10-Q 1 form10-q_2q17.htm 10-Q Document
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________
FORM 10-Q
_____________________________

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended: June 30, 2017
Commission File Number: 1-10853
_____________________________
BB&T CORPORATION
(Exact name of registrant as specified in its charter)
_____________________________
North Carolina
56-0939887
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
200 West Second Street
Winston-Salem, North Carolina
27101
(Address of principal executive offices)
(Zip Code)
(336) 733-2000
(Registrant's telephone number, including area code)
______________________________
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý   No  ¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  ý   No  ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
 
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨   No  ý
At June 30, 2017, 808,092,503 shares of the Registrant's common stock, $5 par value, were outstanding.


 


TABLE OF CONTENTS
 
 
 
BB&T CORPORATION
FORM 10-Q
June 30, 2017
 
 
 
Page No.
PART I
 
Item 1.
Financial Statements
 
 
 
 
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
 
 
 
 
Note 3. Securities
 
 
Note 5. Goodwill
 
 
Note 7. Deposits
 
 
 
Note 10. AOCI
 
Note 11. Income Taxes
 
Note 12. Benefit Plans
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 2.
Item 3.
Defaults Upon Senior Securities - (none.)
 
Item 4.
Mine Safety Disclosures - (not applicable.)
 
Item 5.
Other Information - (none to be reported.)
 
Item 6.



Glossary of Defined Terms
The following terms may be used throughout this Report, including the consolidated financial statements and related notes. 
Term
 
Definition
2015 Repurchase Plan
 
Plan for the repurchase of up to 50 million shares of BB&T's common stock
ACL
 
Allowance for credit losses
Acquired from FDIC
 
Assets of Colonial that were formerly covered under loss sharing agreements
AFS
 
Available-for-sale
Agency MBS
 
Mortgage-backed securities issued by a U.S. government agency or GSE
ALLL
 
Allowance for loan and lease losses
American Coastal
 
American Coastal Insurance Company
AOCI
 
Accumulated other comprehensive income (loss)
Basel III
 
Global regulatory standards on bank capital adequacy and liquidity published by the BCBS
BB&T
 
BB&T Corporation and subsidiaries
BCBS
 
Basel Committee on Banking Supervision
BHC
 
Bank holding company
BHCA
 
Bank Holding Company Act of 1956, as amended
Branch Bank
 
Branch Banking and Trust Company
BSA/AML
 
Bank Secrecy Act/Anti-Money Laundering
BU
 
Business Unit
CCAR
 
Comprehensive Capital Analysis and Review
CD
 
Certificate of deposit
CDI
 
Core deposit intangible assets
CEO
 
Chief Executive Officer
CET1
 
Common equity Tier 1
CFPB
 
Consumer Financial Protection Bureau
CMO
 
Collateralized mortgage obligation
Colonial
 
Collectively, certain assets and liabilities of Colonial Bank acquired by BB&T in 2009
Company
 
BB&T Corporation and subsidiaries (interchangeable with "BB&T" above)
CRA
 
Community Reinvestment Act of 1977
CRE
 
Commercial real estate
CRMC
 
Credit Risk Management Committee
CROC
 
Compliance Risk Oversight Committee
DIF
 
Deposit Insurance Fund administered by the FDIC
Dodd-Frank Act
 
Dodd-Frank Wall Street Reform and Consumer Protection Act
EPS
 
Earnings per common share
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
FTP
 
Funds transfer pricing
GAAP
 
Accounting principles generally accepted in the United States of America
GNMA
 
Government National Mortgage Association
Grandbridge
 
Grandbridge Real Estate Capital, LLC
GSE
 
U.S. government-sponsored enterprise
HFI
 
Held for investment
HMDA
 
Home Mortgage Disclosure Act
HTM
 
Held-to-maturity
IDI
 
Insured depository institution

1


Term
 
Definition
IPV
 
Independent price verification
IRC
 
Internal Revenue Code
IRS
 
Internal Revenue Service
ISDA
 
International Swaps and Derivatives Association, Inc.
LCR
 
Liquidity Coverage Ratio
LHFS
 
Loans held for sale
LIBOR
 
London Interbank Offered Rate
MBS
 
Mortgage-backed securities
MRLCC
 
Market Risk, Liquidity and Capital Committee
MSR
 
Mortgage servicing right
MSRB
 
Municipal Securities Rulemaking Board
N/A
 
Not applicable
National Penn
 
National Penn Bancshares, Inc., acquired by BB&T effective April 1, 2016
NIM
 
Net interest margin, computed on a TE basis
NM
 
Not meaningful
NPA
 
Nonperforming asset
NPL
 
Nonperforming loan
NSFR
 
Net stable funding ratio
NYSE
 
NYSE Euronext, Inc.
OAS
 
Option adjusted spread
OCI
 
Other comprehensive income (loss)
OREO
 
Other real estate owned
ORMC
 
Operational Risk Management Committee
OTTI
 
Other-than-temporary impairment
Parent Company
 
BB&T Corporation, the parent company of Branch Bank and other subsidiaries
Patriot Act
 
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
PCI
 
Purchased credit impaired loans as well as assets of Colonial Bank acquired from the FDIC during 2009, which were formerly covered under loss sharing agreements
Re-REMICs
 
Re-securitizations of Real Estate Mortgage Investment Conduits
RMC
 
Risk Management Committee
RMO
 
Risk Management Organization
RSU
 
Restricted stock unit
RUFC
 
Reserve for unfunded lending commitments
SBIC
 
Small Business Investment Company
SEC
 
Securities and Exchange Commission
Short-Term Borrowings
 
Federal funds purchased, securities sold under repurchase agreements and other short-term borrowed funds with original maturities of less than one year
Simulation
 
Interest sensitivity simulation analysis
Susquehanna
 
Susquehanna Bancshares, Inc., acquired by BB&T effective August 1, 2015
Swett & Crawford
 
CGSC North America Holdings Corporation, acquired by BB&T effective April 1, 2016
TBA
 
To be announced
TDR
 
Troubled debt restructuring
TE
 
Taxable-equivalent
U.S.
 
United States of America
U.S. Treasury
 
United States Department of the Treasury
UPB
 
Unpaid principal balance
VaR
 
Value-at-risk
VIE
 
Variable interest entity


2


ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
BB&T CORPORATION AND SUBSIDIARIES
Unaudited
(Dollars in millions, except per share data, shares in thousands)
June 30, 2017
 
December 31, 2016
Assets
 
 
 
Cash and due from banks
$
2,201

 
$
1,897

Interest-bearing deposits with banks
671

 
1,895

Federal funds sold and other cash equivalents
137

 
144

Restricted cash
419

 
488

AFS securities at fair value
26,899

 
26,926

HTM securities (fair value of $18,307 and $16,546 at June 30, 2017 and December 31, 2016, respectively)
18,384

 
16,680

LHFS at fair value
1,471

 
1,716

Loans and leases
143,645

 
143,322

ALLL
(1,485
)
 
(1,489
)
Loans and leases, net of ALLL
142,160

 
141,833

 
 
 
 
Premises and equipment
2,084

 
2,107

Goodwill
9,618

 
9,638

CDI and other intangible assets
782

 
854

MSRs at fair value
1,052

 
1,052

Other assets
15,314

 
14,046

Total assets
$
221,192

 
$
219,276

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Deposits:
 
 
 
Noninterest-bearing deposits
$
53,343

 
$
50,697

Interest-bearing deposits
103,625

 
109,537

Total deposits
156,968

 
160,234

 
 
 
 
Short-term borrowings
6,142

 
1,406

Long-term debt
21,738

 
21,965

Accounts payable and other liabilities
5,995

 
5,745

Total liabilities
190,843

 
189,350

 
 
 
 
Commitments and contingencies (Note 13)

 

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

 
3,053

Common stock, $5 par
4,040

 
4,047

Additional paid-in capital
8,966

 
9,104

Retained earnings
15,321

 
14,809

AOCI, net of deferred income taxes
(1,073
)
 
(1,132
)
Noncontrolling interests
42

 
45

Total shareholders' equity
30,349

 
29,926

Total liabilities and shareholders' equity
$
221,192

 
$
219,276

 
 
 
 
Common shares outstanding
808,093

 
809,475

Common shares authorized
2,000,000

 
2,000,000

Preferred shares outstanding
126

 
126

Preferred shares authorized
5,000

 
5,000


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

3


CONSOLIDATED STATEMENTS OF INCOME
BB&T CORPORATION AND SUBSIDIARIES
 
 
Three Months Ended
 
Six Months Ended
Unaudited
 
June 30,
 
June 30,
(Dollars in millions, except per share data, shares in thousands)
 
2017
 
2016
 
2017
 
2016
Interest Income
 
 
 
 
 
 
 
 
Interest and fees on loans and leases
 
$
1,540

 
$
1,509

 
$
3,041

 
$
2,951

Interest and dividends on securities
 
272

 
286

 
530

 
541

Interest on other earning assets
 
12

 
10

 
28

 
34

Total interest income
 
1,824

 
1,805

 
3,599

 
3,526

Interest Expense
 
 
 
 
 
 
 
 
Interest on deposits
 
80

 
64

 
149

 
128

Interest on short-term borrowings
 
5

 
3

 
7

 
5

Interest on long-term debt
 
104

 
121

 
199

 
247

Total interest expense
 
189

 
188

 
355

 
380

Net Interest Income
 
1,635

 
1,617

 
3,244

 
3,146

Provision for credit losses
 
135

 
111

 
283

 
295

Net Interest Income After Provision for Credit Losses
 
1,500

 
1,506

 
2,961

 
2,851

Noninterest Income
 
 
 
 
 
 
 
 
Insurance income
 
481

 
465

 
939

 
884

Service charges on deposits
 
176

 
166

 
344

 
320

Mortgage banking income
 
94

 
111

 
197

 
202

Investment banking and brokerage fees and commissions
 
105

 
102

 
196

 
199

Trust and investment advisory revenues
 
70

 
67

 
138

 
129

Bankcard fees and merchant discounts
 
75

 
60

 
134

 
116

Checkcard fees
 
54

 
50

 
105

 
95

Operating lease income
 
37

 
35

 
73

 
69

Income from bank-owned life insurance
 
32

 
31

 
61

 
62

FDIC loss share income, net
 

 
(64
)
 

 
(124
)
Other income
 
96

 
107

 
204

 
149

Securities gains (losses), net
 
 
 
 
 
 
 
 
Gross realized gains
 

 

 

 
45

Gross realized losses
 

 

 

 

OTTI charges
 

 

 

 

Non-credit portion recognized in OCI
 

 

 

 

Total securities gains (losses), net
 

 

 

 
45

Total noninterest income
 
1,220

 
1,130

 
2,391

 
2,146

Noninterest Expense
 
 
 
 
 
 
 
 
Personnel expense
 
1,042

 
1,039

 
2,053

 
1,954

Occupancy and equipment expense
 
198

 
194

 
391

 
385

Software expense
 
57

 
53

 
115

 
104

Outside IT services
 
39

 
44

 
88

 
85

Amortization of intangibles
 
36

 
42

 
74

 
74

Regulatory charges
 
36

 
32

 
75

 
62

Professional services
 
38

 
26

 
60

 
48

Loan-related expense
 
36

 
36

 
66

 
68

Merger-related and restructuring charges, net
 
10

 
92

 
46

 
115

Loss (gain) on early extinguishment of debt
 

 

 
392

 
(1
)
Other expense
 
250

 
239

 
484

 
448

Total noninterest expense
 
1,742

 
1,797

 
3,844

 
3,342

Earnings
 
 
 
 
 
 
 
 
Income before income taxes
 
978

 
839

 
1,508

 
1,655

Provision for income taxes
 
304

 
252

 
408

 
498

Net income
 
674

 
587

 
1,100

 
1,157

Noncontrolling interests
 
(1
)
 
3

 
4

 
9

Dividends on preferred stock
 
44

 
43

 
87

 
80

Net income available to common shareholders
 
$
631

 
$
541

 
$
1,009

 
$
1,068

Basic EPS
 
$
0.78

 
$
0.67

 
$
1.25

 
$
1.34

Diluted EPS
 
$
0.77

 
$
0.66

 
$
1.23

 
$
1.32

Cash dividends declared per share
 
$
0.30

 
$
0.28

 
$
0.60

 
$
0.55

Basic weighted average shares outstanding
 
808,980

 
814,261

 
809,439

 
797,727

Diluted weighted average shares outstanding
 
819,389

 
823,682

 
821,072

 
806,839

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

4


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
BB&T CORPORATION AND SUBSIDIARIES
 
 
Three Months Ended
 
Six Months Ended
Unaudited
 
June 30,
 
June 30,
(Dollars in millions)
 
2017
 
2016
 
2017
 
2016
Net Income
 
$
674

 
$
587

 
$
1,100

 
$
1,157

OCI, net of tax:
 
 

 
 

 
 

 
 

Change in unrecognized net pension and postretirement costs
 
12

 
11

 
21

 
22

Change in unrealized net gains (losses) on cash flow hedges
 
(34
)
 
(49
)
 
(36
)
 
(164
)
Change in unrealized net gains (losses) on AFS securities
 
74

 
100

 
72

 
297

Change in FDIC's share of unrealized gains/losses on AFS securities
 

 
17

 

 
32

Other, net
 

 
1

 
2

 
4

Total OCI
 
52

 
80

 
59

 
191

Total comprehensive income
 
$
726

 
$
667

 
$
1,159

 
$
1,348

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

 
$
7

 
$
14

 
$
14

Change in unrealized net gains (losses) on cash flow hedges
 
(20
)
 
(30
)
 
(21
)
 
(98
)
Change in unrealized net gains (losses) on AFS securities
 
43

 
60

 
42

 
178

Change in FDIC's share of unrealized gains/losses on AFS securities
 

 
10

 

 
18

Other, net
 

 

 

 


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


5


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
BB&T CORPORATION AND SUBSIDIARIES
Unaudited 
(Dollars in millions, shares in thousands)
Shares of
Common
Stock
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
AOCI
 
Noncontrolling
Interests
 
Total
Shareholders'
Equity
Balance, January 1, 2016
780,337

 
$
2,603

 
$
3,902

 
$
8,365

 
$
13,464

 
$
(1,028
)
 
$
34

 
$
27,340

Add (Deduct):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 
1,148

 

 
9

 
1,157

Net change in AOCI

 

 

 

 

 
191

 

 
191

Stock transactions:
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
Issued in business combinations
31,666

 

 
158

 
905

 

 

 

 
1,063

Issued in connection with equity awards, net
2,497

 

 
13

 
(22
)
 

 

 

 
(9
)
Issued in connection with preferred stock offerings

 
450

 
 
 
 
 
 
 
 
 
 
 
450

Cash dividends declared on common stock

 

 

 

 
(439
)
 

 

 
(439
)
Cash dividends declared on preferred stock

 

 

 

 
(80
)
 

 

 
(80
)
Equity-based compensation expense

 

 

 
65

 

 

 

 
65

Other, net

 

 

 
(2
)
 
11

 

 
(4
)
 
5

Balance, June 30, 2016
814,500

 
$
3,053

 
$
4,073

 
$
9,311

 
$
14,104

 
$
(837
)
 
$
39

 
$
29,743

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2017
809,475

 
$
3,053

 
$
4,047

 
$
9,104

 
$
14,809

 
$
(1,132
)
 
$
45

 
$
29,926

Add (Deduct):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 
1,096

 

 
4

 
1,100

Net change in AOCI

 

 

 

 

 
59

 

 
59

Stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued in connection with equity awards, net
6,644

 

 
33

 
55

 

 

 

 
88

Repurchase of common stock
(8,026
)
 

 
(40
)
 
(280
)
 

 

 

 
(320
)
Cash dividends declared on common stock

 

 

 

 
(485
)
 

 

 
(485
)
Cash dividends declared on preferred stock

 

 

 

 
(87
)
 

 

 
(87
)
Equity-based compensation expense

 

 

 
74

 

 

 

 
74

Other, net

 

 

 
13

 
(12
)
 

 
(7
)
 
(6
)
Balance, June 30, 2017
808,093

 
$
3,053

 
$
4,040

 
$
8,966

 
$
15,321

 
$
(1,073
)
 
$
42

 
$
30,349


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

6


CONSOLIDATED STATEMENTS OF CASH FLOWS
BB&T CORPORATION AND SUBSIDIARIES
Unaudited
 
Six Months Ended June 30,
(Dollars in millions)
 
2017
 
2016
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
1,100

 
$
1,157

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

 
 
Provision for credit losses
 
283

 
295

Depreciation
 
200

 
195

Loss (gain) on early extinguishment of debt
 
392

 
(1
)
Amortization of intangibles
 
74

 
74

Equity-based compensation expense
 
74

 
65

(Gain) loss on securities, net
 

 
(45
)
Net change in operating assets and liabilities:
 
 

 
 
LHFS
 
394

 
(1,413
)
Trading securities
 
(655
)
 
595

Other assets
 
(556
)
 
(438
)
Accounts payable and other liabilities
 
179

 
282

Other, net
 
3

 
95

Net cash from operating activities
 
1,488

 
861

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 
Proceeds from sales of AFS securities
 
224

 
4,480

Proceeds from maturities, calls and paydowns of AFS securities
 
2,531

 
2,466

Purchases of AFS securities
 
(2,599
)
 
(6,912
)
Proceeds from maturities, calls and paydowns of HTM securities
 
1,138

 
2,964

Purchases of HTM securities
 
(2,859
)
 
(3,122
)
Originations and purchases of loans and leases, net of principal collected
 
(1,049
)
 
(1,103
)
Net cash received (paid) for acquisitions and divestitures
 

 
(789
)
Other, net
 
57

 
(38
)
Net cash from investing activities
 
(2,557
)
 
(2,054
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 
Net change in deposits
 
(3,256
)
 
3,499

Net change in short-term borrowings
 
4,736

 
(3,515
)
Proceeds from issuance of long-term debt
 
4,650

 
3,028

Repayment of long-term debt
 
(5,271
)
 
(3,008
)
Net cash from common stock transactions
 
(232
)
 
(9
)
Net proceeds from preferred stock issued
 

 
450

Cash dividends paid on common stock
 
(485
)
 
(439
)
Cash dividends paid on preferred stock
 
(87
)
 
(80
)
Other, net
 
87

 
169

Net cash from financing activities
 
142

 
95

Net Change in Cash and Cash Equivalents
 
(927
)
 
(1,098
)
Cash and Cash Equivalents at Beginning of Period
 
3,936

 
3,711

Cash and Cash Equivalents at End of Period
 
$
3,009

 
$
2,613

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
347

 
$
395

Income taxes
 
187

 
263

Noncash investing activities:
 
 

 
 
Transfers of loans to foreclosed assets
 
267

 
229

Stock issued in business combinations
 

 
1,063


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

7


NOTE 1. Basis of Presentation
 
See the Glossary of Defined Terms at the beginning of this Report for terms used throughout the consolidated financial statements and related notes of this Form 10-Q.
 
General
 
These consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with GAAP. In the opinion of management, all normal recurring adjustments necessary for a fair statement of the consolidated financial position and consolidated results of operations have been made. The year-end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. The information contained in the financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2016 should be referred to in connection with these unaudited interim consolidated financial statements.
 
Reclassifications
 
Certain amounts reported in prior periods' consolidated financial statements have been reclassified to conform to the current presentation. Such reclassifications had no effect on previously reported cash flows, shareholders' equity or net income.
 
Use of Estimates in the Preparation of Financial Statements
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change include the determination of the ACL, determination of fair value for financial instruments, valuation of MSRs, goodwill, intangible assets and other purchase accounting related adjustments, benefit plan obligations and expenses, and tax assets, liabilities and expense.
 
Changes in Accounting Principles and Effects of New Accounting Pronouncements

Standards Adopted During Current Period - BB&T adopted the following guidance effective January 1, 2017, none of which were material to the consolidated financial statements:

Stock Compensation - eliminated the concept of additional paid-in capital pools for equity-based awards and requires that the related excess tax benefits and tax deficiencies be recognized in earnings and classified as an operating activity in the statement of cash flows. The excess tax benefit for equity-based awards that vested or were exercised during the first quarter of 2017 was $35 million. The guidance also allows entities to make a one-time policy election to account for forfeitures when they occur, which BB&T has elected to do. Additionally, to retain equity classification, the guidance permits tax withholding up to the maximum statutory tax rate instead of the minimum statutory tax rate. Cash paid in lieu of shares for tax withholding purposes is classified as a financing activity in the Statement of Cash Flows.

Investments - eliminated the requirement to retroactively adjust the financial statements when a change in ownership or influence causes an existing investment to qualify for the equity method of accounting. The guidance also requires the investor to add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting.

Derivatives and Hedging - clarified that an exercise contingency does not need to be evaluated to determine whether it relates to interest rates and credit risk in an embedded derivative analysis. An entity performing the assessment will be required to assess the embedded call or put options solely in accordance with the pre-existing decision sequence.

Business Combinations - provided clarification on the definition of a business and criteria to aid in the assessment of whether an integrated set of assets and activities constitutes a business.

Premium Amortization on Purchased Callable Debt Securities - shortened the amortization period for the premium to the earliest call date. The amortization period for securities purchased at a discount was unaffected.

Standards Not Yet Adopted - the adoption of the following guidance is not expected to be material to the consolidated financial statements unless otherwise specified:

8



Statement of Cash Flows - requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The adoption of this guidance will only affect the Consolidated Statements of Cash Flows. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years.

Statement of Cash Flows - clarifies the classification within the statement of cash flows for certain transactions, including debt extinguishment costs, zero-coupon debt, contingent consideration related to business combinations, insurance proceeds, equity method distributions and beneficial interests in securitizations. The guidance also clarifies that cash flows with aspects of multiple classes of cash flows or that cannot be separated by source or use should be classified based on the activity that is likely to be the predominant source or use of cash flows for the item. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years.

Liabilities - requires companies to recognize breakage on prepaid stored-value products in accordance with the recently issued guidance on Revenue from Contracts with Customers. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years.

Revenue from Contracts with Customers - requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Because the guidance does not apply to revenue associated with financial instruments, including loans and securities, the new guidance is not expected to have a material impact on the components of the Consolidated Statement of Income most closely associated with financial instruments, including securities gains/losses and interest income. BB&T's preliminary evaluation of the impact of changes for in-scope items within noninterest income has not identified material changes. The Company continues to evaluate the related changes to disclosures that may be required. The guidance is effective for interim and annual reporting periods beginning after December 15, 2017.

Financial Instruments - requires the majority of equity investments to be measured at fair value with changes in fair value recognized in net income, excluding equity investments that are consolidated or accounted for under the equity method of accounting. The new guidance allows equity investments without readily determinable fair values to be measured at cost minus impairment, with a qualitative assessment required to identify impairment. For financial instruments recorded at amortized cost, the new guidance requires public companies to disclose all fair values using an exit price and eliminates the disclosure requirements related to measurement assumptions. The new guidance also requires separate presentation of financial assets and liabilities based on form and measurement category. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years.

Leases - requires lessees to recognize assets and liabilities related to certain operating leases on the balance sheet. The new guidance also requires additional disclosures by lessees and contains targeted changes to accounting by lessors. Upon adoption, the Company expects assets and liabilities will likely be significantly higher; however, the Company's implementation efforts are on-going, including the installation of a software solution, which will aid in determining the magnitude of the increases and its impact on the Consolidated Financial Statements. This guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years.

Credit Losses - replaces the incurred loss impairment methodology in current GAAP with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit deteriorated loans will receive an allowance account for expected credit losses at the acquisition date that represents a component of the purchase price allocation. For AFS debt securities where the fair value is less than cost, any credit impairment will be recorded through an allowance for expected credit losses. Upon adoption, the Company expects that the ACL will likely be materially higher; however, the Company is still in the process of determining the magnitude of the increase and its impact on the Consolidated Financial Statements. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.

Intangibles—Goodwill and Other - simplifies the measurement of goodwill impairment. An entity will no longer perform a hypothetical purchase price allocation to measure goodwill impairment. Instead, impairment will be measured using the difference between the carrying amount and the fair value of the reporting unit. This guidance is effective for impairment tests in fiscal years beginning after December 15, 2019 and interim periods within those fiscal years.

Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost - requires that the service cost component of net benefit costs of pension and postretirement benefit plans be reported in the same line item as other compensation costs in the Consolidated Statements of Income. The other components of net benefit cost will be required to be presented in a separate line item. The guidance also specifies that only the service cost component will be eligible for capitalization. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years.


9


NOTE 2. Acquisitions and Divestitures
 
On April 1, 2016, BB&T acquired National Penn, resulting in the addition of $10.1 billion in assets and $6.6 billion of deposits. National Penn had 126 financial centers as of the acquisition date.

On April 1, 2016, BB&T purchased insurance broker Swett & Crawford from Cooper Gay Swett & Crawford for $461 million in cash.
 
See the Annual Report on Form 10-K for the year ended December 31, 2016 for additional information related to these transactions.

NOTE 3. Securities
 
 
June 30, 2017
 
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
(Dollars in millions)
 
 
Gains
 
Losses
 
AFS securities:
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
3,765

 
$
7

 
$
63

 
$
3,709

GSE
 
188

 

 
6

 
182

Agency MBS
 
21,024

 
12

 
467

 
20,569

States and political subdivisions
 
1,788

 
48

 
37

 
1,799

Non-agency MBS
 
418

 
214

 

 
632

Other
 
8

 

 

 
8

Total AFS securities
 
$
27,191

 
$
281

 
$
573

 
$
26,899

 
 
 
 
 
 
 
 
 
HTM securities:
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
1,098

 
$
21

 
$

 
$
1,119

GSE
 
2,197

 
16

 
16

 
2,197

Agency MBS
 
14,979

 
49

 
150

 
14,878

States and political subdivisions
 
64

 

 

 
64

Other
 
46

 
3

 

 
49

Total HTM securities
 
$
18,384

 
$
89

 
$
166

 
$
18,307

 
 
December 31, 2016
 
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
(Dollars in millions)
 
 
Gains
 
Losses
 
AFS securities:
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
2,669

 
$
2

 
$
84

 
$
2,587

GSE
 
190

 

 
10

 
180

Agency MBS
 
21,819

 
13

 
568

 
21,264

States and political subdivisions
 
2,198

 
56

 
49

 
2,205

Non-agency MBS
 
446

 
233

 

 
679

Other
 
11

 

 

 
11

Total AFS securities
 
$
27,333

 
$
304

 
$
711

 
$
26,926

 
 
 
 
 
 
 
 
 
HTM securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
$
1,098

 
$
20

 
$

 
$
1,118

GSE
 
2,197

 
14

 
30

 
2,181

Agency MBS
 
13,225

 
40

 
180

 
13,085

States and political subdivisions
 
110

 

 

 
110

Other
 
50

 
2

 

 
52

Total HTM securities
 
$
16,680

 
$
76

 
$
210

 
$
16,546

 
Certain investments in marketable debt securities and MBS issued by FNMA and FHLMC exceeded 10% of shareholders' equity at June 30, 2017. The FNMA investments had total amortized cost and fair value of $15.3 billion and $15.0 billion, respectively. The FHLMC investments had total amortized cost and fair value of $8.7 billion and $8.5 billion, respectively.
 
Changes in credit losses on securities with OTTI where a portion of the unrealized loss was recognized in OCI was immaterial for all periods presented.


10


The amortized cost and estimated fair value of the securities portfolio by contractual maturity are shown in the following table. The expected life of MBS may differ from contractual maturities because borrowers have the right to prepay the underlying mortgage loans with or without prepayment penalties.
 
 
June 30, 2017
 
 
AFS
 
HTM
(Dollars in millions)
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
 
$
456

 
$
457

 
$

 
$

Due after one year through five years
 
1,825

 
1,832

 
1,798

 
1,824

Due after five years through ten years
 
2,548

 
2,486

 
1,545

 
1,540

Due after ten years
 
22,362

 
22,124

 
15,041

 
14,943

Total debt securities
 
$
27,191

 
$
26,899

 
$
18,384

 
$
18,307

 
The following tables present the fair values and gross unrealized losses of investments based on the length of time that individual securities have been in a continuous unrealized loss position:
 
 
June 30, 2017
 
 
Less than 12 months
 
12 months or more
 
Total
(Dollars in millions)
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
AFS securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
2,146

 
$
58

 
$
130

 
$
5

 
$
2,276

 
$
63

GSE
 
132

 
4

 
50

 
2

 
182

 
6

Agency MBS
 
13,515

 
253

 
5,438

 
214

 
18,953

 
467

States and political subdivisions
 
65

 
1

 
419

 
36

 
484

 
37

Total
 
$
15,858

 
$
316

 
$
6,037

 
$
257

 
$
21,895

 
$
573

 
 
 
 
 
 
 
 
 
 
 
 
 
HTM securities:
 
 

 
 

 
 

 
 

 
 

 
 

GSE
 
$
1,531

 
$
16

 
$

 
$

 
$
1,531

 
$
16

Agency MBS
 
7,206

 
133

 
695

 
17

 
7,901

 
150

Total
 
$
8,737

 
$
149

 
$
695

 
$
17

 
$
9,432

 
$
166

 
 
December 31, 2016
 
 
Less than 12 months
 
12 months or more
 
Total
(Dollars in millions)
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
AFS securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
2,014

 
$
84

 
$

 
$

 
$
2,014

 
$
84

GSE
 
180

 
10

 

 

 
180

 
10

Agency MBS
 
14,842

 
342

 
5,138

 
226

 
19,980

 
568

States and political subdivisions
 
365

 
7

 
314

 
42

 
679

 
49

Total
 
$
17,401

 
$
443

 
$
5,452

 
$
268

 
$
22,853

 
$
711

 
 
 
 
 
 
 
 
 
 
 
 
 
HTM securities:
 
 

 
 

 
 

 
 

 
 

 
 

GSE
 
$
1,762

 
$
30

 
$

 
$

 
$
1,762

 
$
30

Agency MBS
 
7,717

 
178

 
305

 
2

 
8,022

 
180

Total
 
$
9,479

 
$
208

 
$
305

 
$
2

 
$
9,784

 
$
210

 
The unrealized losses on U.S. Treasury securities, GSE securities and Agency MBS were the result of increases in market interest rates compared to the date the securities were acquired rather than the credit quality of the issuers or underlying loans.
 
At June 30, 2017, the majority of the unrealized losses on states and political subdivisions securities was the result of fair value hedge basis adjustments that are a component of amortized cost. These securities in an unrealized loss position are evaluated for credit impairment through a qualitative analysis of issuer performance and the primary source of repayment. At June 30, 2017, none of these securities had credit impairment.
 

11


NOTE 4. Loans and ACL

During the first quarter of 2017, an other lending subsidiaries portfolio totaling $244 million was acquired. During the second quarter of 2017, residential mortgage loans totaling $300 million were sold, which included $40 million of nonaccrual loans and $199 million of performing TDRs.

The following tables present loans and leases HFI by aging category:
 
 
June 30, 2017
 
 
Accruing
 
 
 
 
(Dollars in millions)
 
Current
 
30-89 Days Past Due
 
90 Days Or More Past Due
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
52,266

 
$
18

 
$

 
$
295

 
$
52,579

CRE-income producing properties
 
14,815

 
1

 

 
35

 
14,851

CRE-construction and development
 
3,859

 
2

 

 
15

 
3,876

Dealer floor plan
 
1,522

 

 

 

 
1,522

Other lending subsidiaries
 
8,237

 
16

 

 
8

 
8,261

Retail:
 
 
 
 
 
 
 
 
 


Direct retail lending
 
11,875

 
54

 
7

 
65

 
12,001

Revolving credit
 
2,600

 
20

 
10

 

 
2,630

Residential mortgage-nonguaranteed
 
27,878

 
265

 
51

 
125

 
28,319

Residential mortgage-government guaranteed
 
414

 
128

 
350

 
6

 
898

Sales finance
 
10,024

 
57

 
4

 
5

 
10,090

Other lending subsidiaries
 
7,496

 
284

 

 
58

 
7,838

PCI
 
680

 
29

 
71

 

 
780

Total
 
$
141,666

 
$
874

 
$
493

 
$
612

 
$
143,645

 
 
December 31, 2016
 
 
Accruing
 
 
 
 
(Dollars in millions)
 
Current
 
30-89 Days Past Due
 
90 Days Or More Past Due
 
Nonaccrual
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
51,329

 
$
27

 
$

 
$
363

 
$
51,719

CRE-income producing properties
 
14,492

 
6

 

 
40

 
14,538

CRE-construction and development
 
3,800

 
2

 

 
17

 
3,819

Dealer floor plan
 
1,413

 

 

 

 
1,413

Other lending subsidiaries
 
7,660

 
21

 

 
10

 
7,691

Retail:
 
 

 
 

 
 

 
 

 
 
Direct retail lending
 
11,963

 
60

 
6

 
63

 
12,092

Revolving credit
 
2,620

 
23

 
12

 

 
2,655

Residential mortgage-nonguaranteed
 
28,378

 
393

 
79

 
172

 
29,022

Residential mortgage-government guaranteed
 
324

 
132

 
443

 

 
899

Sales finance
 
11,179

 
76

 
6

 
6

 
11,267

Other lending subsidiaries
 
6,931

 
301

 

 
65

 
7,297

PCI
 
784

 
36

 
90

 

 
910

Total
 
$
140,873

 
$
1,077

 
$
636

 
$
736

 
$
143,322



12


The following tables present the carrying amount of loans by risk rating. PCI loans are excluded because their related ALLL is determined by loan pool performance:
 
 
June 30, 2017
(Dollars in millions)
 
Commercial & Industrial
 
CRE - Income Producing Properties
 
CRE - Construction & Development
 
Dealer Floor Plan
 
Other Lending Subsidiaries
Commercial:
 
 
 
 
 
 
 
 
 
 
Pass
 
$
50,785

 
$
14,370

 
$
3,772

 
$
1,522

 
$
8,185

Special mention
 
372

 
122

 
53

 

 
26

Substandard-performing
 
1,127

 
324

 
36

 

 
42

Nonperforming
 
295

 
35

 
15

 

 
8

Total
 
$
52,579

 
$
14,851

 
$
3,876

 
$
1,522

 
$
8,261

 
 
Direct Retail Lending
 
Revolving Credit
 
Residential Mortgage
 
Sales Finance
 
Other Lending Subsidiaries
Retail:
 
 
 
 
 
 
 
 
 
 
Performing
 
$
11,936

 
$
2,630

 
$
29,086

 
$
10,085

 
$
7,780

Nonperforming
 
65

 

 
131

 
5

 
58

Total
 
$
12,001

 
$
2,630

 
$
29,217

 
$
10,090

 
$
7,838

 
 
December 31, 2016
(Dollars in millions)
 
Commercial & Industrial
 
CRE - Income Producing Properties
 
CRE - Construction & Development
 
Dealer Floor Plan
 
Other Lending Subsidiaries
Commercial:
 
 
 
 
 
 
 
 
 
 
Pass
 
$
49,921

 
$
14,061

 
$
3,718

 
$
1,404

 
$
7,604

Special mention
 
314

 
124

 
38

 

 
33

Substandard-performing
 
1,121

 
313

 
46

 
9

 
44

Nonperforming
 
363

 
40

 
17

 

 
10

Total
 
$
51,719

 
$
14,538

 
$
3,819

 
$
1,413

 
$
7,691

 
 
Direct Retail Lending
 
Revolving Credit
 
Residential Mortgage
 
Sales Finance
 
Other Lending Subsidiaries
Retail:
 
 
 
 
 
 
 
 
 
 
Performing
 
$
12,029

 
$
2,655

 
$
29,749

 
$
11,261

 
$
7,232

Nonperforming
 
63

 

 
172

 
6

 
65

Total
 
$
12,092

 
$
2,655

 
$
29,921

 
$
11,267

 
$
7,297


The following tables present activity in the ACL for the periods presented:
 
 
Three Months Ended June 30, 2017
(Dollars in millions)
 
Beginning Balance
 
Charge-Offs
 
Recoveries
 
Provision (Benefit)
 
Ending Balance
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
490

 
$
(21
)
 
$
8

 
$
2

 
$
479

CRE-income producing properties
 
116

 
(3
)
 

 
27

 
140

CRE-construction and development
 
22

 

 
3

 
(2
)
 
23

Dealer floor plan
 
11

 
(1
)
 

 
2

 
12

Other lending subsidiaries
 
36

 
(5
)
 
1

 
4

 
36

Retail:
 
 
 
 
 
 
 
 
 


Direct retail lending
 
102

 
(16
)
 
7

 
7

 
100

Revolving credit
 
103

 
(19
)
 
5

 
12

 
101

Residential mortgage-nonguaranteed
 
182

 
(19
)
 
1

 
9

 
173

Residential mortgage-government guaranteed
 
41

 
(1
)
 

 
(2
)
 
38

Sales finance
 
42

 
(6
)
 
3

 

 
39

Other lending subsidiaries
 
296

 
(82
)
 
13

 
87

 
314

PCI
 
46

 

 

 
(16
)
 
30

ALLL
 
1,487

 
(173
)
 
41

 
130

 
1,485

RUFC
 
112

 

 

 
5

 
117

ACL
 
$
1,599

 
$
(173
)
 
$
41

 
$
135

 
$
1,602


13


 
 
Three Months Ended June 30, 2016
(Dollars in millions)
 
Beginning Balance
 
Charge-Offs
 
Recoveries
 
Provision (Benefit)
 
Acquisition
 
Ending Balance
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
499

 
$
(26
)
 
$
12

 
$
34

 
$

 
$
519

CRE-income producing properties
 
125

 

 
1

 
(10
)
 

 
116

CRE-construction and development
 
32

 

 
5

 
(9
)
 

 
28

Dealer floor plan
 
10

 

 

 

 

 
10

Other lending subsidiaries
 
26

 
(4
)
 
2

 
3

 

 
27

Retail:
 
 
 
 
 
 
 
 
 
 
 


Direct retail lending
 
103

 
(12
)
 
6

 
8

 

 
105

Revolving credit
 
100

 
(16
)
 
5

 
9

 

 
98

Residential mortgage-nonguaranteed
 
197

 
(8
)
 
1

 
4

 

 
194

Residential mortgage-government guaranteed
 
24

 
(1
)
 

 
7

 

 
30

Sales finance
 
39

 
(6
)
 
3

 

 

 
36

Other lending subsidiaries
 
270

 
(69
)
 
10

 
68

 

 
279

PCI
 
63

 

 

 
2

 

 
65

ALLL
 
1,488

 
(142
)
 
45

 
116

 

 
1,507

RUFC
 
92

 

 

 
(5
)
 
9

 
96

ACL
 
$
1,580

 
$
(142
)
 
$
45

 
$
111

 
$
9

 
$
1,603

 
 
Six Months Ended June 30, 2017
(Dollars in millions)
 
Beginning Balance
 
Charge-Offs
 
Recoveries
 
Provision (Benefit)
 
Ending Balance
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
500

 
$
(50
)
 
$
14

 
$
15

 
$
479

CRE-income producing properties
 
117

 
(4
)
 
4

 
23

 
140

CRE-construction and development
 
25

 

 
5

 
(7
)
 
23

Dealer floor plan
 
11

 
(1
)
 

 
2

 
12

Other lending subsidiaries
 
29

 
(10
)
 
2

 
15

 
36

Retail:
 
 

 
 

 
 

 
 

 


Direct retail lending
 
103

 
(30
)
 
13

 
14

 
100

Revolving credit
 
106

 
(40
)
 
10

 
25

 
101

Residential mortgage-nonguaranteed
 
186

 
(30
)
 
1

 
16

 
173

Residential mortgage-government guaranteed
 
41

 
(2
)
 

 
(1
)
 
38

Sales finance
 
38

 
(15
)
 
7

 
9

 
39

Other lending subsidiaries
 
289

 
(180
)
 
26

 
179

 
314

PCI
 
44

 

 

 
(14
)
 
30

ALLL
 
1,489

 
(362
)
 
82

 
276

 
1,485

RUFC
 
110

 

 

 
7

 
117

ACL
 
$
1,599

 
$
(362
)
 
$
82

 
$
283

 
$
1,602


14


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

 
$
(82
)
 
$
24

 
$
111

 
$

 
$
519

CRE-income producing properties
 
135

 
(2
)
 
4

 
(21
)
 

 
116

CRE-construction and development
 
37

 

 
6

 
(15
)
 

 
28

Dealer floor plan
 
8

 

 

 
2

 

 
10

Other lending subsidiaries
 
22

 
(12
)
 
4

 
13

 

 
27

Retail:
 
 

 
 

 
 

 
 

 
 

 


Direct retail lending
 
105

 
(25
)
 
13

 
12

 

 
105

Revolving credit
 
104

 
(35
)
 
10

 
19

 

 
98

Residential mortgage-nonguaranteed
 
194

 
(15
)
 
2

 
13

 

 
194

Residential mortgage-government guaranteed
 
23

 
(2
)
 

 
9

 

 
30

Sales finance
 
40

 
(14
)
 
6

 
4

 

 
36

Other lending subsidiaries
 
265

 
(153
)
 
20

 
147

 

 
279

PCI
 
61

 

 

 
4

 

 
65

ALLL
 
1,460

 
(340
)
 
89

 
298

 

 
1,507

RUFC
 
90

 

 

 
(3
)
 
9

 
96

ACL
 
$
1,550

 
$
(340
)
 
$
89

 
$
295

 
$
9

 
$
1,603


The following table provides a summary of loans that are collectively evaluated for impairment:
 
 
June 30, 2017
 
December 31, 2016
(Dollars in millions)
 
Recorded Investment
 
Related ALLL
 
Recorded Investment
 
Related ALLL
Commercial:
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
52,194

 
$
450

 
$
51,253

 
$
463

CRE-income producing properties
 
14,774

 
135

 
14,455

 
112

CRE-construction and development
 
3,849

 
20

 
3,787

 
21

Dealer floor plan
 
1,522

 
12

 
1,413

 
11

Other lending subsidiaries
 
8,251

 
35

 
7,678

 
28

Retail:
 
 
 
 
 
 
 
 
Direct retail lending
 
11,922

 
91

 
12,011

 
93

Revolving credit
 
2,601

 
90

 
2,626

 
95

Residential mortgage-nonguaranteed
 
27,904

 
137

 
28,488

 
136

Residential mortgage-government guaranteed
 
499

 
7

 
466

 
8

Sales finance
 
10,075

 
38

 
11,251

 
37

Other lending subsidiaries
 
7,592

 
271

 
7,057

 
249

PCI
 
780

 
30

 
910

 
44

Total
 
$
141,963

 
$
1,316

 
$
141,395

 
$
1,297



15


The following tables set forth certain information regarding impaired loans, excluding PCI and LHFS, that were individually evaluated for impairment:
Six Months Ended June 30, 2017
 
Recorded Investment
 
UPB
 
Related ALLL
 
Average Recorded Investment
 
Interest Income Recognized
(Dollars in millions)
 
 
 
 
 
With no related ALLL recorded:
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
174

 
$
202

 
$

 
$
190

 
$

CRE-income producing properties
 
21

 
26

 

 
28

 

CRE-construction and development
 
10

 
11

 

 
12

 

Dealer floor plan
 

 

 

 
5

 

Other lending subsidiaries
 
3

 
4

 

 
3

 

Retail:
 
 
 
 
 
 
 
 
 
 
Direct retail lending
 
19

 
43

 

 
14

 

Residential mortgage-nonguaranteed
 
94

 
133

 

 
104

 
2

Residential mortgage-government guaranteed
 
3

 
4

 

 
3

 

Sales finance
 
1

 
2

 

 
1

 

Other lending subsidiaries
 
4

 
9

 

 
4

 

With an ALLL recorded:
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
211

 
216

 
29

 
253

 
3

CRE-income producing properties
 
56

 
56

 
5

 
56

 
1

CRE-construction and development
 
17

 
17

 
3

 
19

 

Dealer floor plan
 

 

 

 

 

Other lending subsidiaries
 
7

 
8

 
1

 
7

 

Retail:
 
 
 
 
 
 
 
 
 
 
Direct retail lending
 
60

 
61

 
9

 
66

 
2

Revolving credit
 
29

 
29

 
11

 
29

 

Residential mortgage-nonguaranteed
 
321

 
329

 
36

 
448

 
10

Residential mortgage-government guaranteed
 
396

 
396

 
31

 
414

 
8

Sales finance
 
14

 
14

 
1

 
14

 

Other lending subsidiaries
 
242

 
244

 
43

 
241

 
19

Total
 
$
1,682

 
$
1,804

 
$
169

 
$
1,911

 
$
45


16


As of / For The Year Ended December 31, 2016
 
Recorded Investment
 
UPB
 
Related ALLL
 
Average Recorded Investment
 
Interest Income Recognized
(Dollars in millions)
 
 
 
 
 
With no related ALLL recorded:
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
201

 
$
225

 
$

 
$
217

 
$
1

CRE-income producing properties
 
25

 
27

 

 
16

 

CRE-construction and development
 
10

 
11

 

 
8

 

Dealer floor plan
 

 

 

 

 

Other lending subsidiaries
 
4

 
6

 

 
6

 

Retail:
 
 

 
 

 
 

 
 

 
 

Direct retail lending
 
13

 
38

 

 
12

 
1

Residential mortgage-nonguaranteed
 
94

 
141

 

 
97

 
4

Residential mortgage-government guaranteed
 
3

 
3

 

 
3

 

Sales finance
 
1

 
2

 

 
1

 

Other lending subsidiaries
 
4

 
9

 

 
4

 

With an ALLL recorded:
 
 

 
 

 
 

 
 

 
 

Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
265

 
269

 
37

 
259

 
5

CRE-income producing properties
 
58

 
61

 
5

 
68

 
2

CRE-construction and development
 
22

 
22

 
4

 
22

 
1

Dealer floor plan
 

 

 

 

 

Other lending subsidiaries
 
9

 
9

 
1

 
5

 

Retail:
 
 

 
 

 
 

 
 

 
 

Direct retail lending
 
68

 
69

 
10

 
71

 
4

Revolving credit
 
29

 
29

 
11

 
31

 
1

Residential mortgage-nonguaranteed
 
440

 
451

 
50

 
383

 
16

Residential mortgage-government guaranteed
 
430

 
431

 
33

 
360

 
14

Sales finance
 
15

 
15

 
1

 
16

 
1

Other lending subsidiaries
 
236

 
239

 
40

 
206

 
32

Total
 
$
1,927

 
$
2,057

 
$
192

 
$
1,785

 
$
82


Trial modifications are excluded from the following disclosures because the specific types and amounts of concessions offered to borrowers frequently change between the trial modification and the permanent modification. The following table presents a summary of TDRs, all of which are considered impaired:
(Dollars in millions)
 
Jun 30, 2017
 
Dec 31, 2016
Performing TDRs:
 
 
 
 
Commercial:
 
 
 
 
Commercial and industrial
 
$
48

 
$
55

CRE-income producing properties
 
15

 
16

CRE-construction and development
 
9

 
9

Direct retail lending
 
63

 
67

Revolving credit
 
29

 
29

Residential mortgage-nonguaranteed
 
199

 
332

Residential mortgage-government guaranteed
 
386

 
420

Sales finance
 
14

 
16

Other lending subsidiaries
 
232

 
226

Total performing TDRs
 
995

 
1,170

Nonperforming TDRs (also included in NPL disclosures)
 
211

 
183

Total TDRs
 
$
1,206

 
$
1,353

ALLL attributable to TDRs
 
$
135

 
$
146



17


The following table summarizes the primary reason loan modifications were classified as TDRs and includes newly designated TDRs as well as modifications made to existing TDRs. Balances represent the recorded investment at the end of the quarter in which the modification was made. Rate modifications include TDRs made with below market interest rates that also include modifications of loan structures.
 
 
Three Months Ended June 30,
 
 
2017
 
2016
 
 
Types of Modifications
 
Impact To ALLL
 
Types of Modifications
 
Impact To ALLL
(Dollars in millions)
 
Rate
 
Structure
 
 
Rate
 
Structure
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
45

 
$
37

 
$
1

 
$
33

 
$
14

 
$
1

CRE-income producing properties
 
6

 
3

 

 
3

 
1

 

CRE-construction and development
 
5

 
1

 
1

 
1

 
3

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Retail:
 
 

 
 

 
 

 
 

 
 

 
 

Direct retail lending
 
2

 
1

 

 
4

 

 

Revolving credit
 
4

 

 
1

 
4

 

 
1

Residential mortgage-nonguaranteed
 
48

 
6

 
7

 
21

 
6

 
2

Residential mortgage-government guaranteed
 
72

 

 
3

 
69

 

 
3

Sales finance
 

 
2

 

 

 
1

 

Other lending subsidiaries
 
37

 

 
4

 
42

 

 
5

 
 
Six Months Ended June 30,
 
 
2017
 
2016
 
 
Types of Modifications
 
Impact To ALLL
 
Types of Modifications
 
Impact To ALLL
(Dollars in millions)
 
Rate
 
Structure
 
 
Rate
 
Structure
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
70

 
$
75

 
$
2

 
$
95

 
$
23

 
$
2

CRE-income producing properties
 
11

 
4

 

 
11

 
8

 

CRE-construction and development
 
8

 
4

 
1

 
4

 
3

 

 
 
 
 
 
 
 
 
 
 
 
 
 
Retail:
 
 

 
 

 
 

 
 

 
 

 
 

Direct retail lending
 
6

 
2

 

 
8

 
1

 

Revolving credit
 
10

 

 
2

 
9

 

 
2

Residential mortgage-nonguaranteed
 
95

 
12

 
10

 
38

 
14

 
3

Residential mortgage-government guaranteed
 
170

 

 
6

 
108

 

 
5

Sales finance
 

 
4

 

 

 
3

 

Other lending subsidiaries
 
78

 

 
8

 
74

 

 
10


Charge-offs and forgiveness of principal and interest for TDRs were immaterial for all periods presented.
 
The pre-default balance for modifications that had been classified as TDRs during the previous 12 months that experienced a payment default was $17 million and $16 million for the three months ended June 30, 2017 and 2016, respectively, and $45 million and $33 million for the six months ended June 30, 2017 and 2016, respectively. Payment default is defined as movement of the TDR to nonaccrual status, foreclosure or charge-off, whichever occurs first.

Information about PCI loans is presented in the following table:
 
 
Six Months Ended June 30, 2017
 
Year Ended December 31, 2016
(Dollars in millions)
 
Purchased Impaired
 
Purchased Nonimpaired
 
Purchased Impaired
 
Purchased Nonimpaired
Accretable yield at beginning of period
 
$
253

 
$
155

 
$
189

 
$
176

Additions
 

 

 
36

 

Accretion
 
(48
)
 
(31
)
 
(134
)
 
(73
)
Other, net
 
20

 
22

 
162

 
52

Accretable yield at end of period
 
$
225

 
$
146

 
$
253

 
$
155

 
 
 
 
 
 
 
 
 
Carrying value at end of period
 
$
519

 
$
261

 
$
614

 
$
296

Outstanding UPB at end of period
 
778

 
364

 
910

 
423


18



The following table presents additional information about loans and leases:
(Dollars in millions)
 
Jun 30, 2017
 
Dec 31, 2016
Unearned income, discounts and net deferred loan fees and costs, excluding PCI
 
$
170

 
$
265

Residential mortgage loans in process of foreclosure
 
324

 
366


NOTE 5. Goodwill and Other Intangible Assets
 
The changes in the carrying amount of goodwill attributable to operating segments are reflected in the table below:
(Dollars in millions)
 
Community Banking
 
Residential Mortgage Banking
 
Dealer Financial Services
 
Specialized Lending
 
Insurance Holdings
 
Financial Services
 
Total
Goodwill, January 1, 2017
 
$
7,032

 
$
416

 
$
111

 
$
113

 
$
1,752

 
$
214

 
$
9,638

Adjustments
 
(12
)
 
6

 

 
(9
)
 
(5
)
 

 
(20
)
Goodwill, June 30, 2017
 
$
7,020

 
$
422

 
$
111

 
$
104

 
$
1,747

 
$
214

 
$
9,618

 
The adjustments to goodwill were primarily the result of finalizing the purchase price allocation for National Penn and Swett & Crawford.

The following table presents information for identifiable intangible assets subject to amortization:
 
 
June 30, 2017
 
December 31, 2016
(Dollars in millions)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
CDI
 
$
970

 
$
(744
)
 
$
226

 
$
970

 
$
(710
)
 
$
260

Other, primarily customer relationship intangibles
 
1,417

 
(861
)
 
556

 
1,415

 
(821
)
 
594

Total
 
$
2,387

 
$
(1,605
)
 
$
782

 
$
2,385

 
$
(1,531
)
 
$
854


NOTE 6. Loan Servicing
 
Residential Mortgage Banking Activities
 
The following tables summarize residential mortgage banking activities:
(Dollars in millions)
 
Jun 30, 2017
 
Dec 31, 2016
UPB of residential mortgage and home equity loan servicing portfolio
 
$
120,173

 
$
121,639

UPB of residential mortgage loans serviced for others (primarily agency conforming fixed rate)
 
90,106

 
90,325

Mortgage loans sold with recourse
 
535

 
578

Maximum recourse exposure from mortgage loans sold with recourse liability
 
268

 
282

Indemnification, recourse and repurchase reserves
 
39

 
40

 
 
As of / For The
Six Months Ended June 30,
(Dollars in millions)
 
2017
 
2016
UPB of residential mortgage loans sold from LHFS
 
$
6,309

 
$
6,183

Pre-tax gains recognized on mortgage loans sold and held for sale
 
65

 
59

Servicing fees recognized from mortgage loans serviced for others
 
133

 
134

Approximate weighted average servicing fee on the outstanding balance of residential mortgage loans serviced for others
 
0.28
%
 
0.28
%
Weighted average interest rate on mortgage loans serviced for others
 
4.00

 
4.09


19


 
 
Six Months Ended June 30,
(Dollars in millions)
 
2017
 
2016
Residential MSRs, carrying value, beginning of period
 
$
915

 
$
880

Additions
 
63

 
56

Change in fair value due to changes in valuation inputs or assumptions:
 
 
 
 
Prepayment speeds
 
(45
)
 
(209
)
OAS
 
42

 
9

Servicing costs
 
9

 
2

Realization of expected net servicing cash flows, passage of time and other
 
(69
)
 
(69
)
Residential MSRs, carrying value, end of period
 
$
915

 
$
669

 
 
 
 
 
Gains (losses) on derivative financial instruments used to mitigate the income statement effect of changes in residential MSR fair value
 
$
3

 
$
220

 
The sensitivity of the fair value of the residential MSRs to changes in key assumptions is included in the accompanying table:
 
 
June 30, 2017
 
December 31, 2016
 
 
Range
 
Weighted
Average
 
Range
 
Weighted
Average
(Dollars in millions)
 
Min
 
Max
 
 
Min
 
Max
 
Prepayment speed
 
8.7
%
 
9.7
%
 
9.5
%
 
7.5
%
 
8.4
%
 
8.1
%
Effect on fair value of a 10% increase
 
 
 
 
 
$
(31
)
 
 
 
 
 
$
(28
)
Effect on fair value of a 20% increase
 
 
 
 
 
(60
)
 
 
 
 
 
(54
)
 
 
 
 
 
 
 
 
 
 
 
 
 
OAS
 
8.5
%
 
9.3
%
 
8.7
%
 
9.8
%
 
10.2
%
 
10.0
%
Effect on fair value of a 10% increase
 
 
 
 
 
$
(28
)
 
 
 
 
 
$
(33
)
Effect on fair value of a 20% increase
 
 
 
 
 
(55
)
 
 
 
 
 
(64
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Composition of loans serviced for others:
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-rate residential mortgage loans
 
 
 
 
 
99.1
%
 
 
 
 
 
99.1
%
Adjustable-rate residential mortgage loans
 
 
 
 
 
0.9

 
 
 
 
 
0.9

Total
 
 

 
 

 
100.0
%
 
 
 
 
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average life
 
 

 
 

 
6.5 years

 
 
 
 
 
7.0 years


The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the above table, the effect of an adverse variation in one assumption on the fair value of the MSRs is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another, which may magnify or counteract the effect of the change.
 
Commercial Mortgage Banking Activities

The following table summarizes commercial mortgage banking activities for the periods presented:
(Dollars in millions)
Jun 30, 2017
 
Dec 31, 2016
UPB of CRE mortgages serviced for others
$
28,999

 
$
29,333

CRE mortgages serviced for others covered by recourse provisions
4,267

 
4,240

Maximum recourse exposure from CRE mortgages sold with recourse liability
1,242

 
1,272

Recorded reserves related to recourse exposure
5

 
7

CRE mortgages originated during the year-to-date period
3,217

 
7,145

Commercial MSRs at fair value
137

 
137



20


NOTE 7. Deposits
 
A summary of deposits is presented in the accompanying table:
(Dollars in millions)
 
Jun 30, 2017
 
Dec 31, 2016
Noninterest-bearing deposits
 
$
53,343

 
$
50,697

Interest checking
 
27,966

 
30,263

Money market and savings
 
61,671

 
64,883

Time deposits
 
13,988

 
14,391

Total deposits
 
$
156,968

 
$
160,234

 
 
 
 
 
Time deposits $100,000 and greater
 
$
5,662

 
$
5,394

Time deposits $250,000 and greater
 
2,845

 
2,179

 
NOTE 8. Long-Term Debt

The following table reflects the carrying amounts at June 30, 2017 and December 31, 2016, and the related maturity dates, contractual rates and effective interest rates at June 30, 2017:
 
 
 
 
 
 
Stated Rate
 
Effective Rate
 
 
 
 
(Dollars in millions)
 
Maturity
 
Min
 
Max
 
 
Jun 30, 2017
 
Dec 31, 2016
BB&T Corporation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate senior notes
 
2017
to
2024
 
1.45
%
 
6.85
%
 
2.50
%
 
$
7,838

 
$
7,600

Floating rate senior notes
 
2018
 
2022
 
1.80

 
2.11

 
1.92

 
2,247

 
1,898

Fixed rate subordinated notes
 
2019
 
2022
 
3.95

 
5.25

 
1.66

 
954

 
1,338

Branch Bank
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate senior notes
 
2017
 
2022
 
1.35

 
2.85

 
2.17

 
5,594

 
4,209

Floating rate senior notes
 
2019
 
2020
 
1.61

 
1.70

 
1.70

 
849

 
250

Fixed rate subordinated notes
 
2025
 
2026
 
3.63

 
3.80

 
3.45

 
2,141

 
2,138

Floating rate subordinated notes
 
 
 

 

 

 

 
262

FHLB advances (4.7 years weighted average maturity at June 30, 2017)
 
2017
 
2034
 

 
6.38

 
1.27

 
1,948

 
4,118

Other long-term debt
 
 
 
 
 
 
 
 
 
 
 
167

 
152

Total long-term debt
 
 
 
 
 
 
 
 
 
 
 
$
21,738

 
$
21,965

 
The effective rates above reflect the impact of fair value hedges and debt issuance costs. Subordinated notes with a remaining maturity of one year or greater qualify under the risk-based capital guidelines as Tier 2 supplementary capital, subject to certain limitations.

During the first quarter of 2017, BB&T terminated FHLB advances totaling $2.9 billion of par value, which resulted in a pre-tax loss on early extinguishment of debt totaling $392 million.

NOTE 9. Shareholders' Equity

On July 20, 2017, BB&T entered into an accelerated share repurchase agreement for $920 million of BB&T’s common stock, which is expected to be completed in the third quarter of 2017. The number of shares repurchased under the agreement will be based on the volume weighted average share price of the Company's common stock during the term of the transaction.
 
The activity relating to restricted shares/units during the period is presented in the following table:
(Shares in thousands)
 
Restricted Shares/Units
 
Wtd. Avg. Grant Date Fair Value
Nonvested at January 1, 2017
 
13,516

 
$
29.39

Granted
 
3,889

 
42.89

Vested
 
(3,746
)
 
27.05

Forfeited
 
(205
)
 
32.91

Nonvested at June 30, 2017
 
13,454

 
33.89

Expected to vest at June 30, 2017
 
12,468

 
33.89



21


NOTE 10. AOCI
 
 
Three Months Ended June 30, 2017
(Dollars in millions)
 
Unrecognized Net Pension and Postretirement Costs
 
Unrealized Net Gains (Losses) on Cash Flow Hedges
 
Unrealized Net Gains (Losses) on AFS Securities
 
Other, net
 
Total
AOCI balance, April 1, 2017
 
$
(755
)
 
$
(94
)
 
$
(261
)
 
$
(15
)
 
$
(1,125
)
OCI before reclassifications, net of tax
 
1


(30
)

81

 
1

 
53

Amounts reclassified from AOCI:
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
18

 

 

 

 
18

Interest income
 

 

 
(12
)
 
(1
)
 
(13
)
Interest expense
 

 
(6
)
 

 

 
(6
)
Securities (gains) losses, net
 

 

 

 

 

Total before income taxes
 
18

 
(6
)
 
(12
)
 
(1
)
 
(1
)
Less: Income taxes
 
7

 
(2
)
 
(5
)
 

 

Net of income taxes
 
11

 
(4
)
 
(7
)
 
(1
)
 
(1
)
Net change in AOCI
 
12

 
(34
)
 
74

 

 
52

AOCI balance, June 30, 2017
 
$
(743
)
 
$
(128
)
 
$
(187
)
 
$
(15
)
 
$
(1,073
)
 
 
Three Months Ended June 30, 2016
(Dollars in millions)
 
Unrecognized Net Pension and Postretirement Costs
 
Unrealized Net Gains (Losses) on Cash Flow Hedges
 
Unrealized Net Gains (Losses) on AFS Securities
 
FDIC's Share of Unrealized (Gains) Losses on AFS Securities
 
Other, net
 
Total
AOCI balance, April 1, 2016
 
$
(712
)
 
$
(198
)
 
$
163

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


(51
)

110


6


1


67

Amounts reclassified from AOCI:
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
16

 

 

 

 

 
16

Interest income
 

 

 
(16
)
 

 

 
(16
)
Interest expense
 

 
4

 

 

 

 
4

FDIC loss share income, net
 

 

 

 
17

 

 
17

Securities (gains) losses, net
 

 

 

 

 

 

Total before income taxes
 
16

 
4

 
(16
)
 
17

 

 
21

Less: Income taxes
 
6

 
2

 
(6
)
 
6

 

 
8

Net of income taxes
 
10

 
2

 
(10
)
 
11

 

 
13

Net change in AOCI
 
11


(49
)

100


17


1


80

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

 
$
(137
)
 
$
(15
)
 
$
(837
)
 
 
Six Months Ended June 30, 2017
(Dollars in millions)
 
Unrecognized Net Pension and Postretirement Costs
 
Unrealized Net Gains (Losses) on Cash Flow Hedges
 
Unrealized Net Gains (Losses) on AFS Securities
 
Other, net
 
Total
AOCI balance, January 1, 2017
 
$
(764
)
 
$
(92
)
 
$
(259
)
 
$
(17
)
 
$
(1,132
)
OCI before reclassifications, net of tax
 
(1
)
 
(27
)
 
80

 
2

 
54

Amounts reclassified from AOCI:
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
35

 

 

 

 
35

Interest income
 

 

 
(13
)
 

 
(13
)
Interest expense
 

 
(14
)
 

 

 
(14
)
Securities (gains) losses, net
 

 

 

 

 

Total before income taxes
 
35

 
(14
)
 
(13
)
 

 
8

Less: Income taxes
 
13

 
(5
)
 
(5
)
 

 
3

Net of income taxes
 
22

 
(9
)
 
(8
)
 

 
5

Net change in AOCI
 
21

 
(36
)
 
72

 
2

 
59

AOCI balance, June 30, 2017
 
$
(743
)
 
$
(128
)
 
$
(187
)
 
$
(15
)
 
$
(1,073
)

22


 
 
Six Months Ended June 30, 2016
(Dollars in millions)
 
Unrecognized Net Pension and Postretirement Costs
 
Unrealized Net Gains (Losses) on Cash Flow Hedges
 
Unrealized Net Gains (Losses) on AFS Securities
 
FDIC's Share of Unrealized (Gains) Losses on AFS Securities
 
Other, net
 
Total
AOCI balance, January 1, 2016
 
$
(723
)
 
$
(83
)
 
$
(34
)
 
$
(169
)
 
$
(19
)
 
$
(1,028
)
OCI before reclassifications, net of tax
 
1

 
(177
)
 
352

 
11

 
3

 
190

Amounts reclassified from AOCI:
 
 
 
 
 
 
 
 
 
 
 
 
Personnel expense
 
33

 

 

 

 

 
33

Interest income
 

 

 
(43
)
 

 
1

 
(42
)
Interest expense
 

 
21

 

 

 

 
21

FDIC loss share income, net
 

 

 

 
33

 

 
33

Securities (gains) losses, net
 

 

 
(45
)
 

 

 
(45
)
Total before income taxes
 
33

 
21

 
(88
)
 
33

 
1

 

Less: Income taxes
 
12

 
8

 
(33
)
 
12

 

 
(1
)
Net of income taxes
 
21

 
13

 
(55
)
 
21

 
1

 
1

Net change in AOCI
 
22

 
(164
)
 
297

 
32

 
4

 
191

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

 
$
(137
)
 
$
(15
)
 
$
(837
)

NOTE 11. Income Taxes

The effective tax rates for the three months ended June 30, 2017 and 2016 were 31.1% and 30.0%, respectively.

The effective tax rates for the six months ended June 30, 2017 and 2016 were 27.1% and 30.1%, respectively. The effective tax rate for the six months ended June 30, 2017 was lower than the corresponding period in 2016 primarily due to the excess tax benefits from equity-based compensation plans and the tax benefits associated with using the marginal income tax rate for the loss on the early extinguishment of debt.

NOTE 12. Benefit Plans
 
 
Three Months Ended June 30,
 
 
Qualified Plans
 
Nonqualified Plans
(Dollars in millions)
 
2017
 
2016
 
2017
 
2016
Service cost
 
$
49

 
$
44

 
$
4

 
$
3

Interest cost
 
43

 
41

 
4

 
4

Estimated return on plan assets
 
(92
)
 
(81
)
 

 

Amortization and other
 
16

 
16

 
3

 
3

Net periodic benefit cost
 
$
16

 
$
20

 
$
11

 
$
10

 
 
Six Months Ended June 30,
 
 
Qualified Plans
 
Nonqualified Plans
(Dollars in millions)
 
2017
 
2016
 
2017
 
2016
Service cost
 
$
98

 
$
86

 
$
7

 
$
6

Interest cost
 
87

 
81

 
9

 
9

Estimated return on plan assets
 
(185
)
 
(162
)
 

 

Amortization and other
 
33

 
33

 
6

 
6

Net periodic benefit cost
 
$
33

 
$
38

 
$
22

 
$
21


BB&T makes contributions to the qualified pension plans in amounts between the minimum required for funding and the maximum deductible for federal income tax purposes. Discretionary contributions totaling $260 million were made during the six months ended June 30, 2017. There are no required contributions for the remainder of 2017, though BB&T may elect to make additional discretionary contributions.


23


NOTE 13. Commitments and Contingencies
(Dollars in millions)
 
Jun 30, 2017
 
Dec 31, 2016
Letters of credit
 
$
2,717

 
$
2,786

Carrying amount of the liability for letters of credit
 
23

 
27

 
 
 
 
 
Investments in affordable housing and historic building rehabilitation projects:
 
 
 
 
Carrying amount
 
1,934

 
1,719

Amount of future funding commitments included in carrying amount
 
911

 
738

Lending exposure
 
575

 
495

Tax credits subject to recapture
 
428

 
413

 
 
 
 
 
Private equity investments
 
407

 
362

Future funding commitments to private equity investments
 
139

 
197

 
Legal Proceedings

The nature of BB&T's business ordinarily results in a certain amount of claims, litigation, investigations and legal and administrative cases and proceedings, all of which are considered incidental to the normal conduct of business. BB&T believes it has meritorious defenses to the claims asserted against it in its currently outstanding legal proceedings and, with respect to such legal proceedings, intends to continue to defend itself vigorously, litigating or settling cases according to management's judgment as to what is in the best interests of BB&T and its shareholders.
 
On at least a quarterly basis, liabilities and contingencies in connection with outstanding legal proceedings are assessed utilizing the latest information available. For those matters where it is probable that BB&T will incur a loss and the amount of the loss can be reasonably estimated, and is more than nominal, a liability is recorded in the consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments on at least a quarterly basis. For other matters, where a loss is not probable or the amount of the loss is not estimable, legal reserves are not accrued. While the outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel and available insurance coverage, management believes that the established legal reserves are adequate and the liabilities arising from legal proceedings will not have a material adverse effect on the consolidated financial position, consolidated results of operations or consolidated cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the consolidated financial position, consolidated results of operations or consolidated cash flows of BB&T.
 
Pledged Assets
 
Certain assets were pledged to secure municipal deposits, securities sold under agreements to repurchase, borrowings and borrowing capacity, subject to any applicable asset discount, at the FHLB and FRB as well as for other purposes as required or permitted by law. The following table provides the total carrying amount of pledged assets by asset type, of which the majority are pursuant to agreements that do not permit the other party to sell or repledge the collateral. Assets related to employee benefit plans have been excluded from the following table.
(Dollars in millions)
 
Jun 30, 2017
 
Dec 31, 2016
Pledged securities
 
$
16,316

 
$
15,549

Pledged loans
 
73,720

 
75,015



24


NOTE 14. Fair Value Disclosures
 
Accounting standards define fair value as the exchange price that would be received on the measurement date to sell an asset or the price paid to transfer a liability in the principal or most advantageous market available to the entity in an orderly transaction between market participants, with a three level valuation input hierarchy.

The following tables present fair value information for assets and liabilities measured at fair value on a recurring basis:
 
 
June 30, 2017
(Dollars in millions)
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Trading securities
 
$
1,403

 
$
345

 
$
1,058

 
$

AFS securities:
 
 

 
 
 
 
 
 
U.S. Treasury
 
3,709

 

 
3,709

 

GSE
 
182

 

 
182

 

Agency MBS
 
20,569

 

 
20,569

 

States and political subdivisions
 
1,799

 

 
1,799

 

Non-agency MBS
 
632

 

 
158

 
474

Other
 
8

 
5

 
3

 

LHFS
 
1,471

 

 
1,471

 

MSRs
 
1,052

 

 

 
1,052

Derivative assets:
 


 
 
 
 
 
 
Interest rate contracts
 
613

 

 
604

 
9

Foreign exchange contracts
 
3

 

 
3

 

Private equity investments
 
394

 

 

 
394

Total assets
 
$
31,835

 
$
350

 
$
29,556

 
$
1,929

 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

Derivative liabilities:
 
 

 
 

 
 

 
 

Interest rate contracts
 
$
794

 
$

 
$
788

 
$
6

Foreign exchange contracts
 
9

 

 
9

 

Securities sold short
 
127

 

 
127

 

Total liabilities
 
$
930

 
$

 
$
924

 
$
6

 
 
December 31, 2016
(Dollars in millions)
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Trading securities
 
$
748

 
$
324

 
$
424

 
$

AFS securities:
 
 

 
 

 
 

 
 

U.S. Treasury
 
2,587

 

 
2,587

 

GSE
 
180

 

 
180

 

Agency MBS
 
21,264

 

 
21,264

 

States and political subdivisions
 
2,205

 

 
2,205

 

Non-agency MBS
 
679

 

 
172

 
507

Other
 
11

 
8

 
3

 

LHFS
 
1,716

 

 
1,716

 

MSRs
 
1,052

 

 

 
1,052

Derivative assets:
 
 
 
 
 
 
 
 
Interest rate contracts
 
814

 

 
807

 
7

Foreign exchange contracts
 
8

 

 
8

 

Private equity investments
 
362

 

 

 
362

Total assets
 
$
31,626

 
$
332

 
$
29,366

 
$
1,928

 
 
 
 
 
 
 
 
 
Liabilities:
 
 

 
 

 
 

 
 

Derivative liabilities:
 
 

 
 

 
 

 
 

Interest rate contracts
 
$
998

 
$

 
$
978

 
$
20

Foreign exchange contracts
 
5

 

 
5

 

Securities sold short
 
137

 

 
137

 

Total liabilities
 
$
1,140

 
$

 
$
1,120

 
$
20


25


The following discussion focuses on the valuation techniques and significant inputs for Level 2 and Level 3 assets and liabilities.

A third-party pricing service is generally utilized in determining the fair value of the securities portfolio. Management independently evaluates the fair values provided by the pricing service through comparisons to other external pricing sources, review of additional information provided by the pricing service and other third party sources for selected securities and back-testing to compare the price realized on any security sales to the daily pricing information received from the pricing service. Fair value measurements are derived from market-based pricing matrices that were developed using observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads and broker quotes. As described by security type below, additional inputs may be used, or some inputs may not be applicable. In the event that market observable data was not available, which would generally occur due to the lack of an active market for a given security, the valuation of the security would be subjective and may involve substantial judgment by management.
 
Trading securities: Trading securities include various types of debt and equity securities, primarily consisting of debt securities issued by the U.S. Treasury, GSEs, or states and political subdivisions. The valuation techniques used for these investments are more fully discussed below.
 
U.S. Treasury securities: Treasury securities are valued using quoted prices in active over-the-counter markets.
 
GSE securities and agency MBS: GSE pass-through securities are valued using market-based pricing matrices that reference observable inputs including benchmark TBA security pricing and yield curves that were estimated based on U.S. Treasury yields and certain floating rate indices. The pricing matrices for these securities may also give consideration to pool-specific data supplied directly by the GSE. GSE CMOs are valued using market-based pricing matrices that are based on observable inputs including offers, bids, reported trades, dealer quotes and market research reports, the characteristics of a specific tranche, market convention prepayment speeds and benchmark yield curves as described above.
 
States and political subdivisions: These securities are valued using market-based pricing matrices that reference observable inputs including MSRB reported trades, issuer spreads, material event notices and benchmark yield curves.
 
Non-agency MBS: Pricing matrices for these securities are based on observable inputs including offers, bids, reported trades, dealer quotes and market research reports, the characteristics of a specific tranche, market convention prepayment speeds and benchmark yield curves as described above. Non-agency MBS also include investments in Re-REMIC trusts that primarily hold non-agency MBS, which are valued based on broker pricing models that use baseline securities yields and tranche-level yield adjustments to discount cash flows modeled using market convention prepayment speed and default assumptions.
 
Other securities: These securities consist primarily of mutual funds and corporate bonds. These securities are valued based on a review of quoted market prices for assets as well as through the various other inputs discussed previously.
 
LHFS: Certain mortgage loans are originated to be sold to investors, which are carried at fair value. The fair value is primarily based on quoted market prices for securities backed by similar types of loans. The changes in fair value of these assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage LHFS.
 
MSRs: Residential MSRs are valued using an OAS valuation model to project cash flows over multiple interest rate scenarios, which are discounted at risk-adjusted rates. The model considers portfolio characteristics, contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. Fair value estimates and assumptions are compared to industry surveys, recent market activity, actual portfolio experience and, when available, other observable market data. Commercial MSRs are valued using a cash flow valuation model that calculates the present value of estimated future net servicing cash flows. BB&T considers actual and expected loan prepayment rates, discount rates, servicing costs and other economic factors that are determined based on current market conditions.
 
Derivative assets and liabilities: The fair values of derivatives are determined based on quoted market prices and internal pricing models that use market observable data. The fair values of interest rate lock commitments, which are related to mortgage loan commitments and are categorized as Level 3, are based on quoted market prices adjusted for commitments that are not expected to fund and include the value attributable to the net servicing fees.
 
Private equity investments: In many cases there are no observable market values for these investments and therefore management must estimate the fair value based on a comparison of the operating performance of the company to multiples in the marketplace for similar entities. This analysis requires significant judgment, and actual values in a sale could differ materially from those estimated.
 
Securities sold short: Securities sold short represent debt securities sold short that are entered into as a hedging strategy for the purposes of supporting institutional and retail client trading activities.

26



The following tables summarize activity for Level 3 assets and liabilities:
 
 
Three Months Ended June 30, 2017
(Dollars in millions)
 
Non-agency MBS
 
MSRs
 
Net Derivatives
 
Private Equity Investments
Balance at April 1, 2017
 
$
480

 
$
1,088

 
$
10

 
$
400

Total realized and unrealized gains (losses):
 
 
 
 
 
 
 
 
Included in earnings (1)
 
14

 
(17
)
 
23

 

Included in unrealized net holding gains (losses) in OCI
 
(2
)
 

 

 

Purchases
 

 

 

 
7

Issuances
 

 
25

 
9

 

Sales
 

 

 

 
(12
)
Settlements
 
(18
)
 
(44
)
 
(39
)
 
(1
)
Balance at June 30, 2017
 
$
474

 
$
1,052

 
$
3

 
$
394

 
 
 
 
 
 
 
 
 
Change in unrealized gains (losses) included in earnings for the period, attributable to assets and liabilities still held at June 30, 2017
 
$
14

 
$
(19
)
 
$
4

 
$
(1
)
 
 
Three Months Ended June 30, 2016
(Dollars in millions)
 
Non-agency MBS
 
MSRs
 
Net Derivatives
 
Private Equity Investments
Balance at April 1, 2016
 
$
600

 
$
860

 
$
21

 
$
301

Total realized and unrealized gains (losses):
 
 
 
 
 
 
 
 
Included in earnings (1)
 
17

 
(69
)
 
24

 

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

 

 

Purchases
 

 

 

 
55

Issuances
 

 
34

 
23

 

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

 
$
785

 
$
33

 
$
353

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

 
$
(69
)
 
$
33

 
$
(2
)

 
 
Six Months Ended June 30, 2017
(Dollars in millions)
 
Non-agency MBS
 
MSRs
 
Net Derivatives
 
Private Equity Investments
Balance at January 1, 2017
 
$
507

 
1,052

 
$
(13
)
 
$
362

Total realized and unrealized gains (losses):
 
 
 
 
 
 
 
 
Included in earnings (1)
 
23

 
20

 
19

 
5

Included in unrealized net holding gains (losses) in OCI
 
(20
)
 

 

 

Purchases
 

 

 

 
75

Issuances
 

 
63

 
24

 

Sales
 

 

 

 
(30
)
Settlements
 
(36
)
 
(83
)
 
(27
)
 
(5
)
Transfers out of Level 3
 

 

 

 
(13
)
Balance at June 30, 2017
 
$
474

 
$
1,052

 
$
3

 
$
394

 
 
 
 
 
 
 
 
 
Change in unrealized gains (losses) included in earnings for the period, attributable to assets and liabilities still held at June 30, 2017
 
$
22

 
$
20

 
$
4

 
$
1


27


 
 
Six Months Ended June 30, 2016
(Dollars in millions)
 
Non-agency MBS
 
MSRs
 
Net Derivatives
 
Private Equity Investments
Balance at January 1, 2016
 
$
626

 
$
880

 
$
4

 
$
289

Total realized and unrealized gains (losses):
 
 
 
 
 
 
 
 
Included in earnings (1)
 
32

 
(196
)
 
56

 
3

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

 

 

Purchases
 

 

 

 
74

Issuances
 

 
56

 
63

 

Sales
 

 

 

 
(8
)
Settlements
 
(54
)
 
(78
)
 
(90
)
 
(5
)
Adoption of fair value option for commercial MSRs
 

 
123

 

 

Balance at June 30, 2016
 
$
559

 
$
785

 
$
33

 
$
353

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

 
$
(196
)
 
$
33

 
$

(1)
Amounts related to non-agency MBS are included in interest income, amounts related to MSRs and net derivatives are included in mortgage banking income and amounts related to private equity investments are included in other income in the Consolidated Statements of Income.

BB&T’s policy is to recognize transfers between levels as of the end of a reporting period.
 
The non-agency MBS categorized as Level 3 represent ownership interest in various tranches of Re-REMIC trusts. These securities are valued at a discount, which is unobservable in the market, to the fair value of the underlying securities owned by the trusts. The Re-REMIC tranches do not have an active market and therefore are categorized as Level 3. At June 30, 2017, the fair value of Re-REMIC non-agency MBS represented a discount of 17.4% to the fair value of the underlying securities owned by the Re-REMIC trusts.

The majority of private equity investments are in SBIC qualified funds, which primarily focus on equity and subordinated debt investments in privately-held middle market companies. The majority of these VIE investments are not redeemable and distributions are received as the underlying assets of the funds liquidate. The timing of distributions, which are expected to occur on various dates through 2026, is uncertain and dependent on various events such as recapitalizations, refinance transactions and ownership changes among others. Excluding the investment of future funds, BB&T estimates these investments have a weighted average remaining life of approximately three years; however, the timing and amount of distributions may vary significantly. As of June 30, 2017, restrictions on the ability to sell the investments include, but are not limited to, consent of a majority member or general partner approval for transfer of ownership. These investments are spread over numerous privately-held middle market companies, and thus the sensitivity to a change in fair value for any single investment is limited. The significant unobservable inputs for these investments are EBITDA multiples that ranged from 5x to 13x, with a weighted average of 8x, at June 30, 2017.

The following table details the fair value and UPB of LHFS that were elected to be carried at fair value:
 
 
June 30, 2017
 
December 31, 2016
(Dollars in millions)
 
Fair Value
 
Aggregate UPB
 
Difference
 
Fair Value
 
Aggregate UPB
 
Difference
LHFS reported at fair value
 
$
1,471

 
$
1,450

 
$
21

 
$
1,716

 
$
1,736

 
$
(20
)
 
Excluding government guaranteed, LHFS that were in nonaccrual status or 90 days or more past due and still accruing interest were not material at June 30, 2017.

The following table provides information about certain assets measured at fair value on a nonrecurring basis, which are primarily collateral dependent and may be subject to liquidity adjustments. The carrying values represent end of period values, which approximate the fair value measurements that occurred on the various measurement dates throughout the period. The valuation adjustments represent the amounts recorded during the period regardless of whether the asset is still held at period end. These assets are considered to be Level 3 assets (excludes PCI).

28


 
 
June 30, 2017
 
June 30, 2016
 
 
 
 
Valuation Adjustments
 
 
 
Valuation Adjustments
(Dollars in millions)
 
Carrying Value
 
Three Months Ended
 
Six Months Ended
 
Carrying Value
 
Three Months Ended
 
Six Months Ended
Impaired loans
 
$
190

 
$
(6
)
 
$
(14
)
 
$
358

 
$
(16
)
 
$
(54
)
Foreclosed real estate
 
48

 
(60
)
 
(126
)
 
53

 
(44
)
 
(98
)
 
For financial instruments not recorded at fair value, estimates of fair value are based on relevant market data and information about the instrument. Values obtained relate to one trading unit without regard to any premium or discount that may result from concentrations of ownership, possible tax ramifications, estimated transaction costs that may result from bulk sales or the relationship between various instruments.
 
An active market does not exist for certain financial instruments. Fair value estimates for these instruments are based on current economic conditions, currency and interest rate risk characteristics, loss experience and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. In addition, changes in assumptions could significantly affect these fair value estimates. The following assumptions were used to estimate the fair value of these financial instruments.
 
Cash and cash equivalents and restricted cash: For these short-term instruments, the carrying amounts are a reasonable estimate of fair values.
 
HTM securities: The fair values of HTM securities are based on a market approach using observable inputs such as benchmark yields and securities, TBA prices, reported trades, issuer spreads, current bids and offers, monthly payment information and collateral performance.
 
Loans receivable: The fair values for loans are estimated using discounted cash flow analyses, applying interest rates currently being offered for loans with similar terms and credit quality, which are deemed to be indicative of orderly transactions in the current market. For commercial loans and leases, discount rates may be adjusted to address additional credit risk on lower risk grade instruments. For residential mortgage and other consumer loans, internal prepayment risk models are used to adjust contractual cash flows. Loans are aggregated into pools of similar terms and credit quality and discounted using a LIBOR based rate. The carrying amounts of accrued interest approximate fair values.

Deposit liabilities: The fair values for demand deposits are equal to the amount payable on demand. Fair values for CDs are estimated using a discounted cash flow calculation that applies current interest rates to aggregate expected maturities. BB&T has developed long-term relationships with its deposit customers, commonly referred to as CDIs, that have not been considered in the determination of the deposit liabilities' fair value.
 
Short-term borrowings: The carrying amounts of short-term borrowings, excluding securities sold short, approximate their fair values.
 
Long-term debt: The fair values of long-term debt instruments are estimated based on quoted market prices for the instrument if available, or for similar instruments if not available, or by using discounted cash flow analyses, based on current incremental borrowing rates for similar types of instruments.

Contractual commitments: The fair values of commitments are estimated using the fees charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The fair values of guarantees and letters of credit are estimated based on the counterparties' creditworthiness and average default rates for loan products with similar risks. These respective fair value measurements are categorized within Level 3 of the fair value hierarchy. Retail lending commitments are assigned no fair value as BB&T typically has the ability to cancel such commitments by providing notice to the borrower.
 
Financial assets and liabilities not recorded at fair value are summarized below:

29


 
 
June 30, 2017
(Dollars in millions)
 
Carrying Amount
 
Total Fair Value
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
HTM securities
 
$
18,384

 
$
18,307

 
$
18,307

 
$

Loans and leases HFI, net of ALLL
 
142,160

 
142,081

 

 
142,081

 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 

 
 

 
 

 
 

Deposits
 
156,968

 
157,092

 
157,092

 

Long-term debt
 
21,738

 
21,965

 
21,965

 

 
 
December 31, 2016
(Dollars in millions)
 
Carrying Amount
 
Total Fair Value
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
 
HTM securities
 
$
16,680

 
$
16,546

 
$
16,546

 
$

Loans and leases HFI, net of ALLL
 
141,833

 
142,044

 

 
142,044

 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
Deposits
 
160,234

 
160,403

 
160,403

 

Long-term debt
 
21,965

 
22,423

 
22,423

 

 
The following is a summary of selected information pertaining to off-balance sheet financial instruments:
 
 
June 30, 2017
 
December 31, 2016
(Dollars in millions)
 
Notional/Contract Amount
 
Fair Value
 
Notional/Contract Amount
 
Fair Value
Commitments to extend, originate or purchase credit
 
$
66,419

 
$
284

 
$
64,395

 
$
250

Residential mortgage loans sold with recourse
 
535

 
6

 
578

 
7

Other loans sold with recourse
 
4,267

 
5

 
4,240

 
7

Letters of credit
 
2,717

 
23

 
2,786

 
27



30


NOTE 15. Derivative Financial Instruments

The following table presents the notional amount and estimated fair value of derivative instruments:
 
 
 
 
June 30, 2017
 
December 31, 2016
 
 
Hedged Item or Transaction
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
(Dollars in millions)
 
 
 
Gain
 
Loss
 
 
Gain
 
Loss
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed swaps
 
3 mo. LIBOR funding
 
$
6,800

 
$

 
$
(220
)
 
$
7,050

 
$

 
$
(187
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value hedges:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Receive fixed swaps
 
Long-term debt
 
13,226

 
166

 
(94
)
 
12,099

 
202

 
(100
)
Options
 
Long-term debt
 
5,337

 

 
(1
)
 
2,790

 

 
(1
)
Pay fixed swaps
 
Commercial loans
 
371

 
3

 
(1
)
 
346

 
4

 
(2
)
Pay fixed swaps
 
Municipal securities
 
231

 

 
(82
)
 
231

 

 
(83
)
Total
 
 
 
19,165

 
169

 
(178
)
 
15,466

 
206

 
(186
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Not designated as hedges:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Client-related and other risk management:
 
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Receive fixed swaps
 
 
 
10,597

 
209

 
(38
)
 
9,989

 
235

 
(44
)
Pay fixed swaps
 
 
 
10,703

 
37

 
(226
)
 
10,263

 
43

 
(252
)
Other swaps
 
 
 
1,033

 
2

 
(3
)
 
1,086

 
2

 
(5
)
Other
 
 
 
654

 
1

 
(1
)
 
709

 
2

 
(2
)
Forward commitments
 
 
 
6,695

 
11

 
(8
)
 
5,972

 
29

 
(28
)
Foreign exchange contracts
 
594

 
3

 
(9
)
 
669

 
8

 
(5
)
Total
 
 
 
30,276

 
263

 
(285
)
 
28,688

 
319

 
(336
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage banking:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Interest rate lock commitments
 
1,914

 
9

 
(6
)
 
2,219

 
7

 
(20
)
When issued securities, forward rate agreements and forward commitments
 
3,025

 
16

 
(8
)
 
3,657

 
51

 
(14
)
Other
 
 
 
447

 
2

 

 
449

 
2

 
(1
)
Total
 
 
 
5,386

 
27

 
(14
)
 
6,325

 
60

 
(35
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
MSRs:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Receive fixed swaps
 
 
 
4,286

 
50

 
(58
)
 
5,034

 
18

 
(236
)
Pay fixed swaps
 
 
 
4,245

 
7

 
(40
)
 
3,768

 
56

 
(7
)
Options
 
 
 
4,865

 
99

 
(2
)
 
5,710

 
160

 
(8
)
When issued securities, forward rate agreements and forward commitments
 
2,805

 
1

 
(6
)
 
3,210

 
3

 
(8
)
Other
 
 
 
1,081

 

 

 

 

 

Total
 
 
 
17,282

 
157

 
(106
)
 
17,722

 
237

 
(259
)
Total derivatives not designated as hedges
 
52,944

 
447

 
(405
)
 
52,735

 
616

 
(630
)
Total derivatives
 
 
 
$
78,909

 
616

 
(803
)
 
$
75,251

 
822

 
(1,003
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross amounts not offset in the Consolidated Balance Sheets:
 
 

 
 

 
 

 
 

 
 

Amounts subject to master netting arrangements not offset due to policy election
 
 
 
(355
)
 
355

 
 

 
(443
)
 
443

Cash collateral (received) posted
 
 

 
(69
)
 
384

 
 

 
(119
)
 
450

Net amount
 
 
 
 

 
$
192

 
$
(64
)
 
 

 
$
260

 
$
(110
)
 

31


The fair values of derivatives in a gain or loss position are presented on a gross basis in other assets or other liabilities, respectively, in the Consolidated Balance Sheets. Collateral practices mitigate the potential loss impact to affected parties by requiring liquid collateral to be posted on a scheduled basis to secure the aggregate net unsecured exposure. In addition to collateral, the right of setoff allows counterparties to offset net derivative values with a defaulting party against certain other contractual receivables from or obligations due to the defaulting party in determining the net termination amount.

No portion of the change in fair value of derivatives designated as hedges has been excluded from effectiveness testing. The ineffective portion was immaterial for all periods presented. The following tables present the effective portion of hedging derivative instruments on the consolidated statements of income:
 
 
Three Months Ended June 30,
 
 
Pre-tax Gain (Loss) Recognized in OCI
 
Location of Amounts Reclassified from AOCI into Income
 
Pre-tax Gain (Loss) Reclassified from AOCI into Income
 
 
 
 
(Dollars in millions)
 
2017
 
2016
 
 
2017
 
2016
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
(47
)
 
$
(83
)
 
Total interest expense
 
$
6

 
$
(4
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax Gain (Loss) Recognized in Income
 
 
 
 
 
 
Location of Amounts Recognized in Income
 
 
 
 
 
 
 
 
2017
 
2016
Fair value hedges:
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
Total interest income
 
$
(5
)
 
$
(4
)
Interest rate contracts
 
 
 
 
 
Total interest expense
 
42

 
59

Total
 
 
 
 
 
 
 
$
37

 
$
55

 
 
 
 
 
 
 
 
 
 
 
Not designated as hedges:
 
 
 
 
 
 
 
 

 
 

Client-related and other risk management:
 
 
 
 

 
 

Interest rate contracts
 
 
 
 
 
Other noninterest income
 
$
16

 
$
9

Foreign exchange contracts
 
 
 
Other noninterest income
 
(3
)
 
13

Mortgage banking:
 
 
 
 
 
 
 
 

 
 

Interest rate contracts
 
 
 
 
 
Mortgage banking income
 
10

 
(13
)
MSRs:
 
 
 
 
 
 
 
 

 
 

Interest rate contracts
 
 
 
 
 
Mortgage banking income
 
23

 
86

Total
 
 
 
 
 
 
 
$
46

 
$
95

 
 
Six Months Ended June 30,
 
 
Pre-tax Gain (Loss) Recognized in OCI
 
Location of Amounts Reclassified from AOCI into Income
 
Pre-tax Gain (Loss) Reclassified from AOCI into Income
 
 
 
 
(Dollars in millions)
 
2017
 
2016
 
 
2017
 
2016
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
$
(43
)
 
$
(283
)
 
Total interest expense
 
$
14

 
$
(21
)
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
Pre-tax Gain (Loss) Recognized in Income
 
 
 
 
 
 
Location of Amounts Recognized in Income
 
 
 
 
 
 
 
 
2017
 
2016
Fair Value Hedges:
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 
 
 
Total interest income
 
$
(9
)
 
$
(8
)
Interest rate contracts
 
 
 
 
 
Total interest expense
 
88

 
119

Total
 
 
 
 
 
 
 
$
79

 
$
111

 
 
 
 
 
 
 
 
 
 
 
Not Designated as Hedges:
 
 
 
 
 
 
 
 

 
 

Client-related and other risk management:
 
 
 
 

 
 

Interest rate contracts
 
 
 
 
 
Other noninterest income
 
$
27

 
$
8

Foreign exchange contracts
 
 
 
Other noninterest income
 
(5
)
 
5

Mortgage Banking:
 
 
 
 
 
 
 
 
 
 

Interest rate contracts
 
 
 
 
 
Mortgage banking income
 
(5
)
 
(19
)
MSRs:
 
 
 
 
 
 
 
 

 
 

Interest rate contracts
 
 
 
 
 
Mortgage banking income
 
3

 
229

Total
 
 
 
 
 
 
 
$
20

 
$
223



32


The following table provides a summary of derivative strategies and the related accounting treatment:
 
 
Cash Flow Hedges
 
Fair Value Hedges
 
Derivatives Not Designated as Hedges
Risk exposure
 
Variability in cash flows of interest payments on floating rate business loans, overnight funding and various LIBOR funding instruments.
 
Changes in value on fixed rate long-term debt, CDs, FHLB advances, loans and state and political subdivision securities due to changes in interest rates.
 
Risk associated with an asset or liability, including mortgage banking operations and MSRs, or for client needs. Includes exposure to changes in market rates and conditions subsequent to the interest rate lock and funding date for mortgage loans originated for sale.
Risk management objective
 
Hedge the variability in the interest payments and receipts on future cash flows for forecasted transactions related to the first unhedged payments and receipts of variable interest.
 
Convert the fixed rate paid or received to a floating rate, primarily through the use of swaps.
 
For interest rate lock commitment derivatives and LHFS, use mortgage-based derivatives such as forward commitments and options to mitigate market risk. For MSRs, mitigate the income statement effect of changes in the fair value of the MSRs.
Treatment for portion that is highly effective
 
Recognized in AOCI until the related cash flows from the hedged item are recognized in earnings.
 
Recognized in current period income along with the corresponding changes in the fair value of the designated hedged item attributable to the risk being hedged.
 
Entire change in fair value recognized in current period income.
Treatment for portion that is ineffective
 
Recognized in current period income.
 
Recognized in current period income.
 
Not applicable
Treatment if hedge ceases to be highly effective or is terminated
 
Hedge is dedesignated. Effective changes in value that are recorded in AOCI before dedesignation are amortized to yield over the period the forecasted hedged transactions impact earnings.
 
If hedged item remains outstanding, termination proceeds are included in cash flows from financing activities and effective changes in value are reflected as part of the carrying value of the financial instrument and amortized to earnings over its estimated remaining life.
 
Not applicable
Treatment if transaction is no longer probable of occurring during forecast period or within a short period thereafter
 
Hedge accounting is ceased and any gain or loss in AOCI is reported in earnings immediately.
 
Not applicable
 
Not applicable
 
The following table presents information about BB&T's cash flow and fair value hedges:
(Dollars in millions)
 
Jun 30, 2017
 
Dec 31, 2016
Cash flow hedges:
 
 
 
 

Net unrecognized after-tax loss on active hedges recorded in AOCI
 
$
(139
)
 
$
(118
)
Net unrecognized after-tax gain on terminated hedges recorded in AOCI (to be recognized in earnings through 2022)
 
10

 
26

Estimated portion of net after-tax gain (loss) on active and terminated hedges to be reclassified from AOCI into earnings during the next 12 months
 
(36
)
 
(4
)
Maximum time period over which BB&T has hedged a portion of the variability in future cash flows for forecasted transactions excluding those transactions relating to the payment of variable interest on existing instruments
 
5 years

 
6 years

Fair value hedges:
 
 

 
 
Unrecognized pre-tax net gain on terminated hedges (to be recognized as interest primarily through 2019)
 
$
155

 
$
169

Portion of pre-tax net gain on terminated hedges to be recognized as a change in interest during the next 12 months
 
50

 
56

 

33


Derivatives Credit Risk – Dealer Counterparties
 
Credit risk related to derivatives arises when amounts receivable from a counterparty exceed those payable to the same counterparty. The risk of loss is addressed by subjecting dealer counterparties to credit reviews and approvals similar to those used in making loans or other extensions of credit and by requiring collateral. Dealer counterparties operate under agreements to provide cash and/or liquid collateral when unsecured loss positions exceed minimal limits.
 
Derivative contracts with dealer counterparties settle on a monthly, quarterly or semiannual basis, with daily movement of collateral between counterparties required within established netting agreements. BB&T only transacts with dealer counterparties with strong credit standings.
 
Derivatives Credit Risk – Central Clearing Parties
 
Certain derivatives are cleared through central clearing parties that require initial margin collateral, as well as collateral for trades in a net loss position. Initial margin collateral requirements are established by central clearing parties on varying bases, with such amounts generally designed to offset the risk of non-payment. Initial margin is generally calculated by applying the maximum loss experienced in value over a specified time horizon to the portfolio of existing trades. The central clearing party used for TBA transactions does not post variation margin to the bank.
(Dollars in millions)
Jun 30, 2017
 
Dec 31, 2016
Dealer Counterparties:
 
 
 
Cash collateral received from dealer counterparties
$
69

 
$
123

Derivatives in a net gain position secured by that collateral
71

 
123

Unsecured positions in a net gain with dealer counterparties after collateral postings
2

 
4

 
 
 
 
Cash collateral posted to dealer counterparties
153

 
138

Derivatives in a net loss position secured by that collateral
153

 
144

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

 
8

 
 
 
 
Central Clearing Parties:
 
 
 
Cash collateral, including initial margin, posted to central clearing parties
238

 
313

Derivatives in a net loss position secured by that collateral
238

 
318

Securities pledged to central clearing parties
108

 
119

 

NOTE 16. Computation of EPS
 
Basic and diluted EPS calculations are presented in the following table:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions, except per share data, shares in thousands)
 
2017
 
2016
 
2017
 
2016
Net income available to common shareholders
 
$
631

 
$
541

 
$
1,009

 
$
1,068

 
 
 
 
 
 
 
 
 
Weighted average number of common shares
 
808,980

 
814,261

 
809,439

 
797,727

Effect of dilutive outstanding equity-based awards
 
10,409

 
9,421

 
11,633

 
9,112

Weighted average number of diluted common shares
 
819,389

 
823,682

 
821,072

 
806,839

 
 
 
 
 
 
 
 
 
Basic EPS
 
$
0.78

 
$
0.67

 
$
1.25

 
$
1.34

 
 
 
 
 
 
 
 
 
Diluted EPS
 
$
0.77

 
$
0.66

 
$
1.23

 
$
1.32

 
 
 
 
 
 
 
 
 
Anti-dilutive awards
 
187

 
5,755

 
297

 
9,958

 

34


NOTE 17. Operating Segments
 
The financial information related to National Penn's operations was included in the Other, Treasury & Corporate segment from the date of acquisition until the systems conversion, which occurred during July 2016. The majority of National Penn's operations are now included in Community Banking.

During the second quarter of 2017, a change was made in the method for allocation of capital to the operating segments impacting both the allocated balances and funding credit, resulting primarily in an increase to net interest income in the Residential Mortgage segment, offset by the Other, Treasury & Corporate segment. Results for prior periods have been revised to reflect the changes in allocation methodology, which are not considered significant to other segments.  

Segment Realignment
 
Effective January 2017, several business activities were realigned within the segments. First, certain client relationships with $218 million of loans and $2.0 billion of deposits were no longer included in Financial Services and are only reported in Community Banking as the result of client re-segmentation. Second, the Mortgage Warehouse Lending and Domestic Factoring businesses within Specialized Lending were moved to Residential Mortgage Banking and Other, Treasury & Corporate, respectively, to align with changes in the internal management structure. Third, the International division was restructured with components integrated into Community Banking and Financial Services from Other, Treasury & Corporate also to align with changes in the internal management structure. The segment information presented herein reflects the impact of the realignment.

Community Banking
 
Community Banking serves individual and business clients by offering a variety of loan and deposit products and other financial services. Community Banking is primarily responsible for serving client relationships and, therefore, is credited with certain revenue from the Residential Mortgage Banking, Financial Services, Insurance Holdings, Specialized Lending, and other segments, which is reflected in net referral fees.
 
Residential Mortgage Banking
 
Residential Mortgage Banking retains and services mortgage loans originated by BB&T as well as those purchased from various correspondent originators. Mortgage loan products include fixed and adjustable rate government and conventional loans for the purpose of constructing, purchasing or refinancing residential properties. Substantially all of the properties are owner occupied. BB&T generally retains the servicing rights to loans sold. Residential Mortgage Banking earns interest on loans held in the warehouse and portfolio, earns fee income from the origination and servicing of mortgage loans and recognizes gains or losses from the sale of mortgage loans. Residential Mortgage Banking also includes Mortgage Warehouse Lending which provides short-term lending solutions to finance first-lien residential mortgage LHFS by independent mortgage companies.
 
Dealer Financial Services
 
Dealer Financial Services originates loans to consumers on a prime and nonprime basis for the purchase of automobiles. Such loans are originated on an indirect basis through approved franchised and independent automobile dealers throughout the BB&T market area and nationally through Regional Acceptance Corporation. This segment also originates loans for the purchase of boats and recreational vehicles originated through dealers in BB&T’s market area. In addition, financing and servicing to dealers for their inventories is provided through a joint relationship between Dealer Financial Services and Community Banking.
 

35


Specialized Lending
 
Specialized Lending consists of BUs and subsidiaries that provide specialty finance products to consumers and businesses. The BUs include Sheffield Financial and Governmental Finance. Sheffield Financial is a dealer-based financer of small ticket equipment for both businesses and consumers. Governmental Finance provides tax-exempt financing to meet the capital project needs of local governments. Operating subsidiaries include BB&T Equipment Finance and BB&T Commercial Equipment Capital, which provide equipment leasing for large and small-to-middle market clients primarily within BB&T’s banking footprint; Prime Rate Premium Finance Corporation, which includes AFCO and CAFO, insurance premium finance BUs that provide funding to businesses in the United States and Canada and to consumers in certain markets within BB&T’s banking footprint; and Grandbridge, a full-service commercial mortgage banking lender providing loans on a national basis. Branch Bank clients as well as nonbank clients within and outside BB&T’s primary geographic market area are served by these BUs. The Community Banking and Financial Services segments receive credit for referrals to these BUs with the corresponding charge retained as part of Other, Treasury & Corporate in the accompanying tables.

Insurance Holdings
 
BB&T's insurance agency / brokerage network is the fifth largest in the world. Insurance Holdings provides property and casualty, employee benefits and life insurance to businesses and individuals. It also provides small business and corporate services, such as workers compensation and professional liability, as well as surety coverage and title insurance. Community Banking and Financial Services receive credit for insurance commissions on referred accounts, with the corresponding charge retained as part of Other, Treasury & Corporate in the accompanying tables.
 
Financial Services
 
Financial Services provides personal trust administration, estate planning, investment counseling, wealth management, asset management, corporate retirement services, corporate banking and corporate trust services. Financial Services also offers clients investment alternatives, including discount brokerage services, equities, fixed-rate and variable-rate annuities, mutual funds and governmental and municipal bonds through BB&T Investment Services, Inc.
 
Financial Services includes BB&T Securities, a full-service brokerage and investment banking firm that provides services in retail brokerage, equity and debt underwriting and investment advice 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 also has a public finance department that provides investment banking services, financial advisory services and municipal bond financing to a variety of regional taxable and tax-exempt issuers.
 
Financial Services includes a group of consolidated SBIC private equity and mezzanine investment funds that invest in privately owned middle-market operating companies to facilitate growth or ownership transition. Financial Services also includes the Corporate Banking Division that originates and services large corporate relationships, syndicated lending relationships and client derivatives. Community Banking receives an interoffice credit for referral fees, with the corresponding charge retained as part of Other, Treasury & Corporate in the accompanying tables. Also captured within the net intersegment interest income for Financial Services is the NIM for the loans and deposits associated with client relationships assigned to the Wealth Division that are housed in the Community Bank.
 
Other, Treasury & Corporate
 
Other, Treasury & Corporate is the combination of the Other segment that represents operating entities that do not meet the quantitative or qualitative thresholds for disclosure; BB&T’s Treasury function, which is responsible for the management of the securities portfolios, overall balance sheet funding and liquidity, and overall management of interest rate risk; the corporate support functions that have not been allocated to the business segments; certain merger-related charges or credits that are incurred as part of the acquisition and conversion of acquired entities; certain charges that are considered to be unusual in nature and not reflective of the normal operations of the segments; and intercompany eliminations including intersegment net referral fees and net intersegment interest income (expense).
 
The investment balances and results related to affordable housing investments are included in the Other, Treasury & Corporate segment. PCI loans from the Colonial acquisition and related net interest income are also included in this segment. Performance results of bank acquisitions prior to system conversion are typically reported in this segment and on a post-conversion date are reported in the Community Banking segment and other segments as applicable.


36


 
 
Three Months Ended June 30,
 
 
Community
Banking
 
Residential
Mortgage Banking
 
Dealer
Financial Services
 
Specialized
Lending
(Dollars in millions)
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Net interest income (expense)
 
$
618

 
$
532

 
$
331

 
$
345

 
$
244

 
$
226

 
$
181

 
$
172

Net intersegment interest income (expense)
 
414

 
401

 
(211
)
 
(214
)
 
(46
)
 
(39
)
 
(77
)
 
(67
)
Segment net interest income
 
1,032

 
933

 
120

 
131

 
198

 
187

 
104

 
105

Allocated provision for credit losses
 
63

 
23

 
10

 
12

 
81

 
58

 
12

 
14

Noninterest income
 
338

 
304

 
72

 
83

 

 

 
69

 
70

Intersegment net referral fees (expense)
 
43

 
43

 

 
1

 

 

 

 

Noninterest expense
 
454

 
432

 
79

 
89

 
43

 
36

 
71

 
68

Amortization of intangibles
 
17

 
18

 

 

 

 

 
1

 
1

Allocated corporate expenses
 
343

 
332

 
30

 
26

 
14

 
11

 
20

 
18

Income (loss) before income taxes
 
536

 
475

 
73

 
88

 
60

 
82

 
69

 
74

Provision (benefit) for income taxes
 
191

 
173

 
27

 
33

 
22

 
31

 
15

 
17

Segment net income (loss)
 
$
345

 
$
302

 
$
46

 
$
55

 
$
38

 
$
51

 
$
54

 
$
57

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Identifiable assets (period end)
 
$
74,549

 
$
67,896

 
$
34,098

 
$
35,894

 
$
15,745

 
$
14,463

 
$
18,826

 
$
17,233

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance Holdings
 
Financial Services
 
Other, Treasury & Corporate (1)
 
Total BB&T
Corporation
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Net interest income (expense)
 
$
1

 
$
1

 
$
76

 
$
68

 
$
184

 
$
273

 
$
1,635

 
$
1,617

Net intersegment interest income (expense)
 

 
(2
)
 
92

 
84

 
(172
)
 
(163
)
 

 

Segment net interest income
 
1

 
(1
)
 
168

 
152

 
12

 
110

 
1,635

 
1,617

Allocated provision for credit losses
 

 

 
(17
)
 
6

 
(14
)
 
(2
)
 
135

 
111

Noninterest income
 
483

 
465

 
230

 
212

 
28

 
(4
)
 
1,220

 
1,130

Intersegment net referral fees (expense)
 

 

 
9

 
5

 
(52
)
 
(49
)
 

 

Noninterest expense
 
349

 
350

 
195

 
189

 
515

 
591

 
1,706

 
1,755

Amortization of intangibles
 
16

 
18

 
2

 
1

 

 
4

 
36

 
42

Allocated corporate expenses
 
31

 
28

 
45

 
37

 
(483
)
 
(452
)
 

 

Income (loss) before income taxes
 
88

 
68

 
182

 
136

 
(30
)
 
(84
)
 
978

 
839

Provision (benefit) for income taxes
 
33

 
26

 
67

 
51

 
(51
)
 
(79
)
 
304

 
252

Segment net income (loss)
 
$
55

 
$
42

 
$
115

 
$
85

 
$
21

 
$
(5
)
 
$
674

 
$
587

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Identifiable assets (period end)
 
$
3,596

 
$
3,590

 
$
18,836

 
$
17,360

 
$
55,542

 
$
65,423

 
$
221,192

 
$
221,859


37


 
 
Six Months Ended June 30,
 
 
Community
Banking
 
Residential
Mortgage Banking
 
Dealer   
Financial Services
 
Specialized
Lending
(Dollars in millions)
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Net interest income (expense)
 
$
1,205

 
$
1,061

 
$
664

 
$
686

 
$
485

 
$
455

 
$
356

 
$
340

Net intersegment interest income (expense)
 
827

 
799

 
(424
)
 
(431
)
 
(91
)
 
(79
)
 
(149
)
 
(133
)
Segment net interest income
 
2,032

 
1,860

 
240

 
255

 
394

 
376

 
207

 
207

Allocated provision for credit losses
 
88

 
13

 
15

 
22

 
176

 
134

 
28

 
33

Noninterest income
 
648

 
589

 
148

 
154

 

 
1

 
139

 
132

Intersegment net referral fees (expense)
 
83

 
78

 

 
1

 

 

 

 

Noninterest expense
 
886

 
851

 
153

 
167

 
84

 
71

 
140

 
130

Amortization of intangibles
 
35

 
37

 

 

 

 

 
4

 
2

Allocated corporate expenses
 
689

 
667

 
61

 
52

 
28

 
22

 
40

 
35

Income (loss) before income taxes
 
1,065

 
959

 
159

 
169

 
106

 
150

 
134

 
139

Provision (benefit) for income taxes
 
380

 
349

 
59

 
64

 
39

 
57

 
29

 
31

Segment net income (loss)
 
$
685

 
$
610

 
$
100

 
$
105

 
$
67

 
$
93

 
$
105

 
$
108

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Identifiable assets (period end)
 
$
74,549

 
$
67,896

 
$
34,098

 
$
35,894

 
$
15,745

 
$
14,463

 
$
18,826

 
$
17,233

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance Holdings
 
Financial Services
 
Other, Treasury & Corporate (1)
 
Total BB&T
Corporation
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Net interest income (expense)
 
$
1

 
$
1

 
$
141

 
$
131

 
$
392

 
$
472

 
$
3,244

 
$
3,146

Net intersegment interest income (expense)
 
1

 
(3
)
 
183

 
165

 
(347
)
 
(318
)
 

 

Segment net interest income
 
2

 
(2
)
 
324

 
296

 
45

 
154

 
3,244

 
3,146

Allocated provision for credit losses
 

 

 
(16
)
 
96

 
(8
)
 
(3
)
 
283

 
295

Noninterest income
 
945

 
886

 
446

 
411

 
65

 
(27
)
 
2,391

 
2,146

Intersegment net referral fees (expense)
 

 

 
14

 
8

 
(97
)
 
(87
)
 

 

Noninterest expense
 
691

 
649

 
378

 
371

 
1,438

 
1,029

 
3,770

 
3,268

Amortization of intangibles
 
32

 
29

 
4

 
2

 
(1
)
 
4

 
74

 
74

Allocated corporate expenses
 
62

 
56

 
90

 
74

 
(970
)
 
(906
)
 

 

Income (loss) before income taxes
 
162

 
150

 
328

 
172

 
(446
)
 
(84
)
 
1,508

 
1,655

Provision (benefit) for income taxes
 
61

 
56

 
121

 
65

 
(281
)
 
(124
)
 
408

 
498

Segment net income (loss)
 
$
101

 
$
94

 
$
207

 
$
107

 
$
(165
)
 
$
40

 
$
1,100

 
$
1,157

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Identifiable assets (period end)
 
$
3,596

 
$
3,590

 
$
18,836

 
$
17,360

 
$
55,542

 
$
65,423

 
$
221,192

 
$
221,859

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


38


ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the financial condition, results of operations, business plans and the future performance of BB&T that are based on the beliefs and assumptions of the management of BB&T and the information available to management at the time that these disclosures were prepared. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "plans," "projects," "may," "will," "should," "could," and other similar expressions are intended to identify these forward-looking statements. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. Such factors include, but are not limited to, the following:

general economic or business conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit, insurance or other services;
disruptions to the national or global financial markets, including the impact of a downgrade of U.S. government obligations by one of the credit ratings agencies, the economic instability and recessionary conditions in Europe, the potential exit of the United Kingdom from the European Union and the economic slowdown in China;
changes in the interest rate environment, including interest rate changes made by the FRB, as well as cash flow reassessments may reduce NIM and/or the volumes and values of loans made or held as well as the value of other financial assets held;
competitive pressures among depository and other financial institutions may increase significantly;
legislative, regulatory or accounting changes, including changes resulting from the adoption and implementation of the Dodd-Frank Act may adversely affect the businesses in which BB&T is engaged;
local, state or federal taxing authorities may take tax positions that are adverse to BB&T;
a reduction may occur in BB&T's credit ratings;
adverse changes may occur in the securities markets;
competitors of BB&T may have greater financial resources or develop products that enable them to compete more successfully than BB&T and may be subject to different regulatory standards than BB&T;
cybersecurity risks, including "denial of service," "hacking" and "identity theft," could adversely affect BB&T's business and financial performance or reputation, and BB&T could be liable for financial losses incurred by third parties due to breaches of data shared between financial institutions;
natural or other disasters, including acts of terrorism, could have an adverse effect on BB&T in that such events could materially disrupt BB&T's operations or the ability or willingness of customers to access the services BB&T offers;
costs related to the integration of the businesses of BB&T and its merger partners may be greater than expected;
failure to execute on strategic or operational plans, including the ability to successfully complete and/or integrate mergers and acquisitions or fully achieve expected cost savings or revenue growth associated with mergers and acquisitions within the expected time frames could adversely impact financial condition and results of operations;
significant litigation and regulatory proceedings could have a material adverse effect on BB&T;
unfavorable resolution of legal proceedings or other claims and regulatory and other governmental investigations or other inquiries could result in negative publicity, protests, fines, penalties, restrictions on BB&T's operations or ability to expand its business and other negative consequences, all of which could cause reputational damage and adversely impact BB&T's financial conditions and results of operations;
risks resulting from the extensive use of models;
risk management measures may not be fully effective;
deposit attrition, customer loss and/or revenue loss following completed mergers/acquisitions may exceed expectations;
higher than expected costs related to information technology infrastructure or a failure to successfully implement future system enhancements could adversely impact BB&T's financial condition and results of operations and could result in significant additional costs to BB&T; and
widespread system outages, caused by the failure of critical internal systems or critical services provided by third parties, could adversely impact BB&T's financial condition and results of operations.

These and other risk factors are more fully described in this report and in BB&T's Annual Report on Form 10-K for the year ended December 31, 2016 under the sections entitled "Item 1A. Risk Factors" and from time to time, in other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Actual results may differ materially from those expressed in or implied by any forward-looking statements. Except to the extent required by applicable law or regulation, BB&T undertakes no obligation to revise or update publicly any forward-looking statements for any reason. Readers should, however, consult any further disclosures of a forward-looking nature BB&T may make in any subsequent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q or Current Reports on Form 8-K.


39


BB&T is a financial holding company organized under the laws of North Carolina. BB&T conducts operations through its principal bank subsidiary, Branch Bank, and its nonbank subsidiaries.

Regulatory Considerations
 
The extensive regulatory framework applicable to financial institutions 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. 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. Refer to BB&T's Annual Report on Form 10-K for the year ended December 31, 2016 for additional disclosures with respect to laws and regulations affecting BB&T.

The current administration and members of Congress have publicly disclosed proposals to change certain laws and regulations (e.g., DOL fiduciary rule). Proposals to change the laws and regulations 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 following summarizes changes to proposed or final rules that were published since the filing of BB&T's Annual Report on Form 10-K for the year ended December 31, 2016.

DOL Fiduciary Rule
During April 2016, the DOL issued a final rule related to fiduciary standards in regards to the investing of clients' retirement assets. The final rule expands the definition of a fiduciary under the Employee Retirement Income Security Act of 1974. Those who provide investment advice to plans, plan sponsors, fiduciaries, plan participants, beneficiaries and IRAs and IRA owners must either avoid payments that create conflicts of interest or comply with the protective terms of an exemption issued by the DOL. Under new exemptions adopted with the rule, financial institutions will be obligated to acknowledge their status and the status of their individual advisers as "fiduciaries." Firms and advisers will be required to make prudent investment recommendations without regard to their own interests, or the interests of those other than the customer; charge only reasonable compensation; and make no misrepresentations to their customers regarding recommended investments. Additionally, the new rule requires certain disclosures to be made to the investor, and ongoing compliance must be monitored and documented.

In early April 2017, the DOL issued a 60 day extension on implementation of certain aspects of the final rule to allow additional time to evaluate the impacts of the rule in accordance with an executive order issued by the President of the United States. Thus, the requirements under the rule will be phased in from June 9, 2017 to January 1, 2018. The estimated impact for 2017 is not significant.

Executive Summary
 
Consolidated net income available to common shareholders for the second quarter of 2017 was $631 million, an increase of $90 million compared to the same quarter of 2016. On a diluted per common share basis, earnings for the second quarter of 2017 were $0.77, an increase of $0.11 compared to the second quarter of 2016. Earnings for the current quarter include pre-tax merger-related and restructuring charges of $10 million ($6 million after tax). Earnings for the earlier quarter include pre-tax merger-related and restructurings charges of $92 million ($58 million after-tax) and a $13 million tax benefit related to specific tax-advantaged assets.
 
BB&T's results of operations for the second quarter of 2017 produced an annualized return on average assets of 1.22%, an annualized return on average risk-weighted assets of 1.53% and an annualized return on average common shareholders' equity of 9.30%, compared to ratios for the same quarter of the prior year of 1.06%, 1.38% and 8.21%, respectively.

Total revenues on a TE basis were $2.9 billion for the second quarter of 2017, an increase of $108 million compared to the same period in 2016, which was driven by a $90 million increase in noninterest income. Net interest margin was 3.47%, compared to 3.41% for the second quarter of 2016.

The provision for credit losses was $135 million, which includes a $16 million benefit for PCI loans, compared to $111 million in the second quarter of 2016. Net charge-offs for the second quarter of 2017 totaled $132 million, compared to $97 million in the earlier quarter. The provision for credit losses on PCI loans was a $16 million benefit, compared to a $2 million provision in the earlier quarter. Asset quality continues to improve, as NPAs, performing TDRs, loans 90 days or more past due and net charge-offs all declined compared to the first quarter of 2017.

Noninterest income was up $90 million compared to the second quarter of 2016. This increase was driven by higher insurance income, FDIC loss share income and bankcard fees and merchant discounts. These increases were partially offset by a decline in mortgage banking income compared to the earlier quarter.

40


  
Noninterest expense was $1.7 billion for the second quarter of 2017, down $55 million compared to the earlier quarter. This decrease was driven by lower merger-related and restructuring charges in the current year.

The provision for income taxes was $304 million for the second quarter of 2017, compared to $252 million for the earlier quarter. This produced an effective tax rate for the second quarter of 2017 of 31.1%, compared to 30.0% for the second quarter of 2016. The prior year quarter included a $13 million tax benefit related to specific tax-advantaged assets.

The Company previously announced that the FRB accepted its capital plan and did not object to its proposed capital actions. Capital actions, which have been approved by BB&T's Board of Directors, include an increase in the quarterly dividend of $0.03 to $0.33 and cumulative share buybacks of up to $1.88 billion from the third quarter of 2017 through the second quarter of 2018. On July 20, 2017, BB&T entered into an accelerated share repurchase agreement for $920 million of BB&T’s common stock, which is expected to be completed in the third quarter of 2017.

Analysis of Results of Operations

Net Interest Income and NIM
 
Second Quarter 2017 compared to Second Quarter 2016
 
Net interest income on a TE basis was $1.7 billion for the second quarter of 2017, an increase of $18 million compared to the same period in 2016. Interest income increased $19 million, which primarily reflects higher rates partially offset by lower average volumes. Interest expense was essentially flat as higher deposit costs was largely offset by lower debt costs.
 
Net interest margin was 3.47%, compared to 3.41% for the second quarter of 2016. Average earning assets decreased $1.4 billion, or 0.7%, while average interest-bearing liabilities decreased $5.6 billion, or 4.0%. Noninterest-bearing deposits increased $3.8 billion due to organic growth. The annualized TE yield on the total loan portfolio for the second quarter was 4.36%, up five basis points compared to the earlier quarter. The annualized TE yield on the average securities portfolio for the second quarter was 2.49%, up two basis points compared to the earlier quarter.
 
The average annualized cost of interest-bearing deposits was 0.30%, up seven basis points compared to the second quarter of 2016. The average annualized rate on long-term debt was 1.91%, down 19 basis points, primarily due to benefits from the extinguishment of FHLB advances.

Six Months of 2017 compared to Six Months of 2016
 
Net interest income on a TE basis was $3.3 billion for the six months ended June 30, 2017, an increase of $99 million compared to the same period in 2016. This increase reflects a $74 million increase in TE interest income and a $25 million decrease in funding costs. The increase in interest income was driven by an increase in average earning assets of $3.8 billion compared to the same period of 2016 and higher overall yields. The decrease in funding costs was driven by lower long-term debt costs partially offset by higher deposit costs.
 
The NIM was 3.47% for the six months ended June 30, 2017, compared to 3.42% for the same period of 2016. The annualized TE yield on the average securities portfolio for the six months ended June 30, 2017 was 2.45%, up one basis point compared to the annualized yield earned during the same period of 2016. The annualized TE yield for the total loan portfolio for the six months ended June 30, 2017 was 4.33%, flat compared to the corresponding period of 2016.
 
The average annualized cost of interest-bearing deposits for the six months ended June 30, 2017 was 0.28%, up four basis points compared to the same period in the prior year. The average annualized rate on long-term debt for the six months ended June 30, 2017 was 1.87%, compared to 2.15% for the same period in 2016. This decrease is primarily due to the early extinguishment of higher cost FHLB advances.

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


41


Table 1-1
TE Net Interest Income and Rate / Volume Analysis (1)
Three Months Ended June 30, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Balances (6)
 
Annualized Yield/Rate
 
Income/Expense
 
Increase
 
Change due to
(Dollars in millions)
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
(Decrease)
 
Rate
 
Volume
Assets
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total securities, at amortized cost (2)
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
 
$
4,761

 
$
2,252

 
1.73
%
 
1.76
%
 
$
21

 
$
10

 
$
11

 
$

 
$
11

GSE
 
2,386

 
4,199

 
2.22

 
2.06

 
14

 
21

 
(7
)
 
2

 
(9
)
Agency MBS
 
35,911

 
38,911

 
2.21

 
2.09

 
198

 
203

 
(5
)
 
11

 
(16
)
States and political subdivisions
 
1,879

 
2,555

 
5.29

 
5.24

 
25

 
34

 
(9
)
 

 
(9
)
Non-agency MBS
 
416

 
526

 
24.16

 
23.81

 
25

 
31

 
(6
)
 

 
(6
)
Other
 
57

 
67

 
2.22

 
1.91

 

 
1

 
(1
)
 

 
(1
)
Total securities
 
45,410

 
48,510

 
2.49

 
2.47

 
283

 
300

 
(17
)
 
13

 
(30
)
Other earning assets (3)
 
3,649

 
3,215

 
1.36

 
1.22

 
11

 
9

 
2

 
1

 
1

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

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Commercial:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Commercial and industrial
 
51,900

 
51,646

 
3.52

 
3.37

 
456

 
433

 
23

 
21

 
2

CRE-income producing properties
 
14,864

 
14,786

 
3.86

 
3.79

 
143

 
139

 
4

 
3

 
1

CRE-construction and development
 
3,905

 
3,669

 
3.81

 
3.74

 
37

 
34

 
3

 
1

 
2

Dealer floor plan
 
1,490

 
1,305

 
2.55

 
2.04

 
10

 
7

 
3

 
2

 
1

Direct retail lending
 
12,000

 
12,031

 
4.55

 
4.33

 
135

 
127

 
8

 
8

 

Sales finance
 
10,450

 
9,670

 
3.19

 
3.05

 
83

 
74

 
9

 
3

 
6

Revolving credit
 
2,612

 
2,477

 
8.78

 
8.73

 
57

 
54

 
3

 

 
3

Residential mortgage
 
29,392

 
30,471

 
4.01

 
4.09

 
295

 
312

 
(17
)
 
(6
)
 
(11
)
Other lending subsidiaries
 
15,636

 
13,961

 
7.84

 
8.39

 
306

 
292

 
14

 
(20
)
 
34

PCI
 
825

 
1,130

 
17.94

 
16.91

 
37

 
48

 
(11
)
 
3

 
(14
)
Total loans and leases HFI
 
143,074

 
141,146

 
4.37

 
4.32

 
1,559

 
1,520

 
39

 
15

 
24

LHFS
 
1,253

 
1,951

 
3.65

 
3.43

 
11

 
16

 
(5
)
 
1

 
(6
)
Total loans and leases
 
144,327

 
143,097

 
4.36

 
4.31

 
1,570

 
1,536

 
34

 
16

 
18

Total earning assets
 
193,386

 
194,822

 
3.87

 
3.80

 
1,864

 
1,845

 
19

 
30

 
(11
)
Nonearning assets
 
27,632

 
28,577

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Total assets
 
$
221,018

 
$
223,399

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Interest-checking
 
$
28,849

 
$
28,376

 
0.22

 
0.15

 
15

 
11

 
4

 
4

 

Money market and savings
 
64,294

 
63,195

 
0.29

 
0.19

 
47

 
29

 
18

 
17

 
1

Time deposits
 
14,088

 
18,101

 
0.48

 
0.51

 
17

 
23

 
(6
)
 
(1
)
 
(5
)
Foreign deposits - interest-bearing
 
459

 
1,865

 
1.03

 
0.38

 
1

 
1

 

 
1

 
(1
)
Total interest-bearing deposits
 
107,690

 
111,537

 
0.30

 
0.23

 
80

 
64

 
16

 
21

 
(5
)
Short-term borrowings
 
2,748

 
2,951

 
0.70

 
0.34

 
5

 
3

 
2

 
2

 

Long-term debt
 
21,767

 
23,272

 
1.91

 
2.10

 
104

 
121

 
(17
)
 
(10
)
 
(7
)
Total interest-bearing liabilities
 
132,205

 
137,760

 
0.57

 
0.55

 
189

 
188

 
1

 
13

 
(12
)
Noninterest-bearing deposits
 
52,573

 
48,801

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Other liabilities
 
5,938

 
7,228

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Shareholders' equity
 
30,302

 
29,610

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total liabilities and shareholders' equity
 
$
221,018

 
$
223,399

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Average interest-rate spread
 
 

 
 
 
3.30
%
 
3.25
%
 
 

 
 

 
 

 
 

 
 

NIM/net interest income
 
 

 
 
 
3.47
%
 
3.41
%
 
$
1,675

 
$
1,657

 
$
18

 
$
17

 
$
1

Taxable-equivalent adjustment
 
 

 
 
 
 
 
 

 
$
40

 
$
40

 
 

 
 

 
 

(1)
Yields are stated on a TE basis utilizing the marginal income tax rates for the periods presented. The change in interest not solely due to changes in yield/rate or volume has been allocated on a pro-rata basis based on the absolute dollar amount of each.
(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, are included for rate calculation purposes.
(5)
NPLs are included in the average balances.
(6)
Excludes basis adjustments for fair value hedges.


42


Table 1-2
TE Net Interest Income and Rate / Volume Analysis (1)
Six Months Ended June 30, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Balances (6)
 
Annualized Yield/Rate
 
Income/Expense
 
Increase
 
Change due to
(Dollars in millions)
 
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
(Decrease)
 
Rate
 
Volume
Assets
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total securities, at amortized cost (2)
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
 
$
4,746

 
$
2,514

 
1.72
%
 
1.73
%
 
$
41

 
$
22

 
$
19

 
$

 
$
19

GSE
 
2,385

 
4,632

 
2.22

 
2.09

 
27

 
48

 
(21
)
 
3

 
(24
)
Agency MBS
 
35,412

 
36,343

 
2.19

 
2.04

 
387

 
370

 
17

 
27

 
(10
)
States and political subdivisions
 
1,985

 
2,410

 
5.20

 
5.30

 
52

 
64

 
(12
)
 
(1
)
 
(11
)
Non-agency MBS
 
424

 
582

 
21.45

 
21.62

 
45

 
62

 
(17
)
 

 
(17
)
Other
 
58

 
64

 
2.05

 
1.75

 

 
1

 
(1
)
 
(1
)
 

Total securities
 
45,010

 
46,545

 
2.45

 
2.44

 
552

 
567

 
(15
)
 
28

 
(43
)
Other earning assets (3)
 
3,953

 
3,310

 
1.43

 
2.07

 
27

 
34

 
(7
)
 
(13
)
 
6

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

 
 

 
 

Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 

 
 

Commercial and industrial
 
51,511

 
49,830

 
3.48

 
3.33

 
889

 
825

 
64

 
37

 
27

CRE-income producing properties
 
14,734

 
14,138

 
3.78

 
3.78

 
276

 
266

 
10

 

 
10

CRE-construction and development
 
3,875

 
3,644

 
3.75

 
3.75

 
72

 
68

 
4

 

 
4

Dealer floor plan
 
1,458

 
1,272

 
2.44

 
2.03

 
18

 
13

 
5

 
3

 
2

Direct retail lending
 
12,007

 
11,569

 
4.44

 
4.29

 
264

 
245

 
19

 
9

 
10

Sales finance
 
10,672

 
9,859

 
3.19

 
3.03

 
169

 
149

 
20

 
8

 
12

Revolving credit
 
2,610

 
2,470

 
8.79

 
8.78

 
114

 
108

 
6

 

 
6

Residential mortgage
 
29,546

 
30,167

 
4.01

 
4.09

 
592

 
617

 
(25
)
 
(12
)
 
(13
)
Other lending subsidiaries
 
15,279

 
13,700

 
7.91

 
8.47

 
600

 
578

 
22

 
(41
)
 
63

PCI
 
854

 
1,114

 
18.86

 
19.27

 
80

 
107

 
(27
)
 
(2
)
 
(25
)
Total loans and leases HFI
 
142,546

 
137,763

 
4.34

 
4.34

 
3,074

 
2,976

 
98

 
2

 
96

LHFS
 
1,468

 
1,599

 
3.56

 
3.56

 
26

 
28

 
(2
)
 

 
(2
)
Total loans and leases
 
144,014

 
139,362

 
4.33

 
4.33

 
3,100

 
3,004

 
96

 
2

 
94

Total earning assets
 
192,977

 
189,217

 
3.84

 
3.82

 
3,679

 
3,605

 
74

 
17

 
57

Nonearning assets
 
27,516

 
27,534

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total assets
 
$
220,493

 
$
216,751

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-checking
 
$
29,211

 
$
26,990

 
0.20

 
0.14

 
28

 
19

 
9

 
7

 
2

Money market and savings
 
64,574

 
61,809

 
0.26

 
0.20

 
84

 
61

 
23

 
20

 
3

Time deposits
 
14,504

 
17,493

 
0.48

 
0.53

 
34

 
46

 
(12
)
 
(4
)
 
(8
)
Foreign deposits - interest-bearing
 
693

 
1,308

 
0.79

 
0.37

 
3

 
2

 
1

 
3

 
(2
)
Total interest-bearing deposits
 
108,982

 
107,600

 
0.28

 
0.24

 
149

 
128

 
21

 
26

 
(5
)
Short-term borrowings
 
2,428

 
2,861

 
0.58

 
0.35

 
7

 
5

 
2

 
3

 
(1
)
Long-term debt
 
21,264

 
23,090

 
1.87

 
2.15

 
199

 
247

 
(48
)
 
(29
)
 
(19
)
Total interest-bearing liabilities
 
132,674

 
133,551

 
0.54

 
0.57

 
355

 
380

 
(25
)
 

 
(25
)
Noninterest-bearing deposits
 
51,838

 
47,502

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Other liabilities
 
5,877

 
6,980

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Shareholders' equity
 
30,104

 
28,718

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total liabilities and shareholders' equity
 
$
220,493

 
$
216,751

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Average interest-rate spread
 
 

 
 
 
3.30
%
 
3.25
%
 
 

 
 

 
 

 
 

 
 

NIM/net interest income
 
 

 
 
 
3.47
%
 
3.42
%
 
$
3,324

 
$
3,225

 
$
99

 
$
17

 
$
82

Taxable-equivalent adjustment
 
 

 
 
 
 
 
 

 
$
80

 
$
79

 
 

 
 

 
 

(1)
Yields are stated on a TE basis assuming tax rates in effect for the periods presented. The change in interest not solely due to changes in yield/rate or volume has been allocated on a pro-rata basis based on the absolute dollar amount of each.
(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, are included for rate calculation purposes.
(5)
NPLs are included in the average balances.
(6)
Excludes basis adjustments for fair value hedges.


43


Provision for Credit Losses
 
Second Quarter 2017 compared to Second Quarter 2016
 
The provision for credit losses totaled $135 million for the second quarter of 2017, compared to $111 million for the same period of the prior year.

Net charge-offs were $132 million for the second quarter of 2017 and $97 million for the second quarter of 2016. Net charge-offs were 0.37% of average loans and leases on an annualized basis for the second quarter of 2017, compared to 0.28% of average loans and leases for the same period in 2016.

Six Months of 2017 compared to Six Months of 2016
 
The provision for credit losses totaled $283 million for the six months ended June 30, 2017, compared to $295 million for the same period of 2016.
 
Net charge-offs for the six months ended June 30, 2017 were $280 million, compared to $251 million for the six months ended June 30, 2016. Net charge-offs in the other lending subsidiaries portfolio increased $21 million, primarily due to an increase in loss severity associated with used car values. Residential mortgage net charge-offs increased $16 million. Commercial and industrial net charge-offs decreased $22 million, primarily due to $30 million of net charge-offs recorded during the first quarter of 2016 related to the energy lending portfolio.

Net charge-offs were 0.40% of average loans and leases on an annualized basis for the six months ended June 30, 2017, compared to 0.37% of average loans and leases for the same period in 2016.

Noninterest Income
 
Second Quarter 2017 compared to Second Quarter 2016
 
Noninterest income for the second quarter of 2017 increased $90 million compared to the earlier quarter. This increase was driven by higher insurance income, bankcard fees and merchant discounts and FDIC loss share income. These increases were partially offset by a decline in mortgage banking income compared to the earlier quarter.

Insurance income increased $16 million, primarily due to the timing of wholesale commission payments. Bankcard fees and merchant discounts increased $15 million primarily due to a reduction in the accrual for rewards and an increase in volumes. FDIC loss share income increased $64 million due to the termination of the loss sharing agreements during the third quarter of 2016.

Mortgage banking income decreased $17 million primarily resulting from lower gains on the net MSR valuation during the current quarter.

Six Months of 2017 compared to Six Months of 2016
 
Noninterest income for the six months ended June 30, 2017 totaled $2.4 billion, compared to $2.1 billion for the same period in 2016, an increase of $245 million. This change was primarily driven by higher insurance income, service charges on deposits, bankcard fees and merchant discounts, FDIC loss share income and other income. This was partially offset by a decrease in securities gains.

Insurance income was $939 million, compared to $884 million for the six months ended June 30, 2016. This increase was largely due to the acquisition of Swett & Crawford in 2016. In addition, employee benefit and life insurance commission increased $13 million.

Service charges on deposits were $344 million for the six months ended June 30, 2017, compared to $320 million for the same period of the prior year. This increase reflects organic growth and the impact of the acquisition of National Penn in 2016.

Bankcard fees and merchant discounts increased $18 million primarily due to a reduction in the accrual for rewards and an increase in volumes.

FDIC loss share income increased $124 million in the current period due to the termination of the loss share agreements.

Other income for the six months ended June 30, 2017 increased $55 million compared to the same period of the prior year, which includes an increase of $33 million in income related to assets for certain post-employment benefits, which is largely offset in personnel expense. In addition, income from derivatives activities increased $16 million compared to the prior period.

44



There were no net securities gains for the six months ended June 30, 2017, compared to net securities gains of $45 million for the six months ended June 30, 2016.

Noninterest Expense
 
Second Quarter 2017 compared to Second Quarter 2016
 
Noninterest expense for the second quarter of 2017 was $1.7 billion, a decrease of $55 million compared to the earlier quarter. This decrease was driven by lower merger-related and restructuring charges in the current year, partially offset by professional services expense.

Personnel expense was essentially flat. Salaries and incentives expense was higher by $20 million, which was mostly offset by a decrease of $17 million in employee benefits expense. The decrease in employee benefits expense was related to certain post-employment benefits, which is largely offset in other income.

Merger-related and restructuring charges decreased $82 million, primarily the result of acquisitions and restructuring activities in the earlier quarter.

Professional services expense increased $12 million compared to the earlier quarter due to an increase in BSA/AML related services.

Regulatory charges increased $4 million primarily due to the $21 million FDIC insurance premium surcharge, which was partially offset by a lower assessment rate

Six Months of 2017 compared to Six Months of 2016
 
Noninterest expense totaled $3.8 billion for the six months ended June 30, 2017, an increase of $502 million, or 15.0%, over the same period of the prior year. This increase was driven by the loss on early extinguishment of debt and higher personnel expense, partially offset by merger-related and restructuring charges.
 
Personnel expense was $2.1 billion for the six months ended June 30, 2017, an increase of $99 million compared to the six months ended June 30, 2016. Salary and incentives expense was $74 million higher as a result of approximately 677 additional full time equivalent employees, primarily due to acquisitions. Employee benefits expense increased $25 million, which includes $22 million of expense related to certain post-employment benefits expense, which is largely offset in other income.

Regulatory charges increased $13 million, primarily due to the $42 million FDIC insurance premium surcharge, which was partially offset by a lower assessment rate.

Professional services expense increased $12 million compared to the same period of the prior year due to an increase in BSA/AML related services.

Merger-related and restructuring charges decreased $69 million, primarily the result of acquisitions and restructuring activities in the earlier period.

The current year included a loss on early extinguishment of debt of $392 million related to the termination of higher-cost FHLB advances totaling $2.9 billion.

Other expense increased $36 million primarily due to higher operating charge-offs, depreciation on property for operating leases, advertising and sundry other expenses.

Provision for Income Taxes
 
Second Quarter 2017 compared to Second Quarter 2016
 
The provision for income taxes was $304 million for the second quarter of 2017, compared to $252 million for the earlier quarter. This produced an effective tax rate for the second quarter of 2017 of 31.1%, compared to 30.0% for the earlier quarter. The prior quarter included a $13 million tax benefit related to specific tax-advantaged assets.


45


Six Months of 2017 compared to Six Months of 2016
 
The provision for income taxes was $408 million for the six months ended June 30, 2017, compared to $498 million for the same period of the prior year. BB&T's effective income tax rate for the six months ended June 30, 2017 was 27.1%, compared to 30.1% for the same period of the prior year. The current year-to-date period includes excess tax benefits from equity-based compensation plans and the tax benefits associated with using the marginal income tax rate for the loss on early extinguishment of debt. The prior year included the $13 million tax benefit previously mentioned.

Segment Results
 
See the "Operating Segments" Note in the "Notes to Consolidated Financial Statements" contained herein and BB&T's Annual Report on Form 10-K for the year ended December 31, 2016, for additional disclosures related to BB&T's reportable business segments. Fluctuations in noninterest income and noninterest expense incurred directly by the segments are more fully discussed in the "Noninterest Income" and "Noninterest Expense" sections above.
 
The financial information related to National Penn's operations was included in the Other, Treasury & Corporate segment from the date of acquisition until the systems conversion, which occurred during July 2016. Post-conversion, the majority of National Penn's operations are included in Community Banking.

Table 2
Net Income by Reportable Segment
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
 
2017
 
2016
 
2017
 
2016
Community Banking
 
$
345

 
$
302

 
$
685

 
$
610

Residential Mortgage Banking
 
46

 
55

 
100

 
105

Dealer Financial Services
 
38

 
51

 
67

 
93

Specialized Lending
 
54

 
57

 
105

 
108

Insurance Holdings
 
55

 
42

 
101

 
94

Financial Services
 
115

 
85

 
207

 
107

Other, Treasury & Corporate
 
21

 
(5
)
 
(165
)
 
40

BB&T Corporation
 
$
674

 
$
587

 
$
1,100

 
$
1,157


During the second quarter of 2017, a change was made in the method for allocation of capital to the operating segments impacting both the allocated balances and funding credit. Results for prior periods have been revised to reflect the new allocations.

Second Quarter 2017 compared to Second Quarter 2016

Community Banking

Community Banking net income was $345 million for the second quarter of 2017, an increase of $43 million compared to the earlier quarter. Segment net interest income increased $99 million driven by higher funding spreads on deposits as well as loan and deposit growth partially from the acquisition of National Penn. Noninterest income increased $34 million due to higher bankcard fees and merchant discounts, service charges on deposits and checkcard fees, partially driven by the National Penn acquisition. Bankcard and merchant discounts benefited from a reduction in the accrual for rewards and increased transaction volumes. The allocated provision for credit losses increased $40 million primarily due to an increase in loss estimates related to commercial real estate loans and higher net charge-offs. Noninterest expense increased $22 million, driven by higher personnel expense and occupancy and equipment expense which were primarily attributable to the National Penn acquisition as well as an increase in operating charge-offs. Allocated corporate expense increased largely due to the National Penn acquisition.

Residential Mortgage Banking

Residential Mortgage Banking net income was $46 million for the second quarter of 2017, a decrease of $9 million compared to the earlier quarter. Segment net interest income decreased due to a decline in average loans. Noninterest income decreased primarily due to lower net mortgage servicing income. Noninterest expense decreased due to declines in loan processing expense, personnel expense and operating charge-offs.


46


Dealer Financial Services

Dealer Financial Services net income was $38 million for the second quarter of 2017, a decrease of $13 million compared to the earlier quarter. This decrease was driven by a $23 million increase in the allocated provision for credit losses, which was primarily due to higher net charge-offs and an increase in the allowance for loan and lease losses, both due to increased loss severity.

Specialized Lending

Specialized Lending net income was $54 million for the second quarter of 2017, a decrease of $3 million compared to the earlier quarter.

Specialized Lending average loans increased $1.6 billion, or 10.8%, primarily due to higher insurance premium finance, equipment finance and commercial mortgage loans.

Insurance Holdings

Insurance Holdings net income was $55 million for the second quarter of 2017, an increase of $13 million compared to the earlier quarter. Noninterest income increased $18 million primarily due to the timing of wholesale commission payments and other commission income.

Financial Services

Financial Services net income was $115 million for the second quarter of 2017, an increase of $30 million compared to the earlier quarter. Segment net interest income increased $16 million, primarily driven by loan and deposit growth and higher funding spreads on deposits, partially offset by lower credit spreads on loans for Corporate Banking. Noninterest income increased $18 million, primarily due to higher trust and investment advisory fees, investment banking and brokerage fees and commissions, and hedge and client derivative income. The allocated provision for credit losses decreased $23 million due to a decline in loss estimates related to commercial and industrial loans and lower net charge-offs. Allocated corporate expenses rose due to increased investments in business initiatives and additional support area costs. Noninterest expense increased due to higher personnel expense, partially offset by lower merger-related and restructuring charges.

Other, Treasury & Corporate

Other, Treasury & Corporate net income was $21 million in the second quarter of 2017, an increase of $26 million compared to the earlier quarter. Segment net interest income decreased $98 million primarily due to the inclusion of National Penn results in the earlier quarter. Noninterest income increased $32 million, driven by a $64 million improvement in FDIC loss share income as a result of terminating the loss share agreements in the third quarter of 2016. This increase was partially offset by a decline in income related to assets for certain post-employment benefits. Noninterest expense decreased $76 million due to lower merger-related and restructuring charges and personnel expense, both primarily due to the inclusion of National Penn results in the earlier quarter. These decreases were partially offset by higher professional services expense related to BSA/AML efforts. The segment allocated $31 million of additional corporate expenses to other operating segments compared to the earlier quarter. The allocated provision for credit losses decreased primarily due to a provision benefit recorded in the current period for PCI loans.

Six Months of 2017 compared to Six Months of 2016
 
Community Banking
 
Community Banking net income was $685 million for the six months ended June 30, 2017, an increase of $75 million compared to the same period of the prior year. Segment net interest income increased $172 million driven by higher funding spreads on deposits as well as loan and deposit growth partially from the acquisition of National Penn. Noninterest income increased $59 million due to higher service charges on deposits, bankcard fees and merchant discounts and checkcard fees, partially driven by the National Penn acquisition. The allocated provision for credit losses increased $75 million due to an increase in loss estimates related to commercial real estate loans, higher net charge-offs and loan growth. Noninterest expense increased $35 million driven by higher personnel expense and occupancy and equipment expense which were primarily attributable to the National Penn acquisition as well as an increase in operating charge-offs. Allocated corporate expense increased $22 million largely due to the National Penn acquisition.


47


Residential Mortgage Banking
 
Residential Mortgage Banking net income was $100 million for the six months ended June 30, 2017, a decrease of $5 million compared to the same period of the prior year. Segment net interest income decreased $15 million primarily due to a decline in credit spreads on loans and lower average loan balances. Noninterest expense decreased $14 million driven by a decline in loan processing expense and professional services. Allocated corporate expense rose due to increased investments in business initiatives and additional support area costs.

Dealer Financial Services
 
Dealer Financial Services net income was $67 million for the six months ended June 30, 2017, a decrease of $26 million compared to the same period of the prior year. Segment net interest income increased $18 million due to higher average loan balances, partially offset by a decline in credit spreads on loans. The allocated provision for credit losses increased $42 million driven by higher net charge-offs and an increase in the allowance for loan and lease losses, both due to increased loss severity. Noninterest expense increased $13 million due to higher loan processing expense and personnel expense.
 
Specialized Lending
 
Specialized Lending net income was $105 million for the six months ended June 30, 2017, a decrease of $3 million compared to the same period of the prior year.
 
Insurance Holdings
 
Insurance Holdings net income was $101 million for the six months ended June 30, 2017, an increase of $7 million compared to the same period of the prior year. Noninterest income increased $59 million, which primarily reflects the addition of Swett & Crawford in April 2016 and higher employee benefit commissions. Noninterest expense increased $42 million driven by higher personnel expense primarily due to Swett & Crawford.

Financial Services
 
Financial Services net income was $207 million for the six months ended June 30, 2017, an increase of $100 million compared to the same period of the prior year. Segment net interest income increased $28 million, primarily driven by loan and deposit growth and higher funding spreads on deposits, partially offset by lower credit spreads. Noninterest income increased $35 million, primarily due to higher hedge and client derivative income and trust and investment advisory fees. The allocated provision for credit losses decreased $112 million due to increased reserves in the earlier period related to energy lending exposures, a decline in loss estimates related to commercial and industrial loans and lower net charge-offs. Allocated corporate expense rose $16 million due to increased investments in business initiatives and additional support area costs.

Other, Treasury & Corporate

Other, Treasury & Corporate generated a net loss of $165 million for the six months ended June 30, 2017, compared to net income of $40 million for the same period of the prior year. Segment net interest income decreased $109 million primarily due to the inclusion of National Penn results in the earlier period and a decline in PCI loans. Noninterest income increased $92 million, primarily driven by a $124 million improvement in FDIC loss share income as a result of terminating the loss share agreements in the third quarter of 2016. Also, there was an increase for income related to assets for certain post-employment benefits, partially offset by securities gains recognized in the earlier period. Noninterest expense increased $409 million due to the first quarter 2017 loss of $392 million on the early extinguishment of higher-cost FHLB advances as well as higher expense related to assets for certain post-employment benefits, partially offset by decreased merger-related and restructuring charges due to the inclusion of National Penn in the earlier period. Allocated corporate expense decreased by $64 million compared to the prior year, reflecting increases in corporate expense allocated to the other operating segments.

Analysis of Financial Condition

Investment Activities
 
The total securities portfolio was $45.3 billion at June 30, 2017, compared to $43.6 billion at December 31, 2016. As of June 30, 2017, the securities portfolio included $26.9 billion of AFS securities (at fair value) and $18.4 billion of HTM securities (at amortized cost).
 

48


The effective duration of the securities portfolio was 4.5 years at June 30, 2017, compared to 4.8 years at December 31, 2016. The duration of the securities portfolio excludes certain non-agency residential MBS that were acquired in the Colonial acquisition and an immaterial amount of other securities without a stated maturity at June 30, 2017.

See the "Securities" Note in the "Notes to Consolidated Financial Statements" herein for additional disclosures related to BB&T's evaluation of securities for OTTI.

Lending Activities
 
Loans HFI totaled $143.6 billion at June 30, 2017, compared to $143.3 billion at December 31, 2016. Management continuously evaluates the composition of the loan portfolio taking into consideration the current and expected market conditions, interest rate environment and risk profiles to optimize profitability. Based upon this evaluation, management may decide to focus efforts on growing or decreasing exposures in certain portfolios through both organic changes and portfolio acquisitions or sales.

Other lending subsidiaries loans were up $1.1 billion due to seasonality and strong growth in equipment finance and commercial real estate lending. The growth in other lending subsidiaries loans also includes a portfolio purchase of $244 million in the first quarter of 2017. Commercial and industrial loans were up $860 million primarily due to growth from the Financial Services and Community Banking segments, as well as seasonal growth from mortgage warehouse lending.

Sales finance loans were down $1.2 billion due to the strategic decision to optimize the size of the portfolio and direct investments towards higher-yielding assets and the continued runoff of the auto loan and lease portfolio obtained in connection with the Susquehanna acquisition. Residential mortgage loans were down $704 million due to continued targeted run-off of the portfolio.

During the second quarter, the Company completed the sale of residential mortgage loans with a carrying value before allowance for loan losses of $300 million. The sale included $40 million of nonaccrual loans and $199 million of performing TDRs.

The following table presents the composition of average loans and leases:
Table 3
Composition of Average Loans and Leases
 
 
 
 
 
For the Three Months Ended
(Dollars in millions)
 
6/30/2017
 
3/31/2017
 
12/31/2016
 
9/30/2016
 
6/30/2016
Commercial and industrial
 
$
51,900

 
$
51,119

 
$
51,306

 
$
51,508

 
$
51,646

CRE-income producing properties
 
14,864

 
14,602

 
14,566

 
14,667

 
14,786

CRE-construction and development
 
3,905

 
3,844

 
3,874

 
3,802

 
3,669

Dealer floor plan
 
1,490

 
1,427

 
1,367

 
1,268

 
1,305

Direct retail lending
 
12,000

 
12,014

 
12,046

 
11,994

 
12,031

Sales finance
 
10,450

 
10,896

 
10,599

 
9,339

 
9,670

Revolving credit
 
2,612

 
2,607

 
2,608

 
2,537

 
2,477

Residential mortgage
 
29,392

 
29,701

 
30,044

 
30,357

 
30,471

Other lending subsidiaries
 
15,636

 
14,919

 
14,955

 
14,742

 
13,961

PCI
 
825

 
883

 
974

 
1,052

 
1,130

Total average loans and leases HFI
 
$
143,074

 
$
142,012

 
$
142,339

 
$
141,266

 
$
141,146

 
Average loans held for investment for the second quarter of 2017 were $143.1 billion, up $1.1 billion compared to the first quarter of 2017. Excluding planned runoff from sales finance loans, residential mortgage loans and PCI loans, average loans held for investment increased $1.9 billion, or an annualized 7.5% compared to the prior quarter.

Average commercial and industrial loans increased $781 million due to growth from the Financial Services and Community Banking segments, as well as seasonal growth from mortgage warehouse lending. In addition, average CRE-income producing properties increased $262 million. Average other lending subsidiaries loans increased $717 million, which includes an increase due to the purchase of a near-prime automobile portfolio late in the first quarter with the remaining increase due to seasonality and strong growth in small ticket consumer finance, commercial mortgage lending and premium finance.

Average sales finance loans decreased $446 million, as the Company is strategically optimizing the size of this portfolio and directing investments towards higher-yielding assets. In addition, average residential mortgage loans decreased $309 million as all conforming loans continue to be sold in the secondary market.


49


Asset Quality
 
NPAs totaled $690 million at June 30, 2017, compared to $813 million at December 31, 2016. The decrease was driven by a $68 million decline in nonperforming commercial and industrial loans, primarily due to payoffs, sales and write-downs and a $41 million decline in nonperforming residential mortgage loans due to the previously mentioned loan sale. NPLs represented 0.43% of loans and leases held for investment, an improvement of eight basis points.

The following table presents activity related to NPAs. Foreclosed real estate acquired from the FDIC is excluded for periods prior to the loss share termination:
Table 4
Rollforward of NPAs
 
 
 
 
 
Six Months Ended June 30,
(Dollars in millions)
 
2017
 
2016
Beginning balance
 
$
813

 
$
686

New NPAs
 
657

 
970

Advances and principal increases
 
141

 
88

Disposals of foreclosed assets (1)
 
(258
)
 
(253
)
Disposals of NPLs (2)
 
(149
)
 
(109
)
Charge-offs and losses
 
(131
)
 
(159
)
Payments
 
(289
)
 
(291
)
Transfers to performing status
 
(91
)
 
(65
)
Other, net
 
(3
)
 
2

Ending balance
 
$
690

 
$
869

(1) 
Includes charge-offs and losses recorded upon sale of $115 million and $90 million for the six months ended June 30, 2017 and 2016, respectively.
(2)
Includes charge-offs and losses recorded upon sale of $17 million and $7 million for the six months ended June 30, 2017 and 2016, respectively.


50


The following tables summarize asset quality information for the past five quarters:
Table 5
Asset Quality
 
 
 
 
 
Three Months Ended
(Dollars in millions)
 
6/30/2017
 
3/31/2017
 
12/31/2016
 
9/30/2016
 
6/30/2016
NPAs (1)
 
 
 
 
 
 
 
 
 
 
NPLs:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
295

 
$
344

 
$
363

 
$
413

 
$
452

CRE-income producing properties
 
35

 
43

 
40

 
38

 
36

CRE-construction and development
 
15

 
17

 
17

 
12

 
14

Dealer floor plan
 

 
7

 

 

 

Direct retail lending
 
65

 
66

 
63

 
55

 
52

Sales finance
 
5

 
6

 
6

 
6

 
5

Residential mortgage-nonguaranteed
 
125

 
167

 
172

 
167

 
171

Residential mortgage-government guaranteed
 
6

 
5

 

 

 
1

Other lending subsidiaries
 
66

 
68

 
75

 
66

 
62

Total nonaccrual loans and leases HFI (1)(2)
 
612

 
723

 
736

 
757

 
793

Foreclosed real estate
 
48

 
49

 
50

 
58

 
70

Other foreclosed property
 
30

 
29

 
27

 
28

 
23

Total nonperforming assets (1)(2)
 
$
690

 
$
801

 
$
813

 
$
843

 
$
886

 
 
 
 
 
 
 
 
 
 
 
Performing TDRs (3):
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
48

 
$
48

 
$
55

 
$
46

 
$
39

CRE-income producing properties
 
15

 
14

 
16

 
14

 
16

CRE-construction and development
 
9

 
11

 
9

 
8

 
10

Direct retail lending
 
63

 
65

 
67

 
69

 
69

Sales finance
 
14

 
15

 
16

 
16

 
16

Revolving credit
 
29

 
29

 
29

 
30

 
31

Residential mortgage-nonguaranteed
 
199

 
327

 
332

 
287

 
276

Residential mortgage-government guaranteed
 
386

 
412

 
420

 
393

 
348

Other lending subsidiaries
 
232

 
232

 
226

 
209

 
198

Total performing TDRs (3)(4)
 
$
995

 
$
1,153

 
$
1,170

 
$
1,072

 
$
1,003

 
 
 
 
 
 
 
 
 
 
 
Loans 90 days or more past due and still accruing:
 
 
 
 
 
 
 
 
 
 
Direct retail lending
 
$
7

 
$
7

 
$
6

 
$
7

 
$
5

Sales finance
 
4

 
5

 
6

 
4

 
4

Revolving credit
 
10

 
10

 
12

 
9

 
8

Residential mortgage-nonguaranteed
 
51

 
64

 
79

 
66

 
56

Residential mortgage-government guaranteed (5)
 
350

 
374

 
443

 
414

 
415

PCI
 
71

 
82

 
90

 
92

 
122

Total loans 90 days or more past due and still accruing (5)
 
$
493

 
$
542

 
$
636

 
$
592

 
$
610

 
 
 
 
 
 
 
 
 
 
 
Loans 30-89 days past due:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
18

 
$
22

 
$
27

 
$
34

 
$
20

CRE-income producing properties
 
1

 
11

 
6

 
3

 
8

CRE-construction and development
 
2

 
1

 
2

 
2

 
2

Direct retail lending
 
54

 
55

 
60

 
62

 
53

Sales finance
 
57

 
51

 
76

 
60

 
61

Revolving credit
 
20

 
20

 
23

 
20

 
19

Residential mortgage-nonguaranteed
 
265

 
272

 
393

 
354

 
361

Residential mortgage-government guaranteed (6)
 
128

 
129

 
132

 
112

 
81

Other lending subsidiaries
 
300

 
215

 
322

 
288

 
261

PCI
 
29

 
29

 
36

 
45

 
48

Total loans 30-89 days past due (6)
 
$
874

 
$
805

 
$
1,077

 
$
980

 
$
914


51


Excludes loans held for sale.
(1)
PCI loans are accounted for using the accretion method.
(2)
Sales of nonperforming loans totaled approximately $75 million, $74 million, $130 million, $63 million and $64 million for the quarter ended June 30, 2017, March 31, 2017, December 31, 2016, September 30, 2016 and June 30, 2016, respectively.
(3)
Excludes TDRs that are nonperforming totaling $211 million, $214 million, $183 million, $134 million and $146 million at June 30, 2017, March 31, 2017, December 31, 2016, September 30, 2016 and June 30, 2016, respectively. These amounts are included in total NPAs.
(4)
Sales of performing TDRs, which were primarily residential mortgage loans, totaled $203 million, $48 million, $36 million, $30 million and $23 million for the quarter ended June 30, 2017, March 31, 2017, December 31, 2016, September 30, 2016 and June 30, 2016, respectively.
(5)
Includes government guaranteed GNMA mortgage loans that BB&T has the right but not the obligation to repurchase that are 90 days or more past due totaling $32 million, $29 million, $48 million, $46 million and $49 million at June 30, 2017, March 31, 2017, December 31, 2016, September 30, 2016 and June 30, 2016, respectively.
(6)
Includes government guaranteed GNMA mortgage loans that BB&T has the right but not the obligation to repurchase that are past due 30-89 days totaling $2 million, $2 million, $3 million, $2 million and $2 million at June 30, 2017, March 31, 2017, December 31, 2016, September 30, 2016 and June 30, 2016, respectively.

Table 6
Asset Quality Ratios
 
 
 
 
 
As of / For the Three Months Ended
 
 
6/30/2017
 
3/31/2017
 
12/31/2016
 
9/30/2016
 
6/30/2016
Asset Quality Ratios:
 
 
 
 
 
 
 
 
 
 
Loans 30-89 days past due and still accruing as a percentage of loans and leases HFI
 
0.61
%
 
0.56
%
 
0.75
%
 
0.69
%
 
0.64
%
Loans 90 days or more past due and still accruing as a percentage of loans and leases HFI
 
0.34

 
0.38

 
0.44

 
0.42

 
0.43

NPLs as a percentage of loans and leases HFI
 
0.43

 
0.51

 
0.51

 
0.53

 
0.56

NPAs as a percentage of:
 
 
 
 
 
 
 
 
 
 
Total assets
 
0.31

 
0.36

 
0.37

 
0.38

 
0.40

Loans and leases HFI plus foreclosed property
 
0.48

 
0.56

 
0.57

 
0.59

 
0.62

Net charge-offs as a percentage of average loans and leases HFI
 
0.37

 
0.42

 
0.42

 
0.37

 
0.28

ALLL as a percentage of loans and leases HFI
 
1.03

 
1.04

 
1.04

 
1.06

 
1.06

Ratio of ALLL to:
 
 
 
 
 
 
 
 
 
 
Net charge-offs
 
2.80x

 
2.49x

 
2.47x

 
2.91x

 
3.88x

NPLs
 
2.43x

 
2.05x

 
2.03x

 
2.00x

 
1.90x

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

Loans 30-89 days past due and still accruing totaled $874 million at June 30, 2017, up $69 million compared to the prior quarter. This increase was primarily driven by seasonality in other lending subsidiaries retail portfolios.

Loans 90 days or more past due and still accruing totaled $493 million at June 30, 2017, down $49 million compared to the prior quarter, primarily due to a decrease in residential mortgage loans. The ratio of loans 90 days or more past due and still accruing as a percentage of loans and leases was 0.34% at June 30, 2017, compared to 0.38% for the prior quarter. Excluding government guaranteed and PCI loans, the ratio of loans 90 days or more past due and still accruing as a percentage of loans and leases was 0.05% at June 30, 2017, a decrease of one basis point compared to the prior quarter.


52


Problem loans include loans on nonaccrual status or loans that are 90 days or more past due and still accruing as disclosed in Table 5. In addition, for the commercial portfolio segment, loans that are rated special mention or substandard performing are closely monitored by management as potential problem loans. Refer to the "Loans and ACL" Note in the "Notes to Consolidated Financial Statements" herein for additional disclosures related to these potential problem loans.
 
Certain residential mortgage loans have an initial period where the borrower is only required to pay the periodic interest. After the interest-only period, the loan will require the payment of both interest and principal over the remaining term. At June 30, 2017, approximately 2.4% of the outstanding balances of residential mortgage loans were in the interest-only phase, compared to 2.6% at December 31, 2016. Approximately 97.8% of the interest-only balances will begin amortizing within the next three years. Approximately 1.1% of interest-only loans are 30 days or more past due and still accruing and 0.6% are on nonaccrual status.
 
Home equity lines, which are a component of the direct retail portfolio, generally require interest-only payments during the first 15 years after origination. After this initial period, the outstanding balance begins amortizing and requires the payment of both interest and principal. At June 30, 2017, the direct retail lending portfolio includes $8.5 billion of variable rate home equity lines and $1.0 billion of variable rate other lines of credit. Approximately $6.4 billion of the variable rate home equity lines is currently in the interest-only phase and approximately 6.7% of these balances will begin amortizing within the next three years. Approximately $867 million of the outstanding balance of variable rate other lines of credit is in the interest-only phase and 17.5% of these balances will begin amortizing within the next three years. Variable rate home equity lines and other lines of credit typically reset on a monthly basis.
 
TDRs occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term and a concession has been granted to the borrower. As a result, BB&T will work with the borrower to prevent further difficulties and ultimately improve the likelihood of recovery on the loan. To facilitate this process, a concessionary modification that would not otherwise be considered may be granted, resulting in classification of the loan as a TDR. Refer to the "Summary of Significant Accounting Policies" Note in the "Notes to Consolidated Financial Statements" in the Annual Report on Form 10-K for the year ended December 31, 2016 for additional policy information regarding TDRs.
 
Performing TDRs totaled $995 million at June 30, 2017, a decrease of $175 million compared to December 31, 2016. This decrease was primarily due to the previously mentioned residential mortgage loan sale, which included $199 million in performing TDRs.

The following table provides a summary of performing TDR activity: 
Table 7
Rollforward of Performing TDRs
 
 
 
 
 
Six Months Ended June 30,
(Dollars in millions)
 
2017
 
2016
Beginning balance
 
$
1,170

 
$
982

Inflows
 
319

 
243

Payments and payoffs
 
(134
)
 
(79
)
Charge-offs
 
(26
)
 
(18
)
Transfers to nonperforming TDRs, net
 
(40
)
 
(35
)
Removal due to the passage of time
 
(41
)
 
(42
)
Non-concessionary re-modifications
 
(2
)
 

Sold and transferred to LHFS
 
(251
)
 
(48
)
Ending balance
 
$
995

 
$
1,003



53


The following table provides further details regarding the payment status of TDRs outstanding at June 30, 2017:
Table 8
Payment Status of TDRs
 
 
 
 
 
June 30, 2017
 
 
 
 
 
 
Past Due
 
Past Due
 
 
(Dollars in millions)
 
Current Status
 
30-89 Days
 
90 Days Or More
 
Total
Performing TDRs (1):
 
 
 
 
 
 
 
 
 
 

 
 
 
 
Commercial and industrial
 
$
48

 
100.0
%
 
$

 
%
 
$

 
%
 
$
48

CRE—income producing properties
 
15

 
100.0

 

 

 

 

 
15

CRE—construction and development
 
9

 
100.0

 

 

 

 

 
9

Direct retail lending
 
62

 
98.4

 
1

 
1.6

 

 

 
63

Sales finance
 
13

 
92.9

 
1

 
7.1

 

 

 
14

Revolving credit
 
25

 
86.2

 
3

 
10.3

 
1

 
3.5

 
29

Residential mortgage—nonguaranteed
 
171

 
85.9

 
25

 
12.6

 
3

 
1.5

 
199

Residential mortgage—government guaranteed
 
168

 
43.5

 
67

 
17.4

 
151

 
39.1

 
386

Other lending subsidiaries
 
191

 
82.3

 
41

 
17.7

 

 

 
232

Total performing TDRs
 
702

 
70.6

 
138

 
13.9

 
155

 
15.5

 
995

Nonperforming TDRs (2)
 
132

 
62.5

 
17

 
8.1

 
62

 
29.4

 
211

Total TDRs
 
$
834

 
69.1

 
$
155

 
12.9

 
$
217

 
18.0

 
$
1,206

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

Allowance for Credit Losses
 
The ACL, which consists of the ALLL and the RUFC, totaled $1.6 billion at June 30, 2017, flat compared to December 31, 2016.

The ALLL, excluding PCI, was $1.5 billion, flat compared to December 31, 2016. The allowance for PCI loans was $30 million, down $14 million compared to December 31, 2016. As of June 30, 2017, the total allowance for loan and lease losses was 1.03% of loans and leases held for investment, compared to 1.04% at December 31, 2016. These amounts include acquired loans, which were marked to fair value and did not receive an ALLL at the acquisition date.

The ALLL was 2.43 times NPLs held for investment, compared to 2.03 times at December 31, 2016. At June 30, 2017, the ALLL was 2.80 times annualized quarterly net charge-offs, compared to 2.47 times at December 31, 2016.

Net charge-offs during the second quarter of 2017 totaled $132 million, or 0.37% of average loans and leases, compared to $97 million, or 0.28% of average loans and leases for the second quarter of 2016.

Refer to the "Loans and ACL" Note in the "Notes to Consolidated Financial Statements" for additional disclosures.
 

54


The following table presents an allocation of the ALLL at June 30, 2017 and December 31, 2016. This allocation of the ALLL is calculated on an approximate basis and is not necessarily indicative of future losses or allocations. The entire amount of the allowance is available to absorb losses occurring in any category of loans and leases.
Table 9
Allocation of ALLL by Category
 
 
 
 
 
 
 
June 30, 2017
 
December 31, 2016
(Dollars in millions)
 
Amount
 
% Loans in each category
 
Amount
 
% Loans in each category
Commercial and industrial
 
$
479

 
36.6
%
 
$
500

 
36.1
%
CRE-income producing properties
 
140

 
10.3

 
117

 
10.1

CRE-construction and development
 
23

 
2.7

 
25

 
2.7

Dealer floor plan
 
12

 
1.1

 
11

 
1.0

Direct retail lending
 
100

 
8.4

 
103

 
8.4

Sales finance
 
39

 
7.0

 
38

 
7.9

Revolving credit
 
101

 
1.8

 
106

 
1.9

Residential mortgage-nonguaranteed
 
173

 
19.7

 
186

 
20.2

Residential mortgage-government guaranteed
 
38

 
0.6

 
41

 
0.6

Other lending subsidiaries
 
350

 
11.2

 
318

 
10.5

PCI
 
30

 
0.6

 
44

 
0.6

Total ALLL
 
1,485

 
100.0
%
 
1,489

 
100.0
%
RUFC
 
117

 
 

 
110

 
 

Total ACL
 
$
1,602

 
 

 
$
1,599

 
 



55


Activity related to the ACL is presented in the following table:
Table 10
Activity in ACL
 
 
 
Three Months Ended
(Dollars in millions)
6/30/2017
 
3/31/2017
 
12/31/2016
 
9/30/2016
 
6/30/2016
Beginning balance
$
1,599

 
$
1,599

 
$
1,621

 
$
1,603

 
$
1,580

Provision for credit losses (excluding PCI loans)
151

 
146

 
133

 
150

 
109

Provision (benefit) for PCI loans
(16
)
 
2

 
(4
)
 
(2
)
 
2

Charge-offs:
 

 
 

 
 

 
 

 
 

Commercial and industrial
(21
)
 
(29
)
 
(23
)
 
(23
)
 
(26
)
CRE-income producing properties
(3
)
 
(1
)
 
(1
)
 
(5
)
 

CRE-construction and development

 

 

 
(1
)
 

Dealer floor plan
(1
)
 

 

 

 

Direct retail lending
(16
)
 
(14
)
 
(16
)
 
(12
)
 
(12
)
Sales finance
(6
)
 
(9
)
 
(8
)
 
(7
)
 
(6
)
Revolving credit
(19
)
 
(21
)
 
(16
)
 
(18
)
 
(16
)
Residential mortgage-nonguaranteed
(19
)
 
(11
)
 
(9
)
 
(11
)
 
(8
)
Residential mortgage-government guaranteed
(1
)
 
(1
)
 
(1
)
 
(2
)
 
(1
)
Other lending subsidiaries
(87
)
 
(103
)
 
(102
)
 
(91
)
 
(73
)
PCI

 

 
(15
)
 

 

Total charge-offs
(173
)
 
(189
)
 
(191
)
 
(170
)
 
(142
)
 
 
 
 
 
 
 
 
 
 
Recoveries:
 

 
 

 
 

 
 

 
 

Commercial and industrial
8

 
6

 
10

 
6

 
12

CRE-income producing properties

 
4

 
1

 
3

 
1

CRE-construction and development
3

 
2

 
2

 
3

 
5

Direct retail lending
7

 
6

 
6

 
7

 
6

Sales finance
3

 
4

 
3

 
3

 
3

Revolving credit
5

 
5

 
5

 
5

 
5

Residential mortgage-nonguaranteed
1

 

 

 
1

 
1

Other lending subsidiaries
14

 
14

 
13

 
12

 
12

Total recoveries
41

 
41

 
40

 
40

 
45

Net charge-offs
(132
)
 
(148
)
 
(151
)
 
(130
)
 
(97
)
Other

 

 

 

 
9

Ending balance
$
1,602

 
$
1,599

 
$
1,599

 
$
1,621

 
$
1,603

 
 
 
 
 
 
 
 
 
 
ALLL (excluding PCI loans)
$
1,455

 
$
1,441

 
$
1,445

 
$
1,448

 
$
1,442

ALLL for PCI loans
30

 
46

 
44

 
63

 
65

RUFC
117

 
112

 
110

 
110

 
96

Total ACL
$
1,602

 
$
1,599

 
$
1,599

 
$
1,621

 
$
1,603




56


 
 
Six Months Ended June 30,
(Dollars in millions)
 
2017
 
2016
Beginning balance
 
$
1,599

 
$
1,550

Provision for credit losses (excluding PCI)
 
297

 
291

Provision (benefit) for PCI loans
 
(14
)
 
4

Charge-offs:
 
 

 
 

Commercial and industrial
 
(50
)
 
(82
)
CRE-income producing properties
 
(4
)
 
(2
)
CRE-construction and development
 

 

Dealer floor plan
 
(1
)
 

Direct retail lending
 
(30
)
 
(25
)
Sales finance
 
(15
)
 
(14
)
Revolving credit
 
(40
)
 
(35
)
Residential mortgage-nonguaranteed
 
(30
)
 
(15
)
Residential mortgage-government guaranteed
 
(2
)
 
(2
)
Other lending subsidiaries
 
(190
)
 
(165
)
PCI
 

 

Total charge-offs
 
(362
)
 
(340
)
 
 
 
 
 
Recoveries:
 
 

 
 

Commercial and industrial
 
14

 
24

CRE-income producing properties
 
4

 
4

CRE-construction and development
 
5

 
6

Direct retail lending
 
13

 
13

Sales finance
 
7

 
6

Revolving credit
 
10

 
10

Residential mortgage-nonguaranteed
 
1

 
2

Other lending subsidiaries
 
28

 
24

Total recoveries
 
82

 
89

Net charge-offs
 
(280
)
 
(251
)
Other
 

 
9

Ending balance
 
$
1,602

 
$
1,603


Deposits
 
Deposits totaled $157.0 billion at June 30, 2017, a decrease of $3.3 billion from December 31, 2016. Money market and savings decreased $3.2 billion and interest checking decreased $2.3 billion. These decreases were partially offset by a $2.6 billion increase in noninterest-bearing deposits.

The following table presents the composition of average deposits for the last five quarters:
Table 11
Composition of Average Deposits
 
 
 
 
 
For the Three Months Ended
(Dollars in millions)
 
6/30/2017
 
3/31/2017
 
12/31/2016
 
9/30/2016
 
6/30/2016
Noninterest-bearing deposits
 
$
52,573

 
$
51,095

 
$
51,421

 
$
50,559

 
$
48,801

Interest checking
 
28,849

 
29,578

 
28,634

 
27,754

 
28,376

Money market and savings
 
64,294

 
64,857

 
63,884

 
64,335

 
63,195

Time deposits
 
14,088

 
14,924

 
15,693

 
15,818

 
18,101

Foreign office deposits - interest-bearing
 
459

 
929

 
486

 
1,037

 
1,865

Total average deposits
 
$
160,263

 
$
161,383

 
$
160,118

 
$
159,503

 
$
160,338

 
Average deposits for the second quarter were $160.3 billion, a decrease of $1.1 billion compared to the prior quarter.

Average noninterest-bearing deposits increased $1.5 billion, primarily due to increases in commercial balances.


57


Interest checking decreased $729 million and money market and savings decreased $563 million primarily due to commercial balances. Average time deposits decreased $836 million due to decreases in commercial and personal balances. Average foreign office deposits decreased $470 million due to changes overall funding mix.

Noninterest-bearing deposits represented 32.8 percent of total average deposits for the second quarter, compared to 31.7 percent for the prior quarter and 30.4 percent a year ago. The cost of interest-bearing deposits was 0.30 percent for the second quarter, up four basis points compared to the prior quarter.

Borrowings
 
At June 30, 2017, short-term borrowings totaled $6.1 billion, an increase of $4.7 billion compared to December 31, 2016. Short-term borrowings fluctuate based on the Company's funding needs. Long-term debt totaled $21.7 billion at June 30, 2017, a decrease of $227 million compared to December 31, 2016. The decrease reflects the early extinguishment of $2.9 billion of FHLB advances and other repayments totaling $2.0 billion. During the first half of 2017, BB&T issued $1.3 billion of senior medium term notes and Branch Bank issued $2.6 billion of senior bank notes and $685 million in new FHLB advances.
 
Shareholders' Equity
 
Total shareholders' equity at June 30, 2017 was $30.3 billion, compared to $29.9 billion at December 31, 2016. Significant increases include net income of $1.1 billion and $88 million pursuant to activity in equity-based compensation plans, partially offset by $320 million of share repurchases and common and preferred dividends totaling $572 million. BB&T's book value per common share at June 30, 2017 was $33.73, compared to $33.14 at December 31, 2016.
 
Merger-Related and Restructuring Activities
 
In conjunction with the consummation of an acquisition or the implementation of a restructuring initiative, BB&T typically accrues certain merger-related and restructuring expenses, which may include estimated severance and other personnel-related costs, costs to terminate lease contracts, costs related to the disposal of duplicate facilities and equipment, costs to terminate data processing contracts and other costs associated with the acquisition or restructuring activity. Merger-related and restructuring accruals are re-evaluated periodically and adjusted as necessary. The remaining accruals at June 30, 2017 are expected to be utilized within one year, unless they relate to specific contracts that expire later. The following table presents a summary of merger and restructuring accrual activity:
Table 12
Merger-Related and Restructuring Accrual Rollforward
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2017
 
Six Months Ended June 30, 2017
(Dollars in millions)
Beginning Balance
 
Expense
 
Utilized
 
Ending Balance
 
Beginning Balance
 
Expense
 
Utilized
 
Ending Balance
Severance and personnel-related
$
20

 
$
9

 
$
(9
)
 
$
20

 
$
25

 
$
13

 
$
(18
)
 
$
20

Occupancy and equipment
17

 

 
(2
)
 
15

 
21

 
9

 
(15
)
 
15

Professional services

 
1

 

 
1

 
1

 
2

 
(2
)
 
1

Systems conversion and related costs
1

 

 
(1
)
 

 
1

 
20

 
(21
)
 

Other adjustments
1

 

 

 
1

 
1

 
2

 
(2
)
 
1

Total
$
39

 
$
10

 
$
(12
)
 
$
37

 
$
49

 
$
46

 
$
(58
)
 
$
37

 

58


Critical Accounting Policies
 
The accounting and reporting policies of BB&T are in accordance with GAAP and conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. BB&T's financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Different assumptions in the application of these policies could result in material changes in the consolidated financial position and/or consolidated results of operations and related disclosures. The more critical accounting and reporting policies include accounting for the ACL, determining fair value of financial instruments, intangible assets, costs and benefit obligations associated with pension and postretirement benefit plans, and income taxes. Understanding BB&T's accounting policies is fundamental to understanding the consolidated financial position and consolidated results of operations. Accordingly, the critical accounting policies are discussed in detail in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in BB&T's Annual Report on Form 10-K for the year ended December 31, 2016. Significant accounting policies and changes in accounting principles and effects of new accounting pronouncements are discussed in detail in the "Basis of Presentation" Note in the "Notes to Consolidated Financial Statements" in BB&T's Annual Report on Form 10-K for the year ended December 31, 2016. Additional disclosures regarding the effects of new accounting pronouncements are included in the "Basis of Presentation" Note included herein. There have been no other changes to the significant accounting policies during 2017.
 
Risk Management
 
BB&T has a strong and consistent risk culture, based on established risk values, which promotes predictable and consistent performance within an environment of open communication and effective challenge. The strong culture influences all associates in the organization daily and helps them evaluate whether risks are acceptable or unacceptable while making decisions that balance quality, profitability and growth appropriately. BB&T’s effective risk management framework establishes an environment which enables it to achieve superior performance relative to peers, ensures that BB&T is viewed among the safest of banks and assures the operational freedom to act on opportunities.
 
BB&T ensures that there is an appropriate return for the amount of risk taken, and that the expected return is in line with its strategic objectives and business plan. Risk-taking activities are evaluated and prioritized to identify those that present attractive risk-adjusted returns while preserving asset value. BB&T only undertakes risks that are understood and can be managed effectively. By managing risk well, BB&T ensures sufficient capital is available to maintain and grow core business operations in a safe and sound manner.
 
Regardless of financial gain or loss to the Company, associates are held accountable if they do not follow the established risk management policies and procedures. Compensation decisions take into account an associate’s adherence to, and successful implementation of, BB&T’s risk values. The compensation structure supports the Company’s core values and sound risk management practices in an effort to promote judicious risk-taking behavior.
 
BB&T’s risk culture encourages transparency and open dialogue between all levels in the performance of organizational functions, such as the development, marketing and implementation of a product or service.
 
The principal types of inherent risk include compliance, credit, liquidity, market, operational, reputation and strategic risks. Refer to BB&T's Annual Report on Form 10-K for the year ended December 31, 2016 for disclosures related to each of these risks under the section titled "Risk Management."
 
Market Risk Management
 
The effective management of market risk is essential to achieving BB&T’s strategic financial objectives. As a financial institution, BB&T’s most significant market risk exposure is interest rate risk in its balance sheet; however, market risk also includes product liquidity risk, price risk and volatility risk in BB&T’s BUs. The primary objectives of market risk management are to minimize any adverse effect that changes in market risk factors may have on net interest income, net income and capital and to offset the risk of price changes for certain assets recorded at fair value. At BB&T, market risk management also includes the enterprise-wide IPV function.
 
Interest Rate Market Risk (Other than Trading)
 
BB&T actively manages market risk associated with asset and liability portfolios with a focus on the strategic pricing of asset and liability accounts and management of appropriate maturity mixes of assets and liabilities. The goal of these activities is the development of appropriate maturity and repricing opportunities in BB&T’s portfolios of assets and liabilities that will produce reasonably consistent net interest income during periods of changing interest rates. These portfolios are analyzed for proper fixed-rate and variable-rate mixes under various interest rate scenarios.
 

59


The asset/liability management process is designed to achieve relatively stable NIM and assure liquidity by coordinating the volumes, maturities or repricing opportunities of earning assets, deposits and borrowed funds. Among other things, this process gives consideration to prepayment trends related to securities, loans and leases and certain deposits that have no stated maturity. Prepayment assumptions are developed using a combination of market data and internal historical prepayment experience for residential mortgage-related loans and securities, and internal historical prepayment experience for client deposits with no stated maturity and loans that are not residential mortgage related. These assumptions are subject to monthly review and adjustment, and are modified as deemed necessary to reflect changes in interest rates relative to the reference rate of the underlying assets or liabilities. On a monthly basis, BB&T evaluates the accuracy of its Simulation model, which includes an evaluation of its prepayment assumptions, to ensure that all significant assumptions inherent in the model appropriately reflect changes in the interest rate environment and related trends in prepayment activity. It is the responsibility of the MRLCC to determine and achieve the most appropriate volume and mix of earning assets and interest-bearing liabilities, as well as to ensure an adequate level of liquidity and capital, within the context of corporate performance goals. The MRLCC also sets policy guidelines and establishes long-term strategies with respect to interest rate risk exposure and liquidity. The MRLCC meets regularly to review BB&T’s interest rate risk and liquidity positions in relation to present and prospective market and business conditions, and adopts funding and balance sheet management strategies that are intended to ensure that the potential impacts on earnings and liquidity as a result of fluctuations in interest rates are within acceptable tolerance guidelines.
 
BB&T uses derivatives primarily to manage economic risk related to securities, commercial loans, MSRs and mortgage banking operations, long-term debt and other funding sources. BB&T also uses derivatives to facilitate transactions on behalf of its clients. As of June 30, 2017, BB&T had derivative financial instruments outstanding with notional amounts totaling $78.9 billion, with a net fair value loss of $187 million. See the "Derivative Financial Instruments" Note in the "Notes to Consolidated Financial Statements" herein for additional disclosures.
 
The majority of BB&T’s assets and liabilities are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Fluctuations in interest rates and actions of the FRB to regulate the availability and cost of credit have a greater effect on a financial institution’s profitability than do the effects of higher costs for goods and services. Through its balance sheet management function, which is monitored by the MRLCC, management believes that BB&T is positioned to respond to changing needs for liquidity, changes in interest rates and inflationary trends.
 
Management uses the Simulation to measure the sensitivity of projected earnings to changes in interest rates. The Simulation projects net interest income and interest rate risk for a rolling two-year period of time. The Simulation takes into account the current contractual agreements that BB&T has made with its customers on deposits, borrowings, loans, investments and commitments to enter into those transactions. Furthermore, the Simulation considers the impact of expected customer behavior. Management monitors BB&T’s interest sensitivity by means of a model that incorporates the current volumes, average rates earned and paid, and scheduled maturities and payments of asset and liability portfolios, together with multiple scenarios that include projected prepayments, repricing opportunities and anticipated volume growth. Using this information, the model projects earnings based on projected portfolio balances under multiple interest rate scenarios. This level of detail is needed to simulate the effect that changes in interest rates and portfolio balances may have on the earnings of BB&T. This method is subject to the accuracy of the assumptions that underlie the process, but management believes that it provides a better illustration of the sensitivity of earnings to changes in interest rates than other analyses such as static or dynamic gap. In addition to the Simulation, BB&T uses EVE analysis to focus on projected changes in assets and liabilities given potential changes in interest rates. This measure also allows BB&T to analyze interest rate risk that falls outside the analysis window contained in the Simulation. The EVE model is a discounted cash flow of the portfolio of assets, liabilities, and derivative instruments. The difference in the present value of assets minus the present value of liabilities is defined as the economic value of equity.
 
The asset/liability management process requires a number of key assumptions. Management determines the most likely outlook for the economy and interest rates by analyzing external factors, including published economic projections and data, the effects of likely monetary and fiscal policies, as well as any enacted or prospective regulatory changes. BB&T’s current and prospective liquidity position, current balance sheet volumes and projected growth, accessibility of funds for short-term needs and capital maintenance are also considered. This data is combined with various interest rate scenarios to provide management with the information necessary to analyze interest sensitivity and to aid in the development of strategies to reach performance goals.

The following table shows the effect that the indicated changes in interest rates would have on net interest income as projected for the next twelve months assuming a gradual change in interest rates as described below. Key assumptions in the preparation of the table include prepayment speeds of mortgage-related and other assets, cash flows and maturities of derivative financial instruments, loan volumes and pricing, deposit sensitivity, customer preferences and capital plans. The resulting change in net interest income reflects the level of interest rate sensitivity that income has in relation to the investment, loan and deposit portfolios.

60


Table 13
Interest Sensitivity Simulation Analysis
 
 
 
 
 
 
 
Interest Rate Scenario
 
Annualized Hypothetical Percentage Change in Net Interest Income June 30,
Linear Change in Prime Rate
 
Prime Rate June 30,
 
 
2017
 
2016
 
2017
 
2016
Up 200 bps
 
6.25
%
 
5.50
%
 
3.95
 %
 
3.18
 %
Up 100
 
5.25

 
4.50

 
2.54

 
2.42

No Change
 
4.25

 
3.50

 

 

Down 25
 
4.00

 
3.25

 
(1.14
)
 
(1.42
)
Down 100
 
3.25

 
N/A
 
(7.20
)
 
N/A
 
The MRLCC has established parameters related to interest sensitivity that prescribe a maximum negative impact on net interest income under different interest rate scenarios. In the event the results of the Simulation model fall outside the established parameters, management will make recommendations to the MRLCC on the most appropriate response given the current economic forecast. The following parameters and interest rate scenarios are considered BB&T’s primary measures of interest rate risk:
 
Maximum negative impact on net interest income of 2% for the next 12 months assuming a 25 basis point change in interest rates each month for four months followed by a flat interest rate scenario for the remaining eight month period.

Maximum negative impact on net interest income of 4% for the next 12 months assuming a 25 basis point change in interest rates each month for eight months followed by a flat interest rate scenario for the remaining four month period.

If a parallel rate change of 200 basis points cannot be modeled due to a low level of rates, a proportional limit applies, and the maximum negative impact on net interest income is adjusted on a proportional basis. Regardless of the proportional limit, the negative risk exposure limit will be the greater of the 4% or the proportional limit.
 
Management has also established a maximum negative impact on net interest income of 4% for an immediate 100 basis points parallel change in rates and 8% for an immediate 200 basis points parallel change in rates. Management currently only models up to a negative 100 basis point decline, and the maximum negative impact on net interest income is adjusted on a proportional basis. Regardless of the proportional limit, the negative risk exposure limit will be the greater of 4% or the proportional limit. These "interest rate shock" limits are designed to create an outer band of acceptable risk based upon a significant and immediate change in rates.

Management has temporarily suspended its interest rate exposure limits to declining interest rates. As the Federal Reserve has started to raise rates, competitive pressure on deposit rates has not materialized. As a result, asset repricing in excess of liability repricing is causing the measured exposure to declining rates to increase. Management evaluates its interest rate risk position each month.
 
Management also considers potential negative interest rate scenarios, which implies that a depositor would pay a premium for a financial institution to hold funds on deposit. In such a scenario, some depositors may choose to withdraw their deposits in lieu of paying an interest rate to BB&T to hold such deposits. As a result, management considers potential pricing and structure changes, such as the movement to a primarily fee-based deposit system. Negative rates would also diminish the spreads on loans and securities. As a result, management considers interest rate floors or rate index floors in loans to mitigate this risk. BB&T purchases both fixed and variable rate securities. The fixed rate securities would be beneficial in a negative interest rate environment.
 
Management must also consider how the balance sheet and interest rate risk position could be impacted by changes in balance sheet mix. Liquidity in the banking industry has been very strong during the current economic cycle. Much of this liquidity increase has been due to a significant increase in noninterest-bearing demand deposits. Consistent with the industry, Branch Bank has seen a significant increase in this funding source. The behavior of these deposits is one of the most important assumptions used in determining the interest rate risk position of BB&T. A loss of these deposits in the future would reduce the asset sensitivity of BB&T’s balance sheet as the Company increases interest-bearing funds to offset the loss of this advantageous funding source.

Beta represents the correlation between overall market interest rates and the rates paid by BB&T on interest-bearing deposits. BB&T applies an average beta of approximately 50% to its non-maturity interest bearing deposit accounts for determining its interest rate sensitivity. Non-maturity interest bearing deposit accounts include interest checking accounts, savings accounts, and money market accounts that do not have a contractual maturity. Due to current market conditions the actual deposit beta on non-maturity interest bearing deposits has been less than 15%; however, BB&T expects the beta to increase as rates continue to rise. BB&T regularly conducts sensitivity on other key variables to determine the impact they could have on the interest rate risk position. This allows BB&T to evaluate the likely impact on its balance sheet management strategies due to a more extreme variation in a key assumption than expected.

61


 
The following table shows the effect that the loss of demand deposits and an associated increase in managed rate deposits would have on BB&T’s interest-rate sensitivity position. For purposes of this analysis, BB&T modeled the incremental beta for the replacement of the lost demand deposits at 100%.
 
Table 14
Deposit Mix Sensitivity Analysis
 
 
 
 
 
Linear Change in Rates
 
Base Scenario at June 30, 2017 (1)

 
Results Assuming a Decrease in
Noninterest Bearing Demand Deposits
 
 
 
 
$1 Billion
 
$5 Billion
Up 200 bps
 
3.95
%
 
3.73
%
 
2.88
%
Up 100
 
2.54

 
2.40

 
1.87

(1) The base scenario is equal to the annualized hypothetical percentage change in net interest income at June 30, 2017 as presented in the preceding table.

If rates increased 200 basis points, BB&T could absorb the loss of $18.5 billion, or 34.6%, of noninterest bearing deposits and replace them with managed rate deposits with a beta of 100% before becoming neutral to interest rate changes.
 
The following table shows the effect that the indicated changes in interest rates would have on EVE. Key assumptions in the preparation of the table include prepayment speeds of mortgage-related and other assets, cash flows and maturities of derivative financial instruments, loan volumes and pricing and deposit sensitivity.
 
Table 15
EVE Simulation Analysis
 
 
 
 
 
 
 
EVE/Assets
 
Hypothetical Percentage
Change in EVE
Change in
 
June 30,
 
June 30,
Interest Rates
 
2017
 
2016
 
2017
 
2016
Up 200 bps
 
12.1
%
 
10.4
%
 
(0.6
)%
 
5.5
 %
Up 100
 
12.4

 
10.3

 
1.4

 
5.2

No Change
 
12.2

 
9.8

 

 

Down 25
 
12.1

 
9.5

 
(1.3
)
 
(3.0
)
Down 100
 
11.1

 
N/A
 
(9.6
)
 
N/A

Market Risk from Trading Activities
 
BB&T also manages market risk from trading activities which consists of acting as a financial intermediary to provide its customers access to derivatives, foreign exchange and securities markets. Trading market risk is managed through the use of statistical and non-statistical risk measures and limits. BB&T utilizes a historical VaR methodology to measure and aggregate risks across its covered trading BUs. This methodology uses two years of historical data to estimate economic outcomes for a one-day time horizon at a 99% confidence level. The average 99% one-day VaR and the maximum daily VaR for the three months ended June 30, 2017 and 2016, respectively, were each less than $1 million. Market risk disclosures under Basel II.5 are available in the Additional Disclosures section of the Investor Relations site on BBT.com.

Contractual Obligations, Commitments, Contingent Liabilities, Off-Balance Sheet Arrangements and Related Party Transactions
 
Refer to BB&T's Annual Report on Form 10-K for the year ended December 31, 2016 for discussion with respect to BB&T's quantitative and qualitative disclosures about its fixed and determinable contractual obligations. Additional disclosures about BB&T's contractual obligations, commitments and derivative financial instruments are included in the "Commitments and Contingencies" Note, "Fair Value Disclosures" Note and "Derivative Financial Instruments" Note in the "Notes to Consolidated Financial Statements."
 

62


The following table presents activity in residential mortgage indemnification, recourse and repurchase reserves:
Table 16
Mortgage Indemnification, Recourse and Repurchase Reserves Activity
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(Dollars in millions)
2017
 
2016
 
2017
 
2016
Balance, at beginning of period
$
38

 
$
83

 
$
40

 
$
79

Payments

 
(1
)
 

 
(2
)
Expense (benefit)
1

 
(2
)
 
(1
)
 
3

Balance, at end of period
$
39

 
$
80

 
$
39

 
$
80


Liquidity
 
Liquidity represents the continuing ability to meet funding needs, including deposit withdrawals, timely repayment of borrowings and other liabilities, and funding of loan commitments. In addition to the level of liquid assets, such as cash, cash equivalents and AFS securities, many other factors affect the ability to meet liquidity needs, including access to a variety of funding sources, maintaining borrowing capacity in national money markets, growing core deposits, the repayment of loans and the ability to securitize or package loans for sale.

BB&T monitors the ability to meet customer demand for funds under both normal and stressed market conditions. In considering its liquidity position, management evaluates BB&T’s funding mix based on client core funding, client rate-sensitive funding and national markets funding. In addition, management also evaluates exposure to rate-sensitive funding sources that mature in one year or less. Management also measures liquidity needs against 30 days of stressed cash outflows for Branch Bank and BB&T. To ensure a strong liquidity position, management maintains a liquid asset buffer of cash on hand and highly liquid unpledged securities. BB&T follows the FRB's enhanced prudential standards for purposes of determining the liquid asset buffer. BB&T’s policy is to use the greater of either 5% of total assets or a range of projected net cash outflows over a 30 day period. As of June 30, 2017 and December 31, 2016, BB&T's liquid asset buffer was 13.0% and 12.6%, respectively, of total assets.
 
BB&T is considered to be a "modified LCR" holding company. BB&T would be subject to full LCR requirements if its assets were to increase above $250 billion or if it were to be considered internationally active. BB&T produces LCR calculations to effectively manage the position of High-Quality Liquid Assets and the balance sheet deposit mix to optimize BB&T's liquidity position. BB&T's LCR was approximately 122% at June 30, 2017, compared to the regulatory minimum for such entities of 100%, which puts BB&T in full compliance with the rule. The LCR can experience volatility due to issues like maturing debt rolling into the 30 day measurement period, or client inflows and outflows. The daily change in BB&T’s LCR averaged less than 2% during 2017 with a maximum change of approximately 8%.
 
On April 27, 2016, the OCC, the FRB and the FDIC released a notice of proposed rulemaking for the US version of the net stable funding ratio. Under the proposal, BB&T will be a "modified NSFR" holding company. BB&T would be subject to full NSFR requirements if it has $250 billion or more in assets or $10 billion or more in total on-balance sheet foreign exposure. BB&T is evaluating the information in the release but does not currently expect a material impact on its results of operations or financial condition. The proposed rule would become effective January 1, 2018.

Parent Company
 
The purpose of the Parent Company is to serve as the primary source of capital for the operating subsidiaries, with assets primarily consisting of cash on deposit with Branch Bank, equity investments in subsidiaries, advances to subsidiaries, accounts receivable from subsidiaries, and other miscellaneous assets. The principal obligations of the Parent Company are payments on long-term debt. The main sources of funds for the Parent Company are dividends and management fees from subsidiaries, repayments of advances to subsidiaries, and proceeds from the issuance of equity and long-term debt. The primary uses of funds by the Parent Company are for investments in subsidiaries, advances to subsidiaries, dividend payments to common and preferred shareholders, retirement of common stock and payments on long-term debt.
 
Liquidity at the Parent Company is more susceptible to market disruptions. BB&T prudently manages cash levels at the Parent Company to cover a minimum of one year of projected cash outflows which includes unfunded external commitments, debt service, common and preferred dividends and scheduled debt maturities without the benefit of any new cash infusions. Generally, BB&T maintains a significant buffer above the projected one year of cash outflows. In determining the buffer, BB&T considers cash requirements for common and preferred dividends, unfunded commitments to affiliates, being a source of strength to its banking subsidiary and being able to withstand sustained market disruptions that could limit access to the capital markets. At June 30, 2017 and December 31, 2016, the Parent Company had 30 months and 25 months, respectively, of cash on hand to satisfy projected contractual cash outflows, and 21 months and 19 months, respectively, taking into account common stock dividends.

63



Branch Bank
 
BB&T carefully manages liquidity risk at Branch Bank. Branch Bank’s primary source of funding is customer deposits. Continued access to customer deposits is highly dependent on the confidence the public has in the stability of the bank and its ability to return funds to the client when requested. BB&T maintains a strong focus on its reputation in the market to ensure continued access to client deposits. BB&T integrates its risk appetite into its overall risk management framework to ensure the bank does not exceed its risk tolerance through its lending and other risk taking functions and thus risk becoming undercapitalized. BB&T believes that sufficient capital is paramount to maintaining the confidence of its depositors and other funds providers. BB&T has extensive capital management processes in place to ensure it maintains sufficient capital to absorb losses and maintain a highly capitalized position that will instill confidence in the bank and allow continued access to deposits and other funding sources. Branch Bank monitors many liquidity metrics including funding concentrations, diversification, maturity distribution, contingent funding needs and ability to meet liquidity requirements under times of stress.

Branch Bank has several major sources of funding to meet its liquidity requirements, including access to capital markets through issuance of senior or subordinated bank notes and institutional CDs, access to the FHLB system, dealer repurchase agreements and repurchase agreements with commercial clients, access to the overnight and term Federal funds markets, use of a Cayman branch facility, access to retail brokered CDs and a borrower in custody program with the FRB for the discount window. At June 30, 2017, Branch Bank has approximately $77.0 billion of secured borrowing capacity, which represents approximately 7.3 times the amount of one year wholesale funding maturities.

Capital
 
The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. BB&T’s principal goals related to the maintenance of capital are to provide adequate capital to support BB&T’s risk profile consistent with the Board-approved risk appetite, provide financial flexibility to support future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, achieve optimal credit ratings for BB&T and its subsidiaries and provide a competitive return to shareholders. Risk-based capital ratios, which include Tier 1 Capital, Total Capital and Tier 1 Common Equity, are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.
 
Management regularly monitors the capital position of BB&T on both a consolidated and bank level basis. In this regard, management’s overriding policy is to maintain capital at levels that are in excess of the capital targets, which are above the regulatory "well capitalized" levels. Management has implemented stressed capital ratio minimum targets to evaluate whether capital ratios calculated with planned capital actions are likely to remain above minimums specified by the FRB for the annual CCAR. Breaches of stressed minimum targets prompt a review of the planned capital actions included in BB&T’s capital plan.
Table 17
BB&T's Capital Targets
 
 
 
 
 
 
 
Operating Target
 
Stressed Target
CET1 to risk-weighted assets
 
8.5
%
 
6.0
%
Tier 1 capital to risk-weighted assets
 
10.0

 
7.5

Total capital to risk-weighted assets
 
12.0

 
9.5

Leverage ratio
 
8.0

 
5.5

 
Table 18
Capital Requirements Under Basel III
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Minimum Capital
 
Well-Capitalized
 
Minimum Capital Plus Capital Conservation Buffer
 
BB&T Target
 
 
 
 
2017
 
2018
 
2019 (1)
 
CET1 to risk-weighted assets
4.5
%
 
6.5
%
 
5.750
%
 
6.375
%
 
7.000
%
 
8.5
%
Tier 1 capital to risk-weighted assets
6.0

 
8.0

 
7.250

 
7.875

 
8.500

 
10.0

Total capital to risk-weighted assets
8.0

 
10.0

 
9.250

 
9.875

 
10.500

 
12.0

Leverage ratio
4.0

 
5.0

 
N/A
 
N/A
 
N/A
 
8.0

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


64


While nonrecurring events or management decisions may result in the Company temporarily falling below its operating minimum guidelines for one or more of these ratios, it is management’s intent through capital planning to return to these targeted operating minimums within a reasonable period of time. Such temporary decreases below the operating minimums shown above are not considered an infringement of BB&T’s overall capital policy, provided a return above the minimums is forecast to occur within a reasonable time period.
Table 19
Preliminary Capital Ratios
 
 
 
 
 
(Dollars in millions, except per share data, shares in thousands)
 
Jun 30, 2017
 
Dec 31, 2016
Risk-based:
 
 
 
 
CET1 to risk-weighted assets
 
10.3
%
 
10.2
%
Tier 1 capital to risk-weighted assets
 
12.1

 
12.0

Total capital to risk-weighted assets
 
14.1

 
14.1

Leverage ratio
 
10.1

 
10.0

 
 
 
 
 
Non-GAAP capital measure (1):
 
 

 
 
Tangible common equity per common share
 
$
20.86

 
$
20.18

 
 
 
 
 
Calculation of tangible common equity (1):
 
 
 
 
Total shareholders' equity
 
$
30,349

 
$
29,926

Less:
 
 
 
 
Preferred stock
 
3,053

 
3,053

Noncontrolling interests
 
42

 
45

Intangible assets
 
10,400

 
10,492

Tangible common equity
 
$
16,854

 
$
16,336

 
 
 
 
 
Risk-weighted assets
 
$
177,571

 
$
176,138

Common shares outstanding at end of period
 
808,093

 
809,475

(1)
Tangible common equity and related measures are non-GAAP measures. Management uses these measures to assess the quality of capital and believes that investors may find them useful in their analysis of the Company. These capital measures are not necessarily comparable to similar capital measures that may be presented by other companies.

The Company's estimated CET1 ratio using the Basel III standardized approach on a fully phased-in basis was 10.2% at June 30, 2017 and 10.0% at December 31, 2016. Capital levels remained strong at June 30, 2017.

BB&T declared total common dividends of $0.30 per share during the second quarter of 2017, which resulted in a dividend payout ratio of 38.4%. The Company also completed $160 million of share repurchases during the second quarter of 2017, which resulted in a total payout ratio of 63.8%. The dividend and total payout ratios were 48.0% and 79.8%, respectively, for the year-to-date period ended June 30, 2017.

The Company previously announced that the FRB accepted its capital plan and did not object to its proposed capital actions. Capital actions, which have been approved by BB&T's Board of Directors, include an increase in the quarterly dividend of $0.03 to $0.33 and cumulative share buybacks of up to $1.88 billion from the third quarter of 2017 through the second quarter of 2018. On July 20, 2017, BB&T entered into an accelerated share repurchase agreement for $920 million of BB&T’s common stock, which is expected to be completed in the third quarter of 2017.

Share Repurchase Activity
 
The 2015 Repurchase Plan, announced on June 25, 2015, allows for the repurchase of up to 50 million shares of the Company's common stock. Repurchases under the 2015 Repurchase Plan may be effected through open market purchases or privately negotiated transactions. The timing and exact amount of repurchases will be consistent with the Company's capital plan and subject to various factors, including the Company's capital position, liquidity, financial performance, alternative uses of capital, stock trading price and general market conditions, and may be suspended at any time. The 2015 Repurchase Plan does not have an expiration date. Shares that are repurchased pursuant to the 2015 Repurchase Plan constitute authorized but unissued shares of the Company and are therefore available for future issuances. On July 26, 2016, the Company announced that the Board of Directors authorized up to $640 million of share repurchases over a one-year period beginning with the third quarter of 2016. BB&T repurchased approximately 3.7 million shares for $160 million on the open market during the second quarter of 2017.

65


Table 20
Share Repurchase Activity
 
 
 
 
 
 
 
 
(Shares in thousands)
Total Shares Repurchased
 
Average Price Paid Per Share (1)
 
Total Shares Purchased Pursuant to Publicly-Announced Plan
 
Maximum Remaining Number of Shares Available for Repurchase Pursuant to Publicly-Announced Plan
April 2017
2,280

 
$
43.73

 
2,280

 
31,590

May 2017
1,385

 
43.53

 
1,385

 
30,205

June 2017

 

 

 
30,205

Total
3,665

 
43.65

 
3,665

 
 
(1)
Excludes commissions.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Refer to "Market Risk Management" in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section herein.
 
ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this report, the management of the Company, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective.
 
Changes in Internal Control over Financial Reporting
 
There were no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


66


PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
Refer to the "Commitments and Contingencies" note in the "Notes to Consolidated Financial Statements."
 
ITEM 1A. RISK FACTORS
 
There have been no material changes to the risk factors disclosed in BB&T's Annual Report on Form 10-K for the year ended December 31, 2016. Additional risks and uncertainties not currently known to BB&T or that management has deemed to be immaterial also may materially adversely affect BB&T's business, financial condition, and/or operating results.
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
(c) Refer to "Share Repurchase Activity" in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section herein.
 
ITEM 6. EXHIBITS
10.1
 
BB&T Corporation 2012 Incentive Plan, as amended.
12
 
Statement re: Computation of Ratios.
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
 
XBRL Instance Document.
101.SCH
 
XBRL Taxonomy Extension Schema.
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase.
101.LAB
 
XBRL Taxonomy Extension Label Linkbase.
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase.
101.DEF
 
XBRL Taxonomy Definition Linkbase.
 

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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
BB&T CORPORATION
(Registrant)
 
 
 
 
 
Date:
7/28/2017
 
By:
/s/ Daryl N. Bible
 
 
 
 
Daryl N. Bible
Senior Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
 
 
 
 
 
Date:
7/28/2017
 
By:
/s/ Cynthia B. Powell
 
 
 
 
Cynthia B. Powell
Executive Vice President and Corporate Controller
(Principal Accounting Officer)

 
 
 
 

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EXHIBIT INDEX
 
 
 
 
 
Exhibit No.
 
Description
 
Location
10.1*
 
 
Incorporated herein by reference to Exhibit 10.1 of the Registration Statement on Form S-8, filed May 25, 2017.
12†
 
 
Filed herewith.
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Filed herewith.
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Filed herewith.
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Furnished herewith.
101.INS
 
XBRL Instance Document.
 
Filed herewith.
101.SCH
 
XBRL Taxonomy Extension Schema.
 
Filed herewith.
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase.
 
Filed herewith.
101.LAB
 
XBRL Taxonomy Extension Label Linkbase.
 
Filed herewith.
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase.
 
Filed herewith.
101.DEF
 
XBRL Taxonomy Definition Linkbase.
 
Filed herewith.
* Management compensatory plan or arrangement.
† Exhibit filed with the Securities and Exchange Commission and available upon request.


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