penn).

Other lending subsidiaries loans were up $1.0 billion, which represents organic growth and seasonality.

Residential mortgage loans were up $117 million but down $883 million excluding National Penn, which reflects the continuing strategy to sell conforming residential mortgage loan production. Sales finance loans were down $898 million (down $1.1 billion excluding National Penn) due to the continued effects of the dealer pricing structure changes implemented during the third quarter of 2015.


59


The following table presents the composition of average loans and leases:
Table 3
Composition of Average Loans and Leases
 
 
 
 
 
For the Three Months Ended
 
 
6/30/2016
 
3/31/2016
 
12/31/2015
 
9/30/2015
 
6/30/2015
 
 
(Dollars in millions)
Commercial and industrial
 
$
51,646

 
$
48,013

 
$
48,047

 
$
46,462

 
$
42,541

CRE-income producing properties
 
14,786

 
13,490

 
13,264

 
12,514

 
10,730

CRE-construction and development
 
3,669

 
3,619

 
3,766

 
3,502

 
2,767

Dealer floor plan
 
1,305

 
1,239

 
1,164

 
1,056

 
1,010

Direct retail lending
 
12,031

 
11,107

 
10,896

 
9,926

 
8,449

Sales finance
 
9,670

 
10,049

 
10,533

 
10,386

 
9,507

Revolving credit
 
2,477

 
2,463

 
2,458

 
2,421

 
2,365

Residential mortgage
 
30,471

 
29,864

 
30,334

 
30,384

 
29,862

Other lending subsidiaries
 
13,961

 
13,439

 
13,281

 
12,837

 
11,701

PCI
 
1,130

 
1,098

 
1,070

 
1,052

 
1,055

Total average loans and leases HFI
 
$
141,146

 
$
134,381

 
$
134,813

 
$
130,540

 
$
119,987

 
Average loans held for investment for the second quarter of 2016 were $141.1 billion, up $6.8 billion compared to the first quarter of 2016. National Penn contributed $5.9 billion in average loans, which included commercial and industrial loans of $2.5 billion, CRE-income producing properties loans of $1.2 billion, $967 million of residential mortgage loans and $889 million of direct retail lending loans. The following discussion describes the growth of average loans excluding National Penn for the second quarter of 2016 compared to the first quarter.

Average commercial and industrial loans increased 9.4% annualized primarily due to growth in large corporate lending as well as seasonal growth in mortgage warehouse lending.

Average CRE-income producing properties loans increased 4.3% annualized, while average CRE-construction and development loans decreased 8.8% annualized. These fluctuations reflect the completion of client construction projects and the related movement to permanent financing sources.

Dealer floor plan average loans were up 21.4% annualized, due to organic client additions during the first half of 2016 and higher utilization by existing clients.

Average sales finance loans declined approximately 21.3% annualized, primarily due to the continued effects of the dealer pricing structure changes implemented during the third quarter of 2015.

Average residential mortgage loans decreased 4.8% annualized, which primarily reflects the continuing strategy to sell conforming residential mortgage loan production.

Other lending subsidiaries average loans increased 15.6% annualized, due to strong seasonal growth.

Asset Quality
 
NPAs totaled $886 million at June 30, 2016, compared to $712 million at December 31, 2015. This increase reflects $206 million of commercial and industrial NPLs that were downgraded as a result of a review of shared national credits in the energy lending portfolio during the first quarter of 2016, partially offset by the sale of a $46 million NPL during the second quarter of 2016.

At June 30, 2016, nonperforming loans and leases represented 0.56% of loans and leases held for investment, compared to 0.42% at December 31, 2015. This increase is due to the energy lending portfolio review discussed above.


60


The following table presents activity related to NPAs, excluding foreclosed real estate acquired from the FDIC:
Table 4
Rollforward of NPAs
 
 
 
 
 
Six Months Ended June 30,
 
 
2016
 
2015
 
 
(Dollars in millions)
Beginning balance
 
$
686

 
$
726

New NPAs
 
970

 
570

Advances and principal increases
 
88

 
36

Disposals of foreclosed assets (1)
 
(253
)
 
(220
)
Disposals of NPLs (2)
 
(109
)
 
(75
)
Charge-offs and losses
 
(159
)
 
(126
)
Payments
 
(291
)
 
(159
)
Transfers to performing status
 
(65
)
 
(70
)
Other, net
 
2

 

Ending balance
 
$
869

 
$
682

_________
(1) 
Includes charge-offs and losses recorded upon sale of $90 million and $72 million for the six months ended June 30, 2016 and 2015, respectively.
(2)
Includes charge-offs and losses recorded upon sale of $7 million and $12 million for the six months ended June 30, 2016 and 2015, respectively.


61


The following tables summarize asset quality information for the past five quarters.

Table 5
Asset Quality
 
 
 
 
 
Three Months Ended
 
 
6/30/2016
 
3/31/2016
 
12/31/2015
 
9/30/2015
 
6/30/2015
 
 
(Dollars in millions)
NPAs (1)
 
 
 
 
 
 
 
 
 
 
NPLs:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
452

 
$
442

 
$
237

 
$
211

 
$
198

CRE-income producing properties
 
36

 
48

 
38

 
45

 
59

CRE-construction and development
 
14

 
11

 
13

 
24

 
16

Dealer floor plan
 

 

 

 
7

 
7

Direct retail lending
 
52

 
51

 
43

 
39

 
41

Sales finance
 
5

 
7

 
7

 
6

 
6

Residential mortgage (2)
 
172

 
163

 
173

 
196

 
188

Other lending subsidiaries
 
62

 
64

 
65

 
57

 
57

Total nonaccrual loans and leases held for investment (2)
 
793

 
786

 
576

 
585

 
572

Foreclosed real estate
 
53

 
66

 
82

 
85

 
86

Foreclosed real estate-acquired from FDIC and PCI
 
17

 
23

 
26

 
45

 
47

Other foreclosed property
 
23

 
28

 
28

 
29

 
24

Total nonperforming assets (1)(2)
 
$
886

 
$
903

 
$
712

 
$
744

 
$
729

 
 
 
 
 
 
 
 
 
 
 
Performing TDRs (3)
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
39

 
$
52

 
$
49

 
$
54

 
$
75

CRE-income producing properties
 
16

 
18

 
13

 
12

 
21

CRE-construction and development
 
10

 
13

 
16

 
14

 
23

Direct retail lending
 
69

 
70

 
72

 
75

 
81

Sales finance
 
16

 
17

 
17

 
18

 
18

Revolving credit
 
31

 
32

 
33

 
34

 
36

Residential mortgage-nonguaranteed
 
276

 
281

 
288

 
275

 
273

Residential mortgage-government guaranteed (4)
 
348

 
317

 
316

 
321

 
328

Other lending subsidiaries
 
198

 
181

 
178

 
173

 
172

Total performing TDRs (3)(4)
 
$
1,003

 
$
981

 
$
982

 
$
976

 
$
1,027

 
 
 
 
 
 
 
 
 
 
 
Loans 90 days or more past due and still accruing
 
 
 
 
 
 
 
 
 
 
Direct retail lending
 
$
5

 
$
6

 
$
7

 
$
12

 
$
10

Sales finance
 
4

 
4

 
5

 
4

 
4

Revolving credit
 
8

 
10

 
10

 
9

 
9

Residential mortgage-nonguaranteed
 
56

 
55

 
55

 
61

 
60

Residential mortgage-government guaranteed (5)
 
415

 
434

 
486

 
481

 
492

PCI
 
122

 
100

 
114

 
167

 
124

Total loans 90 days or more past due and still accruing (5)
 
$
610

 
$
609

 
$
677

 
$
734

 
$
699

 
 
 
 
 
 
 
 
 
 
 
Loans 30-89 days past due
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
20

 
$
27

 
$
36

 
$
26

 
$
16

CRE-income producing properties
 
8

 
7

 
13

 
6

 
4

CRE-construction and development
 
2

 
6

 
9

 
2

 
3

Direct retail lending
 
53

 
48

 
58

 
46

 
41

Sales finance
 
61

 
53

 
72

 
63

 
53

Revolving credit
 
19

 
18

 
22

 
20

 
19

Residential mortgage-nonguaranteed
 
361

 
350

 
397

 
368

 
362

Residential mortgage-government guaranteed (6)
 
81

 
66

 
78

 
76

 
76

Other lending subsidiaries
 
261

 
207

 
304

 
274

 
230

PCI
 
48

 
43

 
42

 
28

 
31

Total loans 30-89 days past due (6)
 
$
914

 
$
825

 
$
1,031

 
$
909

 
$
835


62


___________ 
Excludes loans held for sale.
(1)
PCI loans are accounted for using the accretion method.
(2)
During the second quarter of 2016, approximately $46 million of nonaccrual commercial and industrial loans were sold. During the first quarter of 2016, approximately $32 million of nonaccrual residential mortgage loans were sold. During the fourth quarter of 2015, approximately $50 million of nonaccrual residential mortgage loans were sold.
(3)
Includes $33 million of performing TDRs at June 30, 2016 related to government guaranteed GNMA mortgage loans that were previously TDRs and have been repurchased by BB&T.
(4)
Excludes TDRs that are nonperforming totaling $146 million, $172 million, $146 million, $154 million and $127 million at June 30, 2016, March 31, 2016, December 31, 2015, September 30, 2015 and June 30, 2015, respectively. These amounts are included in total NPAs.
(5)
Includes government guaranteed GNMA mortgage loans that BB&T has the right but not the obligation to repurchase that are 90 days or more past due totaling $49 million, $323 million, $365 million, $353 million and $338 million at June 30, 2016, March 31, 2016, December 31, 2015, September 30, 2015 and June 30, 2015, respectively. In prior quarters, these amounts were excluded from this table.
(6)
Includes 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, $2 million, $3 million and $3 million at June 30, 2016, March 31, 2016, December 31, 2015, September 30, 2015 and June 30, 2015, respectively. In prior quarters, these amounts were excluded from this table.

Table 6
Asset Quality Ratios
 
 
 
 
 
As of / For the Three Months Ended
 
 
6/30/2016
 
3/31/2016
 
12/31/2015
 
9/30/2015
 
6/30/2015
Asset Quality Ratios:
 
 
 
 
 
 
 
 
 
 
Loans 30-89 days past due and still accruing as a percentage of loans and leases HFI
 
0.64
%
 
0.61
%
 
0.76
%
 
0.67
%
 
0.68
%
Loans 90 days or more past due and still accruing as a percentage of loans and leases HFI
 
0.43

 
0.45

 
0.50

 
0.54

 
0.57

NPLs as a percentage of loans and leases HFI
 
0.56

 
0.58

 
0.42

 
0.43

 
0.47

NPAs as a percentage of:
 
 
 
 
 
 
 
 
 
 
Total assets
 
0.40

 
0.42

 
0.34

 
0.36

 
0.38

Loans and leases HFI plus foreclosed property
 
0.62

 
0.67

 
0.52

 
0.55

 
0.60

Net charge-offs as a percentage of average loans and leases HFI
 
0.28

 
0.46

 
0.38

 
0.32

 
0.33

ALLL as a percentage of loans and leases HFI
 
1.06

 
1.10

 
1.07

 
1.08

 
1.19

Ratio of ALLL to:
 
 
 
 
 
 
 
 
 
 
Net charge-offs
 
3.88x

 
2.40x

 
2.83x

 
3.44x

 
3.71x

NPLs
 
1.90

 
1.89

 
2.53

 
2.49

 
2.55

 
 
 
 
 
 
 
 
 
 
 
Asset Quality Ratios (Excluding Government Guaranteed and PCI): (1)
 
 

 
 

 
 

 
 

 
 

Loans 90 days or more past due and still accruing as a percentage of loans and leases HFI
 
0.05
%
 
0.06
%
 
0.06
%
 
0.06
%
 
0.07
%
 
___________
Applicable ratios are annualized.
(1)
These asset quality ratios have been adjusted to remove the impact of government guaranteed mortgage loans and PCI. Appropriate adjustments to the numerator and denominator have been reflected in the calculation of these ratios. Management believes the inclusion of such assets in these asset quality ratios results in distortion of these ratios such that they might not be reflective of asset collectibility or might not be comparable to other periods presented or to other portfolios that were not impacted by purchase accounting.

Loans 30-89 days past due and still accruing totaled $914 million at June 30, 2016, down $117 million compared to December 31, 2015. Other lending subsidiaries declined $43 million, reflecting normal seasonality in certain consumer loans. The remaining decline was broad-based, as most categories continued to display strong credit metrics.


63


Loans 90 days or more past due and still accruing totaled $610 million at June 30, 2016, a decline of $67 million compared to December 31, 2015. This decline includes a $71 million reduction for past due government guaranteed residential mortgage loans, which reflects general improvements in credit quality within that portfolio. Excluding government guaranteed and PCI loans, the ratio of loans 90 days or more past due and still accruing as a percentage of loans and leases was 0.05% at June 30, 2016, a decline of one basis point compared to December 31, 2015.
 
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 the "Loans and ACL" Note 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 June 30, 2016, approximately 2.9% of the outstanding balances of residential mortgage loans were in the interest-only phase, compared to 3.3% at December 31, 2015. Approximately 90.1% of the interest-only balances will begin amortizing within the next three years. Approximately 2.1% of interest-only loans are 30 days or more past due and still accruing and 1.5% are on nonaccrual status.
 
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 June 30, 2016, approximately 72.4% 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 the "Summary of Significant Accounting Policies" Note in the "Notes to Consolidated Financial Statements" in the Annual Report on Form 10-K for the year ended December 31, 2015 for additional policy information regarding TDRs.
 
Performing TDRs totaled $1.0 billion at June 30, 2016, an increase of $21 million compared to December 31, 2015. This increase was primarily the result of implementing a change in the strategy of repurchasing loans from GNMA pools that BB&T has the right but not the obligation to repurchase. The following table provides a summary of HFI performing TDR activity:
 
Table 7
Rollforward of Performing TDRs
 
 
 
 
 
Six Months Ended June 30,
 
 
2016
 
2015
 
 
(Dollars in millions)
Beginning balance
 
$
982

 
$
1,050

Inflows
 
243

 
240

Payments and payoffs
 
(98
)
 
(122
)
Charge-offs
 
(18
)
 
(21
)
Transfers to nonperforming TDRs, net
 
(35
)
 
(31
)
Removal due to the passage of time
 
(23
)
 
(9
)
Non-concessionary re-modifications
 

 
(1
)
Sold and transferred to LHFS
 
(48
)
 
(79
)
Ending balance
 
$
1,003

 
$
1,027



64


The following table provides further details regarding the payment status of TDRs outstanding at June 30, 2016:
Table 8
TDRs
 
 
 
 
 
June 30, 2016
 
 
 
 
 
 
Past Due
 
Past Due
 
 
 
 
Current Status
 
30-89 Days
 
90 Days Or More
 
Total
 
 
(Dollars in millions)
Performing TDRs (1):
 
 
 
 
 
 
 
 
 
 

 
 
 
 
Commercial and industrial
 
$
39

 
100.0
%
 
$

 
%
 
$

 
%
 
$
39

CRE—income producing properties
 
16

 
100.0

 

 

 

 

 
16

CRE—construction and development
 
10

 
100.0

 

 

 

 

 
10

Direct retail lending
 
67

 
97.1

 
2

 
2.9

 

 

 
69

Sales finance
 
15

 
93.8

 
1

 
6.2

 

 

 
16

Revolving credit
 
26

 
83.9

 
4

 
12.9

 
1

 
3.2

 
31

Residential mortgage—nonguaranteed
 
235

 
85.1

 
38

 
13.8

 
3

 
1.1

 
276

Residential mortgage—government guaranteed
 
185

 
53.2

 
61

 
17.5

 
102

 
29.3

 
348

Other lending subsidiaries
 
168

 
84.8

 
30

 
15.2

 

 

 
198

Total performing TDRs (1)
 
761

 
75.9

 
136

 
13.5

 
106

 
10.6

 
1,003

Nonperforming TDRs (2)
 
62

 
42.5

 
24

 
16.4

 
60

 
41.1

 
146

Total TDRs (1)(2)
 
$
823

 
71.6

 
$
160

 
13.9

 
$
166

 
14.5

 
$
1,149

___________
(1)
Past due performing TDRs are included in past due disclosures.
(2)
Nonperforming TDRs are included in NPL disclosures.

Allowance for Credit Losses
 
The ACL, which consists of the ALLL and the RUFC, totaled $1.6 billion at June 30, 2016, an increase of $53 million compared to December 31, 2015.

The allowance for loan and lease losses, excluding PCI, was $1.4 billion, up $43 million compared to December 31, 2015. The allowance for loans acquired from the FDIC and PCI loans was $65 million, up $4 million compared to December 31, 2015. As of June 30, 2016, the total allowance for loan and lease losses was 1.06% of loans and leases held for investment, compared to 1.07% at December 31, 2015. These amounts include acquired loans, which did not receive an ALLL at the acquisition date.

The allowance for loan and lease losses was 1.90 times NPLs held for investment, compared to 2.53 times at December 31, 2015. This change reflects the increase in commercial nonaccrual loans discussed above. The remaining NPLs identified in the shared national credits review were current as of June 30, 2016. At June 30, 2016, the allowance for loan and lease losses was 3.88 times annualized net charge-offs, compared to 2.83 times at December 31, 2015.

The energy portfolio totals approximately $1.5 billion and has allocated reserves of 9.3%. This portfolio does not include any offshore, second lien or mezzanine loans.

Net charge-offs during the second quarter of 2016 totaled $97 million, or 0.28% of average loans and leases, compared to $98 million, or 0.33% of average loans and leases for the second quarter of 2015. For the six months ended June 30, 2016, net charge-offs totaled $251 million, compared to $199 million for the comparable prior year period. The other lending subsidiaries portfolio represents $36 million of the increase, driven by higher loss frequency and lower collateral values in the nonprime auto lending business. The remaining increase is primarily due to the $30 million of charge-offs related to the energy lending portfolio that were recorded during the first quarter of 2016. As a percentage of average loans and leases, annualized net charge-offs were 0.37% for the six months ended June 30, 2016, compared to 0.33% for the comparable prior year period.

Charge-offs related to PCI loans represent realized losses in certain acquired loan pools that exceed the amounts originally estimated at the acquisition date. This impairment was provided for in prior quarters and therefore the charge-offs have no impact on the Consolidated Statements of Income.
 
Refer to the "Loans and ACL" Note in the "Notes to Consolidated Financial Statements" for additional disclosures.

65


 
The following table presents an allocation of the ALLL at June 30, 2016 and December 31, 2015. 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
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
 
 
Amount
 
% Loans
in each
category
 
Amount
 
% Loans
in each
category
 
 
(Dollars in millions)
Commercial and industrial
 
$
519

 
36.5
%
 
$
466

 
35.8
%
CRE-income producing properties
 
116

 
10.5

 
135

 
9.9

CRE-construction and development
 
28

 
2.6

 
37

 
2.7

Dealer floor plan
 
10

 
0.9

 
8

 
0.9

Direct retail lending
 
105

 
8.5

 
105

 
8.2

Sales finance
 
36

 
6.6

 
40

 
7.6

Revolving credit
 
98

 
1.8

 
104

 
1.8

Residential mortgage-nonguaranteed
 
194

 
21.0

 
194

 
21.8

Residential mortgage-government guaranteed
 
30

 
0.6

 
23

 
0.6

Other lending subsidiaries
 
306

 
10.2

 
287

 
9.9

PCI
 
65

 
0.8

 
61

 
0.8

Total ALLL
 
1,507

 
100.0
%
 
1,460

 
100.0
%
RUFC
 
96

 
 

 
90

 
 

Total ACL
 
$
1,603

 
 

 
$
1,550

 
 

 

66


Activity related to the ACL is presented in the following table:
Table 10
Analysis of ACL
 
 
 
 
 
Three Months Ended
 
 
6/30/2016
 
3/31/2016
 
12/31/2015
 
9/30/2015
 
6/30/2015
 
 
(Dollars in millions)
Beginning balance
 
$
1,580

 
$
1,550

 
$
1,551

 
$
1,535

 
$
1,532

Provision for credit losses (excluding PCI)
 
109

 
182

 
128

 
100

 
97

Provision (benefit) for PCI loans
 
2

 
2

 
1

 
3

 

Charge-offs:
 
 

 
 

 
 

 
 

 
 

Commercial and industrial
 
(26
)
 
(56
)
 
(19
)
 
(16
)
 
(32
)
CRE-income producing properties
 

 
(2
)
 
(3
)
 
(4
)
 
(4
)
CRE-construction and development
 

 

 
(1
)
 
(1
)
 

Direct retail lending
 
(12
)
 
(13
)
 
(14
)
 
(15
)
 
(13
)
Sales finance
 
(6
)
 
(8
)
 
(10
)
 
(5
)
 
(5
)
Revolving credit
 
(16
)
 
(19
)
 
(16
)
 
(17
)
 
(19
)
Residential mortgage-nonguaranteed
 
(8
)
 
(7
)
 
(14
)
 
(7
)
 
(8
)
Residential mortgage-government guaranteed
 
(1
)
 
(1
)
 
(2
)
 
(3
)
 
(1
)
Other lending subsidiaries
 
(73
)
 
(92
)
 
(85
)
 
(77
)
 
(57
)
Total charge-offs
 
(142
)
 
(198
)
 
(164
)
 
(145
)
 
(139
)
 
 
 
 
 
 
 
 
 
 
 
Recoveries:
 
 

 
 

 
 

 
 

 
 

Commercial and industrial
 
12

 
12

 
8

 
8

 
13

CRE-income producing properties
 
1

 
3

 
1

 
3

 
1

CRE-construction and development
 
5

 
1

 
2

 
3

 
2

Direct retail lending
 
6

 
7

 
6

 
8

 
7

Sales finance
 
3

 
3

 
2

 
2

 
2

Revolving credit
 
5

 
5

 
5

 
5

 
5

Residential mortgage-nonguaranteed
 
1

 
1

 
1

 
1

 
1

Other lending subsidiaries
 
12

 
12

 
9

 
8

 
10

Total recoveries
 
45

 
44

 
34

 
38

 
41

Net charge-offs
 
(97
)
 
(154
)
 
(130
)
 
(107
)
 
(98
)
Other
 
9

 

 

 
20

 
4

Ending balance
 
$
1,603

 
$
1,580

 
$
1,550

 
$
1,551

 
$
1,535

 
 
 
 
 
 
 
 
 
 
 
ALLL (excluding PCI)
 
$
1,442

 
$
1,425

 
$
1,399

 
$
1,398

 
$
1,400

ALLL for PCI loans
 
65

 
63

 
61

 
60

 
57

RUFC
 
96

 
92

 
90

 
93

 
78

Total ACL
 
$
1,603

 
$
1,580

 
$
1,550

 
$
1,551

 
$
1,535




67


 
 
Six Months Ended June 30,
 
 
2016
 
2015
 
 
(Dollars in millions)
Beginning balance
 
$
1,550

 
$
1,534

Provision for credit losses (excluding PCI)
 
291

 
202

Provision (benefit) for PCI loans
 
4

 
(6
)
Charge-offs:
 
 

 
 

Commercial and industrial
 
(82
)
 
(46
)
CRE-income producing properties
 
(2
)
 
(13
)
CRE-construction and development
 

 
(2
)
Direct retail lending
 
(25
)
 
(25
)
Sales finance
 
(14
)
 
(11
)
Revolving credit
 
(35
)
 
(37
)
Residential mortgage-nonguaranteed
 
(15
)
 
(19
)
Residential mortgage-government guaranteed
 
(2
)
 
(1
)
Other lending subsidiaries
 
(165
)
 
(124
)
PCI
 

 
(1
)
Total charge-offs
 
(340
)
 
(279
)
 
 
 
 
 
Recoveries:
 
 

 
 

Commercial and industrial
 
24

 
21

CRE-income producing properties
 
4

 
3

CRE-construction and development
 
6

 
6

Direct retail lending
 
13

 
15

Sales finance
 
6

 
5

Revolving credit
 
10

 
10

Residential mortgage-nonguaranteed
 
2

 
1

Other lending subsidiaries
 
24

 
19

Total recoveries
 
89

 
80

Net charge-offs
 
(251
)
 
(199
)
Other
 
9

 
4

Ending balance
 
$
1,603

 
$
1,535


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, 2015 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:
 
Table 11
Assets Acquired from the FDIC by Loss Share Agreement
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
 
 
Commercial
 
Single Family
 
Total
 
Commercial
 
Single Family
 
Total
 
 
(Dollars in millions)
Loans and leases
 
$
240

 
$
482

 
$
722

 
$
273

 
$
539

 
$
812

AFS securities
 
943

 

 
943

 
1,064

 

 
1,064

Other assets
 
23

 
22

 
45

 
32

 
27

 
59

Total assets acquired from the FDIC
 
$
1,206

 
$
504

 
$
1,710

 
$
1,369

 
$
566

 
$
1,935

 
 
 
 
 
 
 
 
 
 
 
 
 
UPB of loans and leases
 
$
377

 
$
654

 
$
1,031

 
$
462

 
$
725

 
$
1,187

 

68


As of October 1, 2014, the loss share 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. BB&T has commenced negotiations with the FDIC to terminate the loss sharing agreements. While a final termination agreement has not been reached, the impact of a settlement is not expected to be material to the financial condition of BB&T. Should a final agreement be reached, future financial results would no longer include amounts related to the FDIC loss sharing provisions. However, the accounting for the related loans and securities would not be affected by the termination of these agreements.
 
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 commercial loss sharing agreement, adjusted to reflect subsequent pay-downs, redemptions or maturities on the underlying securities. The contractually-specified value of these securities was approximately $449 million and $492 million at June 30, 2016 and December 31, 2015, 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)
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
Attributable to:
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
 
 
(Dollars in millions)
Loans
 
$
218

 
$
47

 
$
285

 
$
11

Securities
 
(520
)
 
(507
)
 
(536
)
 
(518
)
Aggregate loss calculation
 
(153
)
 
(159
)
 
(149
)
 
(158
)
Total
 
$
(455
)
 
$
(619
)
 
$
(400
)
 
$
(665
)
 
The decrease in the carrying amount of the FDIC loss share receivable 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. The change in the carrying amount attributable to the aggregate loss calculation is primarily due to accretion up to the expected payment. 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 the securities 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 $299 million as of June 30, 2016. 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 an additional pre-tax liability of $221 million as of June 30, 2016. 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.
 
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 June 30, 2016, BB&T projects that in 2019 it would owe the FDIC approximately $170 million under the aggregate loss calculation. This liability is expensed over time and BB&T has recognized total expense of approximately $153 million through June 30, 2016.
 
Deposits
 
Deposits totaled $159.2 billion at June 30, 2016, an increase of $10.1 billion from December 31, 2015. This change is primarily due to the acquisition of National Penn, which provided $6.6 billion in deposits as of the acquisition date.


69


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
 
 
6/30/2016
 
3/31/2016
 
12/31/2015
 
9/30/2015
 
6/30/2015
 
 
(Dollars in millions)
Noninterest-bearing deposits
 
$
48,801

 
$
46,203

 
$
45,824

 
$
44,153

 
$
41,502

Interest checking
 
28,376

 
25,604

 
24,157

 
22,593

 
20,950

Money market and savings
 
63,195

 
60,424

 
61,431

 
59,306

 
53,852

Time deposits
 
18,101

 
16,884

 
16,981

 
16,837

 
14,800

Foreign office deposits - interest-bearing
 
1,865

 
752

 
98

 
948

 
764

Total average deposits
 
$
160,338

 
$
149,867

 
$
148,491

 
$
143,837

 
$
131,868

 
Average deposits for the second quarter were $160.3 billion, an increase of $10.5 billion compared to the prior quarter. National Penn contributed $6.6 billion of average deposits. Excluding National Penn, average deposits were up 10.5% annualized. The following discussion describes growth of average deposits excluding National Penn for the second quarter of 2016 compared to the first quarter.

Average noninterest-bearing deposits increased 12.1% annualized due to increases in personal balances and commercial balances, partially offset by decreases in public funds.

Interest checking grew 15.8% annualized primarily due to increases in personal balances and commercial balances.

Money market and savings increased 2.2% annualized as increases in personal balances and commercial balances were partially offset by declines in public funds.

Average foreign office deposits were up $1.1 billion primarily due to elevated short-term funding needs as a result of the acquisitions of National Penn and Swett & Crawford.

Including acquisitions, noninterest-bearing deposits represented 30.4% of total average deposits for the second quarter, compared to 30.8% for the prior quarter and 31.5% a year ago. The cost of interest-bearing deposits was 0.23% for the second quarter, down two basis points compared to the prior quarter.

Borrowings
 
At June 30, 2016, short-term borrowings totaled $1.5 billion, a decrease of $2.1 billion compared to December 31, 2015. Short-term borrowings fluctuate based on the Company's funding needs. Long-term debt totaled $24.4 billion at June 30, 2016, an increase of $666 million from the balance at December 31, 2015, which reflects the issuance of $3.0 billion worth of senior notes, partially offset by normal repayment activity and maturities.
 
Shareholders' Equity
 
Total shareholders' equity at June 30, 2016 was $29.7 billion, compared to $27.3 billion at December 31, 2015. This increase was primarily driven by net income of $1.2 billion, net common stock issuances of $1.1 billion (primarily due to National Penn), a preferred stock issuance for net proceeds of $450 million and a $191 million net change in AOCI, partially offset by common and preferred dividends totaling $519 million. BB&T's book value per common share at June 30, 2016 was $32.72, compared to $31.66 at December 31, 2015.
 
Merger-Related and Restructuring Activities
 
In conjunction with the consummation of an acquisition and completion of other requirements, BB&T typically accrues certain merger-related expenses, which may include estimated severance and other personnel-related costs, costs to terminate lease contracts, costs related to the disposal of duplicate facilities and equipment, costs to terminate data processing contracts and other costs associated with the acquisition. Merger-related and restructuring accruals are re-evaluated periodically and adjusted as necessary. The remaining accruals at June 30, 2016 are expected to be utilized within one year, unless they relate to specific contracts that expire later. The following table presents a summary of BB&T's merger accrual activity.

70


Table 14
Merger-Related and Restructuring Accrual Rollforward
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2016
 
Beginning Balance
 
Expense
 
Utilized
 
Ending Balance
 
Beginning Balance
 
Expense
 
Utilized
 
Ending Balance
 
(Dollars in millions)
 
 
 
 
 
 
 
 
Personnel-related items
$
20

 
$
30

 
$
(8
)
 
$
42

 
$
26

 
$
34

 
$
(18
)
 
$
42

Occupancy and equipment
7

 
40

 
(26
)
 
21

 
11

 
42

 
(32
)
 
21

Professional services
16

 
2

 
(17
)
 
1

 
13

 
10

 
(22
)
 
1

Systems conversion and related charges
1

 
7

 
(8
)
 

 

 
12

 
(12
)
 

Other adjustments
1

 
13

 
(11
)
 
3

 
2

 
17

 
(16
)
 
3

Total
$
45

 
$
92

 
$
(70
)
 
$
67

 
$
52

 
$
115

 
$
(100
)
 
$
67

 
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, 2015. Significant accounting policies and changes in accounting principles and effects of new accounting pronouncements are discussed in detail in "Basis of Presentation" Note in the "Notes to Consolidated Financial Statements" in BB&T's Annual Report on Form 10-K for the year ended December 31, 2015. Effective January 1, 2016, BB&T adopted the fair value method for commercial MSRs. There have been no other changes to the significant accounting policies during 2016. Additional disclosures regarding the effects of new accounting pronouncements are included in the "Basis of Presentation" Note 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.
 

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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, 2015 for disclosures related to each of these risks under the section titled "Risk Management."
 
Market Risk Management
 
The effective management of market risk is essential to achieving BB&T's strategic financial objectives. As a financial institution, BB&T's most significant market risk exposure is interest rate risk in its balance sheet; however, market risk also includes product liquidity risk, price risk and volatility risk in BB&T's BUs. 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.
 
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 June 30, 2016, BB&T had derivative financial instruments outstanding with notional amounts totaling $79.1 billion, with a net fair value gain of $180 million. See the "Derivative Financial Instruments" Note 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.
 

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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.
 
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 15
Interest Sensitivity Simulation Analysis
 
 
 
 
 
 
 
 
Interest Rate Scenario
 
Annualized Hypothetical Percentage Change in Net Interest Income June 30,
Linear Change in Prime Rate
 
Prime Rate June 30,
 
 
2016
 
2015
 
2016
 
2015
Up 200
bps
 
5.50
%
 
5.25
%
 
3.18
 %
 
2.23
%
Up 100
 
 
4.50

 
4.25

 
2.42

 
1.60

No Change
 
 
3.50

 
3.25

 

 

Down 25
 
 
3.25

 
3.00

 
(1.42
)
 
0.18

 
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 25 basis point change in interest rates each month for 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 25 basis point change in interest rates each month for 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 2% or the proportional limit.

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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 also considers potential negative interest rate scenarios, which implies that a depositor would pay a premium for a financial institution to hold funds on deposit. In such a scenario, some depositors may choose to withdraw their deposits in lieu of paying an interest rate to BB&T to hold such deposits. As a result, management considers potential pricing and structure changes, such as the movement to a primarily fee-based deposit system. Negative rates would also diminish the spreads on loans and securities. As a result, management considers interest rate floors or rate index floors in loans to mitigate this risk. BB&T purchases both fixed and variable rate securities. The fixed rate securities would be beneficial in a negative interest rate environment.

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.
 
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%.
 
Table 16
Deposit Mix Sensitivity Analysis
 
 
 
 
 
Linear Change in Rates
 
Base Scenario at June 30, 2016 (1)
 
Results Assuming a Decrease in
Noninterest Bearing Demand Deposits
 
 
 
 
$1 Billion
 
$5 Billion
Up 200
bps
 
3.18
%
 
2.97
%
 
2.10
%
Up 100
 
 
2.42

 
2.29

 
1.75

___________
(1) The base scenario is equal to the annualized hypothetical percentage change in net interest income at June 30, 2016 as presented in the preceding table.

If rates increased 200 basis points, BB&T could absorb the loss of $14.6 billion, or 29.4%, of noninterest bearing deposits and replace them with managed rate deposits with a beta of 100% before becoming neutral to interest rate changes.
 

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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.
 
Table 17
EVE Simulation Analysis
 
 
 
 
 
 
 
 
 
EVE/Assets
 
Hypothetical Percentage
Change in EVE
Change in
 
June 30,
 
June 30,
Interest Rates
 
2016
 
2015
 
2016
 
2015
Up 200
bps
 
10.4
%
 
11.5
%
 
5.5
 %
 
(0.5
)%
Up 100
 
 
10.3

 
11.7

 
5.2

 
1.3

No Change
 
 
9.8

 
11.5

 

 

Down 25
 
 
9.5

 
11.4

 
(3.0
)
 
(1.2
)

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 BUs. 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 June 30, 2016 and 2015 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.

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, 2015 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 the "Commitments and Contingencies" Note and "Fair Value Disclosures" Note in the "Notes to Consolidated Financial Statements."
 
The following table presents activity in residential mortgage indemnification, recourse and repurchase reserves:

Table 18
Mortgage Indemnification, Recourse and Repurchase Reserves Activity
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in millions)
Balance, at beginning of period
$
83

 
$
88

 
$
79

 
$
94

Payments
(1
)
 
(2
)
 
(2
)
 
(4
)
Expense (benefit)
(2
)
 
(3
)
 
3

 
(7
)
Balance, at end of period
$
80

 
$
83

 
$
80

 
$
83


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.
 

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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 June 30, 2016 and December 31, 2015, BB&T's liquid asset buffer was 13.7% and 13.5%, respectively, of total assets.
 
BB&T is considered to be 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 produces LCR calculations to effectively manage the position of High-Quality Liquid Assets and the balance sheet deposit mix to optimize BB&T's liquidity position. BB&T's LCR was approximately 135% at June 30, 2016, compared to the regulatory minimum for such entities of 90%, which puts BB&T in full compliance with the rule. The regulatory minimum will increase to 100% on January 1, 2017.
 
On April 27, 2016, the OCC, the FRB and the FDIC released a notice of proposed rulemaking for the US version of the net stable funding ratio. Under the proposal, BB&T will be a "modified NSFR" holding company. BB&T would be subject to full NSFR requirements if it has $250 billion or more in assets or $10 billion or more in total on-balance sheet foreign exposure. BB&T is evaluating the information in the release but does not currently expect a material impact on its results of operations or financial condition. The proposed rule would become effective January 1, 2018.

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 June 30, 2016 and December 31, 2015, the Parent Company had 33 months and 36 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.
 

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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 June 30, 2016, Branch Bank has approximately $79.5 billion of secured borrowing capacity, which represents approximately 9.0 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.
Table 19
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
 
8.0

 
5.5

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 for the quarter ended June 30, 2016, 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.
 
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. On July 26, 2016, BB&T's Board of Directors approved an increase in the quarterly dividend from $0.02 to $0.30 and authorized cumulative share buybacks of up to $640 million beginning during the third quarter of 2016. These capital actions were consistent with BB&T's capital plan.


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Table 20
Capital Ratios (1)
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
 
 
(Dollars in millions, except per share data, shares in thousands)
Risk-based:
 
 
 
 
Common equity tier 1
 
10.0
%
 
10.3
%
Tier 1
 
11.7

 
11.8

Total
 
13.9

 
14.3

Leverage capital
 
9.6

 
9.8

 
 
 
 
 
Non-GAAP capital measures (2):
 
 

 
 
Tangible common equity as a percentage of tangible assets
 
7.6
%
 
7.7
%
Tangible common equity per common share
 
$
19.75

 
$
19.82

 
 
 
 
 
Calculations of tangible common equity and tangible assets (2):
 
 
 
 
Total shareholders' equity
 
$
29,743

 
$
27,340

Less:
 
 
 
 
Preferred stock
 
3,053

 
2,603

Noncontrolling interests
 
39

 
34

Intangible assets
 
10,567

 
9,234

Tangible common equity
 
$
16,084

 
$
15,469

 
 
 
 
 
Total assets
 
$
221,859

 
$
209,947

Less:
 
 
 
 
Intangible assets
 
10,567

 
9,234

Tangible assets
 
$
211,292

 
$
200,713

 
 
 
 
 
Risk-weighted assets
 
$
176,232

 
$
166,611

Common shares outstanding at end of period
 
814,500

 
780,337

___________
(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.

The Company's estimated common equity tier 1 ratio using the Basel III standardized approach on a fully phased-in basis was 9.8% at June 30, 2016 and 10.0% at December 31, 2015. Capital levels remained strong at June 30, 2016. BB&T declared total common dividends of $0.28 per share during the second quarter of 2016, which represents a $0.01 increase and resulted in a dividend payout ratio of 41.8%. Capital ratios decreased during the second quarter as the deployment of capital for acquisitions was greater than the impact of earnings in excess of dividends.

Table 21
Capital Requirements Under Basel III
 
 
 
 
 
 
 
 
 
 
 
Minimum
 
Well-
 
Minimum Capital Plus Capital Conservation Buffer
 
BB&T
 
 
Capital
 
Capitalized
 
2016
 
2017
 
2018
 
2019 (1)
 
Target
Common equity Tier 1 to risk-weighted assets
4.5
%
 
6.5
%
 
5.125
%
 
5.750
%
 
6.375
%
 
7.000
%
 
8.5
%
Tier 1 capital to risk-weighted assets
6.0

 
8.0

 
6.625

 
7.250

 
7.875

 
8.500

 
10.0

Total capital to risk-weighted assets
8.0

 
10.0

 
8.625

 
9.250

 
9.875

 
10.500

 
12.0

Leverage ratio
4.0

 
5.0

 
N/A
 
N/A
 
N/A
 
N/A
 
8.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) BB&T's goal is to maintain capital levels above the 2019 requirements.
 

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Share Repurchase Activity
 
During June of 2015, the Board of Directors authorized a new stock repurchase plan, the 2015 Repurchase Plan, to repurchase up to 50 million shares of the Company's common stock. Repurchases under the 2015 Repurchase Plan may be effected through open market purchases or privately negotiated transactions. The timing and exact amount of repurchases will be consistent with the Company's capital plan and subject to various factors, including the Company's capital position, liquidity, financial performance, alternative uses of capital, stock trading price and general market conditions, and may be suspended at any time. The 2015 Repurchase Plan does not have an expiration date. Shares that are repurchased pursuant to the 2015 Repurchase Plan will constitute authorized but unissued shares of the Company and will therefore be available for future issuances. No shares were repurchased in connection with the 2015 Repurchase Plan through June 30, 2016. The Board of Directors has authorized up to $640 million of share repurchases over a one-year period beginning with the third quarter of 2016.
Table 22
Share Repurchase Activity
 
 
 
 
 
 
 
Total Shares Repurchased (1)
 
Average Price Paid Per Share (2)
 
Total Shares Purchased Pursuant to Publicly-Announced Plan (3)
 
(Shares in thousands)
April 2016
19

 
$
34.09

 

May 2016
11

 
34.86

 

June 2016
24

 
34.65

 

Total
54

 
34.49

 

___________
(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.
(3)
The maximum remaining number of shares available for repurchase pursuant to publicly-announced plan was 50 million at June 30, 2016

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
 
There were no 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 quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
 

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PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
Refer to the "Commitments and Contingencies" and "Income Taxes" notes in the "Notes to Consolidated Financial Statements."
 
ITEM 1A. RISK FACTORS
 
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, 2015. 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.
 
ITEM 6. EXHIBITS
10.1
 
Modification of 2016-2018 Long-Term Incentive Performance Award - Summary.
12
 
Statement re: Computation of Ratios.
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
 
XBRL Instance Document.
101.SCH
 
XBRL Taxonomy Extension Schema.
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase.
101.LAB
 
XBRL Taxonomy Extension Label Linkbase.
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase.
101.DEF
 
XBRL Taxonomy Definition Linkbase.
 

80


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:
July 27, 2016
 
By:
/s/ Daryl N. Bible
 
 
 
 
Daryl N. Bible
Senior Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
 
Date:
July 27, 2016
 
By:
/s/ Cynthia B. Powell
 
 
 
 
Cynthia B. Powell
Executive Vice President and Corporate Controller
(Principal Accounting Officer)

 
 
 
 

81


EXHIBIT INDEX
 
 
 
 
 
Exhibit No.
 
Description
 
Location
 
 
 
 
 
10.1*
 
Modification of 2016-2018 Long-Term Incentive Performance Award - Summary.
 
Filed herewith.
 
 
 
 
 
12†
 
Statement re: Computation of Ratios.
 
Filed herewith.
 
 
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Filed herewith.
 
 
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Filed herewith.
 
 
 
 
 
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Furnished herewith.
 
 
 
 
 
101.INS
 
XBRL Instance Document.
 
Filed herewith.
 
 
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema.
 
Filed herewith.
 
 
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase.
 
Filed herewith.
 
 
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase.
 
Filed herewith.
 
 
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase.
 
Filed herewith.
 
 
 
 
 
101.DEF
 
XBRL Taxonomy Definition Linkbase.
 
Filed herewith.
 
 
 
 
 
 
 
 
 
 
* Management compensatory plan or arrangement.
† Exhibit filed with the Securities and Exchange Commission and available upon request.


82