10-K 1 form10k.htm FORM 10-K
 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

 

Commission File Number: 1-10853

 

BB&T CORPORATION

(Exact name of Registrant as specified in its Charter)

 

   
North Carolina 56-0939887
(State of Incorporation) (I.R.S. Employer Identification No.)
   

200 West Second Street

Winston-Salem, North Carolina

27101
(Address of principal executive offices) (Zip Code)

(336) 733-2000

(Registrant’s telephone number, including area code)

 

 

Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934:

     
Title of each class

Name of each exchange

on which registered

 
  Common Stock, $5 par value New York Stock Exchange
 

Depositary Shares each representing 1/1,000th interest in a share of Series D Non-Cumulative Perpetual Preferred Stock

New York Stock Exchange
 

Depositary Shares each representing 1/1,000th interest in a share of Series E Non-Cumulative Perpetual Preferred Stock

New York Stock Exchange
 

Depositary Shares each representing 1/1,000th interest in a share of Series F Non-Cumulative Perpetual Preferred Stock 

New York Stock Exchange
 

Depositary Shares each representing 1/1,000th interest in a share of Series G Non-Cumulative Perpetual Preferred Stock

 

New York Stock Exchange
         

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  [X]   No  [  ]

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  [  ]   No  [X]

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  [X]   No  [  ]

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).     Yes  [X]   No  [  ]

Indicate by check mark 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 references in Part III of this Form 10-K or any amendment to this Form 10-K.    [X]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer X      Accelerated filer        
         
Non-accelerated filer       (Do not check if a smaller reporting company) Smaller reporting company        

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  [  ]   No  [X]

At January 31, 2015, the Company had 720,801,219 shares of its Common Stock, $5 par value, outstanding. As of June 30, 2014, the aggregate market value of voting stock held by nonaffiliates of the Company was approximately $28.3 billion.

 
 
 

 

BB&T CORPORATION
Index
December 31, 2014
 
      Page Nos.
       
PART I
Item 1 Business  
Item 1A Risk Factors   21 
Item 1B Unresolved Staff Comments - (None to be reported)    
Item 2 Properties   28 
Item 3 Legal Proceedings (see Note 13 and Note 15)   124, 129
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   28 
Item 6 Selected Financial Data   32 
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations   33 
Item 7A Quantitative and Qualitative Disclosures About Market Risk (see Market Risk Management)   71 
Item 8 Financial Statements and Supplementary Data    
  Consolidated Balance Sheets   88 
  Consolidated Statements of Income   89 
  Consolidated Statements of Comprehensive Income   90 
  Consolidated Statements of Changes in Shareholders' Equity   91 
  Consolidated Statements of Cash Flows   92 
  Notes to Consolidated Financial Statements   93 
  Report of Independent Registered Public Accounting Firm   87 
  Quarterly Financial Summary   81 
Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure - (None to be reported)    
Item 9A Controls and Procedures   86 
Item 9B Other Information - (None to be reported)    
PART III
Item 10 Directors, Executive Officers and Corporate Governance   *
Item 11 Executive Compensation   *
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   *
Item 13 Certain Relationships and Related Transactions, and Director Independence   *
Item 14 Principal Accounting Fees and Services   *
PART IV
Item 15 Exhibits, Financial Statement Schedules    
  Financial Statements - (see Listing in Item 8 above)    
  Exhibits   150 
  Financial Statement Schedules - (None required)    
2

 

 

  * For information regarding executive officers, refer to “Executive Officers of BB&T” in Part I. The other information required by Item 10 is incorporated herein by reference to the information that appears under the headings “Proposal 1-Election of Directors,” “Corporate Governance Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s Proxy Statement for the 2015 Annual Meeting of Shareholders.

 

    The information required by Item 11 is incorporated herein by reference to the information that appears under the headings “Compensation Discussion and Analysis,” “Compensation of Executive Officers,” “Compensation Committee Report on Executive Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation of Directors” in the Registrant’s Proxy Statement for the 2015 Annual Meeting of Shareholders.

 

    For information regarding the registrant’s securities authorized for issuance under equity compensation plans, refer to “Equity Compensation Plan Information” in Part II.

 

    The other information required by Item 12 is incorporated herein by reference to the information that appears under the headings “Stock Ownership Information” and “Compensation of Executive Officers” in the Registrant’s Proxy Statement for the 2015 Annual Meeting of Shareholders.

 

    The information required by Item 13 is incorporated herein by reference to the information that appears under the headings “Corporate Governance Matters” and “Transactions with Executive Officers and Directors” in the Registrant’s Proxy Statement for the 2015 Annual Meeting of Shareholders.

 

    The information required by Item 14 is incorporated herein by reference to the information that appears under the headings “Fees to Auditors” and “Corporate Governance Matters” in the Registrant’s Proxy Statement for the 2015 Annual Meeting of Shareholders.
3

Glossary of Defined Terms

The following terms may be used throughout this Report, including the consolidated financial statements and related notes.

 

Term   Definition
2006 Repurchase Plan   Plan for the repurchase of up to 50 million shares of BB&T’s common stock
ACL   Allowance for credit losses
Acquired from FDIC   Assets of Colonial Bank acquired from the Federal Deposit Insurance Corporation during 2009, which are currently covered or were formerly covered under loss sharing agreements
AFS   Available-for-sale
ALLL   Allowance for loan and lease losses
AOCI   Accumulated other comprehensive income (loss)
BankAtlantic   BankAtlantic, a federal savings association acquired by BB&T from BankAtlantic Bancorp, Inc.
Basel III   Global regulatory standards on bank capital adequacy and liquidity published by the BCBS
BB&T   BB&T Corporation and subsidiaries
BCBS   Basel Committee on Bank Supervision
BHC   Bank holding company
BHCA   Bank Holding Company Act of 1956, as amended
Branch Bank   Branch Banking and Trust Company
CCAR   Comprehensive Capital Analysis and Review
CD   Certificate of deposit
CDI   Core deposit intangible assets
CFPB   Consumer Financial Protection Bureau
CEO   Chief Executive Officer
CRO   Chief Risk Officer
CMO   Collateralized mortgage obligation
Colonial   Collectively, certain assets and liabilities of Colonial Bank acquired by BB&T in 2009
Company   BB&T Corporation and subsidiaries (interchangeable with "BB&T" above)
Council   Financial Stability Oversight Council
CRA   Community Reinvestment Act of 1977
CRE   Commercial real estate
CRMC   Credit Risk Management Committee
CROC   Compliance Risk Oversight Committee
Crump Insurance   The life and property and casualty insurance operations acquired from the Crump Group
DIF   Deposit Insurance Fund administered by the FDIC
Directors’ Plan   Non-Employee Directors’ Stock Option Plan
Dodd-Frank Act   Dodd-Frank Wall Street Reform and Consumer Protection Act
EITSC   Enterprise IT Steering Committee
EPS   Earnings per common share
ERP   Enterprise resource planning
EU   European Union
EVE   Economic value of equity
Exchange Act   Securities Exchange Act of 1934, as amended
FASB   Financial Accounting Standards Board
FATCA   Foreign Account Tax Compliance Act
FDIC   Federal Deposit Insurance Corporation
FHA   Federal Housing Administration
FHC   Financial Holding Company
FHLB   Federal Home Loan Bank
FHLMC   Federal Home Loan Mortgage Corporation
FINRA   Financial Industry Regulatory Authority
FNMA   Federal National Mortgage Association
FRB   Board of Governors of the Federal Reserve System
FTE   Fully taxable-equivalent
FTP   Funds transfer pricing
GAAP   Accounting principles generally accepted in the United States of America
GNMA   Government National Mortgage Association
4

 

Term   Definition
Grandbridge   Grandbridge Real Estate Capital, LLC
GSE   U.S. government-sponsored enterprise
HFI   Held for investment
HMDA   Home Mortgage Disclosure Act
HTM   Held-to-maturity
HUD-OIG   Office of Inspector General, U.S. Department of Housing and Urban Development
IDI   Insured depository institution
IMLAFA   International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001
IPV   Independent price verification
IRA   Individual retirement account
IRC   Internal Revenue Code
IRS   Internal Revenue Service
ISDA   International Swaps and Derivatives Association, Inc.
LCR   Liquidity Coverage Ratio
LHFS   Loans held for sale
LIBOR   London Interbank Offered Rate
LOB   Line of business
MBS   Mortgage-backed securities
MRLCC   Market Risk, Liquidity and Capital Committee
MSR   Mortgage servicing right
MSRB   Municipal Securities Rulemaking Board
NIM   Net interest margin
NPA   Nonperforming asset
NPL   Nonperforming loan
NPR   Notice of Proposed Rulemaking
NYSE   NYSE Euronext, Inc.
OAS   Option adjusted spread
OCC   Office of the Comptroller of the Currency
OCI   Other comprehensive income (loss)
OREO   Other real estate owned
ORMC   Operational Risk Management Committee
OTTI   Other-than-temporary impairment
Parent Company   BB&T Corporation, the parent company of Branch Bank and other subsidiaries
Patriot Act   Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
Peer Group   Financial holding companies included in the industry peer group index
Reform Act   Federal Deposit Insurance Reform Act of 2005
RMC   Risk Management Committee
RMO   Risk Management Organization
RSU   Restricted stock unit
RUFC   Reserve for unfunded lending commitments
S&P   Standard & Poor's
SBIC   Small Business Investment Company
SCAP   Supervisory Capital Assessment Program
SEC   Securities and Exchange Commission
Short-Term Borrowings   Federal funds purchased, securities sold under repurchase agreements and other short-term borrowed funds with original maturities of less than one year
Simulation   Interest sensitivity simulation analysis
TBA   To be announced
TDR   Troubled debt restructuring
U.S.   United States of America
U.S. Treasury   United States Department of the Treasury
UPB   Unpaid principal balance
VA   U.S. Department of Veterans Affairs
VaR   Value-at-risk
VIE   Variable interest entity

 

5

Forward-Looking Statements

 

This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the financial condition, results of operations, business plans and the future performance of BB&T that are based on the beliefs and assumptions of the management of BB&T and the information available to management at the time that these disclosures were prepared. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “projects,” “may,” “will,” “should,” “could,” and other similar expressions are intended to identify these forward-looking statements. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. Such factors include, but are not limited to, the following:

 

·general economic or business conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit, insurance or other services;

 

·disruptions to the credit and financial markets, either nationally or globally, including the impact of a downgrade of U.S. government obligations by one of the credit ratings agencies and the adverse effects of recessionary conditions in Europe;

 

·changes in the interest rate environment and cash flow reassessments may reduce NIM and/or the volumes and values of loans made or held as well as the value of other financial assets held;

 

·competitive pressures among depository and other financial institutions may increase significantly;

 

·legislative, regulatory or accounting changes, including changes resulting from the adoption and implementation of the Dodd-Frank Act may adversely affect the businesses in which BB&T is engaged;

 

·local, state or federal taxing authorities may take tax positions that are adverse to BB&T;

 

·a reduction may occur in BB&T’s credit ratings;

 

·adverse changes may occur in the securities markets;

 

·competitors of BB&T may have greater financial resources and develop products that enable them to compete more successfully than BB&T and may be subject to different regulatory standards than BB&T;

 

·cyber-security risks, including “denial of service,” “hacking” and “identity theft,” could adversely affect our business and financial performance, or our reputation;

 

·natural or other disasters could have an adverse effect on BB&T in that such events could materially disrupt BB&T’s operations or the ability or willingness of BB&T’s customers to access the financial services BB&T offers;

 

·costs related to the integration of the businesses of BB&T and its merger partners may be greater than expected;

 

·expected cost savings or revenue growth associated with completed mergers and acquisitions may not be fully realized or realized within the expected time frames;

 

·significant litigation could have a material adverse effect on BB&T;

 

·deposit attrition, customer loss and/or revenue loss following completed mergers and acquisitions may be greater than expected; and

 

·failure to implement part or all of the Company’s new ERP system could result in impairment charges that adversely impact BB&T’s financial condition and results of operations and could result in significant additional costs.

 

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Actual results may differ materially from those expressed in or implied by any forward-looking statement. Except to the extent required by applicable law or regulation, BB&T undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

6

 

ITEM 1. BUSINESS

 

BB&T is a FHC headquartered in Winston-Salem, North Carolina. BB&T conducts its business operations primarily through its bank subsidiary, Branch Bank, and other nonbank subsidiaries.

 

Operating Subsidiaries

 

Branch Bank (Winston-Salem, North Carolina), BB&T’s largest subsidiary, was chartered in 1872 and is the oldest bank headquartered in North Carolina. Branch Bank provides a wide range of banking and trust services for retail and commercial clients in its geographic markets, including small and mid-size businesses, public agencies, local governments and individuals, through 1,839 offices (as of December 31, 2014). Branch Bank’s principal operating subsidiaries include:

 

·BB&T Equipment Finance Corporation (Charlotte, North Carolina), provides loan and lease financing to commercial and small businesses;

 

·BB&T Insurance Services, Inc. (Raleigh, North Carolina), offers property and casualty, life, health, employee benefits, commercial general liability, surety, title and other insurance products through its agency network;

 

·BB&T Investment Services, Inc. (Charlotte, North Carolina), is a registered broker-dealer and offers clients non-deposit investment products, including discount brokerage services, equities, fixed-rate, variable-rate and index annuities, mutual funds, government and municipal bonds, and money market funds;

 

·CRC Insurance Services, Inc. (Birmingham, Alabama), is a wholesale insurance broker authorized to do business nationwide;

 

·Crump Life Insurance Services, Inc. (Roseland, New Jersey), is a wholesale insurance broker authorized to do business nationwide;

 

·Grandbridge (Charlotte, North Carolina), specializes in arranging and servicing commercial mortgage loans;

 

·McGriff, Seibels & Williams, Inc. (Birmingham, Alabama), is authorized to do business nationwide and specializes in providing insurance products on an agency basis to large commercial clients, including many Fortune 500 companies; and

 

·Prime Rate Premium Finance Corporation, Inc. (Florence, South Carolina), and its subsidiaries, which include AFCO Credit Corporation, provide insurance premium financing to clients in the United States and Canada.

 

Major Nonbank Subsidiaries

 

BB&T also has a number of nonbank subsidiaries, including:

 

·BB&T Securities, LLC (Richmond, Virginia), is a registered investment banking and full-service brokerage firm that provides services in retail brokerage, equity and debt underwriting, investment advice, corporate finance and equity research; and facilitates the origination, trading and distribution of fixed-income securities and equity products in both the public and private capital markets. BB&T Securities, LLC also provides correspondent clearing services to broker-dealers and entities involved in the securities industry;

 

·Regional Acceptance Corporation (Greenville, North Carolina), specializes in nonprime, indirect financing for consumer purchases of primarily mid-model and late-model used automobiles;

 

·Sterling Capital Management, LLC (Charlotte, North Carolina), is a registered investment advisor, which provides tailored investment management solutions to meet the specific needs and objectives of individual and institutional clients through a full range of investment strategies; and

 

·American Coastal Insurance Company (Davie, Florida), is an admitted Florida specialty insurance company that underwrites property insurance risks for commercial condominium or cooperative associations.

 

7

Services

 

BB&T’s subsidiaries offer a variety of services targeted to retail and commercial clients. BB&T’s objective is to offer clients a full array of products to meet all their financial needs.

 

  Retail Services:   Commercial Services:  
    Asset management     Asset management  
    Automobile lending     Association services  
    Bankcard lending     Capital markets services  
    Consumer finance     Commercial deposit services  
    Home equity lending     Commercial finance  
    Home mortgage lending     Commercial middle market lending  
    Insurance     Commercial mortgage lending  
    Investment brokerage services     Corporate banking  
    Mobile/online banking     Institutional trust services  
    Payment solutions     Insurance  
    Retail deposit services     Insurance premium finance  
    Sales finance     International banking services  
    Small business lending     Leasing  
    Wealth management/private banking     Merchant services  
          Mortgage warehouse lending  
          Payment solutions  
          Private equity investments  
          Real estate lending  
          Supply chain management  

 

Market Area
                             
The following table reflects BB&T’s deposit market share and branch locations by state:
                             
Table 1
BB&T Deposit Market Share and Branch Locations by State
                             
              % of BB&T's Deposits (2)   Deposit Market Share Rank (2)   Number of Branches (3)  
  North Carolina (1)    23  %     2nd    358   
  Virginia    20        4th    361   
  Florida    14        6th    325   
  Georgia    10        5th    161   
  South Carolina    7        3rd    113   
  Maryland    7        7th    125   
  West Virginia    5        1st    77   
  Kentucky    4        4th    82   
  Alabama    3        5th    88   
  Texas    3        19th    82   
  Tennessee    2        7th    52   
  Washington, D.C.    2        7th    13   
                             
                             
 (1) Excludes home office deposits.
 (2) Source: FDIC.gov-data as of June 30, 2014.
 (3) As of December 31, 2014. Excludes two branches in Indiana.

 

BB&T operates in markets that have a diverse employment base covering numerous industries. Management strongly believes that BB&T’s community bank approach to providing client service is a competitive advantage that strengthens the Company’s ability to effectively provide financial products and services to businesses and individuals in its markets. Furthermore, BB&T believes its current market area will support growth in assets and deposits in the future.

 

8

Competition

 

The financial services industry is highly competitive and constantly evolving. BB&T’s subsidiaries compete actively with national, regional and local financial services providers, including banks, thrifts, securities dealers, mortgage bankers, finance companies and insurance companies. In recent years, competition has increased from institutions not subject to the same regulatory restrictions as domestic banks and BHCs. Consumers have the opportunity to select from a variety of traditional and nontraditional alternatives. The industry frequently sees merger activity, which affects competition by eliminating some regional and local institutions, while strengthening the franchises of acquirers. For additional information concerning markets, BB&T’s competitive position and business strategies and recent government interventions, see “Market Area” above and “General Business Development” below.

 

General Business Development

 

BB&T is a regional FHC and has maintained a long-term focus on a strategy that includes expansion of asset size and diversification in terms of revenues and sources of profitability. This strategy encompasses both organic growth and acquisitions of complementary banks and financial businesses.

 

Merger and Acquisition Strategy

 

BB&T’s growth in business, profitability and market share has historically been enhanced by strategic mergers and acquisitions. Management intends to remain disciplined and focused with regard to future merger and acquisition opportunities. BB&T will continue to assess bank and thrift acquisitions subject to market conditions, primarily within or contiguous to BB&T’s existing footprint, and will pursue economically advantageous acquisitions of insurance agencies, specialized lending businesses, and fee income generating financial services businesses. BB&T’s strategy is currently focused on meeting the following three acquisition criteria:

 

·must be strategically attractive – meaning that any bank acquisition should be in BB&T’s existing footprint to allow for cost savings and economies of scale or in contiguous states to provide market diversification, or the transaction must be otherwise strategically compelling;

 

·any risk-related issues would need to be quantified and addressed; and

 

·the transaction must meet BB&T’s financial criteria.

 

During 2014, BB&T completed the purchase of 21 bank branches in Texas, providing $1.2 billion in deposits. BB&T reached an agreement and obtained regulatory approval to acquire 41 additional retail branches in Texas with approximately $2.3 billion in deposits.

 

BB&T also reached agreements to acquire The Bank of Kentucky Financial Corporation, which has $1.9 billion in assets, $1.6 billion in deposits and 32 branches with a strong market share in the northern Kentucky/Cincinnati market, and Susquehanna Bancshares, Inc., which has $18.7 billion in assets, $13.7 billion in deposits and 245 branches in Pennsylvania, Maryland, New Jersey, and West Virginia (balances as of December 31, 2014).

 

Regulatory Considerations

 

The following discussion describes elements of an extensive regulatory framework applicable to BHCs, FHCs and banks and contains specific information about BB&T. Regulation of banks, BHCs and FHCs is intended primarily for the protection of depositors, the DIF and the stability of the financial system, rather than for the protection of shareholders and creditors. As described in more detail below, comprehensive reform of the legislative and regulatory landscape occurred with the passage of the Dodd-Frank Act in 2010. Implementation of the Dodd-Frank Act and related rulemaking activities continued in 2014. In addition to banking laws, regulations and regulatory agencies, BB&T is subject to various other laws, regulations, supervision and examination by other regulatory agencies, all of which directly or indirectly affect the operations and management of BB&T and its ability to make distributions to shareholders.

 

9

BB&T’s earnings are affected by general economic conditions, management policies, changes in state and federal laws and regulations and actions of various regulatory authorities, including those referred to in this section. Proposals to change the laws and regulations to which BB&T is subject are frequently introduced at both the federal and state levels. The likelihood and timing of any such changes and the impact such changes may have on BB&T is impossible to determine with any certainty. The description herein summarizes the significant state and federal laws to which BB&T currently is subject. To the extent statutory or regulatory provisions are described in this section, such descriptions are qualified in their entirety by reference to the particular statutory or regulatory provisions.

 

Financial Regulatory Reform

 

During the past several years, there has been a significant increase in regulation and regulatory oversight for U.S. financial services firms, primarily resulting from the Dodd-Frank Act. The Dodd-Frank Act is extensive, complicated and comprehensive legislation that impacts practically all aspects of a banking organization, representing a significant overhaul of many aspects of the regulation of the financial services industry. The Dodd-Frank Act implements numerous and far-reaching changes that affect financial companies, including banks, BHCs and FHCs such as BB&T.

 

Many of the provisions of the Dodd-Frank Act and other laws are subject to further rulemaking, guidance and interpretation by the applicable federal regulators. BB&T will continue to evaluate the impact of any new regulations so promulgated, including changes in regulatory costs and fees, modifications to consumer products or disclosures required by the CFPB and the requirements of the enhanced supervision provisions, among others.

 

As a BHC and a FHC under federal law, BB&T is subject to regulation under the BHCA and the examination and reporting requirements of the FRB. Branch Bank, a North Carolina state-chartered commercial bank, is subject to regulation, supervision and examination by the North Carolina Commissioner of Banks, the FDIC and the CFPB.

 

State and federal law govern the activities in which Branch Bank engages, the investments it makes and the aggregate amount of loans that may be granted to one borrower. Various consumer and compliance laws and regulations also affect its operations. Branch Bank also is affected by the actions of the FRB as it implements monetary policy.

 

In addition to federal and state banking laws and regulations, BB&T and certain of its subsidiaries and affiliates, including those that engage in securities underwriting, dealing, brokerage, investment advisory and insurance activities, are subject to other federal and state laws and regulations, and supervision and examination by other state and federal regulatory agencies and other regulatory authorities, including the SEC, FINRA, NYSE and various state insurance and securities regulators.

 

FHC Regulation

 

Under current federal law, as a BHC, BB&T has elected to become a FHC, which allows it to offer customers virtually any type of service that is financial in nature or incidental thereto, including banking and activities closely related thereto, securities underwriting, insurance (both underwriting and agency) and merchant banking. In order to maintain its status as a FHC, BB&T and all of its affiliated depository institutions must be well-capitalized and well-managed and have at least a satisfactory CRA rating. The FRB has responsibility for overseeing compliance with these requirements and monitoring FHC status. If the FRB determines that a FHC is not well-capitalized or well-managed, the FHC has a period of time to comply, but during the period of noncompliance, the FRB can place any limitations on the FHC that it believes to be appropriate. Furthermore, if the FRB determines that a FHC has not maintained a satisfactory CRA rating, the FHC would not be able to commence any new financial activities or acquire a company that engages in such activities, although the FHC would still be allowed to engage in activities closely related to banking and make investments in the ordinary course of conducting banking activities.

 

Most of the financial activities that are permissible for FHCs also are permissible for a bank’s “financial subsidiary,” except for insurance underwriting, insurance company portfolio investments, real estate investments and development, and merchant banking, which must be conducted by a FHC. In order for a financial subsidiary of a bank to engage in permissible financial activities, federal law requires the parent bank (and its sister-bank affiliates) to be well-capitalized and well-managed; the aggregate consolidated assets of all of that bank’s financial subsidiaries may not exceed the lesser of 45% of its consolidated total assets or $50 billion; the bank must have at least a satisfactory CRA rating; and, if that bank is one of the 100 largest national banks, it must meet certain financial rating or other comparable requirements.

 

10

Current federal law also establishes a system of functional regulation under which the FRB is the umbrella regulator for BHCs, but BHC affiliates are principally regulated by functional regulators such as the FDIC for state nonmember bank affiliates, the SEC for securities affiliates and state insurance regulators for insurance affiliates. Certain specific activities, including traditional bank trust and fiduciary activities, may be conducted in the bank without the bank being deemed a “broker” or a “dealer” in securities for purposes of functional regulation. Although states generally must regulate bank insurance activities in a nondiscriminatory manner, states may continue to adopt and enforce rules that specifically regulate bank insurance activities in certain identifiable areas.

 

The Dodd-Frank Act also imposes new prudential regulation on depository institutions and their holding companies. As such, BB&T is subject to more stringent standards and requirements with respect to (1) bank and nonbank acquisitions and mergers, (2) the “financial activities” in which it engages as a FHC, (3) affiliate transactions and (4) proprietary trading, among other provisions.

 

Enhanced Supervision Standards for Systemically Important Financial Institutions

 

The Dodd-Frank Act requires the FRB to monitor emerging risks to financial stability and establish enhanced supervision and prudential standards applicable to large, interconnected financial institutions, including BHCs like BB&T, with total consolidated assets of $50 billion or more (often referred to as systemically important financial institutions). During February 2014, the FRB published the final rule implementing the enhanced prudential standards required to be established under section 165 of the Dodd-Frank Act. The enhanced prudential standards include risk-based capital and leverage requirements, liquidity standards, risk management and risk committee requirements, stress test requirements and a debt-to-equity limit for companies that the Council has determined pose a grave threat to financial stability were they to fail such limits.

 

Resolution Planning and Regulation QQ

 

FRB and FDIC regulations require “covered companies” such as BB&T and systemically important financial institutions such as Branch Bank to file, maintain and update plans for a rapid and orderly resolution in the event of material financial distress or failure (a “living will”). Both the FRB and the FDIC must review and approve BB&T’s and Branch Bank’s living wills and are authorized to impose restrictions on BB&T’s and Branch Bank’s growth and activities or operations if deemed necessary. The public portions of BB&T’s and Branch Bank’s resolution plans are available in the Additional Disclosures section of the Investor Relations site at www.bbt.com.

 

CCAR and Stress Test Requirements

 

Current FRB rules require BB&T and other BHCs with $50 billion or more of total consolidated assets to submit annual capital plans based on pre-defined stress scenarios. BB&T and other such BHCs are also required to collect and report certain related data on a quarterly basis to allow the FRB to monitor the companies’ progress against their annual capital plans. Covered BHCs, including BB&T, may pay dividends and repurchase stock only in accordance with a capital plan that has been reviewed by the FRB and as to which the FRB has not objected. The rules also require, among other things, that a covered BHC may not make a capital distribution unless, after giving effect to the distribution, it will meet all minimum regulatory capital ratios and have a ratio of Basel I Tier 1 common capital to risk-weighted assets of at least 5%. In addition, effective January 1, 2015, BB&T must maintain a Basel III common equity tier 1 ratio of at least 4.5%. See Table 3 for additional information about Basel III requirements. The FRB did not object to BB&T’s 2014 capital plan. The 2015 capital plan was submitted during January 2015.

 

The Dodd-Frank Act requires the FRB to conduct an annual supervisory stress test for BHCs, such as BB&T, with $50 billion or more of total consolidated assets. The FRB’s stress test rules also require that BB&T (as well as other covered BHCs) conduct a separate mid-year stress test, file the results of such test with the FRB and publicly disclose details of the scenario and the impact on its capital. BB&T’s annual and midcycle stress test results are available in the Additional Disclosures section of the Investor Relations site on www.bbt.com.

 

During October 2014, the FRB adopted a rule that amends the capital plan and stress test rules to modify the start date of the capital plan and stress test cycles from October 1 to January 1 of the following calendar year. This rule is effective for 2015. The rule also amends the capital plan rule to limit a BHC’s ability to make capital distributions to the extent the BHC’s actual capital issuances are less than the amount indicated in its capital plan under baseline conditions, measured on a quarterly basis.

 

 

11

The Dodd-Frank Act also requires the FDIC to conduct an annual supervisory stress test for FDIC-insured state nonmember banks such as Branch Bank with $50 billion or more of total consolidated assets and requires such institutions to conduct annual company-run stress tests. The results of the annual supervisory stress test are included in the annual capital plan submitted to the FDIC.

 

The FDIC published rulemaking that revises FDIC rules and regulations regarding the annual stress testing requirements for state non-member banks and state savings associations with total consolidated assets of more than $10 billion. FDIC regulations, which implement section 165(i)(2) of the Dodd-Frank Act, require covered banks to conduct annual stress tests and report the results of such stress tests to the FDIC and the FRB and publicly disclose a summary of the results of the required stress tests. The FDIC modified the “as-of” dates for financial data that covered banks will use to perform their stress tests as well as the reporting dates and public disclosure dates of the annual stress tests. The revisions to the regulations will become effective January 1, 2016.

 

Acquisitions

 

BB&T complies with numerous laws related to its acquisition activity. Under the BHCA, a BHC may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any BHC or bank or merge or consolidate with another BHC without the prior approval of the FRB.

 

Current federal law authorizes interstate acquisitions of banks and BHCs without geographic limitation. Furthermore, a bank headquartered in one state is authorized to merge with a bank headquartered in another state, subject to market share limitations and any state requirement that the target bank shall have been in existence and operating for a minimum period of time. After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable federal or state law. These regulatory considerations are applicable to privately negotiated acquisition transactions.

 

During 2014, the FRB issued a final rule to implement section 622 of the Dodd-Frank Act, which generally prohibits a financial company from combining with another company if the ratio of the resulting company's liabilities exceeds 10 percent of the aggregate consolidated liabilities of all financial companies.

 

Other Safety and Soundness Regulations

 

The FRB has enforcement powers over BHCs and their nonbanking subsidiaries. The FRB has authority to prohibit activities that represent unsafe or unsound practices or constitute violations of law, rule, regulation, administrative order or written agreement with a federal regulator. These powers may be exercised through the issuance of cease and desist orders, civil money penalties or other actions.

 

There also are a number of obligations and restrictions imposed on BHCs and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance fund in the event the depository institution is insolvent or is in danger of becoming insolvent. For example, under requirements of the FRB with respect to BHC operations, a BHC is required to serve as a source of financial strength to its subsidiary depository institutions and to commit financial resources to support such institutions in circumstances where it might not do so otherwise. In addition, the “cross-guarantee” provisions of federal law require IDIs under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the DIF as a result of the insolvency of commonly controlled IDIs or for any assistance provided by the FDIC to commonly controlled IDIs in danger of failure. The FDIC’s claim for reimbursement under the cross-guarantee provisions is superior to claims of shareholders of the IDI or its holding company but is subordinate to claims of depositors, secured creditors and nonaffiliated holders of subordinated debt of the commonly controlled IDI.

 

Federal and state banking regulators also have broad enforcement powers over Branch Bank, including the power to impose fines and other civil and criminal penalties, and to appoint a receiver in order to conserve the assets of Branch Bank for the benefit of depositors and other creditors. The North Carolina Commissioner of Banks also has the authority to take possession of a North Carolina state bank in certain circumstances, including, among other things, when it appears that such bank has violated its charter or any applicable laws, is conducting its business in an unauthorized or unsafe manner, is in an unsafe or unsound condition to transact its business or has an impairment of its capital stock.

 

 

12

Payment of Dividends; Capital Requirements

 

The Parent Company is a legal entity separate and distinct from Branch Bank and its subsidiaries. The majority of the Parent Company’s revenue is from dividends paid by Branch Bank. Branch Bank is subject to laws and regulations that limit the amount of dividends it can pay. In addition, BB&T and Branch Bank are subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above regulatory minimums, and to remain “well-capitalized” under the prompt corrective action regulations summarized elsewhere in this section. Federal banking regulators have indicated that banking organizations should generally pay dividends only if (1) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (2) the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. BB&T’s 2015 capital actions will depend on the FRB’s review of BB&T’s 2015 capital plan.

 

North Carolina law states that, provided a bank does not make distributions that reduce its capital below its applicable required capital, the board of directors of a bank chartered under the laws of North Carolina may declare such distributions as the directors deem proper.

 

Capital Requirements
                                         
Information related to certain capital ratios is shown in the following table:
                                         
Table 2
Capital Adequacy Ratios
December 31, 2014
                                         
          Regulatory Minimum   Regulatory Minimum to be Well-Capitalized   BB&T   Branch Bank  
                                         
  Risk-based capital ratios:                                
    Tier 1 capital    4.0  %      6.0  %      12.4  %      11.7  %  
    Total risk-based capital    8.0         10.0         14.9         13.4     
    Tier 1 common capital   N/A       N/A        10.6         11.7     
  Tier 1 leverage capital ratio    3.0         5.0         9.9         9.3     

 

The federal banking agencies, including the FRB and the FDIC, are required to take “prompt corrective action” in respect of depository institutions and their BHCs that do not meet minimum capital requirements. The law establishes five capital categories for IDIs for this purpose: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” To be considered “well-capitalized” under these standards, an institution must maintain the ratios shown above and must not be subject to any order or written directive to meet and maintain a specific capital level for any capital measure.

 

Federal law also requires the bank regulatory agencies to implement systems for “prompt corrective action” for institutions that fail to meet minimum capital requirements within the five capital categories, with progressively more severe restrictions on operations, management and capital distributions according to the category in which an institution is placed. Additionally, failure to meet capital requirements may cause an institution to be directed to raise additional capital. Federal law further mandates that the agencies adopt safety and soundness standards generally relating to operations and management, asset quality and executive compensation, and authorizes administrative action against an institution that fails to meet such standards.

 

In addition to the “prompt corrective action” directives, failure to meet capital guidelines may subject a banking organization to a variety of other enforcement remedies, including additional substantial restrictions on its operations and activities, termination of deposit insurance by the FDIC and, under certain conditions, the appointment of a conservator or receiver.

 

 

13

 

U.S. Implementation of Basel III

 

During 2013, the FRB published final rules establishing a new comprehensive capital framework for U.S. banking organizations known as Basel III. The rules substantially revise the risk-based capital requirements applicable to BHCs and depository institutions, including BB&T and Branch Bank, compared to the current U.S. risk-based capital rules. The rules define the components of capital and address other issues affecting banking institutions' regulatory capital ratios. The rules also address risk weights and other issues affecting the denominator in banking institutions' regulatory capital ratios and replace the existing risk-weighting approach, which was derived from Basel I capital accords of the BCBS, with a more risk-sensitive approach based, in part, on the standardized approach in the BCBS's 2004 “Basel II” capital accords. The Basel III rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies' rules. BB&T qualifies as a standardized approach banking organization and must comply with the new requirements beginning on January 1, 2015. Institutions with greater than $250 billion in assets or $10 billion in foreign assets are considered advanced approach banking organizations, which requires a more conservative calculation of risk-weighted assets.

 

The Basel III rules, among other things, (1) introduce a new capital measure referred to as common equity Tier 1; (2) specify that Tier 1 capital consist of Tier 1 common equity and additional Tier 1 capital instruments meeting specified requirements; (3) define Tier 1 common equity narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to Tier 1 common equity and not to the other components of capital; and (4) expand the scope of the deductions/adjustments from capital as compared to existing regulations.

 

The Basel III rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, resulting in higher risk weights for a variety of asset categories. In addition, the rules provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.

 

The Basel III rules revise the “prompt corrective action” directives by establishing more conservative ratio levels for well-capitalized status. In addition to the minimum risk-based capital requirements, all banks must hold additional capital, the capital conservation buffer (which is in the form of common equity), to avoid being subject to limits on capital distributions, such as dividend payments, discretionary payments on Tier 1 instruments, share buybacks, and certain discretionary bonus payments to executive officers, including heads of major business lines and similar employees. The required amount of the capital conservation buffer will be phased-in annually through January 1, 2019.

 

During September 2014, the FDIC, FRB and OCC issued a final rule on the U.S. implementation of the Basel III LCR rule. Under the final rule, BB&T will be considered a “modified LCR” holding company. BB&T would be subject to full LCR requirements if its operations were to fall under the “internationally active” rules, which would generally be triggered if BB&T’s assets were to increase above $250 billion. BB&T implemented balance sheet changes to support its compliance with the rule and to optimize its balance sheet based on the final rule. These actions included changing the mix of the investment portfolio to include more GNMA and U.S. Treasury securities, which qualify as Level 1 under the rule, and changing its deposit mix to increase retail and commercial deposits. Based on management’s interpretation of the final rule, BB&T’s LCR was approximately 130% at December 31, 2014, compared to the regulatory minimum of 90% that will be effective January 1, 2016, which puts BB&T in full compliance with the rule. The regulatory minimum will increase to 100% on January 1, 2017. The final rule requires each financial institution to have a method for determining “operational deposits” as defined by the rule. The number above includes an estimate of operational deposits; however, BB&T continues to evaluate its method to identify and measure operational deposits.

 

 

 

14

 

The following table summarizes the capital requirements and BB&T’s internal targets under Basel III:
                                                 
Table 3
Capital Under Basel III
                                                 
          Minimum   Well-   Minimum Capital Plus Capital Conservation Buffer   BB&T
          Capital   Capitalized   2016    2017    2018    2019 (1)   Target
Common equity Tier 1 to risk-weighted assets    4.5  %    6.5  %    5.125  %    5.750  %    6.375  %    7.000  %    8.5  %
Tier 1 capital to risk-weighted assets    6.0       8.0       6.625       7.250       7.875       8.500       10.0   
Total capital to risk-weighted assets    8.0       10.0       8.625       9.250       9.875       10.500       12.0   
Leverage ratio    4.0       5.0      N/A     N/A     N/A     N/A      7.0   
                                                 
                                                 
(1) Upon Basel III becoming effective on January 1, 2015, BB&T's goal is to maintain capital levels above the 2019 requirements.

 

 

The following table presents the calculation of the common equity Tier 1 ratio under the U.S. Basel III guidelines:

 

 

Table 4
Basel III Capital Ratios (1)
 
          December 31,  
          2014   2013  
                         
          (Dollars in millions)  
  Tier 1 common equity under Basel I definition $  15,237      $  13,471     
    Net impact of differences between Basel I and Basel III definitions    86         98     
  Tier 1 common equity under Basel III definition $  15,323      $  13,569     
  Risk-weighted assets under Basel III definition $  149,071      $  140,670     
  Common equity Tier 1 ratio under Basel III    10.3  %      9.7  %  
                         
                         
 (1) The Basel III amounts are based upon management's interpretation of the rules adopted by the FRB, which became effective on January 1, 2015.

 

Home Mortgage Disclosure (Regulation C)

 

The CFPB published proposed amendments to Regulation C to implement changes to HMDA made by section 1094 of the Dodd-Frank Act. Specifically, the CFPB proposed several changes to revise the tests for determining which financial institutions and housing-related credit transactions are covered under HMDA. The CFPB also proposes to require financial institutions to report new data points identified in the Dodd-Frank Act, as well as other data points the CFPB believes may be necessary to carry out the purposes of HMDA. Further, the CFPB proposes to better align the requirements of Regulation C to existing industry standards where practicable. To improve the quality and timeliness of HMDA data, the CFPB proposed to require financial institutions with large numbers of reported transactions to submit their HMDA data on a quarterly, rather than an annual, basis.

 

Enhanced Prudential Standards for BHCs and Foreign Banking

 

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

 

 

15

Foreign Account Tax Compliance Act and Conforming Regulations

 

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

 

Volcker Rule

 

The Volcker Rule implements section 619 of the Dodd-Frank Act and prohibits IDIs and affiliated companies ("banking entities") from engaging in short-term proprietary trading of certain securities, derivatives, and commodity futures, and options on these instruments, for their own account. The final rules also impose limits on banking entities' investments in, and other relationships with, hedge funds or private equity funds. Like the Dodd-Frank Act, the rules provide exemptions for certain activities, including market making, underwriting, hedging, trading in government obligations, insurance company activities, and organizing and offering hedge funds or private equity funds. The rules also clarify that certain activities are not prohibited, including acting as agent, broker, or custodian.

 

The compliance requirements under the rules vary based on the size of the banking entity and the scope of activities conducted. Banking entities with significant trading operations will be required to establish a detailed compliance program, and their Chief Executive Officers will be required to attest that the program is reasonably designed to achieve compliance with the final rules. Independent testing and analysis of an institution's compliance program also will be required. The final rules reduce the burden on smaller, less-complex institutions by limiting their compliance and reporting requirements. Additionally, a banking entity that does not engage in covered trading activities will not need to establish a compliance program.

 

Banking entities must conform proprietary trading activities to the final rule by July 21, 2015. The FRB has extended the compliance deadline to July 21, 2016 for purposes of conforming investments in and relationships with covered funds and foreign funds that were in place prior to December 31, 2013. The FRB also announced its intention to grant banking entities an additional one-year extension of the conformance period for legacy funds to July 21, 2017. These requirements are not expected to have a material impact on BB&T’s consolidated financial position, results of operations or cash flows.

 

Deposit Insurance Assessments

 

Branch Bank’s deposits are insured by the DIF of the FDIC up to the limits set forth under applicable law. The FDIC imposes a risk-based deposit premium assessment system that determines assessment rates for an IDI based on an assessment rate calculator, which is based on a number of elements to measure the risk each IDI poses to the DIF. The assessment rate is applied to total average assets less tangible equity, as defined under the Dodd-Frank Act. The assessment rate schedule can change from time to time at the discretion of the FDIC, subject to certain limits. Under the current system, premiums are assessed quarterly.

 

Consumer Protection Laws and Regulations

 

In connection with its lending and leasing activities, Branch Bank is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and their respective state law counterparts.

 

 

16

CFPB

 

The CFPB has broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the laws referenced above, fair lending laws and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets, their service providers and certain non-depository entities such as debt collectors and consumer reporting agencies. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

 

The CFPB has concentrated much of its rulemaking efforts on a variety of mortgage-related topics required under the Dodd-Frank Act, including mortgage origination disclosures, minimum underwriting standards and ability to repay, high-cost mortgage lending, and servicing practices. The rules related to ability to repay, qualified mortgage standards and mortgage servicing became effective in January 2014. The escrow and loan originator compensation rules became effective during 2013. A final rule integrating disclosure required by the Truth in Lending Act and the Real Estate Settlement and Procedures Act becomes effective August 1, 2015. As a result of these rules, BB&T transferred the management of certain home equity loans from direct retail lending within the Community Banking segment to the Residential Mortgage Banking segment.

 

Interchange Fees

 

The FRB adopted rules establishing standards for assessing whether the interchange fees that may be charged with respect to certain electronic debit transactions are “reasonable and proportional” to the costs incurred by issuers for such transactions. Interchange fees, or “swipe” fees, are charges that merchants pay to BB&T and other card-issuing banks for processing electronic payment transactions.

 

During 2013, a U.S. Federal District Court judge ruled against the debit card interchange fee limits imposed by the FRB, resulting in the potential for further reductions to these caps. During March 2014, the Washington, D.C. Circuit Court of Appeals overturned the 2013 lower court decision. During January 2015, the U.S. Supreme Court declined to hear the case, which preserved the limits established by the FRB.

 

Privacy

 

Federal law currently contains extensive customer privacy protection provisions, including substantial customer privacy protections provided under the Financial Services Modernization Act of 1999 (commonly known as the Gramm-Leach-Bliley Act). Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. These provisions also provide that, except for certain limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. Federal law makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.

 

CRA

 

The CRA requires Branch Bank’s primary federal bank regulatory agency, the FDIC, to assess the bank’s record in meeting the credit needs of the communities served by the bank, including low- and moderate-income neighborhoods and persons. Institutions are assigned one of four ratings: “Outstanding,” “Satisfactory,” “Needs to Improve” or “Substantial Noncompliance.” This assessment is reviewed for any bank that applies to merge or consolidate with or acquire the assets or assume the liabilities of an IDI, or to open or relocate a branch office. The CRA record of each subsidiary bank of a FHC, such as BB&T, also is assessed by the FRB in connection with any acquisition or merger application.

 

17

Automated Overdraft Payment Regulation

 

The FRB and FDIC have enacted consumer protection regulations related to automated overdraft payment programs offered by financial institutions. Regulation E prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machine and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. Financial institutions must also provide consumers with a notice that explains the financial institution’s overdraft services, including the fees associated with the service and the consumer’s choices. In addition, FDIC-supervised institutions must monitor overdraft payment programs for “excessive or chronic” customer use and undertake “meaningful and effective” follow-up action with customers that overdraw their accounts more than six times during a rolling 12-month period. Financial institutions must also impose daily limits on overdraft charges, review and modify check-clearing procedures, prominently distinguish account balances from available overdraft coverage amounts and ensure board and management oversight regarding overdraft payment programs.

 

Patriot Act

 

The Patriot Act contains anti-money laundering measures affecting IDIs, broker-dealers and certain other financial institutions. The Patriot Act includes the IMLAFA, which requires such financial institutions to implement policies and procedures to combat money laundering and the financing of terrorism and grants the Secretary of the U.S. Treasury broad authority to establish regulations and to impose requirements and restrictions on financial institutions’ operations. In addition, the Patriot Act requires the federal bank regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and BHC acquisitions. The U.S. Treasury has issued a number of regulations to implement the Patriot Act, which impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing.

 

Other Regulatory Matters

 

BB&T is subject to examinations by federal and state banking regulators, as well as the SEC, the FINRA, the NYSE, various taxing authorities and various state insurance and securities regulators. BB&T periodically receives requests for information from regulatory authorities in various states, including state insurance commissions and state attorneys general, securities regulators and other regulatory authorities, concerning BB&T’s business and accounting practices. Such requests are considered incidental to the normal conduct of business.

 

Employees

 

At December 31, 2014, BB&T had approximately 33,400 employees, the majority of which were full time, compared to approximately 35,000 employees at December 31, 2013.

 

Website Access to BB&T’s Filings with the SEC

 

BB&T’s electronic filings with the SEC, including the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act, as amended, are made available at no cost in the Investor Relations section of the Company’s website, www.bbt.com, as soon as reasonably practicable after BB&T files such material with, or furnishes it to, the SEC. BB&T’s SEC filings are also available through the SEC’s website at www.sec.gov.

 

18

Corporate Governance

 

Information with respect to BB&T’s Board of Directors, Executive Officers and corporate governance policies and principles is presented on BB&T’s website, www.bbt.com, and includes:

 

·Corporate Governance Guidelines

 

·Corporate Board of Directors

 

·Committees of the Corporate Board of Directors and Committee Charters

 

·Codes of Ethics for Directors, Senior Financial Officers and Associates

 

·Executive Officers

 

·Policy and Procedures for Accounting, Securities and Legal Complaints, including Whistleblower Procedures

 

·Statement of Political Activity

 

BB&T intends to disclose any substantive amendments or waivers to the Codes of Ethics for Directors or Senior Financial Officers on BB&T’s website at www.bbt.com.

 

 

19

 

     Executive Officers of BB&T

 

Executive Officer   Recent Work Experience   Years of Service   Age
Kelly S. King   Chairman since January 2010. Chief Executive Officer since January 2009.   42    66 
Chairman and Chief Executive Officer          
               
Christopher L. Henson   Chief Operating Officer since January 2009.   30    53 
Chief Operating Officer          
               
Daryl N. Bible   Chief Financial Officer since January 2009.     53 
Senior Executive Vice President and          
Chief Financial Officer          
               
Ricky K. Brown   President, Community Banking since July 2004.   37    59 
Senior Executive Vice President and          
President, Community Banking          
               
Barbara F. Duck   Enterprise Risk Manager since July 2009.   27    48 
Senior Executive Vice President and          
Enterprise Risk Manager          
               
Donna C. Goodrich   Deposit Services Manager since April 2004.   29    52 
Senior Executive Vice President and          
Deposit Services Manager          
               
Robert J. Johnson, Jr.   General Counsel, Secretary and Chief Corporate Governance Officer since September 2010. Deputy General Counsel from January 2008 to August 2010.   10    42

  Senior Executive Vice President and

  General Counsel, Secretary and Chief Corporate Governance Officer

         
             
Clarke R. Starnes III   Chief Risk Officer since July 2009.   32    55 
Senior Executive Vice President and          
Chief Risk Officer          
               
Steven B. Wiggs   Chief Marketing Officer since February 2005. Lending Group Manager since July 2009.   35    57 
Senior Executive Vice President and          
Chief Marketing Officer and Lending          
  Group Manager            
               
Cynthia A. Williams   Chief Corporate Communications Officer since June 2009.   29    62 
Senior Executive Vice President and          
Chief Corporate Communications Officer          
               
W. Rufus Yates   President and CEO of BB&T Securities since January 2013. President and CEO of Scott & Stringfellow, LLC from 2009 through 2012.   28    57 
Senior Executive Vice President and          
Capital Markets Manager          
20

 

ITEM 1A. RISK FACTORS

 

The following discussion sets forth some of the more important risk factors that could materially affect BB&T’s financial condition and operations. When a risk factor spans several risk categories, the below risks have been listed by their primary risk category. Other factors that could affect the Company’s financial condition and operations are discussed in the “Forward-Looking Statements” section above. However, there may be additional risks that are not presently material or known, and factors besides those discussed below, or elsewhere in this or other reports that BB&T filed or furnished with the SEC, that also could adversely affect the Company.

 

Compliance Risk

 

Changes in banking laws could have a material adverse effect on BB&T.

 

BB&T is extensively regulated under federal and state banking laws and regulations that are intended primarily for the protection of depositors, federal DIFs and the banking system as a whole. In addition, BB&T is subject to changes in federal and state laws as well as changes in banking and credit regulations and governmental economic and monetary policies. Any of these changes could adversely and materially affect BB&T. The current regulatory environment for financial institutions entails significant potential increases in compliance requirements and associated costs, including those related to consumer credit, with a focus on mortgage lending.

 

Federal and state banking regulators also possess broad powers to take supervisory actions as they deem appropriate. These supervisory actions may result in higher capital requirements, higher deposit insurance premiums and limitations on BB&T’s activities that could have a material adverse effect on its business and profitability.

 

The ongoing implementation of the Dodd-Frank Act, and its related rulemaking activities, may result in lower revenues, higher costs and ratings downgrades. In addition, failure to meet the FRB’s capital planning and adequacy requirements and liquidity requirements under the Dodd-Frank Act and other banking laws may limit the ability to pay dividends, pursue acquisitions and repurchase common stock.

 

The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial services industry, addressing, among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, interchange fees, derivatives, lending limits, and changes among the bank regulatory agencies. Under Dodd-Frank, BB&T is deemed to be a “systemically important” institution. During 2014, federal agencies continued implementation of the Dodd-Frank Act. Many of these provisions remain subject to further rulemaking, guidance, and interpretation by the applicable federal regulators, such as the Council, which will regulate the systemic risk of the financial system. Additionally, the CFPB has finalized a number of significant rules that impact nearly every aspect of the lifecycle of a residential mortgage. These rules implement the Dodd-Frank Act amendments to the Equal Credit Opportunity Act, the Truth in Lending Act and the Real Estate Settlement Procedures Act. These rules have a direct impact on BB&T’s operations, as BB&T is both a mortgage originator and a servicer.

 

Due to BB&T’s size, it is subject to additional regulations such as the “living will” requirements relating to the rapid and orderly resolution of systemically important financial institutions in the event of material financial distress or failure. BB&T cannot predict the additional effects that compliance with the Dodd-Frank Act or any regulations will have on BB&T’s businesses or its ability to pursue future business opportunities. Additional regulations resulting from the Dodd-Frank Act may materially adversely affect BB&T’s business, financial condition or results of operations. See “Regulatory Considerations” for additional information regarding the Dodd-Frank Act and its impact upon BB&T.

 

In addition, BB&T has been subject to assessment by the FRB as part of the CCAR program. CCAR is an annual exercise by the FRB to ensure that institutions have forward-looking capital planning processes that account for their risks and sufficient capital to continue operations throughout times of economic and financial stress. BB&T cannot be certain that the FRB will have no objections to BB&T’s future capital plans submitted through the CCAR program. Failure to pass the CCAR review could adversely affect BB&T’s ability to pay dividends, enter into acquisitions and repurchase common stock.

21

 

BB&T may be subject to more stringent capital requirements, which could diminish its ability to pay dividends or require BB&T to reduce its operations.

 

The Dodd-Frank Act requires federal banking agencies to establish more stringent risk-based capital requirements and leverage limits applicable to banks and BHCs. During 2013, the FRB approved final rules that established a new comprehensive capital framework for U.S. banking organizations and established a more conservative definition of capital. Once adopted and fully phased in, banking organizations such as BB&T would be required to meet enhanced minimum capital and leverage ratios. These requirements, and any other new regulations, including those that have been proposed but not yet implemented as a result of the requirements established by the BCBS, could adversely affect BB&T’s ability to pay dividends, or could require BB&T to limit certain business activities or to raise capital, which may adversely affect its results of operations or financial condition. In addition, the costs associated with complying with more stringent capital requirements, such as the requirement to formulate and submit capital plans based on pre-defined stress scenarios on an annual basis, could have a material adverse effect on BB&T. See “Regulatory Considerations” for additional information regarding the capital requirements under the Dodd-Frank Act and Basel III.

 

Differences in interpretation of tax laws and regulations and any potential resulting litigation may adversely impact BB&T’s financial statements.

 

Local, state or federal tax authorities may interpret tax laws and regulations differently than BB&T and challenge tax positions that BB&T has taken on its tax returns. This may result in differences in the treatment of revenues, deductions, credits and/or differences in the timing of these items. The differences in treatment may result in payment of additional taxes, interest or penalties that could have a material adverse effect on BB&T’s results. For example, as discussed in Note 13 “Income Taxes” in the “Notes to Consolidated Financial Statements,” in February 2010, BB&T received an IRS statutory notice of deficiency for tax years 2002-2007 asserting a liability for taxes, penalties and interest of approximately $892 million. Related developments resulted in a $516 million charge in 2013. Potential developments in BB&T’s litigation or in similar cases could adversely affect BB&T’s financial position or results of operations.

 

Credit Risk

 

Changes in national, regional and local economic conditions and deterioration in the geographic and financial markets in which BB&T operates could lead to higher loan charge-offs and reduce BB&T’s net income and growth.

 

BB&T’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 BB&T’s operations and financial condition even if other favorable events occur. BB&T’s banking operations are locally oriented and community-based. Accordingly, BB&T expects to continue to be dependent upon local business conditions as well as conditions in the local residential and CRE markets it serves. For example, an increase in unemployment, a decrease in real estate values or increases in interest rates, as well as other factors, could weaken the economies of the communities BB&T serves. Weakness in BB&T’s market area could depress its earnings and consequently its financial condition because:

 

·customers may not want or need BB&T’s products or services;

 

·borrowers may not be able or willing to repay their loans;

 

·the value of the collateral securing loans to borrowers may decline; and

 

·the quality of BB&T’s loan portfolio may decline.

 

Any of the latter three scenarios could require BB&T to charge off a higher percentage of loans and/or increase provisions for credit losses, which would reduce BB&T’s net income. Credit deterioration, combined with flat to declining real estate values, would result in increased loan charge-offs and higher provisions for credit losses, which may negatively impact BB&T’s net income.

 

A systemic lack of available credit, a lack of confidence in the financial sector, volatility in the financial markets and/or reduced business activity could materially adversely affect BB&T’s business, financial condition and results of operations.

 

22

Further downgrades of U.S. government securities by one or more of the credit ratings agencies could have a material adverse effect on BB&T’s operations, earnings and financial condition.

 

In 2011, the S&P credit rating agency lowered its long term sovereign credit rating on the United States from AAA to AA+, which reflected S&P’s view that an August 2011 agreement of U.S. lawmakers regarding the debt ceiling fell short of what would be necessary to stabilize the U.S. government’s medium term debt dynamics. In June 2013, S&P reaffirmed that rating, while raising its outlook from “Negative” to “Stable.” The three other major credit rating agencies did not downgrade their previously issued U.S. sovereign credit ratings, though some have issued negative outlooks at various times over the last several years. While the risk of a sovereign credit ratings downgrade of the U.S. government, including the rating of U.S. Treasury securities, has been reduced, the possibility still remains. It is foreseeable that the ratings and perceived creditworthiness of instruments issued, insured or guaranteed by institutions or agencies directly linked to the U.S. government could also be correspondingly affected by any such downgrade. Instruments of this nature are key assets on the balance sheets of financial institutions, including BB&T, and are widely used as collateral by financial institutions to meet their day-to-day cash flow needs in the short-term debt market.

 

A possible future downgrade of the sovereign credit ratings of the U.S. government and a decline in the perceived creditworthiness of U.S. government-related obligations could impact BB&T’s ability to obtain funding that is collateralized by affected instruments, as well as affect the pricing of that funding when it is available. A downgrade may also adversely affect the market value of such instruments. BB&T 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 BB&T. For example, BB&T’s securities portfolio consists largely of MBS issued by GSEs, such as FHLMC and FNMA. Among other things, a further downgrade in the U.S. government’s credit rating could adversely impact the value of these securities and may trigger requirements that the Company post additional collateral for trades relative to these securities. A downgrade of the sovereign credit ratings of the U.S. government or the credit ratings of related institutions, agencies or instruments would significantly exacerbate the other risks to which BB&T is subject and any related adverse effects on the business, financial condition and results of operations.

 

The soundness of other financial institutions could adversely affect BB&T.

 

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. BB&T has exposure to many different industries and counterparties, and BB&T and certain of its subsidiaries routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutions. Many of these transactions expose BB&T to credit risk in the event of default of its counterparty. In addition, BB&T’s credit risk may be exacerbated when collateral is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure. These types of losses could materially and adversely affect BB&T’s results of operations or financial condition.

 

The expiration of the loss sharing agreements related to the Colonial acquisition could result in increased losses on loans and securities.

 

In connection with its acquisition of Colonial, BB&T entered into loss sharing agreements with the FDIC, which provided that a significant portion of losses related to the acquired loan portfolios would be borne by the FDIC. Effective October 1, 2014, loans and securities subject to the commercial loss sharing agreement with the FDIC were no longer covered by loss sharing. These loans and securities totaled $561 million and $1.2 billion, respectively, as of December 31, 2014.

 

Additionally, the single family loss sharing agreement ends in 2019. Any charge-off of related losses that BB&T experiences after the term of the single family loss sharing agreement will not be reimbursed by the FDIC and will negatively impact BB&T’s net income.

 

Liquidity Risk

 

BB&T’s liquidity could be impaired by an inability to access the capital markets, an unforeseen outflow of cash or a reduction in the credit ratings for BB&T or its subsidiaries.

 

Liquidity is essential to BB&T’s businesses. When volatility or disruptions occur in the capital markets, BB&T’s ability to access capital could be materially impaired. Additionally, other factors outside of BB&T’s control, such as a general market disruption or an operational problem that affects third parties, could impair BB&T’s ability to access capital markets or create an unforeseen outflow of cash or deposits. BB&T’s inability to access the capital markets could constrain its ability to make new loans, to meet its existing lending commitments and ultimately jeopardize its overall liquidity and capitalization.

 

23

BB&T’s credit ratings are also important to its liquidity. Rating agencies regularly evaluate BB&T and its subsidiaries, and their ratings are based on a number of factors, including the financial strength of BB&T and its subsidiaries, as well as factors not entirely within BB&T’s control, including conditions affecting the financial services industry generally. As a result, there can be no assurance that BB&T will maintain its current ratings. A reduction in BB&T’s credit ratings could adversely affect BB&T’s liquidity and competitive position, increase its borrowing costs, limit its access to the capital markets or trigger unfavorable contractual obligations.

 

Market Risk

 

Turmoil and volatility in global financial markets could have a material adverse effect on BB&T’s operations, earnings and financial condition.

 

The negative impact on economic conditions and global markets from the EU, Puerto Rico and other sovereign debt matters could adversely affect BB&T’s business, financial condition and liquidity. Global conflicts and political activity could cause turmoil and volatility in the financial markets, which could reduce the value of BB&T’s assets or cause a reduction in liquidity that adversely impacts BB&T’s financial condition and results of operations.

 

The monetary, tax and other policies of governmental agencies, including the FRB, have a significant impact on market interest rates, and BB&T’s business and financial performance is impacted significantly by such interest rates.

 

BB&T’s businesses and earnings are affected by the fiscal and other policies adopted by various regulatory authorities of the U.S., non-U.S. governments and international agencies. The FRB regulates the supply of money and credit in the U.S. The federal policies determine in large part the cost of funds for lending and investing and the return earned on those loans and investments. The market impact from such policies can also materially decrease the value of certain of BB&T’s financial assets, most notably debt securities. Changes in the federal policies are beyond BB&T’s control and, consequently, the impact of these changes on BB&T’s activities and results of operations is difficult to predict.

 

Changes in interest rates may have an adverse effect on BB&T’s profitability.

 

BB&T’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 could adversely affect BB&T’s earnings and financial condition. BB&T 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 FRB, affect interest income and interest expense. As discussed in “Market Risk Management – Interest Rate Market Risk (Other than Trading),” BB&T has ongoing policies and procedures designed to manage the risks associated with changes in market interest rates. However, changes in interest rates still may have an adverse effect on BB&T’s profitability. For example, rising interest rates could adversely affect BB&T’s mortgage banking business because higher interest rates could cause customers to apply for fewer mortgages. Similarly, rising interest rates may increase the cost of BB&T’s deposits, which are a primary source of funding. While BB&T actively manages against these risks through hedging and other risk mitigation strategies, if BB&T’s assumptions regarding borrower behavior are wrong or overall economic conditions are significantly different than anticipated, the Company’s risk mitigation techniques may be insufficient.

 

Loss of deposits or a change in deposit mix could increase the Company’s funding costs.

 

Deposits are a low cost and stable source of funding. BB&T competes with banks and other financial institutions for deposits. Funding costs may increase because the Company may lose deposits and replace them with more expensive sources of funding, clients may shift their deposits into higher cost products or the Company may need to raise its interest rates to avoid losing deposits. Higher funding costs reduce the Company’s NIM, net interest income and net income.

 

24

Operational Risk

 

BB&T faces cybersecurity risks, including “denial of service attacks,” “hacking” and “identity theft” that could result in the disclosure of confidential information, adversely affect BB&T’s business or reputation and create significant legal and financial exposure.

 

BB&T’s computer systems and network infrastructure are subject to security risks and could be susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks and other means. Denial of service attacks have been launched against a number of large financial services institutions, including BB&T. None of these events resulted in a breach of BB&T’s client data or account information; however, the performance of BB&T’s website, www.bbt.com, was adversely affected, and in some instances customers were prevented from accessing BB&T’s website. BB&T expects to be subject to similar attacks in the future. While events to date primarily resulted in inconvenience, future cyber-attacks could be more disruptive and damaging. Hacking and identity theft risks, in particular, could cause serious reputational harm. Cyber threats are rapidly evolving and BB&T may not be able to anticipate or prevent all such attacks. BB&T may incur increasing costs in an effort to minimize these risks and could be held liable for any security breach or loss.

 

Despite efforts to ensure the integrity of its systems, BB&T will not be able to anticipate all security breaches of these types, and BB&T may not be able to implement effective preventive measures against such security breaches. The techniques used by cyber criminals change frequently and can originate from a wide variety of sources, including outside groups such as external service providers, organized crime affiliates, terrorist organizations or hostile foreign governments. Those parties may also attempt to fraudulently induce employees, customers or other users of BB&T’s systems to disclose sensitive information in order to gain access to its data or that of its clients. These risks may increase in the future as the Company continues to increase its mobile-payment and other internet-based product offerings and expands its internal usage of web-based products and applications.

 

A successful penetration or circumvention of system security could cause serious negative consequences to BB&T, including significant disruption of operations, misappropriation of confidential information of BB&T or that of its customers, or damage to computers or systems of the Company or those of its customers and counterparties. A security breach could result in violations of applicable privacy and other laws, financial loss to BB&T or to its customers, loss of confidence in BB&T’s security measures, significant litigation exposure, and harm to BB&T’s reputation, all of which could have a material adverse effect on the Company.

 

BB&T relies on its employees, systems and certain counterparties, and certain failures could materially adversely affect operations.

 

BB&T’s business is dependent on the ability to process, record and monitor a large number of complex transactions. The Company could be materially adversely affected if one or more of its employees causes a significant operational breakdown or failure, either as a result of human error or intentionally. Financial, accounting, or other data processing systems may fail or have other significant shortcomings that materially adversely affect BB&T’s business. In addition, products, services and processes are continually changing and BB&T may not fully identify new operational risks that may arise from such changes. Any of these occurrences could diminish the ability to operate one or more LOBs or result in potential liability to clients, increased operating expenses, higher litigation costs (including fines and sanctions), reputational damage, regulatory intervention or weaker competitive standing, any of which could be material to the Company.

 

If personal, confidential or proprietary information of clients were to be mishandled or misused, significant regulatory consequences, reputational damage and financial loss could occur. Such mishandling or misuse could include circumstances where, for example, such information was erroneously provided to parties who are not permitted to have the information, either through the fault of systems, employees, or counterparties, or where such information was intercepted or otherwise inappropriately taken by third parties.

 

25

BB&T may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control, which may include, for example, security breaches; electrical or telecommunications outages; failures of computer servers or other damage to property or assets; natural disasters; health emergencies or pandemics; or events arising from political events, including terrorist acts. There can be no assurance that disaster recovery or other plans will fully mitigate all potential business continuity risks. Any failures or disruptions of systems or operations could impact BB&T’s ability to service its clients, which could adversely affect BB&T’s results of operations by subjecting BB&T to losses, litigation, regulatory fines or penalties or by requiring the expenditure of significant resources to correct the failure or disruption.

 

Significant litigation could have a material adverse effect on BB&T.

 

BB&T 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 remains high. Substantial legal liability or significant regulatory action against BB&T may have material adverse financial effects or cause significant reputational harm to BB&T, which in turn could seriously harm BB&T’s business prospects.

 

BB&T faces significant operational and other risks related to its activities, which could expose it to negative publicity, litigation and/or regulatory action.

 

BB&T is exposed to many types of risks, including operational, reputational, legal and compliance risk, the risk of fraud or theft by employees or outsiders (including identity and information theft), unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Negative public opinion can result from BB&T’s actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, activities related to asset sales and balance sheet management and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect BB&T’s ability to attract and keep customers and can expose it to litigation and regulatory action.

 

Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. BB&T’s necessary dependence upon automated systems to record and process its 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. BB&T also may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. BB&T 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 is BB&T) and to the risk that BB&T’s (or its vendors’) business continuity and data security systems prove to be inadequate.

 

BB&T relies on other companies to provide certain key components of its business infrastructure.

 

Third party vendors provide certain key components of BB&T’s business infrastructure such as internet connections, network access and mutual fund distribution. While BB&T has selected these third party vendors carefully, it does not control their operations. Any failure by these third parties to perform or provide agreed upon goods and services for any reason, or their poor performance of services, could adversely affect BB&T’s ability to deliver products and services to its customers and otherwise conduct its business. Replacing these third party vendors could also entail significant delay and expense.

 

BB&T may not be able to successfully integrate bank or nonbank mergers and acquisitions.

 

Difficulties may arise in the integration of the business and operations of BHCs, banks and other nonbank entities BB&T acquires and, as a result, BB&T may not be able to achieve the cost savings and synergies that it expects will result from such transactions. Achieving cost savings is dependent on consolidating certain operational and functional areas, eliminating duplicative positions and terminating certain agreements for outside services. Additional operational savings are dependent upon the integration of the acquired or merged entity’s businesses with BB&T or one of BB&T’s subsidiaries, the conversion of core operating systems, data systems and products and the standardization of business practices. Complications or difficulties in the conversion of core operating systems, data systems and products may result in the loss of customers, damage to BB&T’s reputation within the financial services industry, operational problems, one-time costs currently not anticipated or reduced cost savings resulting from such mergers or acquisitions. Annual cost savings in each such transaction may be materially less than anticipated if the holding company, bank merger or nonbank merger or acquisition is delayed unexpectedly, the integration of operations is delayed beyond what is anticipated or the conversion to a single set of data systems is not accomplished on a timely basis.

 

26

Difficulty in integrating an acquired company may cause BB&T not to realize expected revenue increases, cost savings, increases in geographic or product presence and/or other projected benefits from the acquisition. The integration could result in higher than expected deposit attrition, loss of key employees, disruption of BB&T’s businesses or the businesses of the acquired company, or otherwise adversely affect BB&T’s ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition. Also, the negative effect of any divestitures required by regulatory authorities in acquisitions or business combinations may be greater than expected. As a result of these and other factors, BB&T could incur losses on acquired assets and increased expenses resulting from the failure to successfully integrate an acquired company, which could adversely impact its financial condition or results of operations.

 

BB&T may not be able to successfully implement a new ERP system, which could adversely affect BB&T’s business operations and profitability.

 

BB&T is investing significant resources in an enterprise-wide initiative aimed at implementing an integrated ERP financial platform, utilizing certain modules of SAP software. The objective of the new ERP system is to modernize and consolidate many of the existing systems that are currently used for a variety of functions throughout the Company, including both internal and external financial reporting. BB&T may not be able to successfully implement and integrate the new ERP system, which could adversely impact the ability to provide timely and accurate financial information in compliance with legal and regulatory requirements, which could result in sanctions from regulatory authorities. Such sanctions could include fines and suspension of trading in BB&T stock, among others. In addition, a number of core business processes could be affected. The implementation could extend past the expected timing and/or result in operating inefficiencies, which could increase the costs associated with the implementation as well as ongoing operations.

 

Failure to implement part or all of the ERP system could result in impairment charges that adversely impact BB&T’s financial condition and results of operations and could result in significant costs to remediate or replace the defective components. In addition, BB&T may incur significant training, licensing, maintenance, consulting and amortization expenses during and after the implementation, and any such costs may continue for an extended period of time.

 

Strategic and Other Risk

 

BB&T may experience significant competition in its market area, which may reduce its customer base or cause it to lower prices for its products and services in order to maintain market share.

 

There is intense competition among commercial banks in BB&T’s market area. In addition, BB&T competes with other providers of financial services, such as savings and loan associations, credit unions, consumer finance companies, securities firms, insurance companies, commercial finance and leasing companies, the mutual funds industry, full-service brokerage firms and discount brokerage firms, some of which are subject to less extensive regulations than BB&T is with respect to the products and services they provide. BB&T’s success depends, in part, on its ability to adapt its products and services to evolving industry standards and customer expectations. There is increasing pressure to provide products and services at lower prices. Lower prices can reduce BB&T’s NIM and revenues from its fee-based products and services.

 

In addition, the adoption of new technologies by competitors, including internet banking services, mobile phone applications and advanced ATM functionality could require BB&T to make substantial expenditures to modify or adapt its existing products and services. Also, these and other capital investments in BB&T’s business may not produce expected growth in earnings anticipated at the time of the expenditure. BB&T may not be successful in introducing new products and services, achieving market acceptance of its products and services, anticipating or reacting to consumers’ changing technological preferences or developing and maintaining loyal customers.

 

Some of BB&T’s larger competitors, including certain national banks that have a significant presence in BB&T’s market area, may have greater capital and resources than BB&T, may have higher lending limits and may offer products and services not offered by BB&T. Any potential adverse reactions to BB&T’s financial condition or status in the marketplace, as compared to its competitors, could limit BB&T’s 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 BB&T’s financial condition and results of operations.

 

27

BB&T also experiences competition from a variety of institutions outside of its market area. Some of these institutions conduct business primarily over the Internet and thus may 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 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 BB&T’s operations, and the Company may be unable to develop competitive new products and services in response to these changes on a timely basis or at all.

 

BB&T may not be able to complete future acquisitions.

 

BB&T must generally satisfy a number of meaningful conditions before it can complete an acquisition of another bank or BHC, including federal and/or state regulatory approvals. In determining whether to approve a proposed bank or BHC acquisition, bank regulators will consider, among other factors, the effect of the acquisition on competition, financial condition and future prospects, including current and projected capital ratios and levels, the competence, experience and integrity of management and record of compliance with laws and regulations, the convenience and needs of the communities to be served, including the acquiring institution’s record of compliance under the CRA, the effectiveness of the acquiring institution in combating money laundering activities and protests from various stakeholders of both BB&T and its acquisition partner. Also, under the Dodd-Frank Act, U.S. regulators must now take systemic risk into account when evaluating whether to approve a potential acquisition transaction involving a large financial institution like BB&T. BB&T cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted. In specific cases, BB&T may be required to sell banks or branches, or take other actions as a condition to receiving regulatory approval. An inability to satisfy other conditions necessary to consummate an acquisition transaction, such as third-party litigation, a judicial order blocking the transaction or lack of shareholder approval, could also prevent BB&T from completing an announced acquisition.

 

Catastrophic events could have a material adverse effect on BB&T.

 

The occurrence of catastrophic events such as hurricanes, tropical storms, tornados, winter storms and other large scale catastrophes could adversely affect BB&T’s consolidated financial condition or results of operations. BB&T has operations and customers along the Gulf and Atlantic coasts as well as other parts of the southeastern 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 BB&T in that such events could materially disrupt its operations or the ability or willingness of its customers to access the financial services offered by BB&T. BB&T’s property and casualty insurance operations also expose it to claims arising out of catastrophes. The incidence and severity of catastrophes are inherently unpredictable. Although BB&T carries insurance to mitigate its exposure to certain catastrophic events, these events could nevertheless reduce BB&T’s earnings and cause volatility in its financial results for any fiscal quarter or year and have a material adverse effect on BB&T’s financial condition and/or results of operations.

 

ITEM 2. PROPERTIES

 

BB&T leases its headquarters in Winston-Salem, North Carolina and owns or leases other significant office space in the vicinity of its headquarters. BB&T owns free-standing operations centers, with its primary operations and information technology center located in Wilson, North Carolina. Offices are either owned or operated under long-term leases. At December 31, 2014, Branch Bank operated 1,839 branch offices in North Carolina, Virginia, Florida, Georgia, Maryland, South Carolina, West Virginia, Kentucky, Alabama, Texas, Tennessee, Washington DC and Indiana. BB&T also operates numerous insurance agencies and other businesses that occupy facilities. Management believes that the premises are well-located and suitably equipped to serve as financial services facilities. See Note 5 “Premises and Equipment” in the “Notes to Consolidated Financial Statements” in this report for additional disclosures related to properties and other fixed assets.

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

BB&T’s common stock is traded on the NYSE under the symbol “BBT.” The common stock was held by approximately 346,000 shareholders at December 31, 2014 compared to approximately 342,000 shareholders at December 31, 2013. The following table sets forth the quarterly high and low trading prices and closing sales prices for BB&T’s common stock and the dividends declared per share of common stock for each of the last eight quarters.

 

28

 

Table 5
Quarterly Summary of Market Prices and Cash Dividends Declared on Common Stock
                                                           
            2014   2013  
                              Cash                     Cash  
            Sales Prices   Dividends   Sales Prices   Dividends  
            High   Low   Close   Declared   High   Low   Close   Declared  
  Quarter Ended:                                                
    March 31 $  41.04    $  36.28    $  40.17    $  0.23    $  31.81    $  29.54    $  31.39    $  0.23   
    June 30    40.95       36.38       39.43       0.24       34.37       29.18       33.88       0.23   
    September 30    40.21       35.86       37.21       0.24       36.59       33.30       33.75       0.23   
    December 31    39.69       34.50       38.89       0.24       37.42       32.65       37.32       0.23   
      Year $  41.04    $  34.50    $  38.89    $  0.95    $  37.42    $  29.18    $  37.32    $  0.92   

 

Common Stock, Dividends and Share Repurchases

 

BB&T’s ability to pay dividends is primarily dependent on earnings from operations, the adequacy of capital and the availability of liquid assets for distribution and is subject to the FRB not objecting to its capital plan. BB&T’s ability to generate liquid assets for distribution is dependent on the ability of Branch Bank to pay dividends to the Parent Company. The payment of cash dividends is an integral part of providing a competitive return on shareholders’ investments. The Company’s policy is to accomplish this while retaining sufficient capital to support future growth and to meet regulatory requirements. Management has established a guideline that the common dividend payout ratio will be between 30% and 50% and the total payout ratio (including dividends and share repurchases) will be between 30% and 80% of basic EPS during normal economic conditions. BB&T’s common dividend payout ratio, computed by dividing dividends declared per common share by basic EPS, was 34.1% in 2014 compared to 41.4% in 2013. BB&T has paid a cash dividend to shareholders every year since 1903. BB&T expects common dividend declarations, if declared, to occur in January, April, July and October with payment dates on or about the first of March, June, September and December. A discussion of dividend restrictions is included in Note 16 “Regulatory Requirements and Other Restrictions” in the “Notes to Consolidated Financial Statements” and in the “Regulatory Considerations” section.

 

Share Repurchases

 

BB&T has periodically repurchased shares of its own common stock. In accordance with North Carolina law, repurchased shares cannot be held as treasury stock, but revert to the status of authorized and unissued shares upon repurchase.

 

The Board of Directors has granted authority under the 2006 Repurchase Plan for the repurchase of up to 50 million shares of BB&T’s common stock. The 2006 Repurchase Plan remains in effect until all the authorized shares are repurchased unless the plan is modified by the Board of Directors. No shares were repurchased in connection with the 2006 Repurchase Plan during 2014, 2013, or 2012.

 

Table 6
Share Repurchase Activity
                           
                        Maximum Remaining  
                        Number of Shares  
          Total     Average   Total Shares Repurchased   Available for Repurchase  
          Shares     Price Paid   Pursuant to   Pursuant to  
          Repurchased (1)     Per Share (2)   Publicly-Announced Plan   Publicly-Announced Plan  
                           
          (Shares in thousands)  
  October 2014  54    $  37.16     ―       44,139   
  November 2014  5       37.80     ―       44,139   
  December 2014  5       37.81     ―       44,139   
    Total  64       37.26     ―       44,139   
                           
                           
(1) Repurchases reflect shares exchanged or surrendered in connection with the exercise of equity-based awards under BB&T’s equity-based compensation plans.
(2) Excludes commissions.

 

 

29

Preferred Stock

 

See Note 11 “Shareholders’ Equity” in the “Notes to Consolidated Financial Statements” for information about BB&T’s preferred stock.

 

Equity Compensation Plan Information

 

The following table provides information concerning securities to be issued upon the exercise of outstanding equity-based awards, the weighted average price of such awards and the securities remaining available for future issuance as of December 31, 2014.

 

  Table 7  
  Equity Compensation Plan Information  
                                   
            (a)(1)   (b)(2)   (c)(3)  
            Number of securities   Weighted-average   Number of securities remaining  
            to be issued upon   exercise price of   available for future issuance  
            exercise of outstanding   outstanding options,   under equity compensation plans  
  Plan Category   options, warrants and rights   warrants and rights   (excluding securities reflected in (a))  
  Approved by security holders      40,195,870      $  35.09         26,832,221     
  Not approved by security holders      ―           ―           ―       
    Total      40,195,870         35.09         26,832,221     
                                   
                                   
(1) Includes 11,821,700 RSUs.
(2) Excludes RSUs because they do not have an exercise price.
(3) All awards remaining available for future issuance will be issued under the terms of the 2012 Incentive Plan.

 

Performance Graph

 

Set forth below are graphs comparing the total returns (assuming reinvestment of dividends) of BB&T common stock, the S&P 500 Index, and an industry Peer Group. The Peer Group consists of FHCs and BHCs with assets between approximately $50 billion and $410 billion as of December 31, 2014. The companies in the Peer Group were Comerica Incorporated, Fifth-Third Bancorp, Huntington Bancshares, Incorporated, KeyCorp, M&T Bank Corporation, PNC Financial Services Group, Inc., Regions Financial Corporation, SunTrust Banks, Inc., U.S. Bancorp and Zions Bancorporation.

 

 

30

 

                                                             
* $100 invested on December 31, 1994, 2004 or 2009, including reinvestment of dividends. Fiscal year ended December 31.
                                                             
        Cumulative Total Return Through December 31,         Cumulative Total Return  
        2009    2010    2011    2012    2013    2014        Through December 31, 2014  
        $100 Invested December 31, 2009         10 Year   20 Year  
  BB&T Corporation $  100.00    $  105.93    $  103.94    $  123.25    $  163.57    $  174.85          $  134.70    $  801.99   
  S&P 500 Index    100.00       115.06       117.48       136.26       180.38       205.05             209.46       653.60   
  BB&T’s Peer Group    100.00       131.02       116.16       142.15       192.91       215.85             117.20       608.97   

 

31

 

ITEM 6. SELECTED FINANCIAL DATA
(Dollars in millions, except per share data, shares in thousands)
                                                           
                                                        Five Year
        As of/ For the Year Ended December 31,   Compound
        2014   2013   2012   2011   2010   2009   Growth Rate
Summary of Operations:                                                    
  Interest income $  6,142      $  6,507      $  6,917      $  6,885      $  7,115      $  6,884       (2.3) %
  Interest expense    768         891         1,060         1,378         1,795         2,040       (17.7)  
  Net interest income    5,374         5,616         5,857         5,507         5,320         4,844       2.1   
  Provision for credit losses    251         592         1,057         1,190         2,638         2,811       (38.3)  
  Net interest income after                                                    
    provision for credit losses    5,123         5,024         4,800         4,317         2,682         2,033       20.3   
  Noninterest income    3,784         3,937         3,820         3,113         3,957         3,934       (0.8)  
  Noninterest expense    5,921         5,837         5,828         5,802         5,670         4,931       3.7   
  Income before income taxes    2,986         3,124         2,792         1,628         969         1,036       23.6   
  Provision for income taxes    760         1,395         764         296         115         159       36.7   
  Net income    2,226         1,729         2,028         1,332         854         877       20.5   
  Noncontrolling interest    75         50         49         43         38         24       25.6   
  Dividends and accretion on                                                    
    preferred stock    148         117         63         ―           ―           124       3.6   
  Net income available to                                                    
    common shareholders $  2,003      $  1,562      $  1,916      $  1,289      $  816      $  729       22.4   
                                                           
Per Common Share:                                                    
  Average shares outstanding:                                                    
    Basic    718,140         703,042         698,739         696,532         692,489         629,583       2.7   
    Diluted    728,372         714,363         708,877         705,168         701,039         635,619       2.8   
  Earnings:                                                    
    Basic $  2.79      $  2.22      $  2.74      $  1.85      $  1.18      $  1.16       19.2   
    Diluted    2.75         2.19         2.70         1.83         1.16         1.15       19.0   
  Cash dividends declared (1)    0.95         0.92         0.80         0.65         0.60         0.92       0.6   
  Book value    30.16         28.52         27.21         24.98         23.67         23.47       5.1   
                                                           
Average Balances:                                                    
  Securities, at amortized cost (2) $  40,541      $  36,772      $  36,334      $  29,923      $  27,610      $  31,226       5.4   
  Loans and leases (3)    118,830         117,527         113,733         105,962         104,787         102,146       3.1   
  Other assets    25,697         26,963         28,567         27,081         27,261         21,810       3.3   
    Total assets $  185,068      $  181,262      $  178,634      $  162,966      $  159,658      $  155,182       3.6   
  Deposits $  129,077      $  128,555      $  127,617      $  112,318      $  106,773      $  102,381       4.7   
  Long-term debt    22,210         19,301         20,651         22,257         21,653         19,085       3.1   
  Other liabilities    9,790         11,516         10,889         11,124         14,346         17,478       (10.9)  
  Shareholders' equity    23,991         21,890         19,477         17,267         16,886         16,238       8.1   
  Total liabilities and                                                    
    shareholders' equity $  185,068      $  181,262      $  178,634      $  162,966      $  159,658      $  155,182       3.6   
                                                         
Period-End Balances:                                                    
  Total assets $  186,814      $  183,010      $  184,499      $  175,011      $  157,081      $  165,764       2.4   
  Loans and leases (3)    121,307         117,139         118,364         111,205         107,264         106,207       2.7   
  Deposits    129,040         127,475         133,075         124,939         107,213         114,965       2.3   
  Long-term debt    23,312         21,493         19,114         21,803         21,730         21,376       1.7   
  Shareholders' equity    24,426         22,809         21,223         17,480         16,498         16,241       8.5   
                                                           
Selected Ratios:                                                    
  Rate of return on:                                                    
    Average total assets    1.20  %      0.95  %      1.14  %      0.82  %      0.54  %      0.56  %      
    Average common equity    9.40         8.06         10.35         7.49         4.85         4.93         
    Average total equity    9.28         7.90         10.41         7.71         5.06         5.40         
  Dividend payout    34.05         41.44         29.20         35.14         50.85         79.31         
  Average equity to average assets    12.96         12.08         10.90         10.60         10.58         10.46         
                                                           
                                                           
(1) 2011 included a special $0.01 dividend.
(2) Excludes trading securities.
(3) Loans and leases are net of unearned income and include LHFS.
32

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Executive Overview

 

Significant Accomplishments

 

Significant accomplishments during 2014 included:

 

·Record net income available to common shareholders of $2.0 billion, a 28.2% increase over the prior year.

 

·Continued improvement in credit quality:

 

oNPAs declined $392 million, or 33.4%.

 

oNet charge-offs as a percentage of average loans and leases were 0.46% for 2014, compared to 0.69% for 2013.

 

oALLL was 274% of net charge-offs at December 31, 2014, compared to 219% at December 31, 2013.

 

·Continued improvement in deposit mix and average cost:

 

oAverage noninterest-bearing deposits increased 10.0% during 2014 and represented 28.9% of total average deposits for 2014 compared to 26.4% in 2013.

 

oThe average cost of interest-bearing deposits for 2014 was 0.26%, a decline of six basis points compared to the prior year.

 

·Strong growth in regulatory capital ratios during 2014:

 

oTier 1 risk-based capital was 12.4% at year-end 2014, compared to 11.8% at year-end 2013.

 

oTotal capital was 14.9% at year-end 2014, compared to 14.3% at year-end 2013.

 

oLeverage capital was 9.9% at year-end 2014, compared to 9.3% at year-end 2013.

 

·Strategic mergers to complement organic growth:

 

oCompleted the purchase of 21 branches in Texas, providing $1.2 billion in deposits.

 

oReached an agreement to acquire 41 additional branches in Texas with approximately $2.3 billion in deposits.

 

oReached an agreement to acquire The Bank of Kentucky Financial Corporation, which has $1.9 billion in assets, $1.6 billion in deposits and 32 branches and a strong market share in the northern Kentucky/Cincinnati market.

 

oReached an agreement to acquire Susquehanna Bancshares, Inc., which has $18.7 billion in assets, $13.7 billion in deposits and 245 branches in Pennsylvania, New Jersey, West Virginia and Maryland.

 

Key Challenges

 

BB&T’s business has become more dynamic and complex in recent years. Consequently, management has annually evaluated and, as necessary, adjusted the Company’s business strategy in the context of the current operating environment. During this process, management considers the current financial condition and performance of the Company and its expectations for future economic activity from both a national and local market perspective. The achievement of BB&T’s key strategic objectives and established long-term financial goals is subject to many uncertainties and challenges. In the opinion of management, the challenges that are most relevant and likely to have a near term impact on performance are presented below:

 

·Intense competition within the financial services industry given the challenge in growing assets during a period of sustained low interest rates.

 

33
·Global economic and geopolitical risk, including potential financial system instability and ramifications of sovereign debt issues.

 

·Cost and risk associated with regulatory reform and initiatives and IT projects.

 

·Merger integration risk.

 

In addition, certain other challenges and unforeseen events could have a near term impact on BB&T’s financial condition and results of operations. See the section titled “Forward-Looking Statements” for additional examples of such challenges.

 

Overview of Significant Events and Financial Results

 

BB&T generated strong operating results for 2014, despite the challenges associated with the continued low interest rate environment, increased costs associated with certain regulatory initiatives and intense competition for loans to qualified borrowers. From a NIM perspective, the negative impact associated with lower yields on new loans and securities was partially mitigated by a decrease in funding costs from 0.75% to 0.65%, primarily driven by a decline in the cost of interest-bearing deposits and the early extinguishment of certain FHLB advances during the third quarter of 2014.

 

Consolidated net income available to common shareholders for 2014 totaled $2.0 billion, an increase of $441 million compared to $1.6 billion earned during 2013. On a diluted per common share basis, earnings for 2014 were $2.75, compared to $2.19 for 2013. Earnings for 2013 were reduced by $516 million of tax adjustments. BB&T’s results of operations for 2014 produced a return on average assets of 1.20% and a return on average common shareholders’ equity of 9.40% compared to prior year ratios of 0.95% and 8.06%, respectively.

 

BB&T’s revenues for 2014 were $9.3 billion on a FTE basis, a decrease of $398 million compared to 2013. Net interest income on a FTE basis was $245 million lower than the prior year, which reflects a $368 million decrease in interest income that was partially offset by a decrease in funding costs totaling $123 million. Noninterest income decreased $153 million for the year, driven by a $170 million decline in mortgage banking income, which reflects a decline in the volume of residential mortgage loan production and sales and tighter margins.

 

The provision for credit losses declined $341 million, or 57.6%, compared to the prior year, reflecting continued improvement in credit quality. The provision for credit losses also benefited from loan sales that generated a combined $66 million in gains through the release of the related ALLL.

 

Asset quality improved significantly during 2014 as NPAs declined $392 million, or 33.4%, compared to 2013. This decline included a $319 million decrease in NPLs, partially due to loan sales, and a $73 million decrease in foreclosed real estate and other property. Net charge-offs for 2014 were $538 million, compared to $792 million for the prior year. The ratio of the ALLL to net charge-offs was 2.74x for 2014, compared to 2.19x in 2013.

 

Noninterest expense increased $84 million primarily due to a $122 million loss on early extinguishment of debt and $118 million in charges related to the FHA-insured loan origination process. These increases were partially offset by a $113 million decrease in personnel expense primarily due to reduced pension expense.

 

Effective October 1, 2014, loans and securities subject to the commercial loss sharing agreement with the FDIC related to the Colonial acquisition were no longer covered by loss sharing. At December 31, 2014, these loans had a carrying value of $561 million and a UPB of $836 million, and the securities had a carrying value of $1.2 billion.

 

BB&T’s total assets at December 31, 2014 were $186.8 billion, an increase of $3.8 billion compared to December 31, 2013. This increase includes a $4.2 billion increase in loans and leases due to broad-based loan growth, with commercial and industrial up $2.9 billion, sales finance up $1.2 billion and other lending subsidiaries up $1.0 billion. A decline in direct retail lending balances and a corresponding increase in residential mortgage balances reflect the impact of an $8.3 billion transfer that occurred during the first quarter of 2014. Excluding this transfer, mortgage balances declined due to the previously mentioned loan sales, lower origination volume and management’s decision to sell substantially all conforming mortgage loan production. HTM securities increased $2.1 billion, while AFS securities declined $1.2 billion. Other assets declined $1.4 billion due to a $309 million decrease in the FDIC loss share receivable and a $1.0 billion decline in commercial factoring balances.

 

34

Total deposits at December 31, 2014 were $129.0 billion, an increase of $1.6 billion, or 1.2%, from the prior year. The increase in deposits reflects strong growth in noninterest-bearing deposits, which were up $3.8 billion or 10.9% compared to the prior year. Interest checking and money market and savings grew $1.4 billion and $2.0 billion, respectively, while time deposits and IRAs declined $5.7 billion. The increase in total deposits also reflects the previously mentioned acquisition of 21 branches in Texas during the second quarter. The average cost of interest-bearing deposits for 2014 was 0.26%, a decline of six basis points compared to the prior year.

 

Total shareholders’ equity increased $1.6 billion, or 7.1%, compared to the prior year. This increase was primarily driven by net income in excess of dividends totaling $1.4 billion. BB&T’s Tier 1 risk-based capital and total risk-based capital ratios at December 31, 2014 increased to 12.4% and 14.9%, respectively, compared to 11.8% and 14.3% at December 31, 2013, respectively. BB&T’s risk-based capital ratios remain well above regulatory standards for well-capitalized banks. BB&T’s Basel III common equity tier 1 ratio, which is based on management’s interpretation of the FRB rules that became effective on January 1, 2015, was 10.3% at December 31, 2014, versus 9.7% at December 31, 2013.

 

Net Interest Income and NIM

 

Net interest income is BB&T’s primary source of revenue. Net interest income is influenced by a number of factors, including the volume, mix and maturity of interest-earning assets and interest-bearing liabilities and the interest rates earned and paid thereon. The difference between rates earned on interest-earning assets and the cost of funds (with a FTE adjustment made to tax-exempt items to provide comparability with taxable items) is measured by the NIM.

 

2014 compared to 2013

 

For 2014, net interest income on a FTE basis totaled $5.5 billion, a decrease of $245 million or 4.3% compared to the prior year. The decrease in net interest income reflects lower yields on new loans and securities and runoff in the loan portfolio acquired from the FDIC, partially offset by lower funding costs, which declined $123 million compared to 2013. The improvement in funding costs reflects a six basis point reduction in the average cost of interest-bearing deposits due to improved mix and a 67 basis point reduction in the average cost of long-term debt primarily due to the early extinguishment of $1.1 billion of higher-cost FHLB advances during the third quarter and lower rates on new issuances.

 

The FTE-adjusted NIM is the primary measure used in evaluating the gross profit margin from the portfolios of earning assets. The FTE-adjusted NIM was 3.42% in 2014 compared with 3.68% in 2013. The decline in the NIM reflects lower yields on loans and securities, partially offset by the lower funding costs described above. The average annualized FTE yield for total loans and leases was 4.42% for 2014, compared to 4.85% for the prior year. The decrease was primarily due to lower yields on new loan originations and the runoff of higher yielding loans acquired from the FDIC. The FTE yield on the total securities portfolio was 2.45% for the year ended December 31, 2014, compared to 2.51% for the prior year.

 

The average rate paid on interest-bearing deposits for 2014 dropped to 0.26%, from 0.32% in 2013. This improvement was driven by an 18 basis point reduction in the cost of time deposits and IRAs.

 

The rates paid on average short-term borrowings declined to 0.13% in 2014 from 0.16% in 2013. At December 31, 2014, the targeted Federal funds rate was a range of zero percent to 0.25%. The average rate on long-term debt during 2014 was 2.36%, compared to 3.03% for the prior year. This decline reflects the previously mentioned early extinguishment of $1.1 billion of higher-cost FHLB advances and lower rates on new issuances.

 

2013 compared to 2012

 

For 2013, net interest income on an FTE-adjusted basis totaled $5.8 billion, a decrease of $244 million or 4.1%, compared to the prior year. The decrease in net interest income reflects lower yields on new loans and securities and runoff in the loan portfolio acquired from the FDIC, partially offset by lower funding costs, which declined $170 million compared to 2012. The improvement in funding costs reflects an 11 basis point reduction in the average cost of interest-bearing deposits and a lower average long-term debt balance.

 

35

The FTE-adjusted NIM is the primary measure used in evaluating the gross profit margin from the portfolios of earning assets. The FTE-adjusted NIM was 3.68% in 2013 compared with 3.91% in 2012. The decline in the NIM primarily reflects lower yields on new loans and securities and runoff of loans acquired from the FDIC, partially offset by the lower funding costs described above. The average annualized FTE yield for total loans and leases was 4.85% for 2013, compared to 5.35% for the prior year. The decrease was primarily due to lower yields on new loan originations and the runoff of higher yielding loans acquired from FDIC. The FTE yield on the total securities portfolio was 2.51% for the year ended December 31, 2013, compared to 2.64% for the prior year. This decrease reflects runoff in the security portfolio acquired from FDIC and security duration adjustments.

 

The average rate paid on interest-bearing deposits dropped to 0.32% during 2013, from 0.43% in 2012. This improvement included a 16 basis point reduction in the cost of time deposits and IRAs and a five basis point reduction in the cost of money market and savings accounts.

 

The rates paid on average short-term borrowings declined from 0.26% in 2012 to 0.16% during 2013. At December 31, 2013, the targeted Federal funds rate was a range of zero percent to 0.25%. The average rate on long-term debt during 2013 was 3.03%, an increase of one basis point compared to the prior year. This increase reflects the redemption of all higher cost junior subordinated debt to unconsolidated trusts and the related benefit associated with accelerated amortization of derivatives that were unwound in a gain position during 2012, partially offset by lower effective rates on new debt issued during 2013.

 

Acquired from the FDIC and FDIC Loss Share Receivable/Payable

 

In connection with the Colonial acquisition, Branch Bank entered into loss sharing agreements with the FDIC that outline the terms and conditions under which the FDIC will reimburse Branch Bank for a portion of the losses incurred on certain loans, OREO, investment securities and other assets. The FDIC’s obligation to reimburse Branch Bank for losses with respect to assets acquired from the FDIC began with the first dollar of loss incurred.

 

Table 8
Assets Acquired from the FDIC by Loss Share Agreement
December 31, 2014
                           
           Commercial Loss Share Agreement (1)    Single Family Loss Share Agreement    Total  
                           
           (dollars in millions)  
  Loans and leases (2)   $  561    $  654    $  1,215   
  AFS securities      1,243       ―         1,243   
  Other assets      58       38       96   
    Total assets acquired from the FDIC   $  1,862    $  692    $  2,554   
                           
                           
(1) The loss sharing provisions of the commercial loss sharing agreement have expired; however, gains on the disposition of assets subject to this agreement will be shared with the FDIC through September 30, 2017.
(2) Loans and leases subject to the commercial and single family loss share agreements had a UPB of $836 million and $888 million, respectively.

 

Assets subject to the single family loss sharing agreement are indemnified through August 31, 2019.

 

As of October 1, 2014, the loss sharing provisions of the commercial loss sharing agreement expired. As a result, losses on the assets subject to this agreement (commercial loans, other related assets and certain AFS securities) are no longer shared with the FDIC. However, gains on the disposition of assets subject to this agreement will be shared with the FDIC through September 30, 2017. Any gains realized after September 30, 2017 would not be shared with the FDIC.

 

The gain/loss sharing coverage related to the acquired AFS securities is based on a contractually-specified value of the securities as of the date of the loss sharing agreement, adjusted to reflect subsequent pay-downs, redemptions or maturities on the underlying securities. The contractually-specified value of these securities totaled approximately $626 million at December 31, 2014. During the period of gain sharing (October 1, 2014 through September 30, 2017), any decline in the fair value of the acquired AFS securities down to the contractually-specified value would reduce BB&T’s liability to the FDIC at the applicable loss sharing percentage. BB&T is not indemnified for declines in the fair value of the acquired securities below the contractually-specified amount.

 

 

 

36

The terms of the loss sharing agreement with respect to certain non-agency MBS provided that Branch Bank would be reimbursed by the FDIC for 95% of any and all losses incurred through the third quarter of 2014. For other assets acquired from the FDIC, the FDIC reimbursement was as follows:

 

·80% of net losses incurred up to $5 billion
·95% of net losses in excess of $5 billion.

 

BB&T does not expect cumulative net losses to exceed $5 billion on the respective assets acquired from FDIC. Gains and recoveries on assets acquired from FDIC, net of related expenses, will offset losses or be paid to the FDIC at the applicable loss share percentage at the time of recovery.

 

Following the conclusion of the 10 year loss share period in 2019, should actual aggregate losses, excluding securities, be less than an amount determined in accordance with these agreements, BB&T will pay the FDIC a portion of the difference. As of December 31, 2014, BB&T projects that in 2019 Branch Bank would owe the FDIC approximately $177 million under the aggregate loss calculation. As described below, this liability is expensed over time and BB&T has recognized total expense of approximately $132 million through December 31, 2014.

 

The fair value of the net reimbursement the Company expected to receive from the FDIC under these agreements was recorded as the FDIC loss share receivable at the date of acquisition. The fair value of the FDIC loss share receivable/payable was estimated using a discounted cash flow methodology.

 

Acquired loans were aggregated into separate pools based upon common risk characteristics. Each pool is considered a unit of account and the cash flows expected to be collected, credit losses and other relevant information are developed for each pool. A summary of the accounting treatment related to changes in credit losses on each loan pool and the related FDIC loss share asset follows.

 

·If the estimated credit loss on a loan pool is increased:

 

oThe reduction in the net present value of the loan pool is recognized immediately as provision expense and an increase to the ALLL.
oThe FDIC loss share asset is increased by 80% of the adjustment to the ALLL through income.

 

·If the estimated credit loss on a loan pool is reduced:

 

oIf the loan pool has an allowance, the allowance is first reduced to $0 (and 80% of this reduction decreases the FDIC loss share asset) through income.
oIf the loan pool does not have an allowance (or it is first reduced to $0 and there remains additional expected cash flows), the excess of expected cash flows is recognized as a yield adjustment over the remaining expected life of the loan.
oThe decrease in expected reimbursement from the FDIC is recognized in income prospectively using a level yield methodology over the remaining life of the loss share agreements.
oThe increase in the amount expected to be paid to the FDIC as a result of the aggregate loss calculation is recognized prospectively in proportion to expected loan income over the remaining life of the loss share agreements.

 

The accounting treatment for securities acquired from the FDIC is summarized below:

 

·Prior to the recognition of OTTI on a security acquired from the FDIC:

 

oThe purchase discount established at acquisition is accreted into income over the expected life of the underlying securities using a level yield methodology.
oChanges to the expected life of the securities are recognized with a cumulative adjustment to the accretion recognized.

 

·Subsequent to recognition of OTTI, which is determined using the same methodology that is applied to securities that were not acquired from the FDIC, an increase in expected cash flows is recognized as a yield adjustment over the remaining expected life of the security based on an evaluation of the nature of the increase.

 

 

 

37

 

·The income statement effect of the above items is offset by the applicable loss share percentage in FDIC loss share income, net, which cumulatively resulted in a liability of $235 million as of December 31, 2014. Subsequent to September 30, 2014, any OTTI will not be offset with the expiration of commercial loss sharing.

·Securities acquired from the FDIC are classified as AFS and carried at fair market value. The changes in unrealized gains/losses (down to the contractually specified amount) are offset by the applicable loss share percentage in AOCI, which resulted in a liability of $330 million as of December 31, 2014.

·BB&T would only owe these amounts to the FDIC if BB&T were to sell these securities prior to the end of the third quarter of 2017. BB&T has no current intent to dispose of the securities.

 

The following table provides information related to the components of the FDIC loss share receivable (payable):

 

Table 9
FDIC Loss Share Receivable (Payable)
                               
        December 31,  
        2014   2013  
        Carrying Amount   Fair Value   Carrying Amount   Fair Value  
                               
        (Dollars in millions)  
  Loans $  534    $  123    $  843    $  464   
  Securities    (565)      (535)      (565)      (521)  
  Aggregate loss calculation    (132)      (161)      (104)      (131)  
    Total $  (163)   $  (573)   $  174    $  (188)  

 

The decrease in the carrying amount attributable to loans acquired from the FDIC was due to the receipt of cash from the FDIC, negative accretion due to credit loss improvement and the offset to the provision for loans acquired from the FDIC, which was a benefit for the current year. The change in the carrying amount attributable to the aggregate loss calculation is primarily due to accretion of the expected payment, which is included in “Accretion due to credit loss improvement” below. The fair values are based upon a discounted cash flow methodology that is consistent with the acquisition date methodology. The fair value attributable to acquired loans and the aggregate loss calculation changes over time due to the receipt of cash from the FDIC, updated credit loss assumptions and the passage of time. The fair value attributable to securities acquired from the FDIC is based upon the timing and amount that would be payable to the FDIC should they settle at the current fair value at the conclusion of the gain sharing period.

 

The following table provides information related to the income statement impact of loans and securities acquired from the FDIC and the FDIC loss sharing receivable/payable. The table excludes all amounts related to other assets acquired and liabilities assumed in the acquisition.

 

Table 10
Revenue Impact from Assets Acquired from the FDIC, Net
                         
        Year Ended December 31,  
         2014    2013   2012   
                         
        (Dollars in millions)  
  Interest income-loans $  278    $  451    $  765   
  Interest income-securities    125       137       172   
    Total interest income - acquired from FDIC    403       588       937   
  Benefit (provision) for loans acquired from FDIC    29       (5)      (13)  
  OTTI for securities acquired from FDIC    ―         ―         (4)  
  FDIC loss share income, net    (343)      (293)      (318)  
    Adjusted net revenue $  89    $  290    $  602   
                         
  FDIC loss share income, net:                  
    Offset to provision for covered loans $  (25)   $  4    $  11   
    Accretion due to credit loss improvement    (276)      (255)      (271)  
    Offset to OTTI for securities acquired from FDIC    ―         ―         3   
    Accretion for securities    (42)      (42)      (61)  
      Total $  (343)   $  (293)   $  (318)  

 

 

38

 

2014 compared to 2013

 

Interest income for 2014 on loans and securities acquired from the FDIC decreased $185 million compared to 2013, primarily due to lower average acquired loan balances. The yield on acquired loans for 2014 was 17.22% compared to 16.93% in 2013. At December 31, 2014, the accretable yield balance on acquired loans was $378 million. Accretable yield represents the excess of expected future cash flows above the current net carrying amount of loans and will be recognized in income over the remaining life of the loans.

 

During 2014, BB&T increased the accretable yield balance on loans acquired from the FDIC by $116 million, compared to a $107 million increase in 2013, primarily due to improved loss results. These adjustments are recognized on a prospective basis over the remaining lives of the loan pools. Loans acquired from FDIC have experienced better performance than originally anticipated, which has resulted in the recognition of additional interest income on a level yield basis over the expected life of the corresponding loans. A significant portion of this increase in interest income is offset by a reduction in noninterest income recorded in FDIC loss share income.

 

The provision for loans acquired from the FDIC was a benefit of $29 million in 2014, compared to a provision of $5 million for 2013, which reflects improvements in credit quality on acquired loans.

 

FDIC loss share income, net, was $50 million worse than 2013, primarily due to a $29 million change in the offset to the provision for covered loans and $21 million higher negative accretion related to credit losses on covered loans.

 

2013 compared to 2012

 

Interest income for 2013 on loans and securities acquired from the FDIC decreased $349 million compared to 2012, primarily due to lower average acquired loan balances. The yield on acquired loans for 2013 was 16.93% compared to 18.91% in 2012. At December 31, 2013, the accretable yield balance on acquired loans was $538 million. Accretable yield represents the excess of expected future cash flows above the current net carrying amount of loans and will be recognized in income over the remaining life of the acquired loans.

 

During 2013, BB&T increased the accretable yield balance on loans acquired from the FDIC by $107 million, compared to a $72 million reduction in 2012, primarily due to improved loss results in 2013 and changes in the expected lives of the underlying loans in 2012. These adjustments are recognized on a prospective basis over the remaining lives of the loan pools.

 

The provision for loans acquired from the FDIC was $5 million in 2013, a decrease of $8 million compared to 2012. This decrease resulted from the quarterly reassessment process.

 

FDIC loss share income, net, was $25 million better than 2012, primarily due to securities duration adjustments that increased the expected lives of securities in 2013, compared to duration adjustments that shortened the lives in 2012.

 

FTE Net Interest Income and Rate / Volume Analysis

 

The following table sets forth the major components of net interest income and the related yields and rates, as well as the variances between the periods caused by changes in interest rates versus changes in volumes. Changes attributable to the mix of assets and liabilities have been allocated proportionally between the changes due to rate and the changes due to volume.

39

 

Table 11
FTE Net Interest Income and Rate / Volume Analysis (1)
Year Ended December 31, 2014, 2013 and 2012
                                                                  2014 vs. 2013   2013 vs. 2012
            Average Balances (7)   Yield/Rate   Income/Expense   Increase   Change due to   Increase   Change due to
            2014   2013    2012    2014   2013    2012    2014   2013    2012    (Decrease)   Rate   Volume   (Decrease)   Rate   Volume
                                                                                                   
            (Dollars in millions)
Assets                                                                                          
Total securities, at amortized cost: (2)                                                                                          
  U.S. Treasuries   $  1,969    $  486    $  272     1.51  %    0.42  %    0.22  %   $  30    $  2    $  1    $  28    $  13    $  15    $  1    $  ―      $  1 
  GSEs      5,516       5,032       1,329     2.10       2.04       1.92         116       103       25       13       3       10       78       2       76 
  MBS issued by GSE      29,504       27,598       30,848     2.00       2.00       2.02         589       552       624       37       ―         37       (72)      (6)      (66)
  States and political subdivisions      1,827       1,836       1,851     5.78       5.80       5.83         106       107       108       (1)      ―         (1)      (1)      (1)      ―   
  Non-agency MBS      246       283       346     7.55       5.69       5.76         19       16       20       3       5       (2)      (4)      ―         (4)
  Other      547       470       505     1.43       1.45       1.65         8       7       8       1       ―         1       (1)      ―         (1)
  Acquired from FDIC      932       1,067       1,183     13.35       12.82       14.53         125       137       172       (12)      5       (17)      (35)      (19)      (16)
    Total securities      40,541       36,772       36,334     2.45       2.51       2.64         993       924       958       69       26       43       (34)      (24)      (10)
Other earning assets (3)      1,881       2,412       3,359     2.13       1.39       0.91         40       34       31       6       15       (9)      3       13       (10)
Loans and leases, net of unearned income: (4)(5)                                                                                          
  Commercial:                                                                                          
    Commercial and industrial      39,537       38,206       36,966     3.35       3.63       3.96         1,325       1,386       1,464       (61)      (108)      47       (78)      (126)      48 
    CRE-income producing properties      10,489       9,916       9,046     3.49       3.72       3.82         366       368       346       (2)      (23)      21       22       (9)      31 
    CRE-construction and development      2,616       2,589       3,398     3.51       3.86       3.76         92       100       128       (8)      (9)      1       (28)      5       (33)
  Direct retail lending (6)      8,249       15,952       15,270     4.10       4.64       4.87         338       741       744       (403)      (78)      (325)      (3)      (35)      32 
  Sales finance      10,007       8,658       7,680     2.71       3.18       3.97         271       275       305       (4)      (44)      40       (30)      (66)      36 
  Revolving credit      2,385       2,303       2,217     8.70       8.56       8.41         208       197       186       11       3       8       11       3       8 
  Residential mortgage (6)      31,528       23,598       22,623     4.20       4.22       4.37         1,325       996       989       329       (5)      334       7       (35)      42 
  Other lending subsidiaries      10,848       10,468       9,525     9.08       10.20       11.04         985       1,068       1,051       (83)      (121)      38       17       (83)      100 
    Total loans and leases held for investment (excluding acquired from FDIC)      115,659       111,690       106,725     4.25       4.59       4.88         4,910       5,131       5,213       (221)      (385)      164       (82)      (346)      264 
  Acquired from FDIC      1,613       2,667       4,045     17.22       16.93       18.91         278       451       765       (173)      8       (181)      (314)      (74)      (240)
    Total loans and leases held for investment      117,272       114,357       110,770     4.42       4.88       5.40         5,188       5,582       5,978       (394)      (377)      (17)      (396)      (420)      24 
  LHFS      1,558       3,170       2,963     4.19       3.59       3.42         65       114       101       (49)      17       (66)      13       5       8 
    Total loans and leases      118,830       117,527       113,733     4.42       4.85       5.35         5,253       5,696       6,079       (443)      (360)      (83)      (383)      (415)      32 
    Total earning assets      161,252       156,711       153,426     3.90       4.25       4.61         6,286       6,654       7,068       (368)      (319)      (49)      (414)      (426)      12 
    Nonearning assets      23,816       24,551       25,208                                                                         
      Total assets   $  185,068    $  181,262    $  178,634                                                                         
                                                                                                   
Liabilities and Shareholders’ Equity                                                                                          
Interest-bearing deposits:                                                                                          
  Interest-checking   $  18,731    $  19,305    $  19,904     0.07       0.08       0.12         13       15       25       (2)      (2)      ―         (10)      (9)      (1)
  Money market and savings      49,728       48,640       46,927     0.15       0.13       0.18         74       64       85       10       9       1       (21)      (24)      3 
  Time deposits and IRAs      22,569       26,006       31,647     0.67       0.85       1.01         151       221       319       (70)      (43)      (27)      (98)      (46)      (52)
  Foreign office deposits - interest-bearing      722       672       214     0.07       0.08       0.11         1       1       ―         ―         ―         ―         1       ―         1 
    Total interest-bearing deposits      91,750       94,623       98,692     0.26       0.32       0.43         239       301       429       (62)      (36)      (26)      (128)      (79)      (49)
Short-term borrowings      3,421       4,459       3,408     0.13       0.16       0.26         5       7       9       (2)      (1)      (1)      (2)      (4)      2 
Long-term debt      22,210       19,301       20,651     2.36       3.03       3.02         525       584       624       (59)      (139)      80       (40)      2       (42)
    Total interest-bearing liabilities      117,381       118,383       122,751     0.65       0.75       0.86         769       892       1,062       (123)      (176)      53       (170)      (81)      (89)
    Noninterest-bearing deposits      37,327       33,932       28,925                                                                         
    Other liabilities      6,369       7,057       7,481                                                                         
    Shareholders’ equity      23,991       21,890       19,477                                                                         
      Total liabilities and shareholders’ equity   $  185,068    $  181,262    $  178,634                                                                         
Average interest rate spread                      3.25  %    3.50  %    3.75  %                                                      
NIM/ net interest income                      3.42  %    3.68  %    3.91  %   $  5,517    $  5,762    $  6,006    $  (245)   $  (143)   $  (102)   $  (244)   $  (345)   $  101 
Taxable-equivalent adjustment                                       $  143    $  146    $  149                                     
                                                                                                   
                                                                                                   
(1) Yields are stated on a taxable equivalent basis assuming tax rates in effect for the periods presented.
(2) Total securities include AFS and HTM securities.
(3) Includes Federal funds sold, securities purchased under resale agreements or similar arrangements, interest-bearing deposits with banks, trading securities, FHLB stock and other earning assets.
(4) Loan fees, which are not material for any of the periods shown, have been included for rate calculation purposes.
(5) Nonaccrual loans have been included in the average balances.
(6) During the first quarter of 2014, $8.3 billion in loans were transferred from direct retail lending to residential mortgage.
(7) Excludes basis adjustments for fair value hedges.
40

 

Provision for Credit Losses

 

2014 compared to 2013

 

The provision for credit losses was $251 million in 2014, a decrease of $341 million compared to the prior year. The decrease in the provision for credit losses reflects continued improvement in credit trends and outlook, as net charge-offs in 2014 decreased 32.1% compared to the prior year. Improving credit conditions also resulted in an increase in the ratio of the ALLL to net charge-offs, which increased to 2.74x for 2014, compared to 2.19x for 2013.

 

During 2014, approximately $550 million of residential mortgage loans that were primarily performing TDRs and approximately $140 million of residential mortgage loans that were primarily nonperforming were sold at a pre-tax gain of $42 million and $24 million, respectively. Both of these gains were recognized as a reduction to the provision for credit losses.

 

Net charge-offs were 0.46% of average loans and leases held for investment for 2014, compared to 0.69% of average loans and leases held for investment during 2013. Net charge-offs declined $254 million, or 32.1%, with improvement across most loan portfolios led by commercial and industrial loans, which declined $112 million compared to 2013. Net charge-offs in other lending subsidiaries were $15 million higher primarily due to a process change that resulted in the accelerated recognition of charge-offs in the nonprime automobile lending portfolio.

 

2013 compared to 2012

 

The provision for credit losses was $592 million in 2013, a decrease of $465 million compared to the prior year. The decrease in the provision for credit losses reflected continued improvement in credit trends and outlook, as net charge-offs in 2013 decreased 38.8% compared to the prior year. Improving credit conditions also resulted in an increase in the ratio of the ALLL to net charge-offs, which increased to 2.19x for 2013, compared to 1.56x for 2012.

 

Net charge-offs were 0.69% of average loans and leases held for investment during 2013, compared to 1.17% of average loans and leases held for investment during 2012. Net charge-offs decreased in nearly all loan portfolios, including significant decreases in the CRE-construction and development, CRE-income producing properties and direct retail lending portfolios.

 

Noninterest Income

 

Noninterest income is a significant contributor to BB&T’s financial results. Management focuses on diversifying its sources of revenue to further reduce BB&T’s reliance on traditional spread-based interest income, as certain fee-based activities are a relatively stable revenue source during periods of changing interest rates.

 

Table 12
Noninterest Income
                                     
                          % Change  
        Year Ended December 31,   2014   2013  
        2014   2013   2012   vs. 2013   vs. 2012  
                                     
        (Dollars in millions)              
  Insurance income $  1,643    $  1,517    $  1,359     8.3  %    11.6  %  
  Service charges on deposits    600       584       566     2.7       3.2     
  Mortgage banking income    395       565       840     (30.1)      (32.7)    
  Investment banking and brokerage fees and commissions    387       383       365     1.0       4.9     
  Bankcard fees and merchant discounts    269       256       236     5.1       8.5     
  Trust and investment advisory revenues    221       200       184     10.5       8.7     
  Checkcard fees    203       199       185     2.0       7.6     
  Income from bank-owned life insurance    110       113       116     (2.7)      (2.6)    
  FDIC loss share income, net    (343)      (293)      (318)    17.1       (7.9)    
  Securities gains (losses), net    (3)      51       (12)    (105.9)     NM    
  Other income    302       362       299     (16.6)      21.1     
    Total noninterest income $  3,784    $  3,937    $  3,820     (3.9)      3.1     
                                     
                                     

 

41

2014 compared to 2013

 

Noninterest income was $3.8 billion for 2014, a decline of 3.9% compared to 2013. This decrease was driven by declines in mortgage banking income, FDIC loss share income, net securities gains and other income, partially offset by growth in insurance income.

 

Income from BB&T’s insurance agency/brokerage operations was the largest source of noninterest income in 2014. Insurance income was a record $1.6 billion, up $126 million compared to 2013, as increased volume and improving market conditions drove broad-based increases across the insurance business. This growth was led by a $95 million increase in property and casualty commissions and a $17 million increase in contingent insurance commissions.

 

Mortgage banking income totaled $395 million in 2014, a decrease of $170 million, or 30.1%, compared to the prior year. The decrease in mortgage banking income includes a $182 million decrease in residential mortgage production revenues primarily due to decreases in the volume and margins on loan sales, which have come under pressure due to increased competition and sustained low interest rates. The decline also reflects an $18 million reduction in fees primarily due to a reduction in volume. These declines were partially offset by increased servicing income due to a larger servicing portfolio as well as an increase in derivative income.

 

Net securities gains declined $54 million as the prior year contained a $46 million gain on the sale of GNMA securities. FDIC loss share income, net, was $50 million worse than 2013, primarily due to a $29 million change in the offset to the provision for covered loans, which was a benefit in 2014 due to improved credit quality on the acquired loans.

 

Trust and investment advisory revenues increased $21 million to a record $221 million, primarily the result of higher investment advisory revenues during the current year. Other income decreased $60 million in 2014 compared to 2013, primarily due to a $31 million gain on the sale of a consumer lending subsidiary in 2013, a $24 million decrease in income from assets related to certain post-employment benefits, which is offset in personnel expense, and an $8 million decrease in letter of credit fees. These declines and other smaller declines were partially offset by an increase of $19 million related to affordable housing investments, primarily due to decreased impairment, and a $19 million increase in leasing income.

 

2013 compared to 2012

 

Noninterest income was $3.9 billion for 2013, up 3.1% compared to 2012. This increase was driven by strong results from BB&T’s insurance, investment banking and brokerage, bankcard fees and merchant discounts, and trust and investment advisory LOBs, along with strong growth in checkcard fees and steady growth in service charges on deposits. This growth in noninterest income was negatively impacted by a decrease in mortgage banking income.

 

Income from the insurance agency/brokerage operations was the largest source of noninterest income in 2013. Insurance income was up 11.6% compared to 2012, with approximately one-half of the growth attributable to the acquisition of Crump Insurance during April 2012, and the remainder primarily the result of an improving market for insurance premiums and a $13 million experience-based refund of reinsurance premiums that was received in the second quarter of 2013.

 

Investment banking and brokerage fees and commissions increased $18 million, or 4.9%, compared to 2012. This increase was largely driven by higher investment commission income and increased investment banking activities. Bankcard fees and merchant discounts increased $20 million, or 8.5%, in 2013, based on higher retail and commercial bankcard transaction volumes and an increase in merchant discount income. Trust and investment advisory revenues increased $16 million, primarily the result of higher investment advisory revenues during the current year. Checkcard fees were $14 million higher than the prior year, an increase of 7.6%, reflecting increased transaction volume, a portion of which is attributable to the acquisition of BankAtlantic in the prior year. Service charges totaled $584 million, an increase of $18 million, or 3.2%, compared to 2012, reflecting growth in cash management products, an increase in other deposit fees and the impact of the BankAtlantic acquisition.

 

42

 

Mortgage banking income totaled $565 million in 2013, a decrease of $275 million, or 32.7%, compared to the prior year. The decrease in mortgage banking income includes a $247 million decrease in residential mortgage production revenues and a $61 million decrease in net MSR and related hedge valuation adjustments compared to the prior year. These decreases were partially offset by a $12 million increase in residential mortgage servicing revenues, which primarily reflects growth in the servicing portfolio, and a $28 million decrease in the amortization of MSRs that was primarily driven by slower prepayment speeds. The decrease in residential mortgage production revenues primarily resulted from lower gain on sale margins, which reflects increased competition and a higher proportion of loans originated through the correspondent network. The weighted average gain on sale margin for 2013 was 1.15%, a 49.2% decline compared to the prior year. Correspondent loan originations represented 65.1% of mortgage loan originations in 2013, compared to 60.5% of mortgage loan originations in 2012.

 

FDIC loss share income, net reflects accretion of the FDIC loss share receivable due to credit loss improvement (including expense associated with the aggregate loss calculation) and accretion related to securities acquired from FDIC, partially reduced by the offset to the provision for loans acquired from FDIC. Loans acquired from FDIC have experienced better performance than originally anticipated, which has resulted in the recognition of additional interest income on a level yield basis over the expected life of the corresponding loans. A significant portion of this increase in interest income is offset by a reduction in noninterest income recorded in FDIC loss share income. For 2013, noninterest income was reduced by $255 million related to improvement in loan performance compared to a reduction of $271 million in 2012. These decreases in income were partially offset by increases of $4 million and $11 million, respectively, which reflected 80% of the provision for credit losses recorded on loans acquired from FDIC for 2013 and 2012.

 

Net securities gains were $51 million during 2013, compared to $12 million of net securities losses in 2012. Other income increased $63 million in 2013 compared to 2012, primarily due to a $31 million gain on the sale of a consumer lending subsidiary in 2013, a $22 million increase in income from operating leases and a $21 million increase in income from assets related to certain post-employment benefits, which is offset in personnel expense. These increases were partially offset by a $10 million decrease in client derivative related activities.

 

Noninterest Expense

 

The following table provides a breakdown of BB&T’s noninterest expense:

 

Table 13
Noninterest Expense
                                       
                            % Change  
          Year Ended December 31,   2014   2013  
          2014   2013   2012   vs. 2013   vs. 2012  
                                       
          (Dollars in millions)              
  Personnel expense $  3,180    $  3,293    $ 3,125     (3.4) %    5.4  %  
  Occupancy and equipment expense    682       692      650     (1.4)      6.5     
  Loan-related expense    342       255      283     34.1       (9.9)    
  Software expense    174       158      138     10.1       14.5     
  Professional services    139       189      156     (26.5)      21.2     
  Outside IT services    115       89      58     29.2       53.4     
  Regulatory charges    106       143      159     (25.9)      (10.1)    
  Amortization of intangibles    91       106      110     (14.2)      (3.6)    
  Foreclosed property expense    40       55      266     (27.3)      (79.3)    
  Merger-related and restructuring charges, net    46       46      68     ―         (32.4)    
  Loss on early extinguishment of debt    122       ―          NM     NM    
  Other expense    884       811      813     9.0       (0.2)    
    Total noninterest expense $  5,921    $  5,837    $  5,828     1.4       0.2     

 

2014 compared to 2013

 

Personnel expense is the largest component of noninterest expense and includes salaries, wages and incentives, as well as pension and other employee benefit costs. Personnel expense totaled $3.2 billion, a decrease of $113 million compared to 2013. This decline was driven by a $110 million reduction in qualified pension plan expense, primarily due to a higher expected return on plan assets and a change in the actuarial discount rate used to determine the projected benefit obligation as of the beginning of the year that resulted in reduced amortization expense during 2014.

 

 

43

Professional services expense totaled $139 million, a decrease of $50 million compared to the prior year. This decrease was driven by a reduction in legal fees as well as services associated with regulatory initiatives. Regulatory charges totaled $106 million for 2014, a decline of $37 million compared to 2013, which primarily reflects a reduction in FDIC insurance due to current and prior year long-term debt issuances and improved credit conditions.

 

Loan-related expense totaled $342 million for 2014, an increase of $87 million compared to the prior year. This increase includes a $33 million mortgage loan indemnification reserve adjustment, which represents an increase in estimated losses that may be incurred on FHA-insured mortgage loans that have not yet defaulted, and a mortgage reserve adjustment of $27 million related to a review of mortgage lending processes. 

 

Outside IT services totaled $115 million during 2014, compared to $89 million for 2013. This increase was due to third-party costs associated with the new ERP and commercial loan systems.

 

A loss on early extinguishment of debt of $122 million was recorded during 2014 in connection with the early termination of $1.1 billion of higher cost FHLB advances. The transaction occurred during the third quarter and had a beneficial impact to net interest income for the remainder of the year.

 

Other expense was $884 million for 2014, an increase of $73 million, or 9.0%, compared to 2013. During the second quarter of 2014, BB&T was notified that its FHA-insured loan origination process would be the subject of an audit survey by the HUD-OIG. While there are no findings at this time, in light of announcements made by other financial institutions related to the outcomes of similar audits and related matters and after further review of the exposure, an $85 million reserve was established related to BB&T’s FHA-insured loan origination process. The increase in other expense also includes a $17 million increase in depreciation related to operating leases. These increases were partially offset by a $15 million favorable franchise tax adjustment and a decline in expense due to the prior year $11 million write-down of owned real estate.

 

2013 compared to 2012

 

Personnel expense totaled $3.3 billion in 2013, an increase of $168 million, or 5.4%, compared to 2012. The increase in personnel expense includes an increase of $128 million in salaries and wages, which reflects increases related to the acquisitions of Crump Insurance and BankAtlantic during 2012 and the impact of normal salary increases and job class changes. Other personnel expenses increased approximately $40 million, which included an increase of $22 million in post-employment benefits expense that is offset in other income. The remainder of the increase in other personnel expenses was driven by smaller increases in employment taxes and other fringe benefits.

 

Occupancy and equipment expense increased $42 million, or 6.5%, compared to 2012, with a portion of this increase attributable to the acquisitions of Crump Insurance and BankAtlantic acquisitions in the prior year and the remainder attributable to increases in rent and IT-related depreciation and maintenance.

 

Professional services expense totaled $189 million, an increase of $33 million compared to the prior year. This increase was largely driven by costs associated with systems and project-related expenses, partially offset by a decrease in legal fees.

 

Other expense increased $27 million, or 3.1%, compared to 2012, primarily the result of higher project-related expenses, increased depreciation expense related to assets used in the equipment finance leasing business and lower of cost or fair value adjustments on certain owned real estate. These increases were partially offset by a decrease in advertising and marketing expenses, lower insurance-related expenses and the loss on the sale of a leveraged lease that was recorded in the prior year. Software expense increased $20 million compared to the prior year, which primarily reflects higher maintenance and depreciation expense.

 

Foreclosed property expense includes the gain or loss on sale of foreclosed property, valuation adjustments resulting from updated appraisals and the ongoing expense of maintaining foreclosed properties. Foreclosed property expense decreased $211 million, or 79.3% in 2013, due to fewer losses and write-downs and lower maintenance costs on foreclosed property. Loan-related expense totaled $255 million, a decrease of $28 million, or 9.9% compared to the prior year. This decrease was primarily the result of improvements in mortgage repurchase expense and lower costs associated with certain mortgage loan indemnifications.

 

Merger-related and restructuring charges were $22 million lower than the prior year, which reflects the impact of merger-related charges associated with the Crump Insurance and BankAtlantic acquisitions in the prior year, partially offset by restructuring charges associated with optimization activities in Community Banking that were initiated during the second quarter of 2013. Regulatory charges decreased $16 million in 2013 due to improved credit quality, which led to lower deposit insurance premiums.

 

 

44

Provision for Income Taxes

 

BB&T’s provision for income taxes totaled $760 million, $1.4 billion and $764 million for 2014, 2013 and 2012, respectively. BB&T’s effective tax rates for the years ended 2014, 2013 and 2012 were 25.5%, 44.7% and 27.4%, respectively.

 

The decrease in the effective tax rate for 2014 compared to 2013 was primarily due to prior year adjustments totaling $516 million related to uncertain tax positions. During 2013, the U.S. Court of Federal Claims denied BB&T’s refund claim related to the IRS’s disallowance of tax deductions and foreign tax credits taken in connection with a financing transaction entered into by BB&T in 2002. BB&T has appealed this ruling. The decrease in the effective tax rate also reflects a net $36 million benefit recorded during 2014 as a result of developments in the IRS’s examination of tax years 2008-2010.

 

BB&T has extended credit to and invested in the obligations of states and municipalities and their agencies and has made other investments and loans that produce tax-exempt income. The income generated from these investments, together with certain other transactions that have favorable tax treatment, have reduced BB&T’s overall effective tax rate from the statutory rate in all periods presented.

 

Refer to Note 13 “Income Taxes” in the “Notes to 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.

 

Segment Results

 

See Note 21 “Operating Segments” in the “Notes to Consolidated Financial Statements” herein for additional disclosures related to BB&T’s operating segments, the internal accounting and reporting practices used to manage these segments and financial disclosures for these segments.

 

Fluctuations in noninterest income and noninterest expense incurred directly by the segments are more fully discussed in the “Noninterest Income” and “Noninterest Expense” sections above.

 

2014 compared to 2013

 

Community Banking

 

Community Banking had a network of 1,839 banking offices at the end of 2014, an increase of 14 offices compared to December 31, 2013. The increase in offices was primarily driven by the acquisition of 21 branches in Texas, partially offset by the closure of certain lower volume branches.

 

Community Banking net income was $923 million in 2014, an increase of $32 million, or 3.6%, compared to 2013.

 

Segment net interest income totaled $2.9 billion, a decrease of $134 million compared to 2013, primarily due to lower yields on new loans and lower funding spreads earned on deposits, partially offset by loan and noninterest-bearing deposit growth.

 

The allocated provision for credit losses decreased $156 million driven by lower business and consumer loan charge-offs, partially offset by a stabilization in loss factors.

 

Noninterest income of $1.2 billion increased $18 million, primarily due to higher service charges on deposits and bankcard fees.

 

Noninterest expense totaled $1.5 billion for 2014. The $157 million decrease was primarily attributable to lower personnel, occupancy and equipment, professional services and regulatory expense.

 

Intersegment net referral fees decreased $60 million driven by lower mortgage banking referrals.

 

Allocated corporate expenses increased $96 million driven primarily by internal business initiatives, including the ongoing implementation of the ERP system.

 

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

 

 

45

During 2014, BB&T also announced that it reached agreements to acquire additional branches in Texas, The Bank of Kentucky Financial Corporation, and Susquehanna Bancshares, Inc.

 

Residential Mortgage Banking

 

Residential Mortgage Banking net income was $204 million in 2014, a decrease of $179 million, or 46.7%, compared to 2013.

 

Mortgage originations totaled $17.4 billion in 2014, a decrease of $14.2 billion compared to $31.6 billion in 2013. BB&T’s residential mortgage servicing portfolio, which includes both retained loans and loans serviced for others, totaled $122.3 billion at the end of 2014, compared to $121.2 billion at December 31, 2013.

 

Segment net interest income decreased $87 million to $498 million, primarily the result of lower average loan balances.

 

The allocated provision for credit losses was a benefit of $107 million in 2014, compared to expense of $12 million in 2013, reflecting the benefit of the previously discussed sales of residential mortgages in the third and fourth quarters of 2014 and a decrease in loan balances consistent with the current strategy of selling substantially all conforming mortgage loan production.

 

Noninterest income decreased $174 million driven by lower gains on residential mortgage loan production and sales due to lower origination volume and tighter pricing due to competitive factors. This decrease was partially offset by an increase in net servicing income of $31 million, primarily due to slower prepayment speeds and a $2.8 billion, or 3.2%, increase in the investor-owned servicing portfolio.

 

Noninterest expense increased $134 million, which primarily reflects a $27 million charge in the fourth quarter of 2014 related to the previously discussed ongoing review of mortgage processes, as well as adjustments in the second quarter of 2014 totaling $118 million related to the previously described FHA-insured loan exposures.

 

The provision for income taxes decreased $111 million, primarily due to lower pre-tax income.

 

Dealer Financial Services

 

Dealer Financial Services net income was $183 million in 2014, a decrease of $21 million, or 10.3%, compared to 2013.

 

The allocated provision for credit losses increased $23 million primarily due to higher charge-offs in the nonprime automobile loan portfolio as credit trends in that portfolio continue to normalize.

 

Noninterest expense increased $8 million, driven by higher personnel expense, primarily related to Regional Acceptance Corporation’s geographic expansion and operating charge-offs.

 

Dealer Financial Services grew average loans by $1.1 billion, or 10.5%, compared to 2013 as the result of strong growth in the prime and nonprime auto lending businesses.

 

Specialized Lending

 

Specialized Lending net income was $254 million in 2014, a decrease of $16 million, or 5.9%, compared to 2013.

 

Segment net interest income decreased $120 million to $432 million, which primarily reflects the sale of a consumer lending subsidiary during the fourth quarter of 2013 and lower credit spreads on loans earned during 2014.

 

The sale of the specialized lending subsidiary also had a beneficial impact on the allocated provision for credit losses, which decreased $46 million.

 

Noninterest income increased $10 million driven by higher operating lease income.

 

Noninterest expense decreased $36 million driven by lower personnel, occupancy and equipment, loan processing and professional services expense.

 

Small ticket consumer finance, equipment finance, governmental finance and commercial mortgage experienced strong growth compared to 2013.

 

46

 

Insurance Services

 

Insurance Services net income was $233 million in 2014, an increase of $46 million, or 24.6%, compared to 2013.

 

Insurance Services’ noninterest income of $1.7 billion increased $128 million, primarily due to increased commissions on new and renewal property and casualty business, higher performance-based commissions and an increase in employee benefit commissions.

 

Noninterest expense increased $54 million driven by higher salaries, performance-based incentives, operating charge-offs and business referral expense.

 

Financial Services

 

Financial Services net income was $280 million in 2014, a decrease of $23 million, or 7.6%, compared to 2013.

 

The allocated provision for credit losses increased $7 million compared to the prior year as the result of growth in the Corporate Banking and BB&T Wealth loan portfolios.

 

Noninterest income increased $26 million, primarily due to higher trust, investment advisory and investment banking income. Client invested assets totaled $119.0 billion as of December 31, 2014, an increase of $7.8 billion, or 7.0%, compared to 2013.

 

Noninterest expense increased $28 million, primarily due to higher personnel expense, operating charge-offs, sub-advisory fees and occupancy and equipment expense.

 

Allocated corporate expenses increased $21 million, primarily driven by internal business initiatives and growth in the segment.

 

Financial Services continues to generate significant loan growth through expanded lending strategies, with Corporate Banking’s average loan balances increasing $1.7 billion, or 23.3%, compared to 2013, while BB&T Wealth’s average loan balances increased $229 million, or 25.6%. BB&T Wealth also grew transaction account balances by $438 million, or 18.8%, and money market and savings balances by $575 million, or 9.4%, compared to 2013.

 

Other, Treasury & Corporate

 

Other, Treasury & Corporate net income was $149 million in 2014 compared to a net loss of $509 million in 2013. Results in the prior year include $516 million in adjustments for uncertain income tax positions as previously described.

 

Segment net interest income increased $103 million to $401 million, primarily due to an increase in the investment portfolio, lower funding credits on deposits allocated to Community Banking and Financial Services and lower corporate borrowing costs, partially offset by runoff in the acquired from FDIC loan portfolio.

 

The allocated provision for credit losses was a benefit of $66 million compared to a benefit of $16 million in the prior year. This current year includes a $29 million benefit for loans acquired from the FDIC and a $29 million reduction in the reserve for unfunded lending commitments driven by improvements related to the mix of lines of credit, letters of credit, and bankers’ acceptances.

 

Noninterest income decreased $159 million primarily due to lower securities gains in the investment portfolio, lower FDIC loss share income, the sale of a consumer lending subsidiary during the fourth quarter of 2013 and lower income from assets related to certain post-employment benefits.

 

Noninterest expense increased $68 million, primarily due to $122 million in expense related to early extinguishment of FHLB debt, and higher outside IT services and merger-related expense, partially offset by lower personnel, professional services and tax and license expense.

 

Intersegment net referral fee expense decreased $61 million as the result of a lower level of mortgage banking referral income that was allocated to both Community Banking and Financial Services.

 

47

 

The credit for allocated corporate expenses increased $150 million compared to the prior year primarily related to investments in application systems and business initiatives allocated to the other segments and centralization of certain business activities into corporate functions to allow for efficiencies.

 

2013 compared to 2012

 

Community Banking

 

Community Banking had a network of 1,825 banking offices at the end of 2013, a decrease of seven offices compared to December 31, 2012. The decrease in offices was driven by the closure of low volume branches, partially offset by de novo branch openings.

 

Community Banking net income was $891 million in 2013, an increase of $173 million, or 24.1%, compared to 2012.

 

Segment net interest income totaled $3.0 billion, a decrease of $185 million compared to 2012. The decrease in segment net interest income was primarily attributable to lower funding spreads earned on deposits, partially offset by improvements in deposit mix as a result of growth in noninterest-bearing deposits, money market and savings deposits and a decrease in certificates of deposits.

 

The allocated provision for loan and lease losses decreased $307 million as the result of lower business and consumer loan charge-offs.

 

Noninterest income of $1.2 billion increased $60 million, primarily due to higher checkcard fees, bankcard fees, merchant discounts and service charges on deposits.

 

Noninterest expense of $1.7 billion decreased $123 million, primarily driven by lower foreclosed property, regulatory and professional services expense.

 

Residential Mortgage Banking

 

Residential Mortgage Banking net income was $383 million in 2013, a decrease of $6 million, or 1.5%, compared to 2012.

 

Mortgage originations totaled $31.6 billion in 2013, a decrease of $1.5 billion, or 4.5%, compared to $33.1 billion in 2012. BB&T’s residential mortgage servicing portfolio, which includes both retained loans and loans serviced for others, totaled $121.2 billion at the end of 2013, compared to $110.1 billion at December 31, 2012.

 

Segment net interest income increased $65 million to $585 million. The increase in segment net interest income was driven by growth in loans held for investment, which was partially attributable to the decision to begin retaining certain originated mortgage loans, and higher credit spreads on average loan balances.

 

The allocated provision for loan and lease losses decreased $162 million, primarily reflecting an improvement in mix due to the runoff of lower quality loans. Net charge-offs of $78 million were recorded in 2013, compared to $133 million in 2012, as nonaccrual and aged loans (excluding guaranteed loans) decreased during the period.

 

Noninterest income decreased $272 million, primarily driven by lower gain on sale margins, which reflects increased competition and a higher proportion of loans originated through the correspondent network, and a decrease in net MSR valuation adjustments.

 

Noninterest expense decreased $46 million primarily due to lower foreclosure-related expense and lower expense associated with mortgage repurchase reserves.

 

Dealer Financial Services

 

Dealer Financial Services net income was $204 million in 2013, a decrease of $15 million, or 6.8%, compared to 2012.

 

Segment net interest income of $676 million increased $27 million, primarily the result of loan growth and wider credit spreads in the Regional Acceptance Corporation portfolio. Dealer Financial Services average loans grew by $840 million, or 8.5%, compared to 2012.

 

 

48

The allocated provision for loan and lease losses increased $50 million, primarily due to a more normalized volume of charge-offs in the Regional Acceptance Corporation portfolio after experiencing a lower charge-off volume in the prior year.

 

Specialized Lending

 

Specialized Lending net income was $270 million in 2013, an increase of $33 million, or 13.9%, compared to 2012.

 

Segment net interest income of $552 million decreased $10 million compared to 2012. During the fourth quarter, BB&T sold a consumer lending subsidiary that focused its business on the nonprime consumer market. The sale of this subsidiary included loans totaling approximately $500 million. In connection with this sale transaction, loans totaling approximately $230 million were transferred to Residential Mortgage Banking.

 

Excluding this sales transaction, Specialized Lending grew average balances by $966 million, or 6.9%, over 2012. This increase was primarily driven by growth in small ticket consumer finance, commercial insurance premium finance and equipment finance.

 

The allocated provision for loan and lease losses decreased $50 million, which primarily reflects the removal of reserves in connection with the loan sales and transfers previously discussed. Loss rates are also affected by shifts in the portfolio mix of the underlying subsidiaries.

 

Insurance Services

 

Insurance Services net income was $187 million in 2013, an increase of $44 million, or 30.8%, compared to 2012.

 

Noninterest income was $1.5 billion, an increase of $170 million compared to 2012. The increase reflects the acquisition of Crump Insurance during April 2012, firming market conditions for insurance premiums, organic growth in wholesale and retail property and casualty insurance operations, wholesale life insurance growth and an experience-based refund of reinsurance premiums totaling $13 million that was received during the second quarter of 2013. Wholesale property and casualty insurance income increased $59 million, while retail property and casualty insurance income increased $36 million compared to 2012. Wholesale life insurance income increased $43 million compared to 2012, primarily attributable to the Crump Insurance acquisition.

 

Higher noninterest income growth was offset by a $119 million increase in noninterest expense, primarily the result of higher salary costs and performance-based incentives. The increase in noninterest expense was partially attributable to the Crump Insurance acquisition in 2012.

 

Financial Services

 

Financial Services net income was $303 million in 2013, an increase of $26 million, or 9.4%, compared to 2012.

 

Segment net interest income for Financial Services increased $13 million to $448 million in 2013. The increase in segment net interest income during 2013 was primarily attributable to strong organic loan growth and an improved deposit mix, partially offset by lower NIM.

 

Corporate Banking’s average loan balances increased by $1.6 billion, or 26.5%, in 2013.

 

The allocated provision for loan and lease losses increased $7 million, primarily attributable to lower reserves in 2012 resulting from improved credit trends in the commercial and industrial loan portfolio.

 

Noninterest income for Financial Services increased $20 million, primarily due to higher investment banking and brokerage fees and commissions and trust and investment advisory revenues. Client invested assets totaled $111.2 billion as of December 31, 2013, an increase of $15.0 billion, or 15.6%, compared to 2012.

 

Noninterest expense incurred by Financial Services decreased $25 million, primarily due to lower occupancy and equipment expense and an operating charge-off in the prior year, partially offset by an increase in personnel expense.

 

 

49

Other, Treasury & Corporate

 

Net income in Other, Treasury & Corporate can vary due to changing needs of the Company, including the size of the investment portfolio, the need for wholesale funding, income received from derivatives used to hedge the balance sheet and, in certain cases, income associated with acquisition activities.

 

Other, Treasury & Corporate generated a net loss of $509 million in 2013, compared to net income of $45 million in the prior year. The net loss was primarily the result of $516 million in adjustments for uncertain income tax positions as previously described.

 

Segment net interest income decreased $153 million to $298 million, primarily attributable to runoff of loans acquired from the FDIC.

 

The $136 million increase in noninterest income primarily reflects the gain on the sale of a consumer lending subsidiary totaling $31 million, higher income from assets related to certain post-employment benefits, higher securities gains in the investment portfolio and higher FDIC loss share income.

 

The $84 million increase in noninterest expense was primarily attributable to personnel expense related to certain post-employment benefits mentioned above, as well as higher professional services, data processing software, and IT professional services expense related to corporate project initiatives.

 

Analysis of Financial Condition

 

Investment Activities

 

BB&T’s board-approved investment policy is carried out by the MRLCC, which meets regularly to review the economic environment and establish investment strategies. The MRLCC also has much broader responsibilities, which are discussed in the “Market Risk Management” section in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein.

 

Investment strategies are reviewed by the MRLCC based on the interest rate environment, balance sheet mix, actual and anticipated loan demand, funding opportunities and the overall interest rate sensitivity of the Company. In general, the goals of the investment portfolio are: (i) to provide a sufficient margin of liquid assets to meet unanticipated deposit and loan fluctuations and overall funds management objectives; (ii) to provide eligible securities to secure public funds, trust deposits as prescribed by law and other borrowings; and (iii) to earn the maximum return on funds invested that is commensurate with meeting the requirements of (i) and (ii).

 

Branch Bank invests in securities allowable under bank regulations. These securities may include obligations of the U.S. Treasury, U.S. government agencies, GSEs (including MBS), bank eligible obligations of any state or political subdivision, non-agency MBS, structured notes, bank eligible corporate obligations (including corporate debentures), commercial paper, negotiable CDs, bankers acceptances, mutual funds and limited types of equity securities. Branch Bank also may deal in securities subject to the provisions of the Gramm-Leach-Bliley Act. BB&T’s full-service brokerage and investment banking subsidiary engages in the underwriting, trading and sales of equity and debt securities subject to the risk management policies of the Company.

 

 

50

 

 

The following table provides information regarding the composition of the securities portfolio for the years presented:
                           
Table 14
Composition of Securities Portfolio
                           
          December 31,  
          2014   2013   2012  
                           
          (Dollars in millions)  
  AFS securities (at fair value):                  
    U.S. Treasury $  1,231    $  595    $  281   
    GSE    ―         ―         9   
    MBS issued by GSE    16,154       17,929       20,930   
    States and political subdivisions    1,974       1,851       2,011   
    Non-agency MBS    264       291       312   
    Other    41       45       3   
    Acquired from FDIC    1,243       1,393       1,591   
  Total AFS securities    20,907       22,104       25,137   
                       
  HTM securities (at amortized cost):                  
    U.S. Treasury    1,096       392       ―     
    GSE    5,394       5,603       3,808   
    MBS issued by GSE    13,120       11,636       9,273   
    States and political subdivisions    22       33       34   
    Other    608       437       479   
  Total HTM securities    20,240       18,101       13,594   
  Total securities $  41,147    $  40,205    $  38,731   

 

The securities portfolio totaled $41.1 billion at December 31, 2014, an increase of $942 million, or 2.3%, over the prior year. The increase was driven by higher HTM portfolio balances in response to new regulatory requirements related to liquidity. As of December 31, 2014, approximately 14.0% of the securities portfolio was variable rate, compared to 14.7% as of December 31, 2013. The effective duration of the securities portfolio was 3.9 years at December 31, 2014, compared to 5.5 years at the end of 2013. The duration of the securities portfolio excludes equity securities, auction rate securities, and certain non-agency MBS acquired from the FDIC.

 

MBS issued by GSEs were 71.1% of the total securities portfolio at year-end 2014, compared to 73.5% as of prior year end. As of December 31, 2014, the AFS securities portfolio also includes $1.2 billion of securities that were acquired from the FDIC as part of the Colonial acquisition. Effective October 1, 2014, securities subject to the commercial loss sharing agreement with the FDIC related to the Colonial acquisition were no longer subject to loss sharing; however, any gains on the sale of these securities through September 30, 2017 would be shared with the FDIC. Since these securities are in a significant unrealized gain position, they are effectively covered as any declines in the unrealized gains of the securities down to a contractually specified amount would reduce the liability to the FDIC at the applicable percentage. Securities acquired from the FDIC consisted of $931 million of non-agency MBS and $312 million of municipal securities as of December 31, 2014.

 

During 2014, securities totaling $1.3 billion were sold for a net realized gain of $3 million. During 2013, $2.2 billion of securities were sold that produced a net realized gain of $51 million. During 2012, $306 million of securities were sold for a net realized loss of $3 million. In addition, BB&T recognized $6 million in OTTI charges for 2014 and $9 million in OTTI charges for 2012.

 

Refer to Note 3 “Securities” in the “Notes to Consolidated Financial Statements” herein for additional disclosures related to the evaluation of securities for OTTI.

 

51

 

The following table presents the securities portfolio at December 31, 2014, segregated by major category with ranges of maturities and average yields disclosed:
                                 
Table 15
Securities
                                 
          December 31, 2014  
          AFS     HTM  
                Effective         Effective  
          Fair Value   Yield (1)   Amortized Cost   Yield (1)  
                                 
          (Dollars in millions)  
  U.S. Treasury:                        
    Within one year $  571     0.22  %   $  ―       ―    %  
    One to five years    660     1.15         ―       ―       
    Five to ten years    ―       ―           1,096     2.21     
      Total    1,231     0.72         1,096     2.21     
                                 
  GSE:                        
    One to five years    ―       ―           750     1.53     
    Five to ten years    ―       ―           4,644     2.19     
      Total    ―       ―           5,394     2.10     
                                 
  MBS issued by GSE: (2)                        
    One to five years    20     3.95         ―       ―       
    Five to ten years    4     1.43         ―       ―       
    After ten years    16,130     1.96         13,120     2.22     
      Total    16,154     1.96         13,120     2.22     
                                 
  Obligations of states and political subdivisions: (3)                        
    One to five years    46     6.72         ―       ―       
    Five to ten years    408     6.50         ―       ―       
    After ten years    1,520     6.54         22     5.94     
      Total    1,974     6.53         22     5.94     
                                 
  Non-agency MBS: (2)                        
    After ten years    264     7.48         ―       ―       
      Total    264     7.48         ―       ―       
                                 
  Other:                        
    Within one year    41     1.82         ―       ―       
    One to five years    ―       ―           1     1.29     
    Five to ten years    ―       ―           266     1.24     
    After ten years    ―       ―           341     1.38     
      Total    41     1.82         608     1.32     
                                 
  Acquired from FDIC:                        
    One to five years    112     3.70         ―       ―       
    Five to ten years    200     3.89         ―       ―       
    After ten years    931     17.44         ―       ―       
      Total    1,243     14.03         ―       ―       
        Total securities $  20,907     3.10      $  20,240     2.17     
                                 
                                 
(1) Yields represent interest computed at the end of the period using the effective interest method on an FTE basis applying the statutory federal income tax rate of 35% and the amortized cost of the securities.
(2) For purposes of the maturity table, MBS, which are not due at a single maturity date, have been included in maturity groupings based on the contractual maturity. The expected life of MBS will differ from contractual maturities because borrowers may have the right to call or prepay the underlying mortgage loans.
(3) Weighted-average yield excludes the effect of pay-fixed swaps hedging municipal securities.

 

52

Lending Activities

 

The primary goal of the BB&T lending function is to help clients achieve their financial goals by providing quality loan products that are fair to the client and profitable to the Company. Management believes that this purpose can best be accomplished by building strong, profitable client relationships over time, with BB&T becoming an important contributor to the prosperity and well-being of its clients. In addition to the importance placed on client knowledge and continuous involvement with clients, BB&T’s lending process incorporates the standards of a consistent company-wide credit culture and an in-depth local market knowledge. Furthermore, the Company employs strict underwriting criteria governing the degree of assumed risk and the diversity of the loan portfolio in terms of type, industry and geographical concentration. In this context, BB&T strives to meet the credit needs of businesses and consumers in its markets while pursuing a balanced strategy of loan profitability, loan growth and loan quality.

 

Table 16
Quarterly Average Balances of Loans and Leases
                                   
        For the Three Months Ended
        12/31/14   9/30/14   6/30/14   3/31/14   12/31/13
                                   
          (Dollars in millions)
Commercial:                            
  Commercial and industrial $  40,383    $  39,906    $  39,397    $  38,435    $  38,101 
  CRE - income producing properties    10,681       10,596       10,382       10,293       10,031 
  CRE - construction and development    2,772       2,670       2,566       2,454       2,433 
Direct retail lending (1)    8,085       7,912       7,666       9,349       15,998 
Sales finance    10,247       10,313       10,028       9,428       9,262 
Revolving credit    2,427       2,396       2,362       2,357       2,357 
Residential mortgage (1)    31,046       32,000       32,421       30,635       23,979 
Other lending subsidiaries    11,351       11,234       10,553       10,236       10,448 
  Total average loans and leases held for                            
      investment (excluding acquired from FDIC)    116,992       117,027       115,375       113,187       112,609 
Acquired from FDIC    1,309       1,537       1,739       1,874       2,186 
  Total average loans and leases held                            
      for investment    118,301       118,564       117,114       115,061       114,795 
LHFS    1,611       1,907       1,396       1,311       2,206 
  Total average loans and leases $  119,912    $  120,471    $  118,510    $  116,372    $  117,001 
                                   
                                   
(1) During the first quarter of 2014, $8.3 billion of loans were transferred from direct retail lending to residential mortgage.

 

Average loans held for investment for the fourth quarter of 2014 were $118.3 billion, down $263 million compared to the prior quarter. The decrease in average loans held for investment was primarily due to a decline of $954 million in the residential mortgage portfolio and continued run-off of loans acquired from the FDIC. These declines were partially offset by a $477 million increase in the commercial and industrial portfolio as well as smaller increases in the CRE – construction and development, direct retail lending and other lending subsidiaries portfolios.

 

The decrease of $954 million, or 11.8% annualized, in the residential mortgage portfolio reflects the $550 million loan sale that occurred during the third quarter, which had a partial impact on third quarter averages and a full impact on fourth quarter averages. The decrease also reflects lower origination volume and a reduction in fixed rate home equity loans due to continued runoff. The previously described $140 million loan sale occurred late in the fourth quarter and therefore had minimal impact on average balances.

 

Average commercial and industrial loans increased $477 million, or 4.7% annualized, which reflects strong growth from large corporate clients. Growth in this sector has benefited from the expansion of BB&T’s footprint into new markets. CRE – construction and development loans were up 15.2% annualized, reflecting a continued strong growth trend in that portfolio.

 

The average direct retail lending portfolio increased $173 million, or 8.7% annualized, while average other lending subsidiaries loans increased $117 million, or 4.1% on an annualized basis.

 

53

 

Table 17
Variable Rate Loans (Excluding Acquired from FDIC and LHFS)
                             
  December 31, 2014   Outstanding Balance   Wtd. Avg. Contractual Rate   Wtd. Avg. Remaining Term  
                             
            (Dollars in millions)  
  Commercial:                    
    Commercial and industrial   $ 28,448    2.36  %   2.6  yrs  
    CRE - income producing properties     7,965    3.13      3.8     
    CRE - construction and development     2,565    3.44      2.5     
    Other lending subsidiaries     456    3.04      2.6     
  Retail:                    
    Direct retail lending (1)     6,303    3.44      8.9     
    Revolving credit     2,108    9.14      NM    
    Residential mortgage     6,520    3.45      25.5     
    Sales finance (2)     1,113    1.83      NM    
    Other lending subsidiaries     --     N/A     N/A    
                             
                             
  (1) The weighted average remaining term for direct retail lending represents the remaining contractual draw period. Margin loans totaling $103 million have been excluded from the calculation of the weighted average remaining term because they do not have a contractual end date and are callable on demand.  
  (2) The weighted average remaining term for sales finance is excluded as the balance primarily represents dealer floor plan loans that are callable on demand.  
  NM - not meaningful.    

 

As of December 31, 2014, approximately 5.3% of the outstanding balance of variable rate residential mortgage loans is currently in an interest-only phase. Approximately 85.6% of these balances will begin amortizing within the next three years. Variable rate residential mortgage loans typically reset every 12 months beginning after a 3 to 10 year fixed period, with an annual cap on rate changes ranging from 2% to 6%.

 

As of December 31, 2014, the direct retail lending portfolio includes $5.6 billion of home equity lines. Approximately 67% of the outstanding balance of variable rate home equity lines is currently in the interest-only phase. Approximately 8.2% of these balances will begin scheduled amortization within the next three years. Variable rate home equity lines typically reset on a monthly basis. Variable rate home equity loans were immaterial as of December 31, 2014.

 

BB&T monitors the performance of its home equity loans and lines secured by second liens similar to other consumer loans and utilizes assumptions specific to these loans in determining the necessary ALLL. BB&T also receives notification when the first lien holder, whether BB&T or another financial institution, has initiated foreclosure proceedings against the borrower. When notified that the first lien is in the process of foreclosure, BB&T obtains valuations to determine if any additional charge-offs or reserves are warranted. These valuations are updated at least annually thereafter.

 

BB&T has limited ability to monitor the delinquency status of the first lien, unless the first lien is held or serviced by BB&T. As a result, using migration assumptions that are based on historical experience and adjusted for current trends, BB&T estimates the volume of second lien positions where the first lien is delinquent and adjusts the ALLL to reflect the increased risk of loss on these credits. Finally, BB&T also provides additional reserves to second lien positions when the estimated combined current loan to value ratio for the credit exceeds 100%. As of December 31, 2014, BB&T held or serviced the first lien on 37.2% of its second lien positions.

 

Scheduled repayments are reported in the maturity category in which the payment is due. Determinations of maturities are based on contract terms. BB&T’s credit policy typically does not permit automatic renewal of loans. At the scheduled maturity date (including balloon payment date), the customer generally must request a new loan to replace the matured loan and execute either a new note or note modification with rate, terms and conditions negotiated at that time.

 

BB&T lends to a diverse customer base that is substantially located within the Company’s primary market area. At the same time, the loan portfolio is geographically dispersed throughout BB&T’s branch network to mitigate concentration risk arising from local and regional economic downturns. Refer to the “Risk Management” section herein for a discussion of each of the loan portfolios and the credit risk management policies used to manage the portfolios.

54

 

The following table presents the loan portfolio based upon BB&T’s LOBs:

 

Table 18
Composition of Loan and Lease Portfolio Based on LOB
                                     
        December 31,  
        2014   2013   2012    2011    2010   
                                     
        (Dollars in millions)  
  Commercial:                              
    Commercial and industrial $  41,454    $  38,508    $  38,295    $  36,415    $  34,050   
    CRE—income producing properties    10,722       10,228       9,861       8,860       9,083   
    CRE—construction and development    2,735       2,382       2,861       3,890       5,753   
  Direct retail lending (1)    8,146       15,869       15,817       14,506       13,807   
  Sales finance    10,600       9,382       7,736       7,401       7,050   
  Revolving credit    2,460       2,403       2,330       2,212       2,127   
  Residential mortgage-nonguaranteed (1)    30,107       23,513       23,189       20,057       17,102   
  Residential mortgage-government guaranteed    983       1,135       1,083       524       448   
  Other lending subsidiaries    11,462       10,462       10,137       8,737       7,953   
    Total loans and leases held for investment                              
      (excluding acquired from FDIC)    118,669       113,882       111,309       102,602       97,373   
  Acquired from FDIC    1,215       2,035       3,294       4,867       6,194   
    Total loans and leases held for investment    119,884       115,917       114,603       107,469       103,567   
  LHFS    1,423       1,222       3,761       3,736       3,697   
    Total loans and leases $  121,307    $  117,139    $  118,364    $  111,205    $  107,264   
                                     
                                     
(1) During the first quarter of 2014, $8.3 billion of loans were transferred from direct retail lending to residential mortgage.

 

Total loans and leases were $121.3 billion at year-end 2014, an increase of $4.2 billion compared to the balance at year-end 2013. This increase reflects broad-based loan growth, with commercial and industrial up $2.9 billion, sales finance up $1.2 billion and other lending subsidiaries up $1.0 billion. A decline in direct retail lending balances and a corresponding increase in residential mortgage balances reflect the impact of an $8.3 billion transfer that occurred during the first quarter of 2014.

 

The increase in commercial and industrial loans reflects solid growth from large corporate clients, which typically have strong credit profiles and therefore put downward pressure on pricing. The yield on commercial and industrial loans declined to 3.35% in 2014 from 3.63% in 2013.

 

The decline in residential mortgage balances, after excluding the effects of the loan transfer, reflects the competitive environment, lower originations and the impact of the loans sales previously discussed. Additionally, BB&T implemented a mid-year change in strategy that resulted in originations of loans with eligible collateral types, including adjustable rate mortgages with 10 and 15 year terms, being directed to the LHFS portfolio.

 

The acquired from FDIC loan portfolio, which totaled $1.2 billion at December 31, 2014, continued to runoff during the year, resulting in a decline of $820 million compared to the prior year-end.

 

The majority of BB&T’s loans are with clients in domestic market areas, which are primarily concentrated in the southeastern United States. International loans were immaterial as of December 31, 2014 and 2013.

 

The following tables summarize the loan portfolio based on regulatory classifications, which focuses on the underlying loan collateral, and differs from internal classifications presented herein that focus on the primary purpose of the loan. Acquired from FDIC loans are included in their respective categories.

 

55

 

Table 19
Composition of Loan and Lease Portfolio
                                     
        December 31,  
        2014   2013   2012    2011    2010   
                                     
        (Dollars in millions)  
  Commercial, financial and agricultural $  27,615    $  25,260    $  23,863    $  21,452    $  20,490   
  Lease receivables    1,120       1,126       1,114       1,067       1,158   
  Real estate-construction and land development    4,736       4,630       5,900       7,714       10,969   
  Real estate-mortgage    63,464       65,485       65,760       60,821       57,418   
  Consumer    22,949       19,416       17,966       16,415       13,532   
    Total loans and leases held for investment    119,884       115,917       114,603       107,469       103,567   
  LHFS    1,423       1,222       3,761       3,736       3,697   
    Total loans and leases $  121,307    $  117,139    $  118,364    $  111,205    $  107,264   

 

Table 20
Selected Loan Maturities and Interest Sensitivity
                           
          December 31, 2014  
          Commercial,   Real Estate:        
          Financial   Construction        
          and   and Land        
          Agricultural   Development   Total  
                           
          (Dollars in millions)  
  Fixed Rate:                  
    1 year or less (1) $  2,644    $  399    $  3,043   
    1-5 years    3,322       379       3,701   
    After 5 years    4,350       729       5,079   
      Total    10,316       1,507       11,823   
  Variable Rate:                  
    1 year or less (1)    4,101       877       4,978   
    1-5 years    10,338       1,760       12,098   
    After 5 years    2,860       592       3,452   
      Total    17,299       3,229       20,528   
        Total loans and leases (2) $  27,615    $  4,736    $  32,351   
                           
                           
(1) Includes loans due on demand.  
(2) The above table excludes:       (Dollars in millions)  
  (i) consumer   $  22,949   
  (ii) real estate mortgage      63,464   
  (iii) LHFS      1,423   
  (iv) lease receivables      1,120   
    Total   $  88,956   

 

Asset Quality

 

The following discussion includes assets acquired from the FDIC. Loans acquired from the FDIC, which are considered performing due to the application of the expected cash flows method, were $1.2 billion at December 31, 2014 and $2.0 billion in the prior year. Refer to “Acquired from FDIC and FDIC Loss Share Receivable/Payable” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein for additional information. Foreclosed real estate acquired from the FDIC totaled $56 million and $121 million at December 31, 2014 and 2013, respectively.

 

NPAs, which include foreclosed real estate, repossessions and NPLs, totaled $782 million at December 31, 2014 compared to $1.2 billion at December 31, 2013. The decline in NPAs of $392 million was driven by decreases of $319 million in NPLs and $73 million in foreclosed property. Commercial and industrial NPLs were down $124 million due to continued improvement in credit quality. Residential mortgage NPLs declined $77 million due to the fourth quarter sale of $121 million of residential mortgage NPLs, partially offset by the first quarter loan transfer from direct retail lending to residential mortgage, which included $55 million of NPLs.

 

56

NPAs as a percentage of loans and leases plus foreclosed property were 0.65% at December 31, 2014 compared with 1.01% at December 31, 2013.

 

The following table presents the changes in NPAs during 2014 and 2013 (excludes foreclosed property acquired from the FDIC):

 

Table 21
Rollforward of NPAs
 
              Year Ended December 31,  
              2014   2013  
                         
              (Dollars in millions)  
  Balance at beginning of year $  1,053    $  1,536   
    New NPAs    1,307       1,583   
    Advances and principal increases    74       177   
    Disposals of foreclosed assets    (487)      (533)  
    Disposals of NPLs (1)    (332)      (348)  
    Charge-offs and losses    (309)      (511)  
    Payments    (398)      (636)  
    Transfers to performing status    (192)      (212)  
    Other, net    10       (3)  
  Balance at end of year $  726    $  1,053   
                         
                         
(1) Includes charge-offs and losses recorded upon sale of $25 million and $73 million for the years ended December 31, 2014 and 2013, respectively.

 

The following tables summarize asset quality information for the past five years. As more fully described below, this information has been adjusted to exclude certain components:

 

·BB&T has recorded certain amounts related to government guaranteed GNMA mortgage loans that BB&T has the option, but not the obligation, to repurchase and has effectively regained control. These amounts are reported in the Consolidated Balance Sheets but have been excluded from the asset quality disclosures, as management believes they result in distortion of the reported metrics. The amount of government guaranteed GNMA mortgage loans that have been excluded are noted in the footnotes to Table 22.

 

·In addition, BB&T has concluded that the inclusion of loans acquired from the FDIC in “Loans 90 days or more past due and still accruing as a percentage of total loans and leases” may result in significant distortion to this ratio. The inclusion of these loans could result in a lack of comparability across quarters or years, and could negatively impact comparability with other portfolios that were not impacted by acquisition accounting. BB&T believes that the presentation of this asset quality measure excluding loans acquired from the FDIC provides additional perspective into underlying trends related to the quality of its loan portfolio. Accordingly, the asset quality measures in Table 23 present asset quality information on a consolidated basis as well as “Loans 90 days or more past due and still accruing as a percentage of total loans and leases” excluding loans acquired from the FDIC.

 

57

 

  Table 22  
  Asset Quality  
                                               
          December 31,  
          2014   2013   2012   2011   2010  
                                               
            (Dollars in millions)  
  Nonaccrual loans and leases:                                      
    Commercial and industrial $  239      $  363      $  545      $  582      $  508   
    CRE - income producing properties    74         113         171         275         212   
    CRE - construction and development    26         51         170         495         706   
    Direct retail lending (1)    48         109         132         142         191   
    Sales finance    5         5         7         7         6   
    Residential mortgage (1)(2)(3)    166         243         269         308         466   
    Other lending subsidiaries (2)(4)    58         51         86         63         60   
  Total nonaccrual loans and leases HFI (3)(4)    616         935         1,380         1,872         2,149   
    Nonaccrual LHFS    ―           ―           ―           ―           521   
  Total nonaccrual loans and leases (3)(4)    616         935         1,380         1,872         2,670   
    Foreclosed real estate    87         71         107         536         1,259   
    Foreclosed real estate-acquired from FDIC    56         121         254         378         313   
    Other foreclosed property    23         47