10-K 1 bbvacompassform10-kx2016.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2016
or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                     to  
Commission File Number: 000-55106
BBVA Compass Bancshares, Inc.
(Exact name of registrant as specified in its charter)
Texas
 
20-8948381
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
2200 Post Oak Blvd. Houston, Texas
 
77056
(Address of principal executive offices)
 
(Zip Code)
 
(205) 297-3000
 
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
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 þ No o
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 shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
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 o
 
Accelerated filer o
 
Non-accelerated filer þ
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of February 21, 2017, the registrant had 222,950,751 outstanding shares of common stock, all of which was held by an affiliate of the registrant. Accordingly, there was no public market for the registrant's common stock as of June 30, 2016, the last business day of the registrant's most recently completed second fiscal quarter.
DOCUMENTS INCORPORATED BY REFERENCE
None.




Explanatory Note
The registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K. Accordingly, the registrant is filing this Annual Report on Form 10-K with certain reduced disclosures that correspond to the disclosure items the registrant is permitted to omit from an Annual Report on Form 10-K filing pursuant to General Instruction I(2) of Form 10-K.




TABLE OF CONTENTS

 
 
Page
 
 
 
 
 
 
 
 
 
 
 






Glossary of Acronyms and Terms

The following listing provides a comprehensive reference of common acronyms and terms used throughout the document:
AFS
Available For Sale
ARMs
Adjustable rate mortgages
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Basel III
Global regulatory framework developed by the Basel Committee on Banking Supervision
Basel Committee
Basel Committee on Banking Supervision
Bank
Compass Bank
BBVA
Banco Bilbao Vizcaya Argentaria, S.A.
BBVA Compass
Registered trade name of Compass Bank
BBVA Group
BBVA and its consolidated subsidiaries
BOLI
Bank Owned Life Insurance
BSI
BBVA Securities Inc.
Capital Securities
Debentures issued by the Parent
CAPM
Capital Asset Pricing Model
Cash Flow Hedge
A hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability
CCAR    
Comprehensive Capital Analysis and Review
CD    
Certificate of Deposit or time deposit
CET1
Common Equity Tier 1
CFPB    
Consumer Financial Protection Bureau
CET1 Risk-Based Capital Ratio
Ratio of CET1 to risk-weighted assets
Company
BBVA Compass Bancshares, Inc. and its subsidiaries
Covered Assets
Loans and other real estate owned acquired from the FDIC subject to loss sharing agreements
Covered Loans
Loans acquired from the FDIC subject to loss sharing agreements
CQR
Credit Quality Review
CRA
Community Reinvestment Act
CRD-IV
Capital Requirements Directive IV
DIF    
Depository Insurance Fund
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
ERM
Enterprise Risk Management
EVE
Economic Value of Equity
Exchange Act
Securities and Exchange Act of 1934, as amended
Fair Value Hedge
A hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment
FASB    
Financial Accounting Standards Board
FBO
Foreign banking organization
FDIC
Federal Deposit Insurance Corporation
FDICIA    
Federal Deposit Insurance Corporation Improvement Act
Federal Reserve Board
Board of Governors of the Federal Reserve System
FHLB    
Federal Home Loan Bank
FICO
Fair Isaac Corporation
FinCEN
United States Department of Treasury Financial Crimes Enforcement Network
FINRA    
Financial Industry Regulatory Authority
Fitch
Fitch Ratings

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FNMA    
Federal National Mortgage Association
FTP
Funds transfer pricing
G-SIB
Globally systemically important bank
Guaranty Bank
Collectively, certain assets and liabilities of Guaranty Bank, acquired by the Company in 2009
HTM
Held To Maturity
IHC
Top-tier U.S. intermediate holding company
Large FBOs
Foreign Banking Organizations with $50 billion or more in U.S. assets
LCR
Liquidity Coverage Ratio
Leverage Ratio
Ratio of Tier 1 capital to quarterly average on-balance sheet assets
LIBOR
London Interbank Offered Rate
LGD
Loss given default
LSA
Loss Sharing Agreement
LTV
Loan to Value
Moody's
Moody's Investor Services, Inc.
MRA
Master Repurchase Agreement
MSR
Mortgage Servicing Rights
NSFR
Net Stable Funding Ratio
NYSE
NYSE Euronext, Inc.
OCC
Office of the Comptroller of the Currency
OFAC    
United States Department of Treasury Office of Foreign Assets Control
OREO
Other Real Estate Owned
OTTI    
Other-Than-Temporary Impairment
Parent
BBVA Compass Bancshares, Inc.
Potential Problem Loans
Commercial loans rated substandard or below, which do not meet the definition of nonaccrual, TDR, or 90 days past due and still accruing.
Preferred Stock
Class B Preferred Stock
PD
Probability of default
Purchased Impaired Loans
Acquired loans with evidence of credit deterioration since origination for which it is probable all contractual payments will not be received that are accounted for under ASC Subtopic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.
Purchased Nonimpaired Loans
Acquired loans with a fair value that is lower than the contractual amounts due that are not required to be accounted for in accordance with ASC Subtopic 310-30
REIT
Real Estate Investment Trust
Repurchase Agreement
Securities sold under agreements to repurchase
Reverse Repurchase Agreement
Securities purchased under agreements to resell
SBA
Small Business Administration
SBIC
Small Business Investment Company
SEC
Securities and Exchange Commission
Securities Act
Securities Act of 1933, as amended
Series A Preferred Stock
Floating Non-Cumulative Perpetual Preferred Stock, Series A
Simple
Simple Finance Technology Corp
S&P
Standard and Poor's Rating Services
TBA
To be announced
TDR
Troubled Debt Restructuring
Tier 1 Risk-Based Capital Ratio
Ratio of Tier 1 capital to risk-weighted assets
Total Risk-Based Capital Ratio
Ratio of total capital (the sum of Tier 1 capital and Tier 2 capital) to risk-weighted assets
Trust Preferred Securities
Mandatorily redeemable preferred capital securities

5


U.S.
United States of America
U.S. Treasury
United States Department of the Treasury
U.S. Basel III final rule
Final rule to implement the Basel III capital framework in the United States
U.S. GAAP
Accounting principles generally accepted in the United States
USA PATRIOT Act
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001

6


Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements about the Company and its industry that involve substantial risks and uncertainties. Statements other than statements of current or historical fact, including statements regarding the Company's future financial condition, results of operations, business plans, liquidity, cash flows, projected costs, and the impact of any laws or regulations applicable to the Company, are forward-looking statements. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “projects,” “may,” “will,” “should,” and other similar expressions are intended to identify these forward-looking statements. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. Such factors include, but are not limited to, the following:
national, regional and local economic conditions may be less favorable than expected, resulting in, among other things, increased charge-offs of loans, higher provisions for credit losses and/or reduced demand for the Company's services;
disruptions to the credit and financial markets, either nationally or globally, including further downgrades of the U.S. government's credit rating and the failure of the European Union to stabilize the fiscal condition of member countries;
weakness in the real estate market, including the secondary residential mortgage market, which can affect, among other things, the value of collateral securing mortgage loans, mortgage loan originations and delinquencies, and profits on sales of mortgage loans;
legislative, regulatory or accounting changes, which may adversely affect our business and/or competitive position, impose additional costs on the Company or cause us to change our business practices;
the impact of consumer protection regulations, including the CFPB's residential mortgage and other retail lending regulations, which could adversely affect the Company's business, financial condition or results of operations;
the Federal Reserve Board could object to the Company's annual capital plan , which could cause the Company to change its strategy with respect to its capital plan;
volatile or declining oil prices, which could have a negative impact on the economies and real estate markets of states such as Texas, resulting in, among other things, higher delinquencies and increased charge-offs in the energy lending portfolio as well as other commercial and consumer loan portfolios indirectly impacted by declining oil prices;
the Bank's CRA rating, which could result in certain restrictions on the Company's activities;
disruptions in the Company's ability to access capital markets, which may adversely affect its capital resources and liquidity;
the Company's heavy reliance on communications and information systems to conduct its business and reliance on third parties and affiliates to provide key components of its business infrastructure, any disruptions of which could interrupt the Company's operations or increase the costs of doing business;
that the Company's financial reporting controls and procedures may not prevent or detect all errors or fraud;
the Company is subject to certain risks related to originating and selling mortgages. It may be required to repurchase mortgage loans or indemnify mortgage loan purchases as a result of breaches of representations and warranties, borrower fraud or certain breaches of its servicing agreements, and this could harm the Company's liquidity, results of operations and financial condition;
the Company's dependence on the accuracy and completeness of information about clients and counterparties;
the fiscal and monetary policies of the federal government and its agencies;
the failure to satisfy capital adequacy and liquidity guidelines applicable to the Company;
downgrades to the Company's credit ratings;
changes in interest rates which could affect interest rate spreads and net interest income;
costs and effects of litigation, regulatory investigations or similar matters;
a failure by the Company to effectively manage the risks the Company faces, including credit, operational and cyber security risks;
increased pressures from competitors (both banks and non-banks) and/or an inability by the Company to remain competitive in the financial services industry, particularly in the markets which the Company serves, and keep pace with technological changes;
unpredictable natural or other disasters, which could impact the Company's customers or operations;
a loss of customer deposits, which could increase the Company's funding costs;

7


the impact that can result from having loans concentrated by loan type, industry segment, borrower type or location of the borrower or collateral;
changes in the creditworthiness of customers;
increased loan losses or impairment of goodwill and other intangibles;
potential changes in interchange fees;
negative public opinion, which could damage the Company's reputation and adversely impact business and revenues;
the Company has in the past and may in the future pursue acquisitions, which could affect costs and from which the Company may not be able to realize anticipated benefits;
the Company depends on the expertise of key personnel, and if these individuals leave or change their roles without effective replacements, operations may suffer;
the Company may not be able to hire or retain additional qualified personnel and recruiting and compensation costs may increase as a result of turnover, both of which may increase costs and reduce profitability and may adversely impact the Company's ability to implement the Company's business strategies; and
changes in the Company's accounting policies or in accounting standards which could materially affect how the Company reports financial results and condition.
The forward-looking statements in this Annual Report on Form 10-K speak only as of the time they are made and do not necessarily reflect the Company’s outlook at any other point in time. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or for any other reason. However, readers should carefully review the risk factors set forth in other reports or documents the Company files periodically with the SEC.




8


Part I
Item 1.
Business
Overview
The Parent is a bank holding company that conducts its business operations primarily through its commercial banking subsidiary, Compass Bank, which is an Alabama banking corporation headquartered in Birmingham, Alabama. The Bank operates under the brand “BBVA Compass." The Parent was organized in 2007 as a Texas corporation.
The Parent is a wholly owned subsidiary of BBVA (NYSE: BBVA). BBVA is a global financial services group founded in 1857. It has a significant market position in Spain, owns the largest financial institution in Mexico, has franchises in South America, has a banking position in Turkey and operates an extensive global branch network. BBVA acquired the Company in 2007.
The Bank performs banking services customary for full service banks of similar size and character. Such services include receiving demand and time deposits, making personal and commercial loans and furnishing personal and commercial checking accounts. Compass Bank offers, either directly or through its subsidiaries or affiliates, a variety of services, including: portfolio management and administration and investment services to estates and trusts; term life insurance, variable annuities, property and casualty insurance and other insurance products; investment advisory services; a variety of investment services and products to institutional and individual investors; discount brokerage services, and investment company securities and fixed-rate annuities.
As part of its operations, the Company regularly evaluates acquisition and investment opportunities of a type permissible for a bank holding company, including FDIC-assisted transactions. The Company may also from time to time consider the potential disposition of certain of its assets, branches, subsidiaries, or lines of business.
On April 8, 2013, BBVA contributed all of the outstanding stock of its wholly owned subsidiary, BSI, to the Company.  BSI is a registered broker-dealer and engages in investment banking and institutional sales of fixed income securities.
On May 14, 2013, BBVA Compass Bancshares, Inc., the Company's former mid-tier holding company, was merged into the Parent, the Company's top-tier U.S. holding company. Subsequent to the merger, the Parent's name was changed to BBVA Compass Bancshares, Inc.
On June 6, 2016, the Parent completed the purchase of four subsidiaries (Bancomer Transfer Services, Bancomer Payment Services, Bancomer Foreign Exchange, and Bancomer Financial Services) from BBVA Bancomer USA, Inc. BBVA Bancomer USA, Inc. was a wholly owned subsidiary of BBVA Bancomer, S.A., Mexico City, Mexico and ultimately a wholly owned subsidiary of BBVA.  These four subsidiaries engage in money transfer services, including money transmission and foreign exchange services and are subsidiaries of BBVA Compass Payments, Inc., a wholly owned subsidiary of the Parent.
Banking Operations
At December 31, 2016, the Company, through the Bank, operated approximately 672 banking offices in Alabama, Arizona, California, Colorado, Florida, New Mexico, and Texas. The following chart reflects the distribution of branch locations in each of the states in which the Company conducts its banking operations:
Alabama
89
Arizona
75
California
62
Colorado
38
Florida
45
New Mexico
19
Texas
344
Total
672

9


The banking centers in Alabama are located throughout the state. In Arizona, the banking centers are concentrated in the Tucson and Phoenix metropolitan markets. The banking centers in California are concentrated in the Inland Empire and Central Valley regions. The Colorado banking centers are concentrated in the Denver metropolitan area and the New Mexico banking centers are concentrated in the Albuquerque metropolitan area. In Florida, the banking centers are concentrated in Jacksonville, Gainesville, and the Florida panhandle. The Texas banking centers are primarily located in the state’s four largest metropolitan areas of Houston, Dallas/Ft. Worth, San Antonio, and Austin, as well as cities in south Texas, such as McAllen and Laredo.
The Company also operates loan production offices in Atlanta, Georgia; Miami, Orlando, and Tampa, Florida; Chicago, Illinois; New York, New York; Baltimore, Maryland; Irvine, Los Angeles, Ontario, Roseville, San Diego, and Walnut Creek, California; Charlotte and Raleigh, North Carolina; and Cleveland, Ohio.
Economic Conditions
The Company's operations and customers are primarily concentrated in the Sunbelt Region of the United States, particularly in Alabama, Arizona, California, Colorado, Florida, New Mexico and Texas. In terms of geographic distribution, approximately 56% of the Company’s total deposits and 51% of its branches are located in Texas, while Alabama represents approximately 19% of the Company’s total deposits. While the Company's ability to conduct business and the demand for the Company's products is impacted by the overall health of the United States economy, local economic conditions in the Sunbelt Region, and specifically in the states in which the Company conducts business, also significantly affect demand for the Company's products, the ability of borrowers to repay loans and the value of collateral securing loans.
One key indicator of economic health is the unemployment rate. At the beginning of 2008, the unemployment rate in the United States was 5.0%, rising to a peak of 10.0% in October 2009 during the financial crisis. While there has been a slow, but steady improvement in the unemployment rate from its peak in 2009, the improvement began to accelerate in 2013 and these improvements have continued through 2016. Consequently, the unemployment rate improved from 5.0% for December 2015 to 4.7% in December 2016, a level last achieved in November 2007. This improvement was partially the result of continued strength in nonfarm payroll growth as well as a simultaneous decline in labor force participation. The following table provides a comparison of unemployment rates as of December 2016 and 2015 for the states in which the Company has a retail branch presence.
 
Unemployment Rate*
State
December 2016
 
December 2015
 
Change
Alabama
6.2%
 
6.3%
 
(0.1)
Arizona
4.8%
 
5.9%
 
(1.1)
California
5.2%
 
5.9%
 
(0.7)
Colorado
3.0%
 
3.5%
 
(0.5)
Florida
4.9%
 
5.1%
 
(0.2)
New Mexico
6.6%
 
6.6%
 
Texas
4.6%
 
4.6%
 
* Source: United States Department of Labor, Bureau of Labor Statistics as of December 2016

10


As noted above, a key driver of the improvement in the unemployment rate has been continued strength in nonfarm payroll growth. The following table provides a comparison of nonfarm payroll at December 2016 to December 2015.
 
Nonfarm Payroll*
 
December 2016
 
December 2015
 
Change
State
(In Thousands)
Alabama
1,976.2
 
1,957.5
 
18.7
Arizona
2,717.0
 
2,681.6
 
35.4
California
16,606.6
 
16,274.1
 
332.5
Colorado
2,627.4
 
2,578.6
 
48.8
Florida
8,462.9
 
8,211.5
 
251.4
New Mexico
830.5
 
828.0
 
2.5
Texas
12,141.3
 
11,931.1
 
210.2
* Source: United States Department of Labor, Bureau of Labor Statistics as of December 2016
Combined, the seven-state Sunbelt region in which the Company operates accounted for approximately 42% of the total increase in nonfarm payroll in the U.S. in 2016. The largest year-over-year increases nationally occurred in California, Florida and Texas, with California accounting for 15% of the total increase in total nonfarm payroll in 2016.
The lower oil prices which began in 2014 and continued into 2016 reflected an adjustment in market expectations of long-run demand, global production levels and growth in Europe and China without a subsequent adjustment in supply. In February 2016, average monthly oil prices fell to $30.32 per barrel, their lowest levels since October of 2003, an almost 70% decline from the December 2013 average monthly price per barrel of $97.63. The sharp price decline in oil led to cutbacks in planned capital expenditures and significant reductions in industry headcounts in the energy sector. The impact of the lower oil prices has been felt among energy producers, energy service providers and manufacturers of energy-related equipment and machinery. During the latter part of 2016, oil prices rebounded and stabilized closing out 2016 with a December monthly average of $51.97 per barrel, the highest level since July 2015.
Another economic indicator of health is the real estate market, and in particular changes in residential home prices. After 2008, the national real estate market has experienced a significant decline in value, and the value of real estate in certain Southeastern and Southwestern states in particular have declined significantly more than real estate values in the United States as a whole. Recent data suggests that as the economic recovery continues, the housing market throughout the United States is beginning to strengthen and home prices are beginning to recapture some of the value lost during the economic downturn. The following table presents changes in home prices since the end of 2007 and changes in home prices during 2016 for the states in which the Company operates. During 2016 home prices increased equal to or higher than the national average in all of the states in which the Company operates a retail branch network except Alabama and New Mexico. However, only in Colorado and Texas were home prices above 2007 levels.
 
Percentage Change in
Percentage change in
State
Home Prices since 2007*
Home Prices during 2016*
Alabama
-1.5%
3.5%
Arizona
-13.4%
4.6%
California
-0.1%
5.0%
Colorado
34.9%
8.2%
Florida
-11.5%
7.7%
New Mexico
-8.0%
3.0%
Texas
31.9%
6.2%
U.S. National Average
2.7%
4.6%
* Source: Home price data from FHFA House price index through the third quarter of 2016.

11


Segment Information
The Company is organized along lines of business. Each line of business is a strategic unit that serves a particular group of customers with certain common characteristics by offering various products and services. The lines of business results include certain overhead allocations and intercompany transactions. During the fourth quarter of 2016, the Company transferred certain customer relationships within its large middle market customer group from the Consumer and Commercial Bank segment to the Corporate and Investment Bank segment. At December 31, 2016, the Company’s operating segments consisted of Consumer and Commercial Banking, Corporate and Investment Banking, and Treasury.

The Consumer and Commercial Banking segment serves both the Company’s consumer customers through its full-service banking centers, private client offices throughout the U.S., and through the use of alternative delivery channels such as the internet, mobile devices and telephone banking. It also serves its commercial customers through its full array of banking and investment services to businesses in the Company’s markets. The Consumer and Commercial Banking segment provides individuals with comprehensive products and services including home mortgages, credit and debit cards, deposit accounts, insurance products, mutual funds and brokerage services. The segment also provides private banking and wealth management services to high net worth individuals, including specialized investment portfolio management, traditional credit products, traditional trust and estate services, investment advisory services, financial counseling and customized services to companies and their employees. In addition to traditional credit and deposit products, the Consumer and Commercial Banking segment also supports its commercial customers with capabilities in treasury management, accounts receivable purchasing, asset-based lending, international services, and insurance and interest rate protection and investment products. The Consumer and Commercial Banking segment is also responsible for the Company's small business customers and indirect automobile portfolio.
The Corporate and Investment Banking segment is responsible for providing a full array of banking and investment services to corporate and institutional clients. In addition to traditional credit and deposit products, the Corporate and Investment Banking segment also supports its customers with capabilities in treasury management, accounts receivable purchasing, asset-based lending, foreign-exchange and international services, and interest rate protection and investment products.
The Treasury segment’s primary function is to manage the liquidity and funding positions of the Company, the interest rate sensitivity of the Company's balance sheet, and to manage the investment securities portfolio.
For financial information regarding the Company’s segments, which are presented by line of business, as of and for the years ended December 31, 2016, 2015 and 2014, see Note 23, Segment Information, in the Notes to the Consolidated Financial Statements.
Competition
In most of the markets served by the Company, it encounters intense competition from national, regional and local financial service providers, including banks, thrifts, securities dealers, mortgage bankers and finance companies. Competition is based on a number of factors, including customer service and convenience, the quality and range of products and services offered, innovation, price, reputation and interest rates on loans and deposits. The Company’s ability to compete effectively also depends on its ability to attract, retain and motivate employees while managing employee-related costs.
Many of the Company’s nonfinancial institution competitors have fewer regulatory constraints, broader geographic service areas and, in some cases, lower cost structures. In addition, competition for quality customers has intensified as a result of changes in regulation, advances in technology and product delivery channels, consolidation among financial service providers, bank failures and the conversion of certain former investment banks to bank holding companies. For a discussion of risks related to the competition the Company faces, see Item 1A. - Risk Factors.

12


The table below shows the Company’s deposit market share ranking by state in which the Company operates based on deposits of FDIC-insured institutions as of June 30, 2016, the last date such information is available from the FDIC:
Table 1
Deposit Market Share Ranking
 
 
Deposit Market
State
 
Share Rank*
Alabama
 
2nd
Arizona
 
5th
California
 
29th
Colorado
 
11th
Florida
 
19th
New Mexico
 
11th
Texas
 
4th
*Source: SNL Financial
Employees
At December 31, 2016, the Company had approximately 10,336 full-time equivalent employees.
Supervision, Regulation and Other Factors
Like all bank holding companies, the Company is regulated extensively under federal and state law. In addition, certain of the Company's non-bank subsidiaries are subject to regulation under federal and state law. The following discussion sets forth some of the elements of the bank regulatory framework applicable to the Company and certain of its subsidiaries. The bank regulatory framework is intended primarily for the protection of depositors and the DIF and not for the protection of security holders and creditors. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions.
General
Bank holding companies are subject to supervision and regulation by the Federal Reserve Board under the Bank Holding Company Act. In addition, the Alabama Banking Department regulates holding companies, like the Company, that own Alabama-chartered banks, like the Bank, under the bank holding company laws of the State of Alabama. The Company is subject to primary regulation and examination by the Federal Reserve Board, through the Federal Reserve Bank of Atlanta, and by the Alabama Banking Department. Numerous other federal and state laws, as well as regulations promulgated by the Federal Reserve Board and the state banking regulator, govern almost all aspects of the operations of the Company and the Bank. The Company and the Bank are also subject to supervision and regulation by the CFPB. Various federal and state bodies regulate and supervise the Company's non-bank subsidiaries including its brokerage, investment advisory, insurance agency and processing operations. These include, but are not limited to, the SEC, FINRA, federal and state banking regulators and various state regulators of insurance and brokerage activities. BBVA Securities Inc., a subsidiary of the Company, is permitted to underwrite and deal in bank-ineligible securities subject to certain terms and conditions pursuant to an authorizing order issued by the Federal Reserve Board.
The legislative, regulatory and supervisory framework governing the financial services sector has undergone significant and rapid change since the financial crisis. Moreover, the intensity of supervisory and regulatory scrutiny has also increased. While most of the changes required by the Dodd-Frank Act that impact the Company have been implemented or are expected to follow a known trajectory, new changes under the Trump administration, including their nature and impact, cannot yet be determined with any degree of certainty.



13


Permitted Activities
Under the Bank Holding Company Act, a bank holding company is generally permitted to engage in, or acquire direct or indirect control of more than five percent of the voting shares of, any company engaged in the following activities:
banking or managing or controlling banks;
furnishing services to or performing services for its subsidiaries; and
engaging in activities that the Federal Reserve Board determines to be so closely related to banking as to be a proper incident to the business of banking, including:
factoring accounts receivable;
making, acquiring, brokering or servicing loans and usual related activities;
leasing personal or real property;
operating a non-bank depository institution, such as a savings association;
performing trust company functions;
providing financial and investment advisory activities;
conducting discount securities brokerage activities;
underwriting and dealing in government obligations and money market instruments;
providing specified management consulting and counseling activities;
performing selected data processing services and support services;
acting as agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions;
performing selected insurance underwriting activities;
providing certain community development activities (such as making investments in projects designed primarily to promote community welfare); and
issuing and selling money orders and similar consumer-type payment instruments.
The Federal Reserve Board has the authority to order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company's continued ownership, activity or control constitutes a serious risk to the financial safety, soundness or stability of it or any of its bank subsidiaries.
Actions by Federal and State Regulators
Under federal and state laws and regulations pertaining to the safety and soundness of insured depository institutions, state banking regulators, the Federal Reserve Board, and separately the FDIC as the insurer of bank deposits, have the authority to compel or restrict certain actions on the Company's part if they determine that it has insufficient capital or other resources, or is otherwise operating in a manner that may be deemed to be inconsistent with safe and sound banking practices. Under this authority, the Company's bank regulators can require it to enter into informal or formal supervisory agreements, including board resolutions, memoranda of understanding, written agreements and consents or cease and desist orders, pursuant to which the Company would be required to take identified corrective actions to address cited concerns and to refrain from taking certain actions.

14


Standards for Safety and Soundness
The Federal Deposit Insurance Act requires the federal bank regulatory agencies to prescribe, by regulation or guideline, operational and managerial standards for all insured depository institutions relating to: internal controls; information systems and audit systems; loan documentation; credit underwriting; interest rate risk exposure; and asset quality. The agencies also must prescribe standards for asset quality, earnings, and stock valuation, as well as standards for compensation, fees and benefits. The federal banking regulators have adopted regulations and interagency guidelines prescribing standards for safety and soundness to implement these required standards. These guidelines set forth the safety and soundness standards used to identify and address problems at insured depository institutions before capital becomes impaired. Under the regulations, if a regulator determines that a bank fails to meet any standards prescribed by the guidelines, the regulator may require the bank to submit an acceptable plan to achieve compliance, consistent with deadlines for the submission and review of such safety and soundness compliance plans.
Dividends
The Federal Reserve Board has issued policy statements that provide that insured banks and bank holding companies should generally only pay dividends out of current operating earnings.
The primary sources of funds for the Company's interest and principal payments on its debt are cash on hand and dividends from its bank and non-bank subsidiaries. Various federal and state statutory provisions and regulations limit the amount of dividends that the Bank and its non-banking subsidiaries may pay. Under Alabama law, the Bank may not pay a dividend in excess of 90 percent of its net earnings until its surplus is equal to at least 20 percent of capital. The Bank is also required by Alabama law to seek the approval of the Alabama Superintendent of Banking prior to the payment of dividends if the total of all dividends declared by the Bank in any calendar year will exceed the total of (a) the Bank's net earnings for that year, plus (b) its retained net earnings for the preceding two years, less any required transfers to surplus. The statute defines net earnings as the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets, after deducting from the total thereof all current operating expenses, actual losses, accrued dividends on preferred stock, if any, and all federal, state and local taxes. The Bank cannot, without approval from the Federal Reserve Board and the Alabama Superintendent of Banking, declare or pay a dividend to the Company unless the Bank is able to satisfy the criteria discussed above.
The Federal Deposit Insurance Corporation Improvement Act generally prohibits a depository institution from making any capital distribution, including payment of a dividend, or paying any management fee to its holding company if the institution would thereafter be undercapitalized. In addition, federal banking regulations applicable to the Company and its bank subsidiary require minimum levels of capital that limit the amounts available for payment of dividends. In addition, many regulators have a policy, but not a requirement, that a dividend payment should not exceed net income to date in the current year. The ability of banks and bank holding companies to pay dividends and make other forms of capital distribution also depends on their ability to maintain a sufficient capital conservation buffer under the U.S. Basel III capital framework. The Parent's ability to pay dividends is also subject to the Federal Reserve Board's review of the Parent's annual capital plan and supervisory stress tests of the Company conducted by the Federal Reserve Board as a part of its annual CCAR process, as discussed below under "Large bank holding companies are required to submit annual capital plans to the Federal Reserve Board and are subject to stress testing requirements."
Enhanced Prudential Standards
In the past few years, the Federal Reserve Board has imposed greater risk-based and leverage capital requirements, liquidity requirements, single counterparty credit limits, capital planning and stress testing requirements, risk management requirements and other enhanced prudential standards for bank holding companies with $50 billion or more in total consolidated assets, including the Company. The capital, liquidity and capital planning and stress testing requirements of these enhanced prudential standards are discussed under the relevant topic areas below. The Federal Reserve Board has proposed but not yet finalized the single-counterparty credit limits requirements and an early remediation framework for large bank holding companies.
Under the enhanced prudential standard applicable to Large FBOs, BBVA designated the Parent as its IHC. BBVA’s combined U.S. operations (including its U.S. branches, agencies and subsidiaries) are also subject to liquidity, risk management, stress testing, asset maintenance and other enhanced prudential standards.

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Capital
The Federal Reserve Board has adopted guidelines pursuant to which it assesses the adequacy of capital in examining and supervising a bank holding company and in reviewing applications submitted to it under the Bank Holding Company Act. These guidelines include quantitative measures that assign risk weights to a bank holding company's assets, exposures and off-balance sheet items to determine its risk-weighted assets and that define and set minimum risk-based capital and leverage requirements. Under the capital framework currently in effect, bank holding companies are required to maintain a CET1 Risk-Based Capital Ratio of at least 4.5 percent, a Tier 1 Risk-Based Capital Ratio of at least 6 percent, a Total Risk-Based Capital Ratio of at least 8 percent and a Leverage Ratio of at least 4 percent.
CET1 capital consists principally of common stock and related surplus, plus retained earnings, less any amounts of goodwill, other intangible assets, and other items required to be deducted. Tier 1 capital consists principally of CET1 capital plus certain eligible forms of preferred stock and trust preferred securities and minority interests which are includible subject to phase-out transition provisions. Tier 2 capital primarily includes qualifying subordinated debt instruments, permitted trust preferred securities phased-out of Tier 1 capital, and allowance for loan losses. Total capital is Tier 1 capital plus Tier 2 capital. The denominator of the risk-based capital ratios is risk-weighted assets, a measure of assets and other exposures weighted to take into account different risk characteristics. For purpose of the Leverage Ratio, the denominator is quarterly average assets excluding goodwill, other intangible assets and certain other items deducted from capital.
Capital Requirements Applicable to the Company
The Company and the Bank are subject to the U.S. Basel III capital rule, which implements in the United States of a set of internationally agreed-upon bank capital standards known as Basel III, which are published by the Basel Committee, a committee of central bank and regulatory officials from 27 countries. The Basel III standards were developed after the 2008 financial crisis to further strengthen financial institutions' capital positions by requiring banking organizations to maintain higher minimum levels of capital and by implementing capital buffers above these minimum levels to help withstand future periods of stress.
Certain aspects of the U.S. Basel III capital rule, such as the minimum capital ratios and the methodology for calculating risk-weighted assets, became effective on January 1, 2015 for the Bank and the Company. Other aspects of the rule, such as the capital conservation buffer and the certain regulatory deductions from and adjustments to capital, are being phased in over several years. The phase in period for the capital conservation buffer began on January 1, 2016, with an initial phase-in amount of greater than 0.625%, rising to greater than 2.5% beginning on January 1, 2019. The required capital conservation buffer is greater than 1.25% in 2017.
Compared to previously effective capital rules, the U.S. Basel III capital rule focuses regulatory capital on CET1 capital, narrows the eligibility criteria for regulatory capital instruments, revises the methodology for calculating risk-weighted assets for certain types of assets and exposures and introduces regulatory adjustments and deductions from capital. The U.S. Basel III capital rule requires certain U.S. banking organizations, including the Bank and the Company, to maintain a minimum ratio of CET1 capital to risk-weighted assets of 4.5 percent and, when fully phased in, a CET1 capital conservation buffer of greater than 2.5 percent of risk-weighted assets. Failure to maintain the capital conservation buffer will result in increasingly stringent restrictions on a banking organization's ability to make dividend payments and other capital distributions and pay discretionary bonuses to executive officers. The U.S. Basel III capital rule also requires a minimum Tier 1 Risk-Based Capital Ratio of 6 percent and a minimum Total Risk-Based Capital Ratio of 8 percent.
The eligibility criteria for regulatory capital instruments under the U.S. Basel III capital rule required, among other things, that trust preferred securities be phased out of the Company’s Tier 1 capital by January 1, 2016.
Under the U.S. Basel III capital rule, to be well-capitalized, the Bank must maintain a Total Risk-Based Capital Ratio of 10 percent or greater, a Tier 1 Risk-Based Capital Ratio of 8 percent or greater, a CET1 Risk-Based Capital Ratio of 6.5 percent or greater, and a Tier 1 Leverage Ratio of 5 percent or greater. For a bank holding company such as the Company to be well capitalized, it generally must maintain a Total Risk-Based Capital Ratio of 10 percent or greater and a Tier 1 Risk Based Capital Ratio of 6 percent or greater.

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Capital Ratios as of December 31, 2016
The table below shows certain regulatory capital ratios for the Company and the Bank as of December 31, 2016 using the Transitional Basel III regulatory capital methodology applicable to the Company during 2016.
Table 2
Capital Ratios
 
Regulatory Minimum for Company and Bank (1)
 
Well-Capitalized Minimum for the Bank
 
The Company
 
The Bank
CET 1 Risk-Based Capital Ratio
4.5
%
 
6.5
%
 
11.49
%
 
10.93
%
Tier 1 Risk-Based Capital Ratio
6.0
%
 
8.0
%
 
11.85
%
 
10.95
%
Total Risk-Based Capital Ratio
8.0
%
 
10.0
%
 
14.31
%
 
13.56
%
Leverage Ratio
4.0
%
 
5.0
%
 
9.46
%
 
9.14
%
(1) Regulatory minimum requirements do not include the capital conservation buffer, which must be maintained in addition to meeting regulatory minimum requirements in order to avoid automatic restrictions on capital distributions and certain discretionary bonus payments.
See Note 17, Regulatory Capital Requirements and Dividends from Subsidiaries, in the Notes to the Consolidated Financial Statements, for additional information on the calculation of capital ratios for the Company and the Bank.
Prompt Corrective Action for Undercapitalization
The FDICIA established a system of prompt corrective action to resolve the problems of undercapitalized insured depository institutions. Under this system, the federal banking regulators are required to rate insured depository institutions on the basis of five capital categories as described below. The federal banking regulators are also required to take mandatory supervisory actions and are authorized to take other discretionary actions, with respect to insured depository institutions in the three undercapitalized categories, the severity of which will depend upon the capital category to which the insured depository institution is assigned. Generally, subject to a narrow exception, the FDICIA requires the banking regulator to appoint a receiver or conservator for an insured depository institution that is critically undercapitalized. The federal banking regulators have specified by regulation the relevant capital level for each category. Under the prompt corrective action regulations that are currently in effect under the U.S. Basel III framework, all insured depository institutions are assigned to one of the following capital categories:
Well-capitalized - The insured depository institution exceeds the required minimum level for each relevant capital measure. A well-capitalized insured depository institution is one (1) having a Total Risk-Based Capital Ratio of 10 percent or greater, (2) having a Tier 1 Risk-Based Capital Ratio of 8 percent or greater, (3) having a CET1 Risk-Based Capital Ratio of 6.5 percent or greater (4) having a Leverage Ratio of 5 percent or greater, and (5) that is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.
Adequately Capitalized - The insured depository institution meets the required minimum level for each relevant capital measure. An adequately capitalized insured depository institution is one (1) having a Total Risk-Based Capital Ratio of 8 percent or greater, (2) having a Tier 1 Risk-Based Capital Ratio of 6 percent or greater, and (3) having a CET1 Risk-Based Capital Ratio of 4.5 percent or greater (4) having a Leverage Ratio of 4 percent or greater, and (5) failing to meet the definition of a well-capitalized bank.
Undercapitalized - The insured depository institution fails to meet the required minimum level for any relevant capital measure. An undercapitalized insured depository institution is one (1) having a Total Risk-Based Capital Ratio of less than 8 percent, (2) having a Tier 1 Risk-Based Capital Ratio of less than 6 percent, (3) having a CET1 Risk-Based Capital Ratio of less than 4.5 percent, or (4) a Leverage Ratio of less than 4 percent.
Significantly Undercapitalized - The insured depository institution is significantly below the required minimum level for any relevant capital measure. A significantly undercapitalized insured depository

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institution is one (1) having a Total Risk-Based Capital Ratio of less than 6 percent, (2) having a Tier 1 Risk-Based Capital Ratio of less than 4 percent, (3) a CET 1 Risk Based-Capital Ratio of less than 3 percent, or (4) a Leverage Ratio of less than 3 percent.
Critically Undercapitalized - The insured depository institution fails to meet a critical capital level set by the appropriate federal banking agency. A critically undercapitalized institution is one having a ratio of tangible equity to total assets that is equal to or less than 2 percent.
The regulations permit the appropriate federal banking regulator to downgrade an institution to the next lower category if the regulator determines after notice and opportunity for hearing or response that the institution (1) is in an unsafe or unsound condition or (2) has received and not corrected a less-than-satisfactory rating for any of the categories of asset quality, management, earnings or liquidity in its most recent examination. Supervisory actions by the appropriate federal banking regulator depend upon an institution's classification within the five categories. The Company's management believes that the Company and the Bank have the requisite capital levels to qualify as well-capitalized institutions under the FDICIA. See Note 17, Regulatory Capital Requirements and Dividends from Subsidiaries, in the Notes to the Consolidated Financial Statements.
If an institution fails to remain well-capitalized, it will be subject to a variety of enforcement remedies that increase as the capital condition worsens. For instance, the FDICIA generally prohibits a depository institution from making any capital distribution, including payment of a dividend, or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized as a result. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions may not accept brokered deposits absent a waiver from the FDIC, are subject to growth limitations and are required to submit capital restoration plans for regulatory approval. A depository institution's holding company must guarantee any required capital restoration plan, up to an amount equal to the lesser of 5 percent of the depository institution's assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. Federal banking regulators may not accept a capital restoration plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.
Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator.
Total Loss-Absorbing Capital and Long-Term Debt Requirements
The Federal Reserve Board's final rule on the total loss-absorbing capacity of U.S. G-SIBs and the U.S. intermediate holding companies of non-U.S. G-SIBs does not apply since neither the Parent nor BBVA are G-SIBs and are therefore not subject to the rule.
Annual Capital Plans and Stress Testing
Under enhanced prudential standards applicable to bank holding companies with $50 billion or more of total consolidated assets, the Company is required to submit annual capital plans to the Federal Reserve Board and to generally obtain approval from the Federal Reserve Board before making a dividend payment or other capital distribution. In 2014, the Company began participating in the Federal Reserve Board’s annual CCAR program, pursuant to which it reviewed qualitative and quantitative aspects of the Company’s internal capital planning process. In January 2017, the Federal Reserve Board issued a final rule exempting large and noncomplex firms, including the Company, from the qualitative component of CCAR. Under CCAR, the Company's capital plan must include an assessment of the expected uses and sources of capital over a forward-looking planning horizon of at least nine quarters, a detailed description of the Company's process for assessing capital adequacy, the Company's capital policy, and a discussion of any expected changes to the Company's business plan that are likely to have a material impact on its capital adequacy or liquidity. Based on a quantitative assessment, including a supervisory stress test conducted as part of the CCAR process, the Federal Reserve Board will either object to the Company's capital plan, in whole or in part, or provide a notice of non-

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objection to the Company. If the Federal Reserve Board objects to a capital plan, the Company may not make any capital distribution other than those with respect to which the Federal Reserve Board has indicated its non-objection.
In addition to capital planning requirements the Company and the Bank are subject to stress testing requirements under the Federal Reserve Board’s enhanced prudential standards rule and the Dodd-Frank Act. The Company must conduct semi-annual company-run stress tests and is subject to an annual supervisory stress test conducted by the Federal Reserve Board.
For the capital plan and stress test cycle beginning January 1, 2016, the Company submitted its capital plan to the Federal Reserve Board by April 5, 2016 and the Federal Reserve Board published summary results by June 30, 2016. The Federal Reserve Board did not object to the Company’s 2016 capital plan on either qualitative or quantitative grounds. For the capital plan and stress test cycle beginning January 1, 2017, the Company is required to submit its capital plan to the Federal Reserve Board by April 5, 2017 and the Federal Reserve Board is required to publish summary results by June 30, 2017. Although management believes that the capital plan that the Company plans to submit is reasonable and fiscally sound, the Company can make no assurances that the Federal Reserve Board will not object to the Company’s capital plan.
Deposit Insurance and Assessments
Deposits at the Bank are insured by the DIF as administered by the FDIC, up to the applicable limits established by law. The DIF is funded through assessments on banks, such as the Bank. Changes in the methodology used to calculate these assessments, resulting from the Dodd-Frank Act increased the assessments that the Bank is required to pay to the FDIC. In addition, in March 2016, the FDIC issued a final rule imposing a surcharge on the assessments of insured depository institutions with total consolidated assets of $10 billion or more, such as the Bank, to raise the DIF's reserve ratio. These surcharges will cease on December 31, 2018. The FDIC also collects Financing Corporation deposit assessments, which are calculated off of the assessment base established by the Dodd-Frank Act. The Bank pays the DIF assessment, less offset available by means of prepaid assessment credits, as well as the Financing Corporation assessments.
With respect to brokered deposits, an insured depository institution must be well-capitalized in order to accept, renew or roll over such deposits without FDIC clearance. An adequately capitalized insured depository institution must obtain a waiver from the FDIC in order to accept, renew or roll over brokered deposits. Undercapitalized insured depository institutions generally may not accept, renew or roll over brokered deposits. See the Deposits section in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K.
Volcker Rule
The Volcker Rule prohibits an insured depository institution, such as the Bank, and its affiliates from (1) engaging in “proprietary trading” and (2) investing in or sponsoring certain types of funds (covered funds) subject to certain limited exceptions. The final rules contain exemptions for market-making, hedging, underwriting, trading in U.S. government and agency obligations and also permit certain ownership interests in certain types of funds to be retained.  They also permit the offering and sponsoring of funds under certain conditions.  The final Volcker Rule regulations impose significant compliance and reporting obligations on banking entities. The Company is subject to the enhanced compliance program under the Volcker Rule but does not expect to be required to report metrics to the regulators. The Company is of the view that the impact of the Volcker Rule is not material to its business operations.
Durbin Amendment's Rules Affecting Debit Card Interchange Fees
Under the Durbin Amendment the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction is the sum of 21 cents per transaction, a 1 cent fraud prevention adjustment, and 5 basis points multiplied by the value of the transaction.

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Consumer Protection Regulations
Retail activities of banks are subject to a variety of statutes and regulations designed to protect consumers. Interest and other charges collected or contracted for by banks are subject to state usury laws and federal laws concerning interest rates. Loan operations are also subject to federal laws applicable to credit transactions, such as:
the federal Truth-In-Lending Act and Regulation Z issued by the CFPB, governing disclosures of credit terms to consumer borrowers;
the Home Mortgage Disclosure Act and Regulation C issued by the CFPB, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
the Equal Credit Opportunity Act and Regulation B issued by the CFPB, prohibiting discrimination on the basis of various prohibited factors in extending credit;
the Fair Credit Reporting Act and Regulation V issued by the CFPB, governing the use and provision of information to consumer reporting agencies;
the Fair Debt Collection Practices Act and Regulation F issued by the CFPB, governing the manner in which consumer debts may be collected by collection agencies;
the Service Members Civil Relief Act, applying to all debts incurred prior to commencement of active military service (including credit card and other open-end debt) and limiting the amount of interest, including service and renewal charges and any other fees or charges (other than bona fide insurance) that is related to the obligation or liability; and
the guidance of the various federal agencies charged with the responsibility of implementing such federal laws.
Deposit operations also are subject to, among others:
the Truth in Savings Act and Regulation DD issued by the CFPB, which require disclosure of deposit terms to consumers;
Regulation CC issued by the Federal Reserve Board, which relates to the availability of deposit funds to consumers;
the Right to Financial Privacy Act, which imposes a duty to maintain the confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; and
the Electronic Fund Transfer Act and Regulation E issued by the CFPB, which governs automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services.
In addition, there are consumer protection standards that apply to functional areas of operation (rather than applying only to loan or deposit products). The Company and the Bank are also subject to certain state laws and regulations designed to protect consumers.
The CFPB has promulgated many mortgage-related rules since it was established under the Dodd-Frank Act including rules related to the ability to repay and qualified mortgage standards, mortgage servicing standards, loan originator compensation standards, high-cost mortgage requirements, Home Mortgage Disclosure Act requirements and appraisal and escrow standards for higher priced mortgages.
Changes to consumer protection regulations, including those promulgated by the CFPB could affect the Company's business but the likelihood, timing and scope of any such changes and the impact any such change may have on the

20


Company cannot be determined with any certainty. See Item 1A. Risk Factors. The Company is also subject to legislation and regulation and future legislation or regulation or changes to existing legislation or regulation could affect its business.
Annual Resolution Plans for the Company and the Bank
Each of the Company and the Bank are required to prepare and submit resolution plans, also referred to as living wills. The Bank, must submit to the FDIC a plan whereby the institution can be resolved by the FDIC, in the event of failure, in a manner that ensures depositors will receive access to insured funds within the required timeframes and generally ensures an orderly liquidation of the institution. The Company is required to submit to the Federal Reserve Board and the FDIC a plan that, in the event of material financial distress or failure, provides for the rapid and orderly liquidation of the company under the bankruptcy code and in a way that would not pose systemic risk to the financial system of the United States. If the Federal Reserve Board and the FDIC determine that a company’s plan is not credible and the company fails to cure the deficiencies in a timely manner, then the Federal Reserve Board and the FDIC may jointly impose on the company, or on any of its subsidiaries, more stringent capital, leverage or liquidity requirements or restrictions on growth, activities, or operations.
U.S. Liquidity Standards
The Federal Reserve Board evaluates the Company’s liquidity as part of the supervisory process. In addition, the Basel Committee has developed a set of internationally-agreed upon quantitative liquidity metrics: the LCR and the NSFR. The LCR was developed to ensure that covered banking organizations have sufficient high-quality liquid assets to cover expected net cash outflows over a 30-day liquidity stress period. This standard’s objective is to promote the short-term resilience of the liquidity risk profile of banking organizations. The objective of the NSFR is to reduce funding risk over a one-year horizon by requiring banking organizations to fund their activities with sufficiently stable sources of funding in order to mitigate the risk of future funding stress.
The federal banking regulators implemented the LCR in the United States in 2014. A more stringent version of the LCR applies to financial institutions with $250 billion or more in total assets. A more moderate version of the LCR applies to financial institutions with $50 billion but less than $250 billion of total assets, such as the Company. This version differs in certain respects from the Basel Committee’s version of the LCR, including a narrower definition of high-quality liquid assets, different prescribed cash inflow and outflow assumptions for certain types of instruments and transactions and a shorter phase-in schedule which ended on January 1, 2017. In December 2016, the Federal Reserve Board issued a final rule requiring that banking organizations holding more than $50 billion in assets, such as the Company, make certain public disclosures related to the LCR. Required disclosures include quarterly disclosure of the consolidated LCR, based on averages over the prior quarter, as well as consolidated HQLA amounts broken down by each HQLA category. In April 2016, the federal banking regulators proposed rules to implement the NSFR in the United States, including a more moderate version of the NSFR that would apply to institutions with $50 billion or more but less than $250 billion of total assets, such as the Company. In addition, the Federal Reserve Board has adopted liquidity risk management, stress testing and liquidity buffer requirements as part of the enhanced prudential standards applicable to the U.S. operations of Large FBOs such as BBVA. The Company and the Bank are part of BBVA’s U.S. operations.
Anti-Money Laundering; USA PATRIOT Act; Office of Foreign Assets Control
A major focus of U.S. governmental policy relating to financial institutions in recent years has been fighting money laundering and terrorist financing. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing could have serious legal and reputational consequences for that financial institution.
Under laws applicable to the Company, including the Bank Secrecy Act, as amended by the USA PATRIOT Act, and implementing regulations, U.S. financial institutions must maintain anti-money laundering programs that include established internal policies, procedures, and controls; a designated compliance officer; an ongoing employee training program; and testing of the program by an independent audit function. Bank regulators routinely examine institutions for compliance with these obligations and are required to consider compliance in connection with the regulatory review of applications.
The Company is prohibited from entering into specified financial transactions and account relationships. The Company also must take reasonable steps to conduct enhanced scrutiny of account relationships, as appropriate, to

21


guard against money laundering and to report any suspicious transactions. Pursuant to the USA PATRIOT Act, law enforcement authorities have been granted increased access to financial information maintained by banks, and anti-money laundering obligations have been substantially strengthened.
The USA PATRIOT Act amended, in part, the Bank Secrecy Act and provides for, among other things, the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering. The statute also provides for: (1) regulations that set minimum requirements for verifying customer identification at account opening; (2) rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; and (3) enhanced due diligence requirements for financial institutions that administer, maintain or manage private bank accounts or correspondent accounts for non-U.S. persons.
Federal, state, and local law enforcement may, through FinCEN, request that the Bank search its records for any relationships or transactions with persons reasonably suspected to be involved in terrorist activity or money laundering. Upon receiving such a request, the Bank must search its records and timely report to FinCEN any identified relationships or transactions.
Furthermore, OFAC is responsible for helping to ensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and acts of Congress. OFAC publishes, and routinely updates, lists of names, such as the Specially Designated Nationals and Blocked Persons List, of individuals and entities with whom U.S. persons, as defined by OFAC, are generally prohibited from conducting transactions or dealings. Persons on these lists include persons suspected of aiding, financing, or engaging in terrorist acts, narcotics trafficking, or the proliferation of weapons of mass destruction, among other targeted activities. OFAC also administers sanctions programs against certain countries or territories. If the Bank finds a name on any transaction, account or wire transfer instruction that is on an OFAC list or determines that processing a transaction or maintaining or servicing an account would violate a sanctions program administered by OFAC, it must, depending on the regulation, freeze such account, reject such transaction, file a suspicious activity report and/or notify the appropriate authorities.
Commitments to the Bank
Under the Dodd-Frank Act, both BBVA and the Parent are required to serve as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances when BBVA and the Parent might not do so absent the statutory requirement. Under the Bank Holding Company Act, the Federal Reserve Board may require a bank holding company to terminate any activity or relinquish control of a non-bank subsidiary, other than a non-bank subsidiary of a bank, upon the Federal Reserve Board's determination that such activity or control constitutes a serious risk to the financial soundness or stability of any depository institution subsidiary. Further, the Federal Reserve Board has discretion to require a bank holding company to divest itself of any bank or non-bank subsidiaries if the agency determines that any such divestiture may aid the depository institution's financial condition. In addition, any loans by the Parent to the Bank would be subordinate in right of payment to depositors and to certain other indebtedness of the Bank.
Transactions with Affiliates and Insiders
A variety of legal limitations restrict the Bank from lending or otherwise supplying funds or in some cases transacting business with the Company or the Company's non-bank subsidiaries. The Company is subject to Sections 23A and 23B of the Federal Reserve Act and Federal Reserve Regulation W. Section 23A places limits on the amount of “covered transactions,” which include loans or extensions of credit to, investments in or certain other transactions with, affiliates as well as the amount of advances to third parties collateralized by the securities or obligations of affiliates. The aggregate of all covered transactions is limited to 10 percent of a bank's capital and surplus for any one affiliate and 20 percent for all affiliates. Furthermore, within the foregoing limitations as to amount, certain covered transactions must meet specified collateral requirements ranging from 100 to 130 percent. Also, a bank is prohibited from purchasing low quality assets from any of its affiliates. Section 608 of the Dodd-Frank Act broadens the definition of “covered transactions” to include derivative transactions and the borrowing or lending of securities if the transaction will cause a bank to have credit exposure to an affiliate. The revised definition also includes the acceptance of debt obligations of an affiliate as collateral for a loan or extension of credit to a third party. Furthermore, reverse repurchase transactions are viewed as extensions of credit (instead of asset purchases) and thus become subject to collateral requirements.

22


Section 23B prohibits an institution from engaging in certain transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with nonaffiliated companies. Except for limitations on low quality asset purchases and transactions that are deemed to be unsafe or unsound, Regulation W generally excludes affiliated depository institutions from treatment as affiliates. Transactions between a bank and any of its subsidiaries that are engaged in certain financial activities may be subject to the affiliated transaction limits. The Federal Reserve Board also may designate bank subsidiaries as affiliates.
Banks are also subject to quantitative restrictions on extensions of credit to executive officers, directors, principal shareholders and their related interests. In general, such extensions of credit (1) may not exceed certain dollar limitations, (2) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and (3) must not involve more than the normal risk of repayment or present other unfavorable features. Certain extensions of credit also require the approval of a bank's board of directors.
Regulatory Examinations
Federal and state banking agencies require the Company and the Bank to prepare annual reports on financial condition and to conduct an annual audit of financial affairs in compliance with minimum standards and procedures. The Bank, and in some cases the Company and the Company's non-bank affiliates, must undergo regular on-site examinations by the appropriate regulatory agency, which will examine for adherence to a range of legal and regulatory compliance responsibilities. A bank regulator conducting an examination has complete access to the books and records of the examined institution. The results of the examination are confidential. The cost of examinations may be assessed against the examined institution as the agency deems necessary or appropriate.
Community Reinvestment Act
The CRA requires the Federal Reserve Board to evaluate the record of the Company in meeting the credit needs of its local community, including low and moderate income neighborhoods. These evaluations are considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could result in additional requirements and limitations on the Bank.
In February 2015, the Federal Reserve Board announced the results of its regularly scheduled examination covering 2011 and 2012 to determine the Bank’s compliance with the CRA. The Bank received a rating of “needs to improve". The Bank’s rating in this CRA examination resulted in restrictions on certain activities, including certain mergers and acquisitions and applications to open branches or certain other facilities. The Bank underwent an additional CRA examination that began in the fourth quarter of 2015. In March 2016, the Federal Reserve Bank of Atlanta notified the Bank that its CRA rating had been improved to “Satisfactory,” and the aforementioned restrictions were removed from the Bank.
Commercial Real Estate Lending
Lending operations that involve concentrations of commercial real estate loans are subject to enhanced scrutiny by federal banking regulators. The regulators have advised financial institutions of the risks posed by commercial real estate lending concentrations. Such loans generally include land development, construction loans and loans secured by multifamily property, and nonfarm, nonresidential real property where the primary source of repayment is derived from rental income associated with the property. The guidance prescribes the following guidelines for examiners to help identify institutions that are potentially exposed to concentration risk and may warrant greater supervisory scrutiny:
total reported loans for construction, land development and other land represent 100 percent or more of the institution's total capital, or
total commercial real estate loans represent 300 percent or more of the institution's total capital, and the outstanding balance of the institution's commercial real estate loan portfolio has increased by 50 percent or more during the prior 36 months.
In October 2009, the federal banking regulators issued additional guidance on commercial real estate lending that emphasizes these considerations.

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In addition, the Dodd-Frank Act contains provisions that may impact the Company's business by reducing the amount of its commercial real estate lending and increasing the cost of borrowing, including rules relating to risk retention of securitized assets. Section 941 of the Dodd-Frank Act requires, among other things, a loan originator or a securitizer of asset-backed securities to retain a percentage of the credit risk of securitized assets. In October 2014, the banking agencies issued final rules to implement the credit risk retention requirements of Section 941 of Dodd-Frank. The regulations became effective on February 23, 2015. Compliance with the rules with respect to new securitization transactions backed by residential mortgages have been required since December 24, 2015 and compliance with respect to new securitization transactions backed by other types of assets have been required since December 24, 2016. The Company continues to evaluate the final rules and assess their impact on its securitization activities.
Branching
The Dodd-Frank Act substantially amended the legal framework that had previously governed interstate branching activities. Formerly, under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, a bank's ability to branch into a particular state was largely dependent upon whether the state “opted in” to de novo interstate branching. Many states did not “opt-in,” which resulted in branching restrictions in those states. The Dodd-Frank Act removed the “opt-in” concept and permits banks to engage in de novo branching outside of their home states, provided that the laws of the target state permit banks chartered in that state to branch within that state. Accordingly, de novo interstate branching by the Company is subject to these standards. All branching in which the Company may engage remains subject to regulatory approval and adherence to applicable legal and regulatory requirements.
Anti-Tying Restrictions
In general, a bank may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for them on the condition that (1) the customer obtain or provide some additional credit, property or services from or to said bank or bank holding company or their subsidiaries, or (2) the customer not obtain some other credit, property or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended. A bank may, however, offer combined-balance products and may otherwise offer more favorable terms if a customer obtains two or more traditional bank products. Also, certain foreign transactions are exempt from the general rule.
Privacy and Credit Reporting
Financial institutions are required to disclose their policies for collecting and protecting confidential customer information. Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties, with some exceptions, such as the processing of transactions requested by the consumer. Financial institutions generally may not disclose certain consumer or account information to any nonaffiliated third-party for use in telemarketing, direct mail marketing or other marketing. Federal and state banking agencies have prescribed standards for maintaining the security and confidentiality of consumer information, and the Company is subject to such standards, as well as certain federal and state laws or standards for notifying consumers in the event of a security breach.
The Bank utilizes credit bureau data in underwriting activities. Use of such data is regulated under the Fair Credit Reporting Act and Regulation V on a uniform, nationwide basis, including credit reporting, prescreening and sharing of information between affiliates and the use of credit data. The Fair and Accurate Credit Transactions Act, which amended the Fair Credit Reporting Act, permits states to enact identity theft laws that are not inconsistent with the conduct required by the provisions of that Act.
Enforcement Powers
The Bank and its “institution-affiliated parties,” including management, employees, agents, independent contractors and consultants, such as attorneys and accountants and others who participate in the conduct of the institution's affairs, are subject to potential civil and criminal penalties for violations of law, regulations or written orders of a government agency. Violations can include failure to timely file required reports, filing false or misleading information or submitting inaccurate reports. Civil penalties may be as high as $1,000,000 a day for such violations and criminal penalties for some financial institution crimes may include imprisonment for 20 years. Regulators have flexibility to commence enforcement actions against institutions and institution-affiliated parties, and the FDIC has the authority to terminate deposit insurance. When issued by a banking agency, cease-and-desist and similar orders may, among other things,

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require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets, rescind agreements or contracts or take other actions determined to be appropriate by the ordering agency. The federal banking regulators also may remove a director or officer from an insured depository institution (and bar them from the industry) if a violation is willful or reckless.
Monetary Policy and Economic Controls
The Bank's earnings, and therefore the Company's earnings, are affected by the policies of regulatory authorities, including the monetary policy of the Federal Reserve Board. An important function of the Federal Reserve Board is to promote orderly economic growth by influencing interest rates and the supply of money and credit. Among the methods that have been used to achieve this objective are open market operations in U.S. government securities, changes in the discount rate for bank borrowings, expanded access to funds for non-banks and changes in reserve requirements against bank deposits. These methods are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, interest rates on loans and securities, and rates paid for deposits.
The effects of the various Federal Reserve Board policies on the Company's future business and earnings cannot be predicted. The Company cannot predict the nature or extent of any affects that possible future governmental controls or legislation might have on its business and earnings.
Depositor Preference Statute
Federal law provides that deposits and certain claims for administrative expenses and employee compensation against an insured depository institution are afforded priority over other general unsecured claims against such institution, including federal funds and letters of credit, in the liquidation or other resolution of the institution by any receiver.
FDIC Recordkeeping Requirements
In November 2016, the FDIC issued a final rule establishing recordkeeping requirements for FDIC-insured institutions with 2 million or more deposit accounts, which includes the Bank. The rule generally requires each covered institution to maintain complete and accurate information needed to determine deposit insurance coverage with respect to each deposit account. In addition, each covered institution must ensure that its information technology system is able to calculate the insured amount for most depositors within 24 hours of failure. Compliance is required by April 1, 2020.
Cybersecurity
In October 2016, the federal banking regulators issued an advance notice of proposed rulemaking regarding enhanced cyber risk management standards, which would apply to a wide range of large financial institutions and their third-party service providers, including us and our U.S. Bank Subsidiaries. The proposed standards would expand existing cybersecurity regulations and guidance to focus on cyber risk governance and management; management of internal and external dependencies; and incident response, cyber resilience and situational awareness. In addition, the proposal contemplates more stringent standards for institutions with systems that are critical to the financial sector.
Other Regulatory Matters
The Company and its subsidiaries and 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. The Company and its subsidiaries have from time to time received requests for information from regulatory authorities at the federal level or in various states, including state insurance commissions, state attorneys general, federal agencies or law enforcement authorities, securities regulators and other regulatory authorities, concerning their business practices. Such requests are considered incidental to the normal conduct of business.
Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act
The Company discloses the following information pursuant to Section 13(r) of the Exchange Act, which requires an issuer to disclose whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with natural persons or entities designated by the U.S. government under specified executive orders,

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including activities not prohibited by U.S. law and conducted outside the United States by non-U.S. affiliates in compliance with local law. In order to comply with this requirement, the Company has requested relevant information from its affiliates globally.
During the year ended December 31, 2016, the Company did not knowingly engage in activities, transactions or dealings relating to Iran or with natural persons or entities designated by the U.S. government under the specified executive orders.
Because the Company is controlled by BBVA, the Company's disclosure includes activities, transactions or dealings conducted outside the United States by non-U.S. affiliates of BBVA and its consolidated subsidiaries that are not controlled by the Company. During the year ended December 31, 2016, the BBVA Group had the following activities, transactions and dealings requiring disclosure under Section 13(r) of the Exchange Act.
Legacy contractual obligations related to counter indemnities. Before 2007, the BBVA Group issued certain counter indemnities to its non-Iranian customers in Europe for various business activities relating to Iran in support of guarantees provided by Bank Melli, two of which remained outstanding during the year ended December 31, 2016. For 2016, revenues of $641 (including fees and/or commissions) have been recorded in connection with these counter indemnities. The BBVA Group does not allocate direct costs to fees and commissions and therefore has not disclosed a separate profit measure. In addition, during 2016 the BBVA Group incurred cancellation, enforcement and postage expenses of $214,405 related to these counter guarantees. In addition, in accordance with Council Regulation (EU) Nr. 267/2012 of March 23, 2012, payments of any amounts due to Bank Melli under these counter indemnities were initially blocked and thereafter released upon authorization by the relevant Spanish authorities. The BBVA Group is committed to terminating these business relationships as soon as contractually possible and does not intend to enter into new business relationships involving Bank Melli.
Refund of funds from Bank Sepah. During the year ended December 31, 2016, Bank Sepah returned to BBVA funds in the amount of $4,624 originally transferred by BBVA in March 2007 to an account at Bank Sepah in the name of BBVA’s representative office in Tehran.
Iranian embassy-related activity. The BBVA Group maintains bank accounts in Spain for two employees of the Iranian embassy in Spain. The two employees are Spanish citizens, and one of them has retired. Estimated gross revenues for the year ended December 31, 2016, from embassy-related activity, which include fees and/or commissions, did not exceed $2,490. The BBVA Group does not allocate direct costs to fees and commissions and, therefore, has not disclosed a separate profit measure. The BBVA Group is committed to terminating these business relationships as soon as legally possible.
Additional Information
The Company’s corporate headquarters are located at 2200 Post Oak Blvd., Houston, Texas, 77056, and the Company’s telephone number is (205) 297-3000. The Company maintains an Investor Relations website on the Internet at www.bbvacompass.com. This reference to the Company's website is an inactive textual reference only, and is not a hyperlink. The contents of the Company's website shall not be deemed to be incorporated by reference into this Annual Report on Form 10-K.
The Company files annual, quarterly and current reports and other information with the SEC. You may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that contains reports and information statements and other information that the Company files electronically with the SEC at www.sec.gov. The Company also makes available free of charge, on or through its website, these reports and other information as soon as reasonably practicable following the time they are electronically filed with or furnished to the SEC.

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Item 1A.
Risk Factors
This section highlights the material risks that the Company currently faces. Any of the risks described below could materially adversely affect the Company's business, financial condition, or results of operations.
Any deterioration in national, regional and local economic conditions, particularly unemployment levels and home prices, could materially affect the Company's business, financial condition or results of operations.
The Company's business is subject to periodic fluctuations based on national, regional and local economic conditions. These fluctuations are not predictable, cannot be controlled, and may have a material adverse impact on its financial condition and operations even if other favorable events occur. The Company's banking operations are locally-oriented and community-based. Accordingly, the Company expects to continue to be dependent upon local business conditions as well as conditions in the local residential and commercial real estate markets it serves, including Alabama, Arizona, California, Colorado, Florida, New Mexico and Texas. These economic conditions could require the Company to charge-off a higher percentage of loans or increase provisions for credit losses, which would reduce its net income.
The Company is part of the financial system and a systemic lack of available credit, a lack of confidence in the financial sector, continued volatility in the financial markets and/or reduced business activity could materially adversely affect its business, financial condition or results of operations.
A return of the volatile economic conditions experienced in the U.S. during 2008-2009, including the adverse conditions in the fixed income debt markets, for an extended period of time, particularly if left unmitigated by policy measures, may materially and adversely affect the Company.
Declining oil prices could adversely affect the Company's performance.
As of December 31, 2016, energy-related loan balances represented approximately 5 percent of the Bank’s total loan portfolio. This amount is comprised of loans directly related to energy, such as exploration and production, pipeline transportation of natural gas, crude oil and other refined petroleum products, oil field services, and refining and support. In late 2014, oil prices began to decline and continued to decline through the first half of 2016, which has had an adverse effect on some of the Bank’s borrowers in this portfolio and on the value of the collateral securing some of these loans. If oil prices decline in a material way, the cash flows of the Bank’s customers in this industry could be adversely impacted which could impair their ability to service any loans outstanding to them and/or reduce demand for loans. These factors could result in higher delinquencies and greater charge-offs in future periods, which could adversely affect the Company's business, financial condition or results of operations. 
Furthermore, energy production and related industries represent a significant part of the economies in some of the Bank’s primary markets. A prolonged period of low or volatile oil prices could have a negative impact on the economies and real estate markets of states such as Texas, which could adversely affect the Company's business, financial condition or results of operations.
The failure of the European Union to stabilize the fiscal condition of member countries, especially in Spain, could have an adverse impact on global financial markets, the current U.S. economic recovery and the Company.
Certain European Union member countries have fiscal obligations greater than their fiscal revenue, which has caused investor concern over such countries' ability to continue to service their debt and foster economic growth. Fiscal austerity measures such as raising taxes and reducing entitlements have improved the ability of some member countries to service their debt, but have challenged economic growth and efforts to lower unemployment rates in the region.
The Company is a wholly owned subsidiary of BBVA, which is based in Spain and serves as a source of strength and capital to the Company. Accordingly, European Union weakness, particularly in Spain, could directly impact BBVA and could have an adverse impact on the Company's business or financial condition.
A weaker European economy may transcend Europe, cause investors to lose confidence in the safety and soundness of European financial institutions and the stability of European member economies, and likewise affect U.S.-based financial institutions, the stability of the global financial markets and the economic recovery underway in the U.S. Should the U.S. economic recovery be adversely impacted by these factors, loan and asset growth at U.S. financial institutions, like the Company, could be affected.

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Weakness in the real estate market, including the secondary residential mortgage loan market, has adversely affected the Company in the past and may continue to adversely affect it.
Weakness in the non-agency secondary market for residential mortgage loans has limited the market for and liquidity of many nonconforming mortgage loans. The effects of ongoing mortgage market challenges, combined with the past corrections in residential real estate market prices and reduced levels of home sales, could result in price reductions in single family home values, adversely affecting the value of collateral securing mortgage loans that the Company holds, and mortgage loan originations and profits on sales of mortgage loans. Declining real estate prices have historically caused cyclically higher delinquencies and losses on mortgage loans and home equity lines of credit. These conditions have resulted in losses, write-downs and impairment charges in the Company's mortgage and other business units.
Future declines in real estate values, low home sales volumes, financial stress on borrowers as a result of unemployment, interest rate resets on ARMs or other factors could have adverse effects on borrowers that could result in higher delinquencies and greater charge-offs in future periods, which would adversely affect the Company's financial condition or results of operations. Additionally, counterparties to insurance arrangements used to mitigate risk associated with increased defaults in the real estate market have been stressed by weaknesses in the real estate market and a commensurate increase in the number of claims. Further, decreases in real estate values might adversely affect the creditworthiness of state and local governments, and this might result in decreased profitability or credit losses from loans made to such governments. In markets dependent on energy production, falling energy prices may adversely affect real estate values. A decline in home values or overall economic weakness could also have an adverse impact upon the value of real estate or other assets which the Company owns as a result of foreclosing a loan and its ability to realize value on such assets.
The Company is subject to legislation and regulation, and future legislation or regulation or changes to existing legislation or regulation could affect its business.
The legislative, regulatory and supervisory framework governing the financial sectors has undergone significant and rapid change since the financial crisis. The Dodd-Frank Act as well as other post-financial crisis regulatory reforms in the United States have increased costs, imposed limitations on activities and resulted in an increased intensity in regulatory enforcement. While most of the changes required by the Dodd-Frank Act that impact the Company have been implemented or are expected to follow a known trajectory, new changes under the Trump administration, including their nature and impact, cannot yet be determined with any degree of certainty.
Changes to laws and regulations at both the state or federal level applicable to the Company are frequently proposed and could materially impact the profitability of the Company's business, the value of assets it holds or the collateral available for its loans, require changes to business practices or expose it to additional costs, taxes, liabilities, enforcement actions and reputational risk. The likelihood, timing and scope of any such changes and the impact any such change may have on the Company cannot be determined with any certainty
The CFPB's residential mortgage regulations could adversely affect the Company's business, financial condition or results of operations.
The Company and the Bank are regulated and supervised by the CFPB. The CFPB has promulgated many mortgage-related rules since it was established under the Dodd-Frank Act, including rules related to the ability to repay and qualified mortgage standards, mortgage servicing standards, loan originator compensation standards, high-cost mortgage requirements, Home Mortgage Disclosure Act requirements and appraisal and escrow standards for higher-priced mortgages.
The Company is subject to capital adequacy and liquidity standards, and if it fails to meet these standards its financial condition and operations would be adversely affected.
The U.S. Basel III capital rule and provisions in the Dodd-Frank Act increased capital requirements for banking organizations such as the Company and the Bank and will continue to increase such requirements as they are phased in. Consistent with the Basel Committee's Basel III capital framework, the U.S. Basel III capital rule includes a minimum ratio of CET1 capital to risk weighted assets of 4.5 percent and a CET1 capital conservation buffer of greater than 2.5 percent of risk-weighted assets that will apply to all U.S. banking organizations, including the Bank and the Company. Failure to maintain the capital conservation buffer would result in increasingly stringent restrictions on a banking organization's ability to make dividend payments and other capital distributions and pay discretionary bonuses to

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executive officers. Under the U.S. Basel III final rule, trust preferred securities no longer qualify as Tier 1 capital for bank holding companies such as the Company.
The Company is also required to submit an annual capital plan to the Federal Reserve Board under the CCAR process. The capital plan must include an assessment of the Company's expected uses and sources of capital over a forward-looking planning horizon of at least nine quarters, a detailed description of the Company's process for assessing capital adequacy, the Company's capital policy, and a discussion of any expected changes to the Company's business plan that are likely to have a material impact on its capital adequacy or liquidity. Based on a quantitative assessment, including a supervisory stress test conducted as part of the CCAR process, the Federal Reserve Board will either object to the Company's capital plan, in whole or in part, or provide a notice of non-objection to the Company. If the Federal Reserve Board objects to a capital plan, the Company may not make any capital distribution other than those with respect to which the Federal Reserve Board has indicated its non-objection. In addition to capital planning, the Company and the Bank are subject to capital stress testing requirements imposed by the Dodd-Frank Act.
The Federal Reserve Board evaluates the Company's liquidity as part of the supervisory process and adopted a final LCR rule, which is being phased in for the Company. Failure to comply with these regulatory standards or any new rules, such as a final rule implementing NSFR, could affect the Company's business.
In addition, BBVA designated the Parent as its IHC to comply with the Federal Reserve Board's final rule to enhance its supervision and regulation of the U.S. operations of Large FBOs. The Parent is subject to U.S. risk-based and leverage capital, liquidity, risk management, stress testing and other enhanced prudential standards on a consolidated basis under this rule. BBVA's combined U.S. operations (including its U.S. branches, agencies and subsidiaries) are also subject to certain enhanced prudential standards. These enhanced prudential standards could affect the Company’s operations.
Please refer to Item 1. Business - Supervision and Regulation for more information.
The Parent is a holding company and depends on its subsidiaries for liquidity in the form of dividends, distributions and other payments.
The Parent is a legal entity separate and distinct from its subsidiaries, including the Bank. The principal source of cash flow for the Parent is dividends from the Bank. There are statutory and regulatory limitations on the payment of dividends by the Bank. Regulations of both the Federal Reserve and the State of Alabama affect the ability of the Bank to pay dividends and other distributions to the Company and to make loans to the Company. Also, the Company’s right to participate in a distribution of assets upon a subsidiary's liquidation or reorganization is subject to the prior claims of the subsidiary's creditors. Limitations on the Parent’s ability to receive dividends and distributions from its subsidiaries could have a material adverse effect on the Company’s liquidity and on its ability to pay dividends on common stock. For additional information regarding these limitations see Item 1. Business - Supervision, Regulation and Other Factors - Dividends.
The Company is subject to credit risk.
When the Company loans money, commits to loan money or enters into a letter of credit or other contract with a counterparty, it incurs credit risk, which is the risk of losses if its borrowers do not repay their loans or its counterparties fail to perform according to the terms of their contracts. Many of the Company's products expose it to credit risk, including loans, leases and lending commitments.
Further downgrades to the U.S. government's credit rating, or the credit rating of its securities, by one or more of the credit ratings agencies could have a material adverse effect on general economic conditions, as well as the Company's operations, earnings and financial condition.
It is foreseeable that the ratings and perceived creditworthiness of instruments issued, insured or guaranteed by institutions, agencies or instrumentalities directly linked to the U.S. government could be correspondingly affected by any downgrade to the U.S. government's sovereign credit rating, including the rating of U.S. Treasury securities. Instruments of this nature are key assets on the balance sheets of financial institutions, including the Company, and are widely used as collateral by financial institutions to meet their day-to-day cash flows in the short-term debt market.

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Further downgrades of the U.S. government's sovereign credit rating, and the perceived creditworthiness of U.S. government-related obligations, could impact the Company's ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding when it is available. A downgrade may also adversely affect the market value of such instruments. The Company cannot predict if, when or how any changes to the credit ratings or perceived creditworthiness of these organizations will affect economic conditions. Such ratings actions could result in a significant adverse impact on the Company. A downgrade of the sovereign credit ratings of the U.S. government or the credit ratings of related institutions, agencies or instrumentalities would significantly exacerbate the other risks to which the Company is subject and any related adverse effects on its business, financial condition and results of operations.

A reduction in the Company's own credit rating could have a material adverse effect on the Company's liquidity and increase the cost of its capital markets funding.
Adequate liquidity is essential to the Company's businesses. A reduction to the Company's credit rating could have a material adverse effect on the Company's business, financial condition and results of operations.
The rating agencies regularly evaluate the Company and their ratings are based on a number of factors, including the Company's financial strength as well as factors not entirely within its control, such as conditions affecting the financial services industry generally. Adverse changes in the credit ratings of the Kingdom of Spain, which subsequently could impact BBVA, could also adversely impact the Company's credit rating. There can be no assurance that the Company will maintain its current ratings. The Company's failure to maintain those ratings could increase its borrowing costs, require the Company to replace funding lost due to the downgrade, which may include the loss of customer deposits, and may also limit the Company's access to capital and money markets and trigger additional collateral requirements in derivatives contracts and other secured funding arrangements.
The Company's ability to access the capital markets is important to its overall funding profile. This access is affected by its credit rating. The interest rates that the Company pays on its securities are also influenced by, among other things, the credit ratings that it receives from recognized rating agencies. A downgrade to the Company's credit rating could affect its ability to access the capital markets, increase its borrowing costs and negatively impact its profitability. A ratings downgrade to the Company's credit rating could also create obligations or liabilities for it under the terms of its outstanding securities that could increase its costs or otherwise have a negative effect on the Company's results of operations or financial condition. Additionally, a downgrade of the credit rating of any particular security issued by the Company could negatively affect the ability of the holders of that security to sell the securities and the prices at which any such securities may be sold.
Changes in interest rates could affect the Company's income and cash flows.
The Company's earnings and financial condition are largely dependent on net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest rate spreads, meaning the difference between interest rates earned on loans and investments and the interest rates paid on deposits and borrowings, could adversely affect the Company's earnings and financial condition. The Company cannot control or predict with certainty changes in interest rates.
Regional and local economic conditions, competitive pressures and the policies of regulatory authorities, including monetary policies of the Federal Reserve Board, affect interest income and interest expense. The Company has policies and procedures designed to manage the risks associated with changes in market interest rates. Changes in interest rates, however, may still have an adverse effect on the Company's profitability. While the Company actively manages against these risks, if its assumptions regarding borrower behavior are wrong or overall economic conditions are significantly different than planned for, then its risk mitigation techniques may be insufficient to protect against the risk.
The costs and effects of litigation, regulatory investigations, examinations or similar matters, or adverse facts and developments relating thereto, could materially affect the Company's business, operating results and financial condition.
The Company faces legal risks in its business, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remain high and are escalating. Substantial

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legal liability or significant regulatory action against the Company may have material adverse financial effects or cause significant reputational harm, which in turn could seriously harm its business prospects.
The Company and its operations are subject to increasing regulatory oversight and scrutiny, which may lead to additional regulatory investigations or enforcement actions, thereby increasing the Company’s costs associated with responding to or defending such actions. In particular, inquiries could develop into administrative, civil or criminal proceedings or enforcement actions and may increase the Company's compliance costs, require changes in the Company's business practices, affect the Company's competitiveness, impair the Company's profitability, harm the Company's reputation or otherwise adversely affect the Company's business.
In February 2015, the Federal Reserve Board announced the results of its regularly scheduled examination covering 2011 and 2012 to determine the Bank’s compliance with the CRA. The CRA requires the Federal Reserve Board to evaluate the record of the Bank in meeting the credit needs of its local community, including low and moderate income neighborhoods. The Bank received a rating of “needs to improve." The Bank’s rating in this CRA examination resulted in restrictions on certain activities, including certain mergers and acquisitions and applications to open branches or certain other facilities. However, the Bank received a “Satisfactory” CRA rating in its most recent CRA examination and those restrictions have been removed.
The Company's insurance may not cover all claims that may be asserted against it and indemnification rights to which it is entitled may not be honored. Any claims asserted against the Company, regardless of merit or eventual outcome, may harm its reputation. Should the ultimate judgments or settlements in any litigation or investigation significantly exceed the Company's insurance coverage, they could have a material adverse effect on its business, financial condition and results of operations. In addition, premiums for insurance covering the financial and banking sectors are rising. The Company may not be able to obtain appropriate types or levels of insurance in the future, nor may it be able to obtain adequate replacement policies with acceptable terms or at historic rates, if at all.
Disruptions in the Company's ability to access capital markets may adversely affect its capital resources and liquidity.
The Company may access capital markets to provide it with sufficient capital resources and liquidity to meet its commitments and business needs, and to accommodate the transaction and cash management needs of its clients. Other sources of contingent funding available to the Company include inter-bank borrowings, brokered deposits, repurchase agreements, FHLB capacity and borrowings from the Federal Reserve discount window. Any occurrence that may limit the Company's access to the capital markets, such as a decline in the confidence of debt investors, its depositors or counterparties participating in the capital markets, or a downgrade of its debt rating, may adversely affect the Company's capital costs and its ability to raise capital and, in turn, its liquidity.
Disruptions in the liquidity of financial markets may directly impact the Company to the extent it needs to access capital markets to raise funds to support its business and overall liquidity position. This situation could adversely affect the cost of such funds or the Company's ability to raise such funds. If the Company were unable to access any of these funding sources when needed, it might be unable to meet customers' needs, which could adversely impact its financial condition, results of operations, cash flows and level of regulatory-qualifying capital.
The Company may suffer increased losses in its loan portfolio despite enhancement of its underwriting policies and practices, and the Company's allowances for credit losses may not be adequate to cover such eventual losses.
The Company seeks to mitigate risks inherent in its loan portfolio by adhering to specific underwriting policies and practices, which often include analysis of (1) a borrower's credit history, financial statements, tax returns and cash flow projections; (2) valuation of collateral based on reports of independent appraisers; and (3) verification of liquid assets. The Company's underwriting policies, practices and standards are periodically reviewed and, if appropriate, enhanced in response to changing market conditions and/or corporate strategies.
Like other financial institutions, the Company maintains allowances for credit losses to provide for loan defaults and nonperformance. The Company's allowances for credit losses may not be adequate to cover eventual loan losses, and future provisions for credit losses could materially and adversely affect the Company's financial condition and results of operations. In addition, the FASB's Accounting Standards Update, Financial Instruments-Credit Losses (Subtopic 825-15), that would substantially change the accounting for credit losses under current U.S. GAAP standards. Under current U.S. GAAP standards, credit losses are not reflected in financial statements until it is probable that the credit loss has been incurred. Under the new Credit Loss ASU, an entity would reflect in its financial statements its

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current estimate of credit losses on financial assets over the expected life of each financial asset. The Credit Loss ASU, may have a negative impact on the Company's reported earnings, capital, regulatory capital ratios, as well as on regulatory limits which are based on capital (e.g., loans to affiliates) since it would accelerate the recognition of estimated credit losses.
The value of the Company’s goodwill may decline in the future.
A significant decline in the Company’s expected future cash flows, a significant adverse change in the business climate, or slower growth rates, any or all of which could be materially impacted by many of the risk factors discussed herein, may require that the Company take charges in the future related to the impairment of goodwill. Future regulatory actions could also have a material impact on assessments of goodwill for impairment. If the Company were to conclude that a future write-down of its goodwill and other intangible assets is necessary, the Company would record the appropriate charge which could have a material adverse effect on its results of operations.
The financial services market is undergoing rapid technological changes, and the Company may be unable to effectively compete or may experience heightened cyber-security risks as a result of these changes.
The financial services market, including banking services, is undergoing rapid changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and may enable us to reduce costs. The Company's future success may depend, in part, on its ability to use technology to provide products and services that provide convenience to customers and to create additional efficiencies in its operations. Some of the Company's competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. As a result, the Company's ability to effectively compete to retain or acquire new business may be impaired, and its business, financial condition or results of operations may be adversely affected.
The Company is under continuous threat of loss due to cyber-attacks, especially as it continues to expand customer capabilities to utilize internet and other remote channels to transact business. Two of the most significant cyber-attack risks that it faces are e-fraud and breach of sensitive customer data. Loss from e-fraud occurs when cybercriminals breach and extract funds directly from customers' or the Company's accounts. The attempts to breach sensitive customer data, such as account numbers and social security numbers, are less frequent, but could present significant reputational, legal and/or regulatory costs to the Company if successful.
Over the past few years, there have been a series of distributed denial of service attacks on financial services companies. Distributed denial of service attacks are designed to saturate the targeted online network with excessive amounts of network traffic, resulting in slow response times, or in some cases, causing the site to be temporarily unavailable. Generally, these attacks have not been conducted to steal financial data, but meant to interrupt or suspend a company's internet service. While these events may not result in a breach of client data and account information, the attacks can adversely affect the performance of a company’s website and in some instances prevented customers from accessing a company’s website. Distributed denial of service attacks, hacking and identity theft risks could cause serious reputational harm. Cyber threats are rapidly evolving and the Company may not be able to anticipate or prevent all such attacks. The Company's risk and exposure to these matters remains heightened because of the evolving nature and complexity of these threats from cybercriminals and hackers, its plans to continue to provide internet banking and mobile banking channels, and its plans to develop additional remote connectivity solutions to serve its customers. The Company may incur increasing costs in an effort to minimize these risks and could be held liable for any security breach or loss.
The Company relies heavily on communications and information systems to conduct its business and relies on third parties and affiliates to provide key components of its business infrastructure.
The Company relies heavily on communications and information systems to conduct its business. This includes the utilization of a data center in Mexico. Any failure, interruption or breach in security of these systems could result in failures or disruptions in the Company's customer relationship management, general ledger, deposit, loan and other systems. While the Company has policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of its information systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any

32


failure, interruption or security breach of the Company's information systems could damage its reputation, result in a loss of customer business, subject it to additional regulatory scrutiny, or expose it to civil litigation and possible financial liability.
Third parties and affiliates provide key components of the Company's business infrastructure such as banking services, processing, and internet connections and network access. Any disruption in such services provided by these third parties or affiliates or any failure of these third parties or affiliates to handle current or higher volumes of use could adversely affect the Company's ability to deliver products and services to clients, its reputation and its ability to otherwise conduct business. Beginning in 2011, the Bank began converting to a new core banking system. Implementation and continuing improvement of this new core banking system relies heavily on third parties to develop software.
Technological or financial difficulties of a third party or affiliate service provider, including security breaches, could adversely affect the Company's business to the extent those difficulties result in the interruption or discontinuation of services provided by that party or the loss of sensitive customer data. Further, in some instances the Company may be responsible for failures of such third parties or affiliates to comply with government regulations. The Company may not be insured against all types of losses as a result of third party or affiliate failures and the Company's insurance coverage may be inadequate to cover all losses resulting from system failures or other disruptions. Failures in the Company business infrastructure could interrupt operations or increase the costs of doing business.
The Company is subject to a variety of operational risks, including reputational risk, legal risk and regulatory and compliance risk, and the risk of fraud or theft by employees or outsiders, which may adversely affect its business and results of operations.
The Company is exposed to many types of operational risks, including reputational risk, legal, regulatory and compliance risk, the risk of fraud or theft by employees or outsiders, including unauthorized transactions by employees, or operational errors, such as clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Negative public opinion can result from the Company's actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, and from actions taken by government regulators and community organizations in response to those activities. In addition, negative public opinion can adversely affect the Company's ability to attract and keep customers and can expose it to litigation and regulatory action. Actual or alleged conduct by the Company can result in negative public opinion about its other business. Negative public opinion could also affect the Company's credit ratings, which are important to its access to unsecured wholesale borrowings.
The Company's business involves storing and processing sensitive consumer and business customer data. If personal, non-public, confidential or proprietary information of customers in its possession were to be mishandled or misused, the Company could suffer significant regulatory consequences, reputational damage and financial loss. Such mishandling or misuse could include, for example, if such information were erroneously provided to parties who are not permitted to have the information, either by fault of the Company's systems, employees or counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties.
Because the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. The Company's necessary dependence upon automated systems to record and process transactions and its large transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. The Company also may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control, such as computer viruses, electrical or telecommunications outages, natural disasters, or other damage to property or physical assets which may give rise to disruption of service to customers and to financial loss or liability. The Company is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligations, or will be subject to the same risk of fraud or operational errors by their respective employees as it is, and to the risk that the Company's, or its vendors', business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability of the Company to operate its business, as well as potential liability to clients, reputational damage and regulatory intervention, which could adversely affect the Company's business, financial condition or results of operations.

33


The Company depends on the expertise of key personnel, and its operations may suffer if it fails to attract and retain skilled personnel.
The Company's success depends, in large part, on its ability to attract and retain key individuals. Competition for qualified candidates in the activities and markets that the Company serves is great and it may not be able to hire these candidates and retain them. If the Company is not able to hire or retain these key individuals, it may be unable to execute its business strategies and may suffer adverse consequences to its business, operations and financial condition.
In June 2010, the federal banking regulators issued joint guidance on executive compensation designed to help ensure that a banking organization's incentive compensation policies do not encourage imprudent risk taking and are consistent with the safety and soundness of the organization. In addition, the Dodd-Frank Act requires those agencies, along with the SEC, to adopt rules affecting the structure and reporting of incentive compensation. The federal banking regulators and SEC proposed such rules in 2011 and issued revised proposed rules in 2016.
As a wholly owned subsidiary of BBVA, the Company is also required to comply with the European Union’s CRD-IV, which, among other things, impacts the variable compensation of certain risk-takers and highly compensated individuals in the Company or its subsidiaries. In accordance with CRD-IV, the Bank pays variable compensation of certain employees half in stock and half in cash. Additionally, in accordance with CRD-IV, from 40% to 50% (depending on the classification of the employee), of such payment is deferred for three years. The deferred amounts are subject to performance indicators and a malus clause, which could result in the reduction or forfeiture of the deferred amounts. The equity awards are subject to an additional one-year holding period after delivery. Most of the Company’s competitors are not subject to CRD-IV.
If the Company is unable to attract and retain qualified employees, or do so at rates necessary to maintain its competitive position, or if compensation costs required to attract and retain employees become more expensive, the Company's performance, including its competitive position, could be materially adversely affected.
The Company's framework for managing risks may not be effective in mitigating risk and loss to the company.
The Company's risk management framework is made up of various processes and strategies to manage its risk exposure. The framework to manage risk, including the framework's underlying assumptions, may not be effective under all conditions and circumstances. If the risk management framework proves ineffective, the Company could suffer unexpected losses and could be materially adversely affected.
The Company's financial reporting controls and procedures may not prevent or detect all errors or fraud.
Financial reporting disclosure controls and procedures are designed to reasonably assure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Any disclosure controls and procedures over financial reporting or internal controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in the control system, misstatements due to error or fraud may occur and not be detected.
The Company is subject to certain risks related to originating and selling mortgages. It may be required to repurchase mortgage loans or indemnify mortgage loan purchasers as a result of breaches of representations and warranties, borrower fraud or certain breaches of its servicing agreements, and this could harm the Company's liquidity, results of operations and financial condition.
The Company originates and often sells mortgage loans. When it sells mortgage loans, whether as whole loans or pursuant to a securitization, the Company is required to make customary representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated. The Company's whole loan sale agreements require it to repurchase or substitute mortgage loans in the event that it breaches certain of these representations or warranties. In addition, the Company may be required to repurchase mortgage loans as a result of borrower fraud or

34


in the event of early payment default of the borrower on a mortgage loan. Likewise, the Company is required to repurchase or substitute mortgage loans if it breaches a representation or warranty in connection with its securitizations, whether or not it was the originator of the loan. While in many cases it may have a remedy available against certain parties, often these may not be as broad as the remedies available to a purchaser of mortgage loans against it, and the Company faces the further risk that such parties may not have the financial capacity to satisfy remedies that may be available to it. Therefore, if a purchaser enforces its remedies against it, the Company may not be able to recover its losses from third parties. The Company has received repurchase and indemnity demands from purchasers. These have resulted in an increase in the amount of losses for repurchases. While the Company has taken steps to enhance its underwriting policies and procedures, these steps will not reduce risk associated with loans sold in the past. If repurchase and indemnity demands increase materially, the Company's results of operations may be adversely affected.
The Company is subject to intense competition in the financial services industry, particularly in its market area, which could result in losing business or margin declines.
The Company operates in a highly competitive industry that could become even more competitive as a result of reform of the financial services industry resulting from the Dodd-Frank Act and other legislative, regulatory and technological changes, as well as continued consolidation. The Company faces aggressive competition from other domestic and foreign lending institutions and from numerous other providers of financial services. The ability of non-banking financial institutions to provide services previously limited to commercial banks has intensified competition. Because non-banking financial institutions are not subject to the same regulatory restrictions as banks and bank holding companies, they can often operate with greater flexibility and lower cost structures. Securities firms and insurance companies that elect to become financial holding companies can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking, and may acquire banks and other financial institutions. This may significantly change the competitive environment in which the Company conducts business. Some of the Company's competitors have greater financial resources and/or face fewer regulatory constraints. As a result of these various sources of competition, the Company could lose business to competitors or be forced to price products and services on less advantageous terms to retain or attract clients, either of which would adversely affect its profitability.
Some of the Company's larger competitors, including certain national banks that have a significant presence in its market area, may have greater capital and resources than the Company, may have higher lending limits and may offer products and services not offered by the Company. Although the Company remains strong, stable and well capitalized, management cannot predict the reaction of customers and other third parties with which it conducts business with respect to the strength of the Company relative to its competitors, including its larger competitors. Any potential adverse reactions to the Company's financial condition or status in the marketplace, as compared to its competitors, could limit its ability to attract and retain customers and to compete for new business opportunities. The inability to attract and retain customers or to effectively compete for new business may have a material and adverse effect on the Company's financial condition and results of operations.
The Company also experiences competition from a variety of institutions outside of its market area. Some of these institutions conduct business primarily over the internet and may thus be able to realize certain cost savings and offer products and services at more favorable rates and with greater convenience to the customer who can pay bills and transfer funds directly without going through a bank. This “disintermediation” could result in the loss of fee income, as well as the loss of customer deposits and income generated from those deposits. In addition, changes in consumer spending and saving habits could adversely affect the Company's operations, and the Company may be unable to timely develop competitive new products and services in response to these changes.
Unpredictable catastrophic events could have a material adverse effect on the Company.
The occurrence of catastrophic events such as hurricanes, tropical storms, tornados, terrorist attacks and other large scale catastrophes could adversely affect the Company's consolidated financial condition or results of operations. The Company has operations and customers in the southern United States, which could be adversely impacted by hurricanes and other severe weather in those regions. Unpredictable natural and other disasters could have an adverse effect on the Company in that such events could materially disrupt its operations or the ability or willingness of its customers to access the financial services it offers. The incidence and severity of catastrophes are inherently unpredictable. Although the Company carries insurance to mitigate its exposure to certain catastrophic events, these events could nevertheless

35


reduce its earnings and cause volatility in its financial results for any fiscal quarter or year and have a material adverse effect on its financial condition and/or results of operations.
Customers could pursue alternatives to bank deposits, causing the Company to lose a relatively inexpensive source of funding.
Checking and savings account balances and other forms of client deposits could decrease if customers perceive alternative investments, such as the stock market, provide superior expected returns. When clients move money out of bank deposits in favor of alternative investments, the Company can lose a relatively inexpensive source of funds, increasing its funding costs.
Negative public opinion could damage the Company's reputation and adversely impact business and revenues.
As a financial institution, the Company's earnings and capital are subject to risks associated with negative public opinion. The reputation of the financial services industry in general has been damaged as a result of the financial crisis and other matters affecting the financial services industry, including mortgage foreclosure issues. Negative public opinion regarding the Company could result from its actual or alleged conduct in any number of activities, including lending practices, the failure of any product or service sold by it to meet its clients' expectations or applicable regulatory requirements, breach of sensitive customer information, corporate governance and acquisitions, or from actions taken by government regulators and community organizations in response to those activities. The Company could also be adversely affected by negative public opinion involving BBVA. Negative public opinion can adversely affect the Company's ability to keep, attract and/or retain clients and personnel, and can expose it to litigation and regulatory action. Actual or alleged conduct by one of the Company's businesses can result in negative public opinion about its other businesses. Negative public opinion could also affect the Company's credit ratings, which are important to accessing unsecured wholesale borrowings. Significant changes in these ratings could change the cost and availability of these sources of funding.
The Company depends on the accuracy and completeness of information about clients and counterparties.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, the Company may rely on information furnished by or on behalf of clients and counterparties, including financial statements and other financial information. The Company also may rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors.
Compliance with anti-money laundering and anti-terrorism financing rules involves significant cost and effort.
The Company is subject to rules and regulations regarding money laundering and the financing of terrorism. Monitoring compliance with anti-money laundering and anti-terrorism financing rules and regulations can put a significant financial burden on banks and other financial institutions and poses significant technical problems. Although we have internal policies and procedures designed to ensure compliance with applicable anti-money laundering and anti-terrorism financing rules and regulations, we cannot guarantee that our policies and procedures completely prevent violations of such rules and regulations. Any such violations may have severe consequences, including sanctions, fines and reputational consequences, which could have a material adverse effect on the Company's business, financial condition or results of operations.
The Company is exposed to risks in relation to compliance with anti-corruption laws and regulations and economic sanctions programs.
The Company is required to comply with various anti-corruption laws, including the U.S. Foreign Corrupt Practices Act of 1977, and economic sanctions programs, including those administered by the United Nations Security Council and the United States, including OFAC. The anti-corruption laws generally prohibit providing anything of value to government officials for the purposes of obtaining or retaining business or securing any improper business advantage. As part of its business, the Company may deal with entities, the employees of which are considered government officials. In addition, as noted above in Part I, Item 1 (“Anti-Money Laundering; USA PATRIOT Act; Office of Foreign Assets Control”) above, economic sanctions programs restrict the Company from conducting certain transactions or dealings involving certain sanctioned countries or persons.

36


Although the Company has internal policies and procedures designed to ensure compliance with applicable anti-corruption laws and sanctions regulations, there can be no assurance that such policies and procedures will be sufficient or that the Company’s employees, directors, officers, partners, agents and service providers will not take actions in violation of the Company’s policies and procedures (or otherwise in violation of the relevant anti-corruption laws and sanctions regulations) for which they or the Company may ultimately be held responsible. Violations of anti-corruption laws and sanctions regulations could lead to financial penalties being imposed on the Company, limits being placed on the Company’s activities, authorizations or licenses being revoked, damage to the Company’s reputation and other consequences that could have a material adverse effect on the Company’s business, results of operations and financial condition. Further, litigation or investigations relating to alleged or suspected violations of anti-corruption laws or sanctions regulations could be costly.
Changes in accounting standards could impact reported earnings.
The entities that set accounting standards and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of the Company’s consolidated financial statements. These changes can materially impact how management records and reports the Company’s financial condition and results of operations. In some cases, the Company could be required to apply a new or revised accounting standard retroactively, resulting in a possible restatement of prior period financial statements.




37


Item 1B.
Unresolved Staff Comments
Not Applicable.
Item 2.
Properties
The Company occupies various facilities principally located in Alabama, Arizona, California, Colorado, Florida, New Mexico and Texas and in states where it operates loan production offices that are used in the normal course of the financial services business. The properties consist of both owned and leased properties and include land for future banking center sites. The leased properties include both land and buildings that are generally under long-term leases. The Company leases office space used as the Company's principal executive offices in Houston, Texas. The Bank has significant operations in Birmingham, Alabama. The Company owns the land and building where the Bank is headquartered. See Note 6, Premises and Equipment, in the Notes to the Consolidated Financial Statements, for additional disclosures related to the Company’s properties.
Item 3.
Legal Proceedings
See under “Legal and Regulatory Proceedings” in Note 16, Commitments, Contingencies and Guarantees, in the Notes to the Consolidated Financial Statements.
Item 4.
Mine Safety Disclosures
Not Applicable.
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
The Parent's common stock is not traded on any exchange or other interdealer electronic trading facility and there is no established public trading market for the Parent's common stock.
Holders
As of the date of this filing, BBVA was the sole holder of the Parent's common stock.
Dividends
The payment of dividends on the Parent's common stock is subject to determination and declaration by the Board of Directors of the Parent and regulatory limitations on the payment of dividends. There is no assurance that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends will continue. The following table sets forth the common dividends the Parent paid to its sole shareholder, BBVA, for each of the last eight quarters.
 
2016
 
2015
 
(In Thousands)
Quarter Ended:
 
 
 
March 31
$

 
$

June 30
60,000

 
35,000

September 30

 

December 31
32,864

 
60,000

Year
$
92,864

 
$
95,000



38


Any future dividends paid from the Parent must be set forth as capital actions in the Company's capital plans and not objected to by the Federal Reserve Board before any dividends can be paid. A discussion of dividend restrictions is provided in Item 1. Business - Overview - Supervision, Regulation, and Other Factors - Dividends and in Note 17, Regulatory Capital Requirements and Dividends from Subsidiaries, in the Notes to the Consolidated Financial Statements.
Recent Sales of Unregistered Securities
On March 17, 2014, BBVA contributed $117 million to the Parent, and the Parent issued 2,226,875 shares of its common stock to BBVA. The shares were issued in reliance upon the exemption from registration for transactions not involving a public offering under Section 4(a)(2) of the Securities Act.
On December 3, 2015, BBVA contributed $230 million to the Parent, and the Parent issued 1,150 shares of its Floating Non-Cumulative Perpetual Preferred Stock, Series A. The shares were issued in reliance upon the exemption from registration for transactions not involving a public offering under Section 4(a)(2) of the Securities Act.




39


Item 6.
Selected Financial Data
The following table sets forth summarized historical consolidated financial information for each of the periods indicated. This information should be read together with Management's Discussion and Analysis of Financial Condition and Results of Operations below and with the accompanying Consolidated Financial Statements included in this Annual Report on Form 10-K. The historical information indicated as of and for the years ended December 31, 2016 through 2012, has been derived from the Company's audited Consolidated Financial Statements for the years ended December 31, 2016 through 2012. Historical results set forth below and elsewhere in this Annual Report on Form 10-K are not necessarily indicative of future performance.
 
Years Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012 (1)
 
(Dollars in Thousands)
Summary of Operations:
 
 
 
 
 
 
 
 
 
Interest income
$
2,530,459

 
$
2,438,275

 
$
2,313,996

 
$
2,323,279

 
$
2,491,536

Interest expense
462,778

 
425,298

 
328,491

 
280,575

 
261,554

Net interest income
2,067,681

 
2,012,977

 
1,985,505

 
2,042,704

 
2,229,982

Provision for loan losses
302,589

 
193,638

 
106,301

 
107,546

 
29,471

Net interest income after provision for loan losses
1,765,092

 
1,819,339

 
1,879,204

 
1,935,158

 
2,200,511

Noninterest income
1,055,974

 
1,079,374

 
1,007,812

 
940,129

 
850,048

Noninterest expense, including goodwill impairment (2)
2,303,522

 
2,214,853

 
2,246,877

 
2,260,906

 
2,351,847

Net income before income tax expense
517,544

 
683,860

 
640,139

 
614,381

 
698,712

Income tax expense
146,021

 
176,502

 
155,763

 
179,242

 
219,701

Net income
371,523

 
507,358

 
484,376

 
435,139

 
479,011

Noncontrolling interest
2,010

 
2,228

 
1,976

 
2,094

 
2,138

Net income attributable to BBVA Compass Bancshares, Inc.
$
369,513

 
$
505,130

 
$
482,400

 
$
433,045

 
$
476,873

 
 
 
 
 
 
 
 
 
 
Summary of Balance Sheet:
 
 
 
 
 
 
 
 
 
Period-End Balances:
 
 
 
 
 
 
 
 
 
Investment securities
$
12,868,272

 
$
12,373,196

 
$
11,585,629

 
$
9,832,281

 
$
9,496,359

Loans (3)
60,223,112

 
61,394,666

 
57,526,600

 
50,814,125

 
45,333,608

Allowance for loan losses
(838,293
)
 
(762,673
)
 
(685,041
)
 
(700,719
)
 
(802,853
)
Total assets
87,079,953

 
90,068,538

 
83,244,726

 
72,090,642

 
69,236,695

Deposits
67,279,533

 
65,981,766

 
61,189,810

 
54,437,454

 
51,642,778

FHLB and other borrowings
3,001,551

 
5,438,620

 
4,809,843

 
4,298,707

 
4,273,279

Shareholder's equity
12,750,707

 
12,624,709

 
12,054,922

 
11,545,813

 
11,083,573

Average Balances:
 
 
 
 
 
 
 
 
 
Loans (3)
$
61,505,935

 
$
60,176,687

 
$
54,423,885

 
$
47,959,849

 
$
44,118,556

Total assets
91,064,360

 
88,389,179

 
77,610,420

 
70,320,268

 
66,468,815

Deposits
67,904,564

 
63,538,900

 
58,407,270

 
52,553,741

 
48,549,780

FHLB and other borrowings
4,226,225

 
5,701,974

 
4,254,352

 
4,269,521

 
4,478,136

Shareholder's equity
12,818,572

 
12,368,866

 
11,889,993

 
11,342,319

 
10,906,123

Selected Ratios:
 
 
 
 
 
 
 
 
 
Return on average total assets
0.41
%
 
0.57
%
 
0.62
%
 
0.62
%
 
0.72
%
Return on average total equity
2.90

 
4.10

 
4.07

 
3.84

 
4.39

Average equity to average assets
14.08

 
13.99

 
15.32

 
16.13

 
16.41

(1)
2012 financial information has not been retrospectively adjusted to include the historical activity of the money transmission and foreign exchange services subsidiaries due to immateriality.
(2)
Noninterest expense for the years ended December 31, 2016, 2015 and 2014 includes goodwill impairment of $59.9 million, $17.0 million and $12.5 million, respectively.
(3)
Includes loans held for sale.

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Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this discussion is to focus on significant changes in the financial condition and results of operations of the Company during the years ended December 31, 2016, 2015 and 2014. The Executive Overview summarizes information management believes is important for an understanding of the financial condition and results of operations of the Company. Topics presented in the Executive Overview are discussed in more detail within, and should be read in conjunction with, this Management’s Discussion and Analysis of Financial Condition and Results of Operations and the accompanying Consolidated Financial Statements included in this Annual Report on Form 10-K. The discussion of the critical accounting policies and analysis set forth below is intended to supplement and highlight information contained in the accompanying Consolidated Financial Statements and the selected financial data presented elsewhere in this Annual Report on Form 10-K.
Executive Overview
Financial Performance
Consolidated net income attributable to the Company for 2016 was $369.5 million compared to $505.1 million earned during 2015. The decrease in net income attributable to the Company reflected lower net income before income tax expense primarily as a result of higher provisions for loan losses and noninterest expense and lower noninterest income offset in part by higher net interest income.
Net interest income increased $54.7 million to $2.1 billion in 2016 compared to 2015 due in part to an increase in interest and fees on loans offset by an increase in interest on deposits. The net interest margin for 2016 remained flat at 2.64% compared to 2015.
The provision for loan losses was $302.6 million for 2016 compared to $193.6 million for 2015. Provision for loan losses for 2016 was impacted by a decline in credit quality indicators driven by downgrades during 2016 in the commercial loan portfolio, primarily related to energy loans as well as an increase in charge-offs related to energy loans as well as consumer direct and indirect loans during 2016. Net charge-offs for 2016 totaled $227.0 million compared to $116.0 million for 2015.
Noninterest income was $1.1 billion for 2016, a decrease of $23.4 million compared to 2015. The decrease in noninterest income was largely attributable to a decrease of $51.6 million in investment securities gains. This decrease was offset by a $10.9 million increase in card and merchant processing fees, and an $11.2 million increase in money transfer income. Additionally, other noninterest income increased $15.7 million driven by higher levels of syndication fee income.
Noninterest expense increased $88.7 million to $2.3 billion for 2016 compared to 2015. The higher level of noninterest expense was primarily attributable to a $42.9 million increase in goodwill impairment charges related to the write-off of goodwill associated with the Simple reporting unit. Additionally, salaries, benefits and commissions increased $38.2 million and professional services increased $23.6 million. Offsetting these increases was a $51.1 million decrease in FDIC indemnification expense
Income tax expense was $146.0 million for 2016 compared to $176.5 million for 2015. This resulted in an effective tax rate of 28.2% for 2016 and a 25.8% effective tax rate for 2015. The increase in the effective tax rate for 2016 was primarily driven by the increased goodwill impairment recognized in 2016.
The Company's total assets at December 31, 2016 were $87.1 billion, a decrease of $3.0 billion from December 31, 2015 levels. Total loans excluding loans held for sale were $60.1 billion at December 31, 2016, a decrease of $1.3 billion or 2.1% from December 31, 2015 levels. The decrease in total loans was primarily driven by decreases in the commercial, financial and agricultural and the residential real estate-mortgage portfolios due in part to strategic sales from these loan portfolios. Deposits increased $1.3 billion or 2.0% compared to December 31, 2015, driven by transaction accounts which increased 3.7% fueled by savings and money market growth. Noninterest bearing demand deposits increased 5.4%. Certificates and other time deposits decreased 3.9% at December 31, 2016 compared to December 31, 2015, due in part to a decrease in brokered deposits offset by growth in CDs due to certain product promotions.

41


Total shareholders' equity at December 31, 2016 was $12.8 billion, an increase of $126 million compared to December 31, 2015.
Capital
The Company's Tier 1 and CET1 ratios were 11.85% and 11.49%, respectively at December 31, 2016, compared to 11.08% and 10.70%, respectively at December 31, 2015, under the U.S. Basel III transitional provisions. In June 2016, the Company was informed that the Federal Reserve Board did not object to the Company's capital plan and the capital actions proposed in the capital plan as part of its annual CCAR process. While the Company can give no assurances as to the outcome of the CCAR process in subsequent years or specific interactions with the regulators, it believes it has a strong capital position.
For more information see “Capital” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, Item 1. Business - Supervision, Regulation and Other Factors - Capital, and Note 17, Regulatory Capital Requirements and Dividends from Subsidiaries, in the Notes to the Consolidated Financial Statements in this Annual Report on Form 10-K.
Liquidity
The Company’s sources of liquidity include customers’ interest-bearing and noninterest-bearing deposit accounts, loan principal and interest payments, investment securities, and borrowings. As a bank holding company, the Parent’s primary source of liquidity is the Bank. Due to the net earnings restrictions on dividend distributions, the Bank was not permitted to pay any dividends at December 31, 2016 and 2015 without regulatory approval.
The Parent paid common dividends totaling $92.9 million to its sole shareholder, BBVA, during 2016. Any future dividends paid from the Parent must be set forth as capital actions in the Company's capital plans and not objected to by the Federal Reserve Board before any dividends can be paid.
In January 2016, the minimum phased-in LCR requirement was 90 percent, followed by 100 percent in January 2017. At December 31, 2016, the Company was fully compliant with the minimum phased-in LCR requirements in effect. However, should the Company's cash position or investment mix change in the future, the Company's ability to meet the LCR requirement may be impacted.
Management believes that the current sources of liquidity are adequate to meet the Company’s requirements and plans for continued growth. For more information see below under “Liquidity Management” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 11, FHLB and Other Borrowings, Note 12, Shareholder's Equity, and Note 16, Commitments, Contingencies and Guarantees, in the Notes to the Consolidated Financial Statements.
Digital Transformation
As technology advances continue to change the landscape of the financial services industry, customer behaviors are rapidly adapting and adjusting to take advantage of digital and mobile advances. The Company is focused on enhancing its digital capabilities to ensure its products, services and distribution network align with the evolving preferences of its customers. During 2016, the Company has experienced an increase in number of customers utilizing its digital and mobile capabilities. In addition, the Company has also seen an increase in products sold through its digital channels as a percentage of products sold through all channels.
Noteworthy items related to the Company’s digital transformation announced during 2016 included the following:
In January 2016, the Company announced an alliance with industry disrupter FutureAdvisor, a subsidiary of BlackRock, the world’s largest asset manager. The alliance makes sophisticated tools and guidance available to the Company’s digital savvy clients who are not currently taking advantage of its investment services.
In April 2016, Univision Enterprises, the products and services division of Univision Communications Inc., in partnership with Bancomer Transfer Services, Inc. announced the launch of Univision Remesas, an international digital money transfer service.

42


In May 2016, the Company announced it had expanded its suite of mobile payment solutions for its cardholders with the integration of Android Pay and Samsung Pay. These releases underscore the Company’s drive to provide more and varied ways for customers to bank digitally. They join Apple Pay and the proprietary BBVA Wallet in the Company’s suite of mobile wallet and payment solutions.
In the second quarter of 2016, BBVA Compass began onboarding new customers from Simple onto the Bank’s platform. Previously new accounts from Simple were held at a third party financial institution. In the next few quarters, customer accounts and deposits opened prior to this milestone will be migrated from the third party financial institution to BBVA Compass.
Critical Accounting Policies
The accounting principles followed by the Company and the methods of applying these principles conform with accounting principles generally accepted in the United States of America and with general practices within the banking industry. The Company’s critical accounting policies relate to (1) the allowance for loan losses, (2) fair value of financial instruments, (3) income taxes and (4) goodwill impairment. These critical accounting policies require the use of estimates, assumptions and judgments which are based on information available as of the date of the financial statements. Accordingly, as this information changes, future financial statements could reflect the use of different estimates, assumptions and judgments. Certain determinations inherently have a greater reliance on the use of estimates, assumptions and judgments and, as such, have a greater possibility of producing results that could be materially different than originally reported.
Allowance for Loan Losses: Management’s policy is to maintain the allowance for loan losses at a level sufficient to absorb estimated probable incurred losses in the loan portfolio. Management performs periodic and systematic detailed reviews of its loan portfolio to identify trends and to assess the overall collectability of the loan portfolio. Accounting standards require that loan losses be recorded when management determines it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated.
Estimates for the allowance for loan losses are determined by analyzing historical losses, historical migration to charge-off experience, current trends in delinquencies and charge-offs, the results of regulatory examinations and changes in the size, composition and risk assessment of the loan portfolio. Also included in management’s estimate for the allowance for loan losses are considerations with respect to the impact of current economic events. These events may include, but are not limited to, fluctuations in overall interest rates, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting specific geographical areas and industries in which the Company conducts business.
While management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses and methodology may be necessary if economic or other conditions differ substantially from the assumptions used in making the estimates. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels vary from previous estimates.
A detailed discussion of the methodology used in determining the allowance for loan losses is included in Note 1, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements.
Fair Value of Financial Instruments: A portion of the Company’s assets and liabilities is carried at fair value, with changes in fair value recorded either in earnings or accumulated other comprehensive income (loss). These include investment securities available for sale, trading account assets and liabilities, loans held for sale, mortgage servicing assets, and derivative assets and liabilities. Periodically, the estimation of fair value also affects investment securities held to maturity when it is determined that an impairment write-down is other than temporary. Fair value determination is also relevant for certain other assets such as other real estate owned, which are recorded at the lower of the recorded balance or fair value, less estimated costs to sell. The determination of fair value also impacts certain other assets that are periodically evaluated for impairment using fair value estimates, including goodwill and impaired loans.
Fair value is generally based upon quoted market prices, when available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use observable market based parameters as inputs. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s own creditworthiness, among

43


other things, as well as potentially unobservable parameters. Any such valuation adjustments are applied consistently over time. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.
See Note 21, Fair Value of Financial Instruments, in the Notes to the Consolidated Financial Statements for a detailed discussion of determining fair value, including pricing validation processes.
Income Taxes: The Company’s income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated taxes due. The calculation of each component of the Company’s income tax provision is complex and requires the use of estimates and judgments in its determination. As part of the Company’s evaluation and implementation of business strategies, consideration is given to the regulations and tax laws that apply to the specific facts and circumstances for any tax positions under evaluation. Management closely monitors tax developments on both the federal and state level in order to evaluate the effect they may have on the Company’s overall tax position and the estimates and judgments used in determining the income tax provision and records adjustments as necessary.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expenses. In evaluating the Company’s ability to recover its deferred tax assets within the jurisdiction from which they arise, the Company must consider all available evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and the results of recent operations. A valuation allowance is recognized for a deferred tax asset if, based on the available evidence, it is more likely than not that some portion or all of a deferred tax asset will not be realized. See Note 20, Income Taxes, in the Notes to the Consolidated Financial Statements for additional information.
Goodwill Impairment: It is the Company’s policy to assess goodwill for impairment at the reporting unit level on an annual basis or between annual assessments if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Impairment is the condition that exists when the carrying amount of goodwill exceeds its implied fair value.
Accounting standards require management to estimate the fair value of each reporting unit in assessing impairment at least annually. As such, the Company engages an independent valuation expert to assist in the computation of the fair value estimates of each reporting unit as part of its annual assessment. This assessment utilizes a blend of income and market based valuation methodologies.
The impairment testing process conducted by the Company begins by assigning net assets and goodwill to each reporting unit. The Company then completes step one of the impairment test by comparing the fair value of each reporting unit with the recorded book value of its net assets, with goodwill included in the computation of the carrying amount. If the fair value of a reporting unit exceeds its carrying amount, goodwill of that reporting unit is not considered impaired, and step two of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, step two of the impairment test is performed to determine the amount of impairment. Step two of the impairment test compares the implied fair value of goodwill attributable to each reporting unit to the carrying amount of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination; an entity allocates the fair value determined in step one for the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
The computation of the fair value estimate is based upon management’s estimates and assumptions. Although management has used the estimates and assumptions it believes to be most appropriate in the circumstances, it should be noted that even relatively minor changes in certain valuation assumptions used in management’s calculation would result in significant differences in the results of the impairment test. See “Goodwill” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and see Note 8, Goodwill and Other Acquired Intangible Assets, in the Notes to the Consolidated Financial Statements for a detailed discussion of the impairment testing process.

44


Analysis of Results of Operations
Consolidated net income attributable to the Company totaled $369.5 million, $505.1 million, and $482.4 million for 2016, 2015 and 2014, respectively. The Company's 2016 results reflected lower net income before income tax expense primarily as a result of higher provisions for loan losses and noninterest expense and lower noninterest income offset in part by higher net interest income.
Net Interest Income and Net Interest Margin
Net interest income is the principal component of the Company’s income stream and represents the difference, or spread, between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates as well as changes in the volume and mix of earning assets and interest bearing liabilities can impact net interest income. The following discussion of net interest income is presented on a fully taxable equivalent basis, unless otherwise noted, to facilitate performance comparisons among various taxable and tax-exempt assets.
2016 compared to 2015
Net interest income totaled $2.1 billion and $2.0 in 2016 and 2015, respectively. Net interest income on a fully taxable equivalent basis totaled $2.1 billion in both 2016 and 2015. Net interest margin was 2.64% in both 2016 and 2015.
The fully taxable equivalent yield for 2016 for the loan portfolio was 3.74% compared to 3.69% for the prior year. The 5 basis point increase was primarily driven by the origination of higher yielding loans as well as the impact of the higher benchmark interest rates, which increased in December 2015 and 2016.
The fully taxable equivalent yield on the total investment securities portfolio was 1.83% for 2016, compared to 2.01% for the prior year. The 18 basis point decrease was primarily driven by proceeds from the sale of higher yielding investment securities and from prepayments, maturities and calls of investment securities that have been reinvested into investment securities with lower market rates.
The yield on trading account securities increased to 1.45% in 2016 compared to 1.35% in 2015 due primarily to the impact of the FRB raising the federal funds rate by 25 basis points in December 2015 and 2016.
The yield on other earning assets for 2016 was 0.60 % compared to 0.17 % for the prior year. The 43 basis point increase between years was primarily due to the impact of the FRB raising the federal funds rate by 25 basis points in December 2015 and 2016.
The average rate paid on interest bearing deposits remained relatively flat at 0.64% for 2016 compared to 0.62% for 2015.
The average rate on FHLB and other borrowings during 2016 was 1.96% compared to 1.58% for the prior year. The 38 basis point increase was primarily driven by changes in the value of the interest rate contracts hedging the value of the FHLB and other borrowings as well as the impact of the $700 million issuance of subordinated notes in April 2015 under the Global Bank Note program.
The average rate on other short-term borrowings was 1.44% for 2016 compared to 1.31% for 2015 due to the impact of the FRB raising the federal funds rate by 25 basis points in December 2015 and 2016.
2015 compared to 2014
Net interest income totaled $2.0 billion in both 2015 and 2014. Net interest income on a fully taxable equivalent basis totaled $2.1 billion in both 2015 and 2014.
Net interest margin was 2.64% in 2015 compared to 3.01% in 2014. The 37 basis point decrease in net interest margin primarily reflects the runoff of higher yielding covered loans as well as the impact of lower yields in the AFS investment securities portfolio. In addition, net interest margin was negatively impacted by the increase in the average balance of trading account securities and the increase in the average balance of other short term borrowings primarily due to an increase in U.S. Treasury long and short positions held by BSI.

45


The fully taxable equivalent yield for 2015 for the loan portfolio was 3.69% compared to 3.93% for the prior year. The yield on non-covered loans for 2015 was 3.63% compared to 3.72% for 2014. The 9 basis point decrease was primarily due to a higher volume of new loans originated at lower yields. The yield on covered loans for 2015 was 10.87% compared to 22.67% for 2014. The decrease was primarily due to the impact of the quarterly reassessment of expected future cash flows.
The fully taxable equivalent yield on the total investment securities portfolio was 2.01% for the year ended December 31, 2015, compared to 2.28% for the prior year. The 27 basis point decrease was primarily driven by proceeds from the sale of higher yielding investment securities and from prepayments, maturities and calls of investment securities that have been reinvested into investment securities with lower market rates.
The yield on trading account securities was 1.35% in 2015 compared to 1.73% in 2014 due to an increase in U.S. Treasury securities held by BSI in 2015.
The average rate paid on interest bearing deposits was 0.62% for 2015 compared to 0.60% for 2014.
The average rate on FHLB and other borrowings during 2015 was 1.58%, compared to 1.62 % for the prior year.
The average rate on other short-term borrowings was 1.31% for 2015 compared to 1.38% for 2014 due to the effect of the increase in U.S. Treasury short positions held by BSI in 2015.

46


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.
Table 3
Consolidated Average Balance and Yield/ Rate Analysis
 
December 31, 2016
 
December 31, 2015
 
December 31, 2014
 
Average Balance
 
Income/Expense
 
Yield/ Rate
 
Average Balance
 
Income/ Expense
 
Yield/Rate
 
Average Balance
 
Income/ Expense
 
Yield/Rate
 
(Dollars in Thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans (1) (2) (3)
61,505,935

 
2,303,017

 
3.74

 
60,176,687

 
2,221,093

 
3.69

 
54,423,885

 
2,139,429

 
3.93

Investment securities – AFS (tax exempt) (3)
10,728

 
846

 
7.89

 
253,547

 
10,446

 
4.12

 
492,306

 
20,745

 
4.21

Investment securities – AFS (taxable)
11,345,365

 
191,337

 
1.69

 
10,105,217

 
185,323

 
1.83

 
8,560,090

 
177,987

 
2.08

Total investment securities – AFS
11,356,093

 
192,183

 
1.69

 
10,358,764

 
195,769

 
1.89

 
9,052,396

 
198,732

 
2.20

Investment securities – HTM (tax exempt) (3)
1,062,391

 
34,535

 
3.25

 
1,128,080

 
35,352

 
3.13

 
1,162,674

 
34,881

 
3.00

Investment securities – HTM (taxable)
194,296

 
4,408

 
2.27

 
230,933

 
4,433

 
1.92

 
284,962

 
5,264

 
1.85

Total investment securities - HTM
1,256,687

 
38,943

 
3.10

 
1,359,013

 
39,785

 
2.93

 
1,447,636

 
40,145

 
2.77

Trading account securities (3)
3,714,155

 
53,816

 
1.45

 
3,784,410

 
50,936

 
1.35

 
446,131

 
7,732

 
1.73

Other (4) (5) (6)
3,508,368

 
20,939

 
0.60

 
3,330,793

 
5,622

 
0.17

 
2,973,165

 
713

 
0.02

Total earning assets
81,341,238

 
2,608,898

 
3.21

 
79,009,667

 
2,513,205

 
3.18

 
68,343,213

 
2,386,751

 
3.49

Noninterest earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks (6)
964,281

 
 
 
 
 
974,956

 
 
 
 
 
878,930

 
 
 
 
Allowance for loan losses
(834,310
)
 
 
 
 
 
(714,157
)
 
 
 
 
 
(703,902
)
 
 
 
 
Net unrealized gain (loss) on investment securities available for sale
(5,749
)
 
 
 
 
 
33,207

 
 
 
 
 
41,316

 
 
 
 
Other noninterest earning assets
9,598,900

 
 
 
 
 
9,085,506

 
 
 
 
 
9,050,863

 
 
 
 
Total assets
$
91,064,360

 
 
 
 
 
$
88,389,179

 
 
 
 
 
$
77,610,420

 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
$
7,042,165

 
16,639

 
0.24

 
$
7,218,956

 
12,011

 
0.17

 
$
7,280,418

 
11,986

 
0.16

Savings and money market accounts
25,747,220

 
99,567

 
0.39

 
24,155,771

 
94,336

 
0.39

 
21,616,078

 
87,672

 
0.41

Certificates and other time deposits
14,454,532

 
188,209

 
1.30

 
12,989,759

 
167,809

 
1.29

 
12,745,944

 
151,997

 
1.19

Foreign office deposits
104,039

 
210

 
0.20

 
158,202

 
322

 
0.20

 
131,510

 
259

 
0.20

Total interest bearing deposits
47,347,956

 
304,625

 
0.64

 
44,522,688

 
274,478

 
0.62

 
41,773,950

 
251,914

 
0.60

FHLB and other borrowings
4,226,225

 
82,744

 
1.96

 
5,701,974

 
89,988

 
1.58

 
4,254,352

 
68,957

 
1.62

Federal funds purchased and securities sold under agreements to repurchase (5)
451,980

 
21,165

 
4.68

 
807,677

 
8,390

 
1.04

 
935,439

 
2,302

 
0.25

Other short-term borrowings
3,778,752

 
54,244

 
1.44

 
4,006,716

 
52,442

 
1.31

 
385,461

 
5,318

 
1.38

Total interest bearing liabilities
55,804,913

 
462,778

 
0.83

 
55,039,055

 
425,298

 
0.77

 
47,349,202

 
328,491

 
0.69

Noninterest bearing deposits
20,556,608

 
 
 
 
 
19,016,212

 
 
 
 
 
16,633,320

 
 
 
 
Other noninterest bearing liabilities
1,884,267

 
 
 
 
 
1,965,046

 
 
 
 
 
1,737,905

 
 
 
 
Total liabilities
78,245,788

 
 
 
 
 
76,020,313

 
 
 
 
 
65,720,427

 
 
 
 
Shareholder’s equity
12,818,572

 
 
 
 
 
12,368,866

 
 
 
 
 
11,889,993

 
 
 
 
Total liabilities and shareholder’s equity
$
91,064,360

 
 
 
 
 
$
88,389,179

 
 
 
 
 
$
77,610,420

 
 
 
 
Net interest income/net interest spread
 
 
$
2,146,120

 
2.38
%
 
 
 
$
2,087,907

 
2.41
%
 
 
 
$
2,058,260

 
2.80
%
Net interest margin
 
 
 
 
2.64
%
 
 
 
 
 
2.64
%
 
 
 
 
 
3.01
%
Taxable equivalent adjustment
 
 
78,439

 
 
 
 
 
74,930

 
 
 
 
 
72,755

 
 
Net interest income
 
 
$
2,067,681

 
 
 
 
 
$
2,012,977

 
 
 
 
 
$
1,985,505

 
 
(1)
Loans include loans held for sale and nonaccrual loans.
(2)
Interest income includes loan fees for rate calculation purposes.
(3)
Yields are stated on a fully taxable equivalent basis assuming the tax rate in effect for each period presented.
(4)
Includes federal funds sold, securities purchased under agreements to resell, interest bearing deposits, interest bearing deposits with the Federal Reserve and other earning assets.
(5)
Yield/rate reflects impact of balance sheet offsetting. See Note 15, Securities Financing Activities.
(6)
Beginning in 2016, interest bearing deposits with the Federal Reserve are included in earning assets. In prior periods, these balances were included as noninterest earning assets within cash and due from banks. Prior periods have been reclassified to conform to current period presentation.


47


Table 4
Volume and Yield/ Rate Variances (1)

 
2016 compared to 2015
 
2015 compared to 2014
 
Change due to
 
Change due to
 
Volume
 
Yield/Rate
 
Total
 
Volume
 
Yield/Rate
 
Total
 
(Dollars in Thousands, yields on a fully taxable equivalent basis)
Interest income on:
 
 
 
 
 
 
 
 
 
 
 
Total loans
49,491

 
32,433

 
81,924

 
187,518

 
(105,854
)
 
81,664

Total investment securities available for sale
17,903

 
(21,489
)
 
(3,586
)
 
19,989

 
(22,951
)
 
(2,962
)
Total investment securities held to maturity
(3,094
)
 
2,252

 
(842
)
 
(2,086
)
 
1,726

 
(360
)
Trading account securities
(960
)
 
3,840

 
2,880

 
45,306

 
(2,102
)
 
43,204

Other (2) (3)
316

 
15,001

 
15,317

 
96

 
4,812

 
4,908

Total earning assets
$
63,656

 
$
32,037

 
$
95,693

 
$
250,823

 
$
(124,369
)
 
$
126,454

 
 
 
 
 
 
 
 
 
 
 
 
Interest expense on:
 
 
 
 
 
 
 
 
 
 
 
Interest bearing demand deposits
$
(301
)
 
$
4,929

 
$
4,628

 
$
(101
)
 
$
126

 
$
25

Savings and money market accounts
6,162

 
(931
)
 
5,231

 
10,010

 
(3,346
)
 
6,664

Certificates and other time deposits
19,062

 
1,338

 
20,400

 
2,948

 
12,864

 
15,812

Foreign office deposits
(109
)
 
(3
)
 
(112
)
 
54

 
9

 
63

Total interest bearing deposits
24,814

 
5,333

 
30,147

 
12,911

 
9,653

 
22,564

FHLB and other borrowings
(26,194
)
 
18,950

 
(7,244
)
 
22,890

 
(1,859
)
 
21,031

Federal funds purchased and securities sold under agreements to repurchase
(5,141
)
 
17,916

 
12,775

 
(355
)
 
6,443

 
6,088

Other short-term borrowings
(3,091
)
 
4,893

 
1,802

 
47,411

 
(287
)
 
47,124

Total interest bearing liabilities
(9,612
)
 
47,092

 
37,480

 
82,857

 
13,950

 
96,807

Increase (decrease) in net interest income
$
73,268

 
$
(15,055
)
 
$
58,213

 
$
167,966

 
$
(138,319
)
 
$
29,647

(1)
The change in interest not solely due to volume or yield/rate is allocated to the volume column and yield/rate column in proportion to their relationship of the absolute dollar amounts of the change in each.
(2)
Includes federal funds sold, securities purchased under agreement to resell, interest bearing deposits, interest bearing deposits with the Federal Reserve and other earning assets.
(3)
Beginning in 2016, interest bearing deposits with the Federal Reserve are included in earning assets. In prior periods, these balances were included as noninterest earning assets within cash and due from banks in the cash and cash equivalents line, consistent with the Consolidated Balance Sheet presentation. Prior periods have been reclassified to conform to current period presentation.
Provision for Loan Losses
The provision for loan losses is the charge to earnings that management determines to be necessary to maintain the allowance for loan losses at a sufficient level reflecting management's estimate of probable incurred losses in the loan portfolio.
2016 compared to 2015
Provision for loan losses was $302.6 million for 2016 compared to $193.6 million of provision for loan losses for 2015. Provision for loan losses for 2016 was impacted by a decline in credit quality indicators driven by downgrades during 2016 in the commercial loan portfolio, primarily related to energy loans as well as an increase in charge-offs related to energy loans as well as consumer direct and indirect loans during 2016. The Company recorded net charge-offs of $227.0 million during 2016 compared to $116.0 million during 2015. Net charge-offs were 0.37% (or 0.31% excluding net charge-offs on energy loans) of average loans for 2016 compared to 0.19% (or 0.20% excluding net charge-offs on energy loans) of average loans for 2015.
2015 compared to 2014
Provision for loan losses was $193.6 million for 2015 compared to $106.3 million of provision for loan losses for 2014. Provision for loan losses for 2015 was impacted by loan growth during 2015 in the commercial, financial and agricultural, residential real estate, and consumer portfolios. Offsetting the increase attributable to loan growth was improving credit quality in the commercial, financial and agricultural, real estate-construction and commercial real estate-mortgage portfolios. The Company recorded net charge-offs of $116.0 million during 2015 compared to $122.0 million during 2014. Net charge-offs were 0.19% of average loans for 2015 compared to 0.22% of average loans for 2014.

48


For further discussion and analysis of the allowance for loan losses, refer to the discussion of lending activities found later in this section. Also, refer to Note 4, Loans and Allowance for Loan Losses, in the Notes to the Consolidated Financial Statements for additional disclosures.
Noninterest Income
The following table presents the components of noninterest income.
Table 5
Noninterest Income
 
Years Ended December 31,
 
2016
 
2015
 
2014
 
(In Thousands)
Service charges on deposit accounts
$
214,294

 
$
216,248

 
$
222,686

Card and merchant processing fees
123,668

 
112,818

 
107,891

Investment banking and advisory fees
107,116

 
105,235

 
87,454

Money transfer income
104,592

 
93,437

 
81,409

Retail investment sales
102,982

 
101,614

 
108,477

Asset management fees
34,875

 
33,194

 
42,772

Corporate and correspondent investment sales
24,689

 
30,000

 
29,635

Mortgage banking income
21,496

 
27,258

 
24,551

Bank owned life insurance
17,243

 
18,662

 
18,616

Investment securities gains, net
30,037

 
81,656

 
53,042

Other
274,982

 
259,252

 
231,279

Total noninterest income
$
1,055,974

 
$
1,079,374

 
$
1,007,812

2016 compared to 2015
Noninterest income was $1.1 billion for both 2016 and 2015, a slight decrease of $23.4 million. The decrease in total noninterest income was driven by decreases in corporate and correspondent investment sales, mortgage banking income and investment securities gains which were partially offset by increases in card and merchant processing fees, money transfer income, and other noninterest income
Service charges on deposit accounts represent the Company's largest category of noninterest revenue. Service charges on deposit accounts were $214.3 million in 2016, compared to $216.2 million in 2015.
Card and merchant processing fees represent income related to customers’ utilization of their debit and credit cards, as well as interchange income and merchants’ discounts. Card and merchant processing fees were $123.7 million in 2016, an increase of $10.9 million compared to 2015 driven by a $4.1 million increase related to Simple and a $5.9 million increase in debit card interchange and merchant services.
Investment banking and advisory fees primarily represent income from BSI. Income from investment banking and advisory fees increased to $107.1 million in 2016 compared to $105.2 million in 2015.
Money transfer income represents income from the Parent's wholly owned subsidiary, BBVA Compass Payments, Inc., which engages in money transfer services, including money transmission and foreign exchange services. Income from money transfer services increased to $104.6 million in 2016 compared to $93.4 million in 2015 due to higher transaction volume.
Retail investment sales income is comprised of mutual fund and annuity sales income and insurance sales fees. Income from retail investment sales increased to $103.0 million in 2016, compared to $101.6 million in 2015
Asset management fees are fees generated from money management transactions executed with the Company through trusts, higher net worth customers and other long-term clients. Asset management fees increased to $34.9 million in 2016, compared to $33.2 million in 2015.

49


Corporate and correspondent investment sales represents income generated through the sales of interest rate protection contracts to corporate customers and the sale of bonds and other services to the Company's correspondent banking clients. Income from corporate and correspondent investment sales decreased to $24.7 million in 2016 from $30.0 million in 2015. The primary drivers of the decrease include a $4.0 million decrease in income related to a decline in the sales of interest rate contracts due to the economic environment during the year and a $2.8 million decrease related to the valuation changes in U.S. Treasury securities held to hedge market movements in the MSR asset.
Mortgage banking income for the year ended December 31, 2016 was $21.5 million compared to $27.3 million in 2015. Mortgage banking income in 2016 included $25.3 million of origination fees and gains on sales of mortgage loans as well as losses of $3.8 million related to fair value adjustments on mortgage loans held for sale, mortgage related derivatives and MSRs. Mortgage banking income in 2015 included $35.5 million of origination fees and gains on sales of mortgage loans and losses of $7.0 million related to fair value adjustments on mortgage loans held for sale, mortgage related derivatives and MSRs. The decrease in mortgage banking income in 2016 compared to 2015 was primarily driven by decreased mortgage production volume during 2016 compared to 2015.

BOLI represents income generated by the underlying investments maintained within each of the Company’s life insurance policies on certain key executives and employees. BOLI was $17.2 million in 2016 compared to $18.7 million in 2015.
Investment securities gains, net decreased to $30.0 million in 2016 compared to $81.7 million in 2015. See “—Investment Securities” for more information related to the investment securities sales.
Other income is comprised of income recognized that does not typically fit into one of the other noninterest income categories and includes primarily various fees associated with letters of credit, syndication, ATMs, investment services and foreign exchange fees. The gain (loss) associated with the sale of fixed assets is also included in other income. For 2016, other income increased by $15.7 million due to an increase of approximately $11.2 million in syndication fees. The increase was also attributable to a $7.7 million increase related to the prepayment of FHLB advances and other borrowings. During 2016, the Company terminated approximately $605 million FHLB advances resulting in a $295 thousand net loss compared to an $8.0 million net loss in 2015 related to the prepayment of approximately $1.1 billion FHLB advances.
2015 compared to 2014
Noninterest income was $1.1 billion for 2015, an increase of $71.6 million compared to $1.0 billion reported for 2014. The increase in total noninterest income was driven by increases in investment banking and advisory fees, investment securities gains and other noninterest income which were partially offset by decreases in retail investment sales, asset management fees, and gain (loss) on prepayment of FHLB and other borrowings.
Service charges on deposit accounts were $216.2 million in 2015, compared to $222.7 million in 2014.
Card and merchant processing fees were $112.8 million in 2015, an increase of $4.9 million compared to 2014.
Income from investment banking and advisory fees increased to $105.2 million in 2015 compared to $87.5 million in 2014 due to a $7.5 million increase in structuring and advisory fees and an $8.5 million increase in fees due to higher bond issuances during 2015 compared to 2014.
Income from retail investment sales decreased to $101.6 million in 2015, compared to $108.5 million in 2014. The primary driver of the decrease was due to a shift in product mix to structured products and managed money which resulted in a smaller percentage of fees for the Company.
Asset management fees are fees generated from money management transactions executed with the Company through trusts, higher net worth customers and other long-term clients. Asset management fees decreased to $33.2 million in 2015, compared to $42.8 million in 2014 primarily driven by a decrease in assets under management due to the divestiture of one of the Bank's wealth management subsidiaries during 2015.
Income from corporate and correspondent investment sales increased to $30.0 million in 2015 from $29.6 million in 2014

50


Mortgage banking income for the year ended December 31, 2015 was $27.3 million compared to $24.6 million in 2014. Mortgage banking income in 2015 included $35.5 million of origination fees and gains on sales of mortgage loans as well as losses of $7.0 million related to fair value adjustments on mortgage loans held for sale, mortgage related derivatives and MSRs. Mortgage banking income in 2014 included $28.5 million of origination fees and gains on sales of mortgage loans and losses of $3.3 million related to fair value adjustments on mortgage loans held for sale, mortgage related derivatives and MSRs. The increase in mortgage banking income in 2015 compared to 2014 was primarily driven by the lower interest rate environment in 2015 which allowed for wider profit margins, offset by the decrease in the fair value of the MSRs.
BOLI was $18.7 million in 2015 compared to $18.6 million in 2014.
Investment securities gains, net increased to $81.7 million in 2015 compared to $53.0 million in 2014. See “—Investment Securities” for more information related to the investment securities sales.
For 2015, other income increased by $28.0 million due to a gain of $22.0 million on the sale of mortgage loans not initially originated for sale in the secondary market. Servicing fees also increased $5.6 million due to an increase in loans sold to FNMA where the Company retained the servicing in 2015 compared to 2014. The Company also recorded $6.5 million of income from Spring Studios, which was acquired by the Company in 2015. Partially offsetting the increase is an $8.0 million loss on prepayment of FHLB and other borrowings in 2015. During 2015, the Company prepaid approximately $1.1 billion of FHLB advances resulting in an $8.0 million net loss on the prepayment of FHLB advances and other borrowings.
Noninterest Expense
The following table presents the components of noninterest expense.
Table 6
Noninterest Expense
 
Years Ended December 31,
 
2016
 
2015
 
2014
 
(In Thousands)
Salaries, benefits and commissions
$
1,119,676

 
$
1,081,475

 
$
1,080,364

Equipment
242,273

 
232,050

 
225,175

Professional services
242,206

 
218,584

 
209,943

Net occupancy
160,997

 
161,035

 
159,174

FDIC insurance
80,070

 
64,072

 
64,260

Money transfer expense
67,474

 
60,350

 
51,214

Marketing
50,549

 
41,778

 
36,061

Communications
21,046

 
22,527

 
24,987

Amortization of intangibles
16,373

 
39,208

 
50,856

FDIC indemnification expense
3,984

 
55,129

 
115,049

Goodwill impairment
59,901

 
17,000

 
12,500

Total securities impairment
130

 
1,660

 
180

Other
238,843

 
219,985

 
217,114

Total noninterest expense
$
2,303,522

 
$
2,214,853

 
$
2,246,877

2016 compared to 2015
Noninterest expense was $2.3 billion for 2016, an increase of $88.7 million compared to 2015. The increase in noninterest expense was primarily attributable to increases in salaries, benefits and commissions, professional services, FDIC insurance, money transfer expense, goodwill impairment and other noninterest expense offset in part by decreases in amortization of intangibles and FDIC indemnification expense.

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Salaries, benefits and commissions expense is comprised of salaries and wages in addition to other employee benefit costs and represents the largest components of noninterest expense. Salaries, benefits and commissions expense was $1.1 billion in 2016, an increase of $38.2 million when compared to 2015. The increase was due in part to a $19.7 million increase in incentive expense during 2016 related to the acceleration of incentive and restricted stock expense following the removal of future service condition as well as an increase of approximately $24.8 million related to additional headcount within full time salaried employees.
Professional services expense represents fees incurred for the various support functions, which includes legal, consulting, outsourcing and other professional related fees. Professional services expense increased by $23.6 million in 2016 to $242.2 million compared to 2015 due to an increase of approximately $10.8 million of outsourcing and other professional services, approximately $7.7 million increase related to credit card processing and debit card fees and an increase of approximately $3.9 million of contractor services.
FDIC insurance was $80.1 million in 2016 compared to $64.1 million in 2015. The increase in FDIC insurance was driven by a change in the factors used to calculate the assessment, including a new FDIC assessment rate in 2016.
Money transfer expense represents expense from the Parent's wholly owned subsidiary, BBVA Compass Payments, Inc., which engages in money transfer services, including money transmission and foreign exchange services. Money transfer expense increased to $67.5 million in 2016 compared to $60.4 million in 2015 due to higher transaction volumes during 2016.
Marketing expense increased by $8.8 million to $50.5 million in 2016 due primarily to BBVA's sponsorship of the NBA and an increase in Internet-based marketing related to Simple, a subsidiary of the Company.
Amortization of intangibles decreased by $22.8 million to $16.4 million in 2016 due to the lower level of intangible assets in 2016 compared to 2015.
FDIC indemnification expense, which represents the amortization of changes in the FDIC indemnification asset stemming from changes in credit expectations of covered loans, was $4.0 million in 2016 compared to $55.1 million in 2015. The decrease in 2016 was driven by the continued runoff of the covered loan portfolio.
Goodwill impairment related to the Simple reporting unit was $59.9 million in 2016 compared to $17.0 million in 2015. Refer to "—Goodwill" and Note 8, Goodwill and Other Acquired Intangible Assets in the Notes to the Consolidated Financial Statements for further details.
Other noninterest expense represents postage, supplies, subscriptions, provision for unfunded commitments and gains and losses on the sales and write-downs of OREO as well as other OREO associated expenses. Other noninterest expense increased in 2016 to $238.8 million compared to $220.0 million in 2015. The increase was primarily related to the civil money penalty imposed by the FRB on BSI in December 2016. See Note 16, Commitments, Contingencies and Guarantees, in the Notes to the Consolidated Financial Statements for additional discussion.
2015 compared to 2014
Noninterest expense was $2.2 billion for 2015, a decrease of $32.0 million compared to 2014. The lower level of noninterest expense was primarily attributable to a decrease in FDIC indemnification expense and amortization of intangibles, offset in part by increases in equipment expense, professional services, marketing expense, goodwill impairment and total securities impairment.
Salaries, benefits and commissions expense was $1.1 billion in 2015, relatively flat when compared to 2014.
Equipment expense increased by $6.9 million to $232.1 million in 2015 compared to 2014 due to a $12.6 million increase in software amortization resulting from software additions in 2015 as well as a $4.3 million increase in software maintenance expense offset by a decrease in hardware depreciation and maintenance expense of approximately $11.2 million.
Professional services expense increased by $8.6 million in 2015 to $218.6 million compared to 2014 due to an increase of approximately $6.0 million of debit card processing services and an increase of approximately $2.4 million of consulting fees.

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Marketing expense increased by $5.7 million to $41.8 million in 2015 due primarily to BBVA's sponsorship of the NBA and the launch of the NBA American Express in 2015.
Amortization of intangibles decreased by $11.6 million to $39.2 million in 2015 due to the lower level of intangible assets in 2015 compared to 2014.
FDIC indemnification expense was $55.1 million in 2015 compared to $115.0 million in 2014. The decrease in 2015 was driven by the decrease in the balance of the covered loan portfolio.
Goodwill impairment related to the Simple reporting unit was $17.0 million in 2015 compared to $12.5 million in 2014. Refer to "—Goodwill" and Note 8, Goodwill and Other Acquired Intangible Assets in the Notes to the Consolidated Financial Statements for further details.
Other noninterest expense increased in 2015 to $220.0 million compared to $217.1 million in 2014.
Income Tax Expense
The Company’s income tax expense totaled $146.0 million, $176.5 million and $155.8 million for 2016, 2015, and 2014, respectively. The effective tax rate was 28.2%, 25.8%, and 24.3% for 2016, 2015 and 2014, respectively.
The increase in the effective tax rate for 2016 compared to 2015 was primarily driven by the goodwill impairment recognized in 2016.
The increase in the effective tax rate in 2015 compared to 2014 was primarily driven by higher net income before income tax expense relative to permanent income tax differences in 2015 as compared to 2014 and the release of a valuation allowance on net operating losses of BSI during 2014.
Refer to Note 20, Income Taxes, in the Notes to the Consolidated Financial Statements for a reconciliation of the effective tax rate to the statutory tax rate and a discussion of uncertain tax positions and other tax matters.
Business Segment Results
The Company reports on three business segments: Consumer and Commercial Banking, Corporate and Investment Banking, and Treasury. Additional detailed financial information on each business segment is included in Note 23, Segment Information, in the Notes to the Consolidated Financial Statements. Results of the Company’s business segments are based on the Company’s lines of business and internal management accounting policies that have been developed to reflect the underlying economics of the business. The structure and accounting practices are specific to the Company; therefore, the financial results of the Company’s business segments are not necessarily comparable with similar information for other financial institutions.
The Company employs an FTP methodology at the business segment level in the determination of net interest income earned primarily on loans and deposits. This methodology is a matching fund concept whereby the lines of business that are fund providers are credited and those that are fund users are charged based on maturity, prepayment and/or repricing characteristics applied on an instrument level. The intent of the FTP methodology is to transfer interest rate risk from the business segments by providing matched duration funding of assets and liabilities. Matching duration allocates interest income and expense to each segment so its resulting net interest income is insulated from interest rate risk.
Revenue is recorded in the business segment responsible for the related product or service. Fee sharing is recorded to allocate portions of such revenue to other business segments involved in selling to, or providing services to, customers. Results of operations for the business segments reflect these fee sharing allocations. In addition, the financial results of the business segments include allocations for shared services and operations expenses.

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Net income by business segment is summarized in the following table:
 
Years Ended December 31,
 
2016
 
2015
 
2014
 
(In Thousands)
Consumer and Commercial Banking
$
593,757

 
$
558,359

 
$
454,529

Corporate and Investment Banking
44,725

 
60,687

 
107,917

Treasury
19,320

 
67,166

 
45,648

Corporate Support and Other
(286,279
)
 
(178,854
)
 
(123,718
)
Net income
$
371,523

 
$
507,358

 
$
484,376


Consumer and Commercial Banking
The following table contains selected financial data for the Consumer and Commercial Banking segment:
Consumer and Commercial Banking
Years Ended December 31,
 
2016
 
2015
 
2014
 
(In Thousands)
Net interest income
$
2,219,343

 
$
2,001,780

 
$
1,868,809

Allocated provision for loan losses
240,355

 
138,592

 
114,850

Noninterest income
825,881

 
825,417

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