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: September 30, 2015
Commission file number: 1-10853
BB&T CORPORATION
(Exact name of registrant as specified in its charter)
(I.R.S. Employer
Identification No.)
Winston-Salem, North Carolina
(Address of Principal Executive Offices)
(336) 733-2000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
At September 30, 2015, 780,150,285 shares of the Registrant’s common stock, $5 par value, were outstanding.
Glossary of Defined Terms
The following terms may be used throughout this Report, including the consolidated financial statements and related notes.
The accompanying notes are an integral part of these consolidated financial statements.
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, 2014 should be referred to in connection with these unaudited interim consolidated financial statements.
Reclassifications
Certain amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation. Such reclassifications had no effect on previously reported cash flows, shareholders’ equity or net income.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change include the determination of the ACL, determination of fair value for financial instruments, valuation of goodwill, intangible assets and other purchase accounting related adjustments, benefit plan obligations and expenses, and tax assets, liabilities and expense.
Changes in Accounting Principles and Effects of New Accounting Pronouncements
During September 2015, the FASB issued new guidance related to Business Combinations. The new guidance requires acquirers to recognize adjustments to provisional amounts (that are identified during the measurement period) in the reporting period in which the adjustment amounts are determined. The new guidance also requires such amounts to be disclosed in the consolidated financial statements. BB&T early adopted this guidance effective September 30, 2015. The adoption of this guidance was not material to the consolidated financial statements.
During May 2015, the FASB issued new guidance related to Insurance. The new guidance requires insurance companies to provide additional disclosures about the liability for unpaid claims and claim adjustment expenses. This guidance is effective for annual periods beginning after December 15, 2015. BB&T’s insurance operations primarily consist of agency/broker transactions; therefore, the adoption of this guidance is not expected to be material to the consolidated financial statements.
During May 2015, the FASB issued new guidance related to Fair Value Measurement. The new guidance eliminates the requirement to classify in the fair value hierarchy any investments for which fair value is measured at net asset value per share using the practical expedient. This guidance is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.
During April 2015, the FASB issued new guidance related to Internal-Use Software. Under the new guidance, if a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.
During April 2015, the FASB issued new guidance related to Debt Issuance Costs. The new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This guidance is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.
During February 2015, the FASB issued new guidance related to Consolidation. The new guidance provides an additional requirement for a limited partnership or similar entity to qualify as a voting interest entity, amending the criteria for consolidating such an entity and eliminating the deferral provided under previous guidance for investment companies. In addition, the new guidance amends the criteria for evaluating fees paid to a decision maker or service provider as a variable interest and amends the criteria for evaluating the effect of fee arrangements and related parties on a VIE primary beneficiary determination. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.
During May 2014, the FASB issued new guidance related to Revenue from Contracts with Customers. This guidance supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Accounting Standards Codification. The guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. During August 2015, the FASB provided a one-year deferral of the effective date; therefore, the guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.
Effective January 1, 2015, the Company adopted new guidance related to Receivables. The new guidance requires that a government guaranteed mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. The adoption of this guidance was not material to the consolidated financial statements.
Effective January 1, 2015, the Company adopted new guidance related to Repurchase-to-Maturity Transactions and Repurchase Financings. The new guidance changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting. The guidance also requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which results in secured borrowing accounting for the repurchase agreement. The adoption of this guidance was not material to the consolidated financial statements.
Effective January 1, 2015, the Company adopted new guidance related to Investments in Qualified Affordable Housing Projects. The Company used the retrospective method of adoption and has elected the proportional amortization method to account for these investments. The proportional amortization method allows an entity to amortize the initial cost of the investment in proportion to the amount of tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of the provision for income taxes. See Note 13 “Commitments and Contingencies” for the impact of the adoption of this guidance.
NOTE 2. Acquisitions and Divestitures
Susquehanna Bancshares, Inc.
On August 1, 2015, BB&T acquired all of the outstanding stock of Susquehanna, a FHC organized in 1982 under the laws of the Commonwealth of Pennsylvania. Susquehanna conducted its business operations primarily through its commercial bank subsidiary, Susquehanna Bank, which was merged into Branch Bank. Susquehanna also operated other subsidiaries in the mid-Atlantic region to provide a wide range of retail and commercial banking and financial products and services. In addition to Susquehanna Bank, Susquehanna operated a trust and investment company, an asset management company, an investment advisory and brokerage firm, a property and casualty insurance brokerage company and a vehicle leasing company. Susquehanna had 245 banking offices in Pennsylvania, Maryland, New Jersey and West Virginia. BB&T acquired Susquehanna in order to increase BB&T’s market share in these areas.
The acquisition of Susquehanna constituted a business combination. Accordingly, the assets acquired and liabilities assumed are presented at their fair values in the table below. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. These fair value estimates are considered preliminary and are subject to change for up to one year after the closing date of the acquisition as additional information becomes available. Immaterial amounts of the intangible assets recognized are deductible for income tax purposes.
The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above.
Cash, due from banks and federal funds sold: The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets.
Securities: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair value estimates are based on observable inputs including quoted market prices for similar instruments, quoted market prices that are not in an active market or other inputs that are observable in the market. In the absence of observable inputs, fair value is estimated based on pricing models and/or discounted cash flow methodologies.
Loans and leases: Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan, amortization status and current discount rates. Loans were grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns. The discount rate does not include a factor for credit losses as that has been included as a reduction to the estimated cash flows.
CDI: This intangible asset represents the value of the relationships with deposit customers. The fair value was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, reserve requirements and the net maintenance cost attributable to customer deposits. The CDI is being amortized over 10 years based upon the estimated economic benefits received.
Deposits: The fair values used for the demand and savings deposits by definition equal the amount payable on demand at the acquisition date. The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered to the contractual interest rates on such time deposits.
Debt: The fair values of long-term debt instruments are estimated based on quoted market prices for the instrument if available, or for similar instruments if not available, or by using discounted cash flow analyses, based on current incremental borrowing rates for similar types of instruments.
Other Bank and Branch Acquisitions
The following table summarizes the purchase price allocations for certain bank and branch acquisitions. Accordingly, the assets acquired and liabilities assumed are presented at their estimated fair values. In many cases, the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. The fair value estimates for the current-year acquisitions are considered preliminary and are subject to change for up to one year after the closing date of the acquisition as additional information becomes available.
The acquisition of The Bank of Kentucky provided 32 additional retail branches. The UPB of loans acquired from The Bank of Kentucky was $1.3 billion, and immaterial amounts of the intangible assets recognized are deductible for income tax purposes.
BB&T has reached an agreement to acquire National Penn Bancshares, Inc., a Pennsylvania corporation, which is currently expected to occur during 2016 subject to shareholder and regulatory approvals.
Non-Bank Activity
During the second quarter of 2015, BB&T purchased additional ownership interest in AmRisc, LP from the noncontrolling owners for cash and ownership of American Coastal. Since BB&T held a controlling interest in AmRisc, LP prior to this transaction, the total consideration less the establishment of a deferred tax asset was recognized as a charge to shareholders’ equity. BB&T will continue to consolidate AmRisc, LP and recognize a noncontrolling interest for the remaining interests held by the noncontrolling owners. The transfer of the ownership of American Coastal was accounted for as a sale, and the resulting pre-tax loss is included in other income in the Consolidated Statements of Income. The following table summarizes these transactions:
NOTE 3. Securities
BB&T transferred $517 million of HTM securities to AFS during the third quarter of 2015. These securities, which were sold by the end of the third quarter, represented investments in student loans for which there was a significant increase in risk weighting as a result of the implementation of Basel III.
The fair value of securities acquired from the FDIC included non-agency MBS of $812 million and $931 million as of September 30, 2015 and December 31, 2014, respectively, and states and political subdivisions securities of $299 million and $312 million as of September 30, 2015 and December 31, 2014, respectively. Effective October 1, 2014, securities subject to the commercial loss sharing agreement with the FDIC related to the Colonial acquisition were no longer covered by loss sharing; however, any gains on the sale of these securities through September 30, 2017 would be shared with the FDIC. Since these securities are in a significant unrealized gain position, they continue to be effectively covered as any declines in the unrealized gains of the securities down to a contractually specified amount would reduce the liability to the FDIC at the applicable percentage. The contractually-specified amount is the acquisition date fair value less any paydowns, redemptions or maturities and OTTI and totaled approximately $525 million at September 30, 2015. Any further declines below the contractually-specified amount would not be covered.
Certain investments in marketable debt securities and MBS issued by FNMA and FHLMC exceeded 10% of shareholders’ equity at September 30, 2015. The FNMA investments had total amortized cost and fair value of $12.4 billion and $12.3 billion, respectively. The FHLMC investments had total amortized cost and fair value of $5.9 billion.
The following table reflects changes in credit losses on securities with OTTI (excluding securities acquired from the FDIC) where a portion of the unrealized loss was recognized in OCI:
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.
The unrealized losses on GSE securities and agency MBS were the result of increases in market interest rates compared to the date the securities were acquired rather than the credit quality of the issuers or underlying loans.
At September 30, 2015, $51 million of the unrealized loss on states and political subdivisions securities was the result of fair value hedge basis adjustments that are a component of amortized cost. These securities in an unrealized loss position are evaluated for credit impairment through a qualitative analysis of issuer performance and the primary source of repayment. At September 30, 2015, none of these securities had credit impairment.
NOTE 4. Loans and ACL
During the first quarter of 2014, approximately $8.3 billion of nonguaranteed, closed-end, first and second lien position residential mortgage loans, along with the related allowance, were transferred from direct retail lending to residential mortgage to facilitate compliance with a series of new rules related to mortgage servicing associated with first and second lien position mortgages collateralized by real estate.
During the third quarter of 2014, approximately $550 million of loans, which were primarily performing residential mortgage TDRs, with a related ALLL of $57 million were sold for a gain of $42 million. During the fourth quarter of 2014, approximately $140 million of loans, which were primarily residential mortgage NPLs, with a related ALLL of $19 million were sold for a gain of $24 million. Both gains were recognized as reductions to the provision for credit losses.
Effective October 1, 2014, loans subject to the commercial loss sharing agreement with the FDIC related to the Colonial acquisition were no longer covered by loss sharing. At September 30, 2015, these loans had a carrying value of $320 million, a UPB of $524 million and an allowance of $43 million and are included in PCI. Loans with a carrying value of $562 million at September 30, 2015 continue to be covered by loss sharing and are included in PCI.
The following table summarizes the primary reason loan modifications were classified as TDRs and includes newly designated TDRs as well as modifications made to existing TDRs. Balances represent the recorded investment at the end of the quarter in which the modification was made. Rate modifications in this table include TDRs made with below market interest rates that also include modifications of loan structures.
The pre-default balance for modifications that experienced a payment default that had been classified as TDRs during the previous 12 months was $28 million and $22 million for the three months ended September 30, 2015 and 2014, respectively, and $63 million and $60 million for the nine months ended September 30, 2015 and 2014, respectively. Payment default is defined as movement of the TDR to nonaccrual status, foreclosure or charge-off, whichever occurs first.
The increase in unearned income, discounts and net deferred loan fees and costs is due to the acquisition of Susquehanna.
NOTE 5. Goodwill and Other Intangible Assets
The changes in the carrying amounts of goodwill attributable to BB&T’s operating segments are reflected in the table below. During the second quarter of 2015, BB&T sold American Coastal, which resulted in the allocation and write-off of goodwill from the Insurance Services segment.
Goodwill acquired in connection with the acquisition of Susquehanna is included in the Other, Treasury and Corporate segment until the completion of the systems conversion, which is currently expected to occur during the fourth quarter of 2015.
NOTE 6. Loan Servicing
Residential Mortgage Banking Activities
The following tables summarize residential mortgage banking activities. Mortgage and home equity loans managed by BB&T exclude loans serviced for others with no other continuing involvement.
The potential exposure related to losses incurred by the FHA on defaulted loans ranges from $25 million to $105 million.
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the above table, the effect of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another, which may magnify or counteract the effect of the change.
Commercial Mortgage Banking Activities
CRE mortgage loans serviced for others are not included in loans and leases on the accompanying Consolidated Balance Sheets. The following table summarizes commercial mortgage banking activities for the periods presented:
NOTE 7. Deposits
NOTE 8. Long-Term Debt
The effective rates above reflect the impact of cash flow and fair value hedges, as applicable. Subordinated notes with a remaining maturity of one year or greater qualify under the risk-based capital guidelines as Tier 2 supplementary capital, subject to certain limitations.
During the second quarter of 2015, BB&T terminated FHLB advances totaling $931 million, which resulted in a pre-tax loss on early extinguishment of $172 million. During the third quarter of 2014, BB&T terminated FHLB advances totaling $1.1 billion, resulting in a pre-tax loss on early extinguishment of $122 million.
NOTE 9. Shareholders’ Equity
The activity relating to options and RSUs during the period is presented in the following tables:
NOTE 10. AOCI
NOTE 11. Income Taxes
The effective tax rates for the three months ended September 30, 2015 and 2014 were 29.4% and 23.7%, respectively. The effective tax rates for the nine months ended September 30, 2015 and 2014 were 25.6% and 28.7%, respectively. The effective tax rate for the three months ended September 30, 2015 was higher than the corresponding period of 2014 primarily due to the result of the IRS’s examination of tax years 2008-2010 which resulted in a $50 million tax benefit in the third quarter of 2014. The effective tax rate for the nine months ended September 30, 2015 was lower than the corresponding period of 2014 primarily due to adjustments for uncertain tax positions as described below.
In February 2010, BB&T received an IRS statutory notice of deficiency for tax years 2002-2007 asserting a liability for taxes, penalties and interest of approximately $892 million related to the disallowance of foreign tax credits and other deductions claimed by a subsidiary in connection with a financing transaction. BB&T paid the disputed tax, penalties and interest in March 2010 and filed a lawsuit seeking a refund in the U.S. Court of Federal Claims. On September 20, 2013, the court denied the refund claim. BB&T appealed the decision to the U.S. Court of Appeals for the Federal Circuit. On May 14, 2015, the appeals court overturned a portion of the earlier ruling, resulting in the recognition of income tax benefits of $107 million during the second quarter. The remainder of the decision was affirmed. On September 29, 2015, BB&T filed a petition requesting the case be heard by the U.S. Supreme Court.
It is reasonably possible that the litigation associated with the financing transaction may conclude within the next twelve months; however, it is also possible that the appeals process could take longer than one year. Changes in the amount of unrecognized tax benefits, penalties and interest could result in a benefit of up to approximately $596 million.
Effective January 1, 2015, the Company adopted new accounting guidance related to investments in qualified affordable housing projects. See Note 13 “Commitments and Contingencies” for additional information.
NOTE 12. Benefit Plans
BB&T makes contributions to the qualified pension plan in amounts between the minimum required for funding and the maximum amount deductible for federal income tax purposes. Discretionary contributions totaling $126 million were made during 2015. There are no required contributions for the remainder of 2015, though BB&T may elect to make additional contributions.
NOTE 13. Commitments and Contingencies
Effective January 1, 2015, BB&T adopted new guidance related to investments in qualified affordable housing projects and elected the proportional amortization method to account for these investments. The following table summarizes the impact to certain previously reported amounts.
Legal Proceedings
The nature of BB&T’s business ordinarily results in a certain amount of claims, litigation, investigations and legal and administrative cases and proceedings, all of which are considered incidental to the normal conduct of business. BB&T believes it has meritorious defenses to the claims asserted against it in its currently outstanding legal proceedings and, with respect to such legal proceedings, intends to continue to defend itself vigorously, litigating or settling cases according to management’s judgment as to what is in the best interests of BB&T and its shareholders.
On at least a quarterly basis, liabilities and contingencies in connection with outstanding legal proceedings are assessed utilizing the latest information available. For those matters where it is probable that BB&T will incur a loss and the amount of the loss can be reasonably estimated, a liability is recorded in the consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments on at least a quarterly basis. For other matters, where a loss is not probable or the amount of the loss is not estimable, legal reserves are not accrued. While the outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel and available insurance coverage, management believes that the established legal reserves are adequate and the liabilities arising from legal proceedings will not have a material adverse effect on the consolidated financial position, consolidated results of operations or consolidated cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the consolidated financial position, consolidated results of operations or consolidated cash flows of BB&T.
Pledged Assets
Certain assets were pledged to secure municipal deposits, securities sold under agreements to repurchase, borrowings and borrowing capacity, subject to any applicable asset discount, at the FHLB and FRB as well as for other purposes as required or permitted by law. The following table provides the total carrying amount of pledged assets by asset type, of which the majority are pursuant to agreements that do not permit the other party to sell or repledge the collateral. Assets related to employee benefit plans have been excluded from the following table.
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 discussion focuses on the valuation techniques and significant inputs for Level 2 and Level 3 assets and liabilities.
A third-party pricing service is generally utilized in determining the fair value of the securities portfolio. Management independently evaluates the fair values provided by the pricing service through comparisons to other external pricing sources, review of additional information provided by the pricing service and other third party sources for selected securities and back-testing to compare the price realized on any security sales to the daily pricing information received from the pricing service. Fair value measurements are derived from market-based pricing matrices that were developed using observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads and broker quotes. As described by security type below, additional inputs may be used, or some inputs may not be applicable. In the event that market observable data was not available, which would generally occur due to the lack of an active market for a given security, the valuation of the security would be subjective and may involve substantial judgment by management.
Trading securities: Trading securities include various types of debt and equity securities, primarily consisting of debt securities issued by the U.S. Treasury, GSEs, or states and political subdivisions. The valuation techniques used for these investments are more fully discussed below.
U.S. Treasury securities: Treasury securities are valued using quoted prices in active over the counter markets.
Agency MBS: GSE pass-through securities are valued using market-based pricing matrices that reference observable inputs including benchmark TBA security pricing and yield curves that were estimated based on U.S. Treasury yields and certain floating rate indices. The pricing matrices for these securities may also give consideration to pool-specific data supplied directly by the GSE. GSE CMOs are valued using market-based pricing matrices that are based on observable inputs including offers, bids, reported trades, dealer quotes and market research reports, the characteristics of a specific tranche, market convention prepayment speeds and benchmark yield curves as described above.
States and political subdivisions: These securities are valued using market-based pricing matrices that reference observable inputs including MSRB reported trades, issuer spreads, material event notices and benchmark yield curves.
Non-agency MBS: Pricing matrices for these securities are based on observable inputs including offers, bids, reported trades, dealer quotes and market research reports, the characteristics of a specific tranche, market convention prepayment speeds and benchmark yield curves as described above.
Other securities: These securities consist primarily of mutual funds and corporate bonds. These securities are valued based on a review of quoted market prices for assets as well as through the various other inputs discussed previously.
Acquired from FDIC securities: Securities acquired from the FDIC consist of re-remic non-agency MBS, municipal securities and non-agency MBS. State and political subdivision securities and certain non-agency MBS acquired from the FDIC are valued in a manner similar to the approach described above for those asset classes. The re-remic non-agency MBS, which are categorized as Level 3, are valued based on broker dealer quotes that reflected certain unobservable market inputs.
LHFS: Certain mortgage loans are originated to be sold to investors, which are carried at fair value. The fair value is primarily based on quoted market prices for securities backed by similar types of loans. The changes in fair value of these assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage LHFS.
Residential MSRs: Residential MSRs are valued using an OAS valuation model to project cash flows over multiple interest rate scenarios, which are then discounted at risk-adjusted rates. The model considers portfolio characteristics, contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. Fair value estimates and assumptions are compared to industry surveys, recent market activity, actual portfolio experience and, when available, other observable market data.
Derivative assets and liabilities: The fair values of derivatives are determined based on quoted market prices and internal pricing models that are primarily sensitive to market observable data. The fair values of interest rate lock commitments, which are related to mortgage loan commitments and are categorized as Level 3, are based on quoted market prices adjusted for commitments that are not expected to fund and include the value attributable to the net servicing fees.
Private equity and similar investments: Private equity and similar investments are measured at fair value based on the investment’s net asset value. In many cases there are no observable market values for these investments and therefore management must estimate the fair value based on a comparison of the operating performance of the company to multiples in the marketplace for similar entities. This analysis requires significant judgment, and actual values in a sale could differ materially from those estimated.
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.
BB&T’s policy is to recognize transfers in and transfers out of Levels 1, 2 and 3 as of the end of a reporting period. Transfers involving Level 3 are presented in the preceding tables. There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2015 or 2014.
The majority of private equity and similar investments are in SBIC qualified funds, which primarily focus on equity and subordinated debt investments in privately-held middle market companies. The majority of these investments are not redeemable and distributions are received as the underlying assets of the funds liquidate. The timing of distributions, which are expected to occur on various dates through 2025, is uncertain and dependent on various events such as recapitalizations, refinance transactions and ownership changes among others. Excluding the investment of future funds, these investments have an estimated weighted average remaining life of approximately three years; however, the timing and amount of distributions may vary significantly. 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 11x, with a weighted average of 8x, at September 30, 2015.
Excluding government guaranteed, LHFS that were nonaccrual or 90 days or more past due and still accruing interest were not material at September 30, 2015.
Refer to Note 2 “Acquisitions and Divestitures” for fair value measurements related to acquisitions.
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.
FDIC loss share receivable and payable: The fair values of the receivable and payable are estimated using discounted cash flow analyses, applying a risk free interest rate that is adjusted for the uncertainty in the timing and amount of the cash flows. The expected cash flows to/from the FDIC related to loans were estimated using the same assumptions that were used in determining the accounting values for the related loans. The expected cash flows to/from the FDIC related to securities are based upon the fair value of the related securities and the payment that would be required if the securities were sold for that amount. The loss share agreements are not transferrable and, accordingly, there is no market for the receivable or payable.
Deposit liabilities: The fair values for demand deposits are equal to the amount payable on demand. Fair values for CDs are estimated using a discounted cash flow calculation that applies current interest rates to aggregate expected maturities. BB&T has developed long-term relationships with its deposit customers, commonly referred to as CDIs, that have not been considered in the determination of the deposit liabilities’ fair value.
Short-term borrowings: The carrying amounts of short-term borrowings, 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.
NOTE 15. Derivative Financial Instruments
The fair values of derivatives in a gain or loss position are presented on a gross basis in other assets or other liabilities, respectively, in the Consolidated Balance Sheets. Cash collateral posted for derivatives in a loss position is reported as restricted cash. Derivatives with dealer counterparties at both the bank and the parent company are governed by the terms of ISDA Master netting agreements and Credit Support Annexes. The ISDA Master agreements allow counterparties to offset trades in a gain against trades in a loss to determine net exposure and allows for the right of setoff in the event of either a default or an additional termination event. Credit Support Annexes govern the terms of daily collateral posting practices. Collateral practices mitigate the potential loss impact to affected parties by requiring liquid collateral to be posted on a scheduled basis to secure the aggregate net unsecured exposure. In addition to collateral, the right of setoff allows counterparties to offset net derivative values with a defaulting party against certain other contractual receivables from or obligations due to the defaulting party in determining the net termination amount. No portion of the change in fair value of derivatives designated as hedges has been excluded from effectiveness testing. The ineffective portion was immaterial for all periods presented.
Derivatives Credit Risk – Dealer Counterparties
Credit risk related to derivatives arises when amounts receivable from a counterparty exceed those payable to the same counterparty. The risk of loss is addressed by subjecting dealer counterparties to credit reviews and approvals similar to those used in making loans or other extensions of credit and by requiring collateral. Dealer counterparties operate under agreements to provide cash and/or liquid collateral when unsecured loss positions exceed negotiated limits.
Derivative contracts with dealer counterparties settle on a monthly, quarterly or semiannual basis, with daily movement of collateral between counterparties required within established netting agreements. BB&T only transacts with dealer counterparties with strong credit standings.
Derivatives Credit Risk – Central Clearing Parties
Certain derivatives are cleared through central clearing parties that require initial margin collateral, as well as collateral for trades in a net loss position. Initial margin collateral requirements are established by central clearing parties on varying bases, with such amounts generally designed to offset the risk of non-payment. Initial margin is generally calculated by applying the maximum loss experienced in value over a specified time horizon to the portfolio of existing trades. The central clearing party used for TBA transactions does not post variation margin to the bank.
NOTE 16. Computation of EPS
NOTE 17. Operating Segments
As a result of new qualified mortgage regulations, during January 2014 approximately $8.3 billion of closed-end, first and second lien position residential mortgage loans were transferred from Community Banking to Residential Mortgage Banking based on a change in how these loans are managed. In addition, $319 million of related goodwill was also transferred.
Financial data related to Susquehanna is included in the Other, Treasury and Corporate segment until the completion of the systems conversion, which is currently expected to occur during the fourth quarter of 2015.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BB&T is a financial holding company organized under the laws of North Carolina. BB&T conducts operations through its principal bank subsidiary, Branch Bank, and its nonbank subsidiaries.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the financial condition, results of operations, business plans and the future performance of BB&T that are based on the beliefs and assumptions of the management of BB&T and the information available to management at the time that these disclosures were prepared. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “projects,” “may,” “will,” “should,” “could,” and other similar expressions are intended to identify these forward-looking statements. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. Such factors include, but are not limited to, the following:
These and other risk factors are more fully described in this report and in BB&T’s Annual Report on Form 10-K for the year ended December 31, 2014 under the sections entitled “Item 1A. Risk Factors” and from time to time, in other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Actual results may differ materially from those expressed in or implied by any forward-looking statements. Except to the extent required by applicable law or regulation, BB&T undertakes no obligation to revise or update publicly any forward-looking statements for any reason.
Regulatory Considerations
BB&T and its affiliates are subject to numerous examinations by federal and state banking regulators, as well as the SEC, FINRA, and various state insurance and securities regulators. BB&T has from time to time received requests for information from regulatory authorities in various states, including state insurance commissions and state attorneys general, securities regulators and other regulatory authorities, concerning their business practices. Such requests are considered incidental to the normal conduct of business. Refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2014 for additional disclosures with respect to laws and regulations affecting BB&T.
DIF Assessment
During October 2015, the FDIC issued a proposal that will lower the regular assessment rates for all banks when the DIF reserve ratio reaches 1.15%, which the FDIC expects will occur in early 2016. The proposed rule would also impose on banks with at least $10 billion in assets a surcharge of 4.5 cents per $100 of the assessment base, after making certain adjustments, for a period currently estimated by the FDIC to be two years. BB&T estimates that the net effect of the proposed changes would increase the total annual assessment by an amount within the range of $40 million to $50 million.
Amendments to the Capital Plan and Stress Test Rules
During 2014, the FRB amended the start date of the capital plan and stress test cycles from October 1 to January 1 of the following calendar year. The FRB also amended the capital plan rule to limit a BHC’s ability to make capital distributions to the extent the BHC’s actual capital issuances are less than the amount indicated in its capital plan under baseline conditions, measured on a quarterly basis.
The FDIC revised the annual stress testing requirements for state non-member banks and state savings associations with total consolidated assets of more than $10 billion. FDIC regulations require covered banks to conduct annual stress tests, report the results of such stress tests to the FDIC and the FRB and publicly disclose a summary of the results. The FDIC modified the “as-of” dates for financial data that covered banks will use to perform their stress tests as well as the reporting dates and public disclosure dates of the annual stress tests. The revisions to the regulations will become effective January 1, 2016.
HMDA Regulations
The CFPB has issued final rules changing the reporting requirements for mortgage lenders under the HMDA. The new rules expand the range of transactions subject to these requirements to include most securitized residential mortgage closed-end loans and lines. The rules also increase the overall amount of data required to be collected and submitted, including additional data points about the applicable loans and expanded data about the borrowers. BB&T will be required to begin collecting the expanded data on January 1, 2018.
Liquidity Coverage Ratio: Liquidity Risk Measurement Standards
The OCC, the FRB, and the FDIC have adopted a final rule that implements a quantitative liquidity requirement consistent with the liquidity coverage ratio standard established by the BCBS. Refer to “Market Risk Management” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section herein for additional information.
Foreign Account Tax Compliance Act and Conforming Regulations
During 2014, the IRS issued Notice 2014-33 (the “Notice”) regarding FATCA and its related withholding provisions. The Notice announces that calendar years 2014 and 2015 will be regarded as a transition period for purposes of IRS enforcement and administration with respect to the implementation of FATCA by withholding agents, foreign financial institutions and other entities with IRC chapter 4 responsibilities. The Notice also announces the IRS’s intention to further amend the regulations under Sections 1441, 1442, 1471, and 1472 of the IRC. Prior to the IRS issuing these amendments, taxpayers may rely on the provisions of the Notice regarding the proposed amendments to the regulations. The transition period and other guidance described in the Notice are intended to facilitate an orderly transition for withholding agent and foreign financial institution compliance with FATCA’s requirements and respond to comments regarding certain aspects of the regulations under chapters 3 and 4 of the IRC. BB&T will be fully compliant with the new FATCA regulations and its related provisions by the applicable effective date of December 31, 2015.
U.S. Implementation of Basel III
The Basel III capital requirements became effective on January 1, 2015. As a result, capital information presented for periods after December 31, 2014 is based on the Basel III transitional requirements, while capital data for periods prior to January 1, 2015 is based on the former requirements under Basel I. See the section titled “Capital” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information.
Pay Ratio Disclosure
The SEC has adopted amendments to Item 402 of Regulation S-K to require disclosure of: (1) the median compensation amount of the annual total compensation of all employees of a registrant (excluding the CEO), (2) the annual total compensation of that registrant’s CEO and (3) the ratio of the median of the annual total compensation of all employees (excluding the CEO) to the annual total compensation of the CEO. The rules will require such pay ratio disclosure information for the first fiscal year beginning on or after January 1, 2017.
Executive Summary
Consolidated net income available to common shareholders for the third quarter of 2015 was $492 million, a decrease of $20 million compared to the same quarter of 2014. On a diluted per common share basis, earnings for the third quarter of 2015 were $0.64, compared to $0.70 for the earlier quarter.
BB&T’s results of operations for the third quarter of 2015 produced an annualized return on average assets of 1.04%, an annualized return on average risk-weighted assets of 1.32% and an annualized return on average common shareholders’ equity of 8.14%, compared to earlier quarter ratios of 1.18%, 1.56% and 9.45%, respectively. BB&T’s return on average tangible common shareholders’ equity was 13.23% for the third quarter of 2015, compared to 14.83% for the earlier quarter.
Effective January 1, 2015, BB&T adopted new guidance related to the accounting for investments in qualified affordable housing projects. For periods prior to January 1, 2015, amortization expense related to qualifying investments in low income housing tax credits was reclassified from other income to provision for income taxes, and the amount of amortization and tax benefits recognized was revised as a result of the adoption of the proportional amortization method. See Note 13 “Commitments and Contingencies” for additional information.
On August 1, 2015, BB&T completed the acquisition of Susquehanna, which contributed approximately $130 million in net interest income, $21 million in noninterest income and $74 million of noninterest expenses (excluding merger-related and restructuring charges) and provided $14.1 billion in deposits and $12.9 billion in loans as of the acquisition date.
Total revenues on a FTE basis were $2.5 billion for the third quarter of 2015, up $155 million compared to the earlier quarter due to a $116 million increase in net interest income and $39 million increase in noninterest income, largely the result of the Susquehanna acquisition.
Net interest margin was 3.35%, compared to 3.38% for the earlier quarter. Average earning assets increased $15.6 billion, or 9.6%, while average interest-bearing liabilities increased $8.8 billion, or 7.4%, both of which were primarily driven by Susquehanna. The annualized yield on the total loan portfolio for the third quarter was 4.31%, a decrease of six basis points compared to the earlier quarter, which primarily reflects lower yields on new loans and continued runoff of higher yielding loans acquired from the FDIC, partially offset by higher yields on Susquehanna loans. The annualized fully taxable-equivalent yield on the average securities portfolio for the third quarter was 2.27%, compared to 2.43% for the earlier period.
The average annualized cost of interest-bearing deposits was 0.24%, a decline of two basis points compared to the earlier quarter. The average annualized rate paid on long-term debt was 2.12%, compared to 2.36% for the earlier quarter. This decrease was the result of lower rates on new issues during the last twelve months and early extinguishments of higher cost FHLB advances.
The $39 million increase in noninterest income was driven by improved FDIC loss share income and investment banking and brokerage fees and commissions. These increases were partially offset by a decline in insurance revenues primarily due to the sale of American Coastal.
Excluding PCI loans, the provision for credit losses was $100 million, compared to $46 million in the earlier quarter, primarily due to a reserve release in the earlier quarter. Net charge-offs for the third quarter of 2015, excluding PCI loans, totaled $107 million, down $35 million compared to the earlier quarter.
Noninterest expense was $1.6 billion for the third quarter of 2015, an increase of $55 million compared to the earlier quarter. This increase was driven by the addition of Susquehanna operating costs and higher personnel expense and merger-related and restructuring charges, partially offset by a decrease in loan-related expense and a loss on the early extinguishment of debt in the earlier quarter.
The provision for income taxes was $222 million for the third quarter of 2015, compared to $172 million for the earlier quarter. This produced an effective tax rate for the third quarter of 2015 of 29.4%, compared to 23.7% for the earlier quarter. The earlier quarter included a $50 million income tax benefit.
During the second quarter of 2015, the Company completed the acquisition of The Bank of Kentucky Financial Corporation, which provided $1.6 billion in deposits and $1.2 billion in loans as of the acquisition date.
Refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2014 for additional information with respect to BB&T’s recent accomplishments and significant challenges.
Analysis Of Results Of Operations
Net Interest Income and NIM
Third Quarter 2015 compared to Third Quarter 2014
Net interest income on a FTE basis was $1.5 billion for the third quarter of 2015, an increase of $116 million or 8.4% compared to the same period in 2014. Interest income increased $109 million, which includes $137 million of interest income related to Susquehanna’s operations for the two months they were included, partially offset by runoff of loans acquired from the FDIC as well as lower yields on new loan originations over the past year. Interest expense declined $7 million, which reflects lower deposit costs and the termination of certain higher-rate FLHB advances.
Net interest margin was 3.35%, compared to 3.38% for the earlier quarter. Average earning assets increased $15.6 billion, or 9.6%, while average interest-bearing liabilities increased $8.8 billion, or 7.4%, both of which were primarily driven by Susquehanna. The annualized yield on the total loan portfolio for the third quarter was 4.31%, a decrease of six basis points compared to the earlier quarter, which primarily reflects lower yields on new loans and continued runoff of higher yielding loans acquired from the FDIC, partially offset by the impact of Susquehanna purchase accounting. The annualized fully taxable-equivalent yield on the average securities portfolio for the third quarter was 2.27%, compared to 2.43% for the earlier period. This decline reflects runoff of balances acquired from the FDIC as well as the impact of market rates on securities.
The average annualized cost of interest-bearing deposits was 0.24%, a decline of two basis points compared to the earlier quarter. The average annualized rate paid on long-term debt was 2.12%, compared to 2.36% for the earlier quarter. This decrease was primarily the result of early extinguishments of higher cost FHLB advances as noted above.
Nine Months of 2015 compared to Nine Months of 2014
Net interest income on a FTE basis was $4.2 billion for the nine months ended September 30, 2015, an increase of $50 million compared to the same period in 2014. The increase in net interest income reflects an $8 million increase in interest income and a $42 million decline in funding costs. The increase in interest income was driven by an increase in average earning assets of $8.3 billion compared to the same period of 2014, partially offset by lower yields. The decline in funding costs was driven by lower long-term debt costs and an improvement in deposit mix, partially offset by higher average interest-bearing liabilities.
The NIM was 3.31% for the nine months ended September 30, 2015, compared to 3.44% for the same period of 2014. The 13 basis point decrease in NIM was due to lower yields on new earning assets and runoff of assets acquired from the FDIC, partially offset by lower funding costs.
The annualized FTE yield on the average securities portfolio for the nine months ended September 30, 2015 was 2.38%, a decrease of seven basis points compared to the annualized yield earned during the same period of 2014.
The annualized FTE yield for the total loan portfolio for the nine months ended September 30, 2015 was 4.24%, compared to 4.46% in the corresponding period of 2014. The decrease in the FTE yield on the total loan portfolio was primarily due to lower yields on new loans due to the low interest-rate environment and the runoff of loans acquired from the FDIC.
The average annualized cost of interest-bearing deposits for the nine months ended September 30, 2015 was 0.24%, compared to 0.26% for the same period in the prior year, primarily reflecting improvements in mix.
The average annualized rate paid on long-term debt for the nine months ended September 30, 2015 was 2.14%, compared to 2.41% for the same period in 2014. This decrease was primarily the result of early extinguishments 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.
Provision for Credit Losses
The provision for credit losses totaled $103 million for the third quarter of 2015, compared to $34 million for the same period of the prior year. During the third quarter of 2014, residential mortgage loans (primarily performing TDRs) with a carrying value of approximately $550 million were sold, which resulted in an ALLL release of $42 million and charge-offs of $15 million. In addition, there was a $26 million increase in the provision for retail other lending subsidiaries, which was the result of higher net charge-offs and an increase in delinquent loan balances, which have a higher loss frequency factor than current loans, compared to the earlier period.
Net charge-offs were $107 million for the third quarter of 2015 and $142 million for the third quarter of 2014. This decline reflects the charge-offs related to the residential mortgage loan sale in the earlier quarter and lower commercial charge-offs. Net charge-offs were 0.32% of average loans and leases on an annualized basis for the third quarter of 2015, compared to 0.48% of average loans and leases for the same period in 2014.
The provision for credit losses totaled $299 million for the nine months ended September 30, 2015, compared to $168 million for the same period of 2014. The increase was primarily driven by the commercial and industrial portfolio, which had $56 million of higher provision expense due to stabilization in the rate of improvement in credit trends as well as risk considerations related to the energy sector. The increase was also driven by the provision related to the RUFC, which increased $35 million due to higher commitment balances and credit trend stabilization. In addition, the prior period included a reserve release for residential mortgage due to the previously described loan sale.
Net charge-offs for the nine months ended September 30, 2015 were $306 million, compared to $422 million for the nine months ended September 30, 2014. The decrease was driven by reductions in the commercial and industrial, residential mortgage-nonguaranteed and direct retail lending portfolios of $42 million, $46 million and $16 million, respectively. Net charge-offs were 0.33% of average loans and leases on an annualized basis for the nine months ended September 30, 2015, compared to 0.48% of average loans and leases for the same period in 2014.
Noninterest Income
Noninterest income for the third quarter of 2015 increased $39 million compared to the earlier quarter. This increase was primarily driven by a $29 million improvement in FDIC loss share income primarily due to lower negative accretion related to loans and a $10 million increase in investment banking and brokerage fees and commissions primarily due to capital markets activity. Insurance income declined $31 million, primarily due to the sale of American Coastal. Other income was flat compared to the earlier quarter as $25 million of higher income on partnership investments was largely offset by $24 million of lower income related to assets for certain post-employment benefits.
The remaining categories of noninterest income totaled $502 million for the current quarter, compared to $471 million for the third quarter of 2014, reflecting the impact of acquisition activity.
Noninterest income for the nine months ended September 30, 2015 totaled $3.0 billion, compared to $2.8 billion for the same period in 2014, an increase of $170 million. This change was primarily driven by higher mortgage banking income, FDIC loss share income, investment banking and brokerage fees and commissions and operating lease income, partially offset by reductions in other income and insurance income.
Mortgage banking income totaled $351 million for the nine months ended September 30, 2015, compared to $267 million for the same period of the prior year. This $84 million increase reflects a higher volume of residential and commercial mortgage loan sales and higher net mortgage servicing income.
FDIC loss share income, net was $58 million better than the prior year, primarily due to lower negative accretion related to acquired loans in the current period as well as the impact of the offset to the provision for loans acquired from the FDIC.
Investment banking and brokerage fees and commissions totaled $307 million for the first nine months of 2015, up $32 million compared to the first nine months of 2014, primarily due to higher volume. Operating lease income was $91 million for the first nine months of 2015, which is an increase of $25 million primarily due to portfolio growth.
Other income totaled $226 million for the nine months ended September 30, 2015, compared to $260 million for the comparable prior year period. This decline was primarily due to a $26 million pre-tax loss on the sale of American Coastal during the second quarter of 2015.
Insurance income was $1.2 billion for the nine months ended September 30, 2015, a decrease of $18 million compared to the earlier period. This decline primarily reflects lost revenue resulting from the American Coastal sale, partially offset by higher property and casualty insurance commission revenue.
The remaining categories of noninterest income totaled $1.0 billion during the nine months ended September 30, 2015, up $23 million compared with the same period of 2014.
Noninterest Expense
Noninterest expense totaled $1.6 billion for the third quarter of 2015, an increase of $55 million compared to the same period of 2014. The increase was driven by personnel expense, merger-related and restructuring charges and occupancy and equipment expense, partially offset by lower loan-related expense and the prior period loss on early extinguishment of debt.
Personnel expense increased $87 million, primarily due to $37 million for Susquehanna, $23 million in higher salaries and $16 million in higher employee benefits expense. The increase in employee benefits expense was primarily due to $21 million in higher employee health costs and $19 million in higher pension expense, partially offset by $24 million related to certain post-employment benefits.
Merger-related and restructuring charges were up $70 million and occupancy and equipment expense increased $13 million, both primarily related to Susquehanna. Loan-related expenses decreased $27 million largely due to improvements related to residential mortgage.
The earlier quarter included a $122 million loss on the early extinguishment of $1.1 billion of higher cost FHLB advances. Other categories of noninterest expense totaled $414 million for the current quarter, compared to $380 million for the same period of 2014. This increase primarily reflects acquisition activity in recent periods.
Noninterest expenses totaled $4.7 billion for the nine months ended September 30, 2015, an increase of $211 million, or 4.7%, over the same period of the prior year. Primary drivers for the increase in noninterest expense include higher personnel expense, merger-related and restructuring charges and loss on early extinguishment of debt, partially offset by declines in loan-related expense and other expense.
Personnel expense was $2.6 billion for the nine months ended September 30, 2015, an increase of $190 million compared to the nine months ended September 30, 2014. The increase in personnel expense reflects a $56 million increase in pension plan expense that was driven by higher amortization of net actuarial losses and higher service cost. The increase also includes $49 million of higher salaries (including $30 million from Susquehanna), a $46 million increase in employee health costs and a $38 million increase in production-related incentives due to strong performance at certain fee income-generating businesses.
Merger-related and restructuring charges totaled $115 million for the nine months ended September 30, 2015, compared to $28 million for the prior year period. This increase is primarily due to activity related to The Bank of Kentucky, Susquehanna and AmRisc/American Coastal.
The loss on early extinguishment of debt was $172 million for the nine months ended September 30, 2015, compared to $122 million for the comparable prior year period. The loss amounts were based on the difference between market interest rates at the time of extinguishment and the stated rates on the FHLB advances that were extinguished.
Loan-related expense totaled $113 million for the first nine months of 2015, compared to $196 million for the first nine months of 2014. This improvement is primarily due to the $33 million FHA-insured loan indemnification reserve recorded during the earlier period as well as lower mortgage loan servicing claims activity in the current period.
Other expense totaled $654 million for the first nine months of 2015, compared to $713 million for the same period of 2014. This decline is primarily due to an $85 million charge recognized in the earlier period related to FHA-insured loan originations, partially offset by $19 million of higher depreciation on property held for operating leases and $10 million of other expense from Susquehanna.
Other categories of noninterest expense totaled $1.0 billion for the nine months ended September 30, 2015, an increase of $26 million compared to the same period of 2014.
Provision for Income Taxes
The provision for income taxes was $222 million for the third quarter of 2015, compared to $172 million for the earlier quarter. This produced an effective tax rate for the third quarter of 2015 of 29.4%, compared to 23.7% for the earlier quarter. The earlier quarter included a $50 million income tax benefit as a result of developments in an IRS examination of tax years 2008-2010.
The provision for income taxes was $543 million for the nine months ended September 30, 2015, compared to $644 million for the same period of the prior year. BB&T’s effective income tax rate for the nine months ended September 30, 2015 was 25.6%, compared to 28.7% for the same period of the prior year. The current year-to-date period includes a tax benefit of $107 million as a result of an appeals court ruling related to the Company’s ongoing case regarding the disallowance of foreign tax credits and other deductions claimed by a subsidiary in connection with a financing transaction. The prior year period includes net tax benefits totaling $36 million resulting from developments in an IRS examination of tax years 2008-2010.
Refer to Note 11 “Income Taxes” in the “Notes to Consolidated Financial Statements” for a discussion of uncertain tax positions and other tax matters.
Segment Results
See Note 17 “Operating Segments” in the “Notes to Consolidated Financial Statements” contained herein and BB&T’s Annual Report on Form 10-K for the year ended December 31, 2014, for additional disclosures related to BB&T’s reportable business segments. Fluctuations in noninterest income and noninterest expense incurred directly by the segments are more fully discussed in the “Noninterest Income” and “Noninterest Expense” sections above.
The financial information related to the former Susquehanna’s operations are included in the Other, Treasury & Corporate segment until the systems conversion, which is scheduled to take place in the fourth quarter of 2015.
Community Banking
Community Banking serves individual and business clients by offering a variety of loan and deposit products and other financial services. The segment is primarily responsible for acquiring and maintaining client relationships.
Community Banking net income was $264 million for the third quarter of 2015, an increase of $36 million compared to the earlier quarter. Net income results include the impact of the acquisition of additional retail branches in Texas in the first quarter of 2015 and The Bank of Kentucky in the second quarter of 2015. Segment net interest income increased $39 million, primarily driven by commercial and retail loan growth and deposit growth resulting from the acquisitions, partially offset by lower interest rates on new commercial loans. Noninterest income decreased $4 million, primarily due to lower service charges on deposits. The allocated provision for credit losses decreased $48 million as the result of lower net charge-offs and an improvement in credit trends in the commercial loan portfolio. Noninterest expense increased $25 million driven by higher salary, pension, and occupancy and equipment expense due to the acquisitions as well as higher franchise tax expense.
Residential Mortgage Banking
Residential Mortgage Banking retains and services mortgage loans originated by BB&T as well as those purchased from various correspondent originators. Mortgage loan products include fixed and adjustable-rate government guaranteed and conventional loans for the purpose of constructing, purchasing or refinancing residential properties. Substantially all of the properties are owner-occupied.
Residential Mortgage Banking net income was $60 million for the third quarter of 2015, a decrease of $20 million compared to the earlier quarter. Segment net interest income decreased $11 million, primarily the result of lower average loan balances due to the current strategy of selling substantially all conforming mortgage loan production. Noninterest income increased $10 million driven by an increase in gains on mortgage loan production and sales as a result of higher saleable lock volumes and margins. The allocated provision for credit losses was $7 million in the third quarter of 2015, compared to a benefit of $48 million in the earlier quarter. Earlier quarter results reflect the benefit of the sale of approximately $550 million of residential mortgage loans, which resulted in an ALLL release of $42 million. Noninterest expense decreased $24 million compared to the earlier quarter, which primarily reflects lower foreclosure-related expense.
Dealer Financial Services
Dealer Financial Services primarily originates loans to consumers for the purchase of automobiles. These loans are originated on an indirect basis through approved franchised and independent automobile dealers throughout BB&T’s market area through BB&T Dealer Finance, and on a national basis through Regional Acceptance Corporation. Dealer Financial Services also originates loans for the purchase of recreational and marine vehicles and, in conjunction with the Community Bank, provides financing and servicing to dealers for their inventories.
Dealer Financial Services net income was $43 million for the third quarter of 2015, a decrease of $8 million compared to the earlier quarter. Segment net interest income increased $8 million, primarily driven by growth in the Regional Acceptance loan portfolio and the inclusion of dealer floor plan loans in the segment in the first quarter of 2015, partially offset by lower interest rates on new loans. The allocated provision for credit losses increased $14 million, primarily due to an increase in loss severity related to the Regional Acceptance loan portfolio. Noninterest expense increased $6 million driven by higher personnel and loan processing expense.
Specialized Lending
Specialized Lending consists of businesses that provide specialty finance alternatives to commercial and consumer clients including: commercial finance, mortgage warehouse lending, tax-exempt financing for local governments and special-purpose districts, equipment leasing, full-service commercial mortgage banking, commercial and retail insurance premium finance, and dealer-based financing of equipment for consumers and small businesses.
Specialized Lending net income was $62 million for the third quarter of 2015, a decrease of $9 million compared to the earlier quarter. Noninterest income decreased $4 million driven by lower commercial mortgage income and lower gains on finance leases, partially offset by higher operating lease income. The allocated provision for credit losses increased $5 million primarily due to higher net charge-offs in the commercial finance loan portfolio. Noninterest expense increased $8 million, primarily due to higher personnel expense and higher depreciation of property under operating leases.
Insurance Services
BB&T’s insurance agency / brokerage network is the fifth largest in the United States and sixth largest in the world. Insurance Services provides property and casualty, life and health insurance to businesses and individual clients. It also provides small business and corporate products, such as workers compensation and professional liability, as well as surety coverage and title insurance.
Insurance Services net income was $21 million for the third quarter of 2015, a decrease of $15 million compared to the earlier quarter. Insurance Service’s noninterest income decreased $34 million, which primarily reflects lower direct commercial property and casualty insurance premiums due to the sale of American Coastal. Noninterest expense decreased $13 million driven by lower business referral and insurance claims expense primarily related to the sale of American Coastal and lower operating charge-offs.
Financial Services
Financial Services provides personal trust administration, estate planning, investment counseling, wealth management, asset management, employee benefits services, corporate banking and corporate trust services to individuals, corporations, institutions, foundations and government entities. In addition, Financial Services offers clients investment alternatives, including discount brokerage services, equities, fixed-rate and variable-rate annuities, mutual funds and governmental and municipal bonds through BB&T Investment Services, Inc. The segment also includes BB&T Securities, a full-service brokerage and investment banking firm, the Corporate Banking Division, which originates and services large corporate relationships, syndicated lending relationships and client derivatives, and BB&T’s consolidated SBIC funds, which constitute the significant majority of BB&T’s private equity investments.
Financial Services net income was $83 million for the third quarter of 2015, an increase of $14 million compared to the earlier quarter. Segment net interest income increased $22 million driven by Corporate Banking and BB&T Wealth loan and deposit growth and higher funding spreads, partially offset by lower interest rates on new loans. Noninterest income increased $36 million due to higher capital market fees, investment commissions and brokerage fees and income from SBIC private equity investments. The allocated provision for credit losses increased $15 million as the result of Corporate Banking loan growth, portfolio mix and risk expectations related to the oil and energy sector. Noninterest expense increased $20 million compared to the earlier quarter, primarily driven by higher personnel, occupancy and equipment and professional services expense as a result of increased revenue-producing activities.
Other, Treasury & Corporate
Net income in Other, Treasury & Corporate can vary due to the changing needs of the Corporation, including the size of the investment portfolio, the need for wholesale funding and income received from derivatives used to hedge the balance sheet.
In the third quarter of 2015, Other, Treasury & Corporate net income decreased $18 million compared to the earlier quarter. Segment net interest income increased $54 million driven primarily by the acquisition of Susquehanna and the inclusion of its financial results in the segment. Noninterest income increased $34 million, primarily due to improved FDIC loss share income and higher service charges on deposits primarily related to Susquehanna. The allocated provision for credit losses was a benefit of $4 million in the third quarter of 2015, compared to a benefit of $32 million in the earlier quarter. This $28 million increase primarily reflects the impact of the quarterly reassessment of expected future cash flows on the acquired from FDIC and PCI loan portfolio and a $22 million release in the reserve for unfunded lending commitments driven by improvements related to the mix of lines of credit, letters of credit and bankers’ acceptances in the earlier quarter. Noninterest expense increased $27 million, primarily due to higher salary, employee insurance, occupancy and equipment expense primarily related to Susquehanna as well as merger-related charges, partially offset by the previously disclosed $122 million loss on early extinguishment of FLHB advances in the earlier quarter. Allocated corporate expense decreased by $14 million compared to the earlier quarter.
Community Banking net income was $708 million for the nine months ended September 30, 2015, an increase of $46 million compared to the same period of the prior year. Net income results include the impact of the acquisition of additional retail branches in Texas in the first quarter of 2015 and the Bank of Kentucky in the second quarter of 2015. Segment net interest income increased $34 million, primarily driven by growth in commercial real estate and direct retail loans partially due to the acquisitions, partially offset by lower interest rates on new loans and lower funding spreads on deposits. Noninterest income decreased $23 million driven by lower service charges on deposits, international factoring commissions and letter of credit fees. Intersegment referral fee income increased $18 million driven by higher loan referrals to the Residential Mortgage Banking segment and higher capital markets and investment services referrals to the Financial Services segment. The allocated provision for credit losses decreased $75 million as a result of lower commercial and retail loan net charge-offs. Noninterest expense increased $21 million driven by higher incentive, pension and franchise tax expense and merger-related charges. Allocated corporate expense increased $13 million driven by internal business initiatives.
Residential Mortgage Banking net income was $196 million for the nine months ended September 30, 2015, an increase of $75 million compared to the same period of the prior year. Segment net interest income decreased $37 million, primarily the result of lower interest rates on new LHFS and lower LHFI balances reflecting the current strategy of selling substantially all conforming mortgage loan production. Noninterest income increased $67 million, driven by higher gains on residential mortgage loan production and sales and an increase in net MSR income. The allocated provision for credit losses reflected a benefit of $2 million in the first nine months of 2015, compared to a benefit of $69 million in the earlier period, partially attributable to stabilization in the rate of improvement in credit trends. Earlier period results reflected the benefit of the sale of approximately $550 million of residential mortgage TDRs. Noninterest expense decreased $157 million, which primarily reflects the impact of adjustments totaling $118 million relating to the previously disclosed FHA-insured loan exposures in the earlier period. The decrease in noninterest expense was also partially attributable to lower salary and other loan processing expense.
Dealer Financial Services net income was $137 million for the nine months ended September 30, 2015, a decrease of $12 million compared to the same period of the prior year. Segment net interest income increased $29 million, primarily driven by growth in the Dealer Finance and Regional Acceptance loan portfolios and the inclusion of dealer floor plan loans in the segment results beginning in the first quarter of 2015. The allocated provision for credit losses increased $19 million, primarily due to higher expectations of loss severity related to the nonprime automobile loan portfolio, partially offset by loan growth adjustments. Noninterest expense increased $23 million driven by higher personnel, professional services, loan processing and other expenses.
Specialized Lending net income was $189 million for the nine months ended September 30, 2015, a decrease of $1 million compared to the same period of the prior year. Segment net interest income increased $4 million driven by strong growth in mortgage warehouse loans, small ticket consumer loans and commercial mortgage loans, partially offset by lower interest rates on new loans. Noninterest income increased $34 million driven by higher commercial mortgage and operating lease income. The allocated provision for credit losses increased $9 million due to higher net charge-offs in the commercial finance loan portfolio. Noninterest expense increased $31 million, primarily due to higher personnel expense and higher depreciation of property under operating leases.
Insurance Services net income was $146 million for the nine months ended September 30, 2015, a decrease of $22 million compared to the same period of the prior year. Insurance Service’s noninterest income decreased $22 million, which primarily reflects lower direct commercial property and casualty insurance premiums due to the previously disclosed sale of American Coastal, partially offset by higher new and renewal commercial property and casualty insurance business. Noninterest expense decreased $12 million driven by lower business referral and insurance claims expense and lower operating charge-offs, partially offset by higher employee insurance and pension expense and merger-related charges. Allocated corporate expenses increased $18 million primarily due to the centralization of certain corporate support functions during mid-2014.
Financial Services net income was $217 million for the nine months ended September 30, 2015, an increase of $14 million compared to the same period of the prior year. Segment net interest income increased $56 million driven by Corporate Banking and BB&T Wealth loan and deposit growth, partially offset by lower interest rates on new loans and lower funding spreads on deposits. Noninterest income increased $78 million as a result of higher capital market fees, investment commissions and brokerage fees, trust income, commercial unused commitment fees and income from SBIC private equity investments. The allocated provision for credit losses increased $59 million as a result of the Corporate Banking loan portfolio mix and risk expectations related to the oil and energy sector. Noninterest expense increased $50 million compared to the earlier period, driven by higher salary, incentive, pension and professional services expense.
Other, Treasury & Corporate generated a net loss of $12 million for the nine months ended September 30, 2015, compared to net income of $110 million in the same period of the prior year. Segment net interest income decreased $39 million driven by lower PCI loan balances and lower funding spreads. Noninterest income increased $36 million, primarily due to improved FDIC loss share income, partially offset by the loss on the previously disclosed sale of American Coastal. The allocated provision for credit losses reflected a benefit of $5 million in the first nine months of 2015, compared to a benefit of $57 million in the earlier period, primarily due to a release in the RUFC in the earlier period driven by improvements related to the mix of unfunded lending exposures. Noninterest expense increased $251 million, driven by higher salary, employee insurance and pension expense, partially attributable to the Susquehanna acquisition, as well as higher merger-related charges. In addition, noninterest expense for the current year includes the previously disclosed $172 million loss on early extinguishment of FHLB advances, compared to a similar loss of $122 million in the prior year. Intersegment referral fee expenses increased $21 million driven largely by higher mortgage loan referrals shared by other segments. Allocated corporate expense decreased by $42 million compared to the earlier period as a result of higher expense allocations to the other segments related to internal business initiatives and the continued centralization of certain support functions into the respective allocated corporate centers.
Analysis of Financial Condition
Investment Activities
The total securities portfolio was $43.5 billion at September 30, 2015, compared to $41.1 billion at December 31, 2014. As of September 30, 2015, the securities portfolio included $24.2 billion of AFS securities (at fair value) and $19.2 billion of HTM securities (at amortized cost).
The effective duration of the securities portfolio was 3.8 years at September 30, 2015, compared to 3.9 years at December 31, 2014. The duration of the securities portfolio excludes equity securities, auction rate securities and certain non-agency residential MBS that were acquired in the Colonial acquisition.
See Note 3 “Securities” in the “Notes to Consolidated Financial Statements” herein for additional disclosures related to BB&T’s evaluation of securities for OTTI.
Lending Activities
Loans HFI totaled $135.5 billion at September 30, 2015, up $15.6 billion compared to December 31, 2014. The increase in loans HFI reflects the impact of the Susquehanna acquisition, which added $12.9 billion in loans. Commercial and industrial loans grew $6.6 billion during the first nine months of 2015 ($2.7 billion excluding Susquehanna), CRE – income producing properties loans grew $2.6 billion ($507 million excluding Susquehanna), direct retail lending loans grew $2.5 billion ($765 million excluding Susquehanna) and other lending subsidiaries loans grew $1.8 billion ($986 million excluding Susquehanna). In addition, the acquisition of The Bank of Kentucky added $1.2 billion in loans as of the acquisition date.
Average loans held for investment for the third quarter of 2015 were $130.5 billion, up $10.6 billion compared to the second quarter of 2015. Excluding Susquehanna and The Bank of Kentucky, average loans were up $976 million, or 3.2% annualized.
Average commercial and industrial loans increased $3.9 billion during the third quarter of 2015. Susquehanna contributed $2.7 billion of this increase, while The Bank of Kentucky accounted for $534 million of the increase. Excluding the acquisitions, average commercial and industrial loans increased $715 million, or 6.7% on an annualized basis, which reflects continued growth from large corporate clients.
CRE – income producing properties average loan balances increased $1.8 billion, with Susquehanna and The Bank of Kentucky contributing $1.4 billion and $297 million, respectively. CRE – construction and development increased $735 million; excluding the acquisitions, growth for CRE – construction and development was $128 million or 18.4% annualized.
Sales finance average loans increased $879 million as Susquehanna added $1.2 billion in average sales finance balances. Effective July 1, 2015, BB&T implemented a new program that no longer allows dealer markup on retail installment sales contracts, but instead offers a flat-fee dealer compensation program. Other lending subsidiaries average loans increased $1.1 billion, or $609 million (20.6% annualized) excluding Susquehanna. Direct retail lending grew $1.5 billion, or $253 million (11.9% annualized) excluding the acquisitions.
Excluding acquisition activity, average residential mortgage loans decreased $548 million, which reflects the continued strategy to sell conforming residential mortgage loan production. Acquisition activity contributed $1.1 billion of average residential mortgage loans.
Asset Quality
Asset quality remained strong during the third quarter of 2015. NPAs, which include foreclosed real estate, repossessions, NPLs and nonperforming TDRs, totaled $744 million at September 30, 2015, compared to $782 million at December 31, 2014. The decrease in NPAs was primarily driven by a decline in NPLs of $31 million. NPAs as a percentage of loans and leases HFI plus foreclosed property were 0.55% at September 30, 2015, compared with 0.65% at December 31, 2014. The acquisition of Susquehanna added $10 million of NPAs.
The following tables summarize asset quality information for the past five years. As more fully described below, this information has been adjusted to exclude certain components:
Excludes loans held for sale.
Applicable ratios are annualized.
Loans 30-89 days past due and still accruing, excluding government guaranteed GNMA mortgage loans that BB&T has the right but not the obligation to repurchase, totaled $906 million at September 30, 2015, an increase of $10 million compared to December 31, 2014. The increase was primarily due to the Susquehanna acquisition partially offset by improvements in residential mortgage-nonguaranteed due to improved credit quality and the current strategy of selling all conforming loan production.
Loans 90 days or more past due and still accruing totaled $474 million at September 30, 2015, a decrease of $61 million compared to December 31, 2014. This decline is due to improvement in residential mortgage delinquencies and runoff of delinquent loans acquired from the FDIC, partially offset by the addition of PCI loans acquired from Susquehanna, the majority of which were 90 days or more past due.
Problem loans include loans on nonaccrual status or loans that are 90 days or more past due and still accruing as disclosed in Table 5. In addition, for the commercial portfolio segment, loans that are rated special mention or substandard performing are closely monitored by management as potential problem loans. Refer to Note 4 “Loans and ACL” in the “Notes to Consolidated Financial Statements” herein for additional disclosures related to these potential problem loans.
Certain residential mortgage loans have an initial period where the borrower is only required to pay the periodic interest. After the interest-only period, the loan will require the payment of both interest and principal over the remaining term. At September 30, 2015, approximately 3.8% of the outstanding balances of residential mortgage loans were in the interest-only phase, compared to 5.3% at December 31, 2014. Approximately 89.6% of the interest-only balances will begin amortizing within the next three years. Approximately 2.0% of interest-only loans are 30 days or more past due and still accruing and 1.5% are on nonaccrual status.
Home equity lines, which are a component of the direct retail portfolio, generally require interest-only payments during the first 15 years after origination. After this initial period, the outstanding balance begins amortizing and requires the payment of both interest and principal. At September 30, 2015, approximately 74.2% of the outstanding balances of home equity lines were in the interest-only phase. Approximately 9.0% of these balances will begin amortizing within the next three years. The delinquency rate of interest-only lines is similar to amortizing lines.
TDRs occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term and a concession has been granted to the borrower. As a result, BB&T will work with the borrower to prevent further difficulties and ultimately improve the likelihood of recovery on the loan. To facilitate this process, a concessionary modification that would not otherwise be considered may be granted, resulting in classification of the loan as a TDR. Refer to Note 1 “Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” in the Annual Report on Form 10-K for the year ended December 31, 2014 for additional policy information regarding TDRs.
Performing TDRs totaled $976 million at September 30, 2015, a decrease of $74 million compared to December 31, 2014. The following table provides a summary of HFI performing TDR activity:
Allowance for Credit Losses
The ACL, which consists of the ALLL and the RUFC, totaled $1.6 billion at September 30, 2015, an increase of $17 million compared to December 31, 2014. The ALLL amounted to 1.08% of loans and leases held for investment at September 30, 2015, compared to 1.23% at December 31, 2014. This decline reflects the Susquehanna acquisition, which provided $12.9 billion in loans and no related allowance upon the acquisition date as a result of purchase accounting. The UPB of loans acquired from Susquehanna totaled $13.7 billion at the acquisition date. During 2015, $24 million was added to the RUFC as a result of the acquisitions. The ratio of the ALLL to nonperforming loans and leases held for investment was 2.49 times at September 30, 2015, compared to 2.39 times at December 31, 2014.
Net charge-offs totaled $107 million for the third quarter of 2015 and amounted to 0.32% of average loans and leases, compared to $142 million, or 0.48% of average loans and leases in the third quarter of 2014. For the nine months ended September 30, 2015, net charge-offs were $306 million and amounted to 0.33% of average loans and leases compared to $422 million, or 0.48% of average loans and leases in the same period of 2014.
Charge-offs related to PCI loans represent realized losses in certain acquired loan pools that exceed the amounts originally estimated at the acquisition date. This impairment was provided for in prior quarters and therefore the charge-offs have no impact on the Consolidated Statements of Income.
Refer to Note 4 “Loans and ACL” in the “Notes to Consolidated Financial Statements” for additional disclosures.
The following table presents an allocation of the ALLL at September 30, 2015 and December 31, 2014. This allocation of the ALLL is calculated on an approximate basis and is not necessarily indicative of future losses or allocations. The entire amount of the allowance is available to absorb losses occurring in any category of loans and leases.
FDIC Loss Share Receivable and Assets Acquired from the FDIC
In connection with the Colonial acquisition, Branch Bank entered into loss sharing agreements with the FDIC that outline the terms and conditions under which the FDIC will reimburse Branch Bank for a portion of the losses incurred on certain loans, OREO, investment securities and other assets. Refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2014 for additional information regarding the loss sharing agreements and a summary of the accounting treatment for related assets and liabilities. The following table presents the carrying amount of assets by loss share agreement:
As of October 1, 2014, the loss provisions of the commercial loss sharing agreement expired; however, gains on the disposition of assets subject to this agreement will be shared with the FDIC through September 30, 2017. Any gains realized after September 30, 2017 would not be shared with the FDIC. Assets subject to the single family loss sharing agreement are indemnified through August 31, 2019.
The gain/loss sharing coverage related to the acquired AFS securities is based on a contractually-specified value of the securities as of the date of the commercial loss sharing agreement, adjusted to reflect subsequent pay-downs, redemptions or maturities on the underlying securities. The contractually-specified value of these securities was approximately $525 million and $626 million at September 30, 2015 and December 31, 2014, respectively. During the period of gain sharing (October 1, 2014 through September 30, 2017), any decline in the fair value of the acquired AFS securities down to the contractually-specified value would reduce BB&T’s liability to the FDIC at the applicable loss sharing percentage. BB&T is not indemnified for declines in the fair value of the acquired securities below the contractually-specified amount.
The following table provides information related to the carrying amounts and fair values of the components of the FDIC loss share receivable (payable):
The decrease in the carrying amount of the FDIC loss share receivable attributable to loans acquired from the FDIC was due to the receipt of cash from the FDIC, negative accretion due to credit loss improvement and the offset to the provision for loans acquired from the FDIC, which was a benefit for the current year. The change in the carrying amount attributable to the aggregate loss calculation is primarily due to accretion of the expected payment. The fair values are based upon a discounted cash flow methodology that is consistent with the acquisition date methodology. The fair value attributable to acquired loans and the aggregate loss calculation changes over time due to the receipt of cash from the FDIC, updated credit loss assumptions and the passage of time. The fair value attributable to securities acquired from the FDIC is based upon the timing and amount that would be payable to the FDIC should the securities settle at the current fair value at the conclusion of the gain sharing period.
The cumulative amount recognized through earnings related to securities acquired from the FDIC resulted in a liability of $264 million as of September 30, 2015. Securities acquired from the FDIC are classified as AFS and carried at fair market value, and the changes in unrealized gains/losses are offset by the applicable loss share percentage in AOCI, which resulted in an additional pre-tax liability of $282 million as of September 30, 2015. BB&T would only owe these amounts to the FDIC if BB&T were to sell these securities prior to October 1, 2017. BB&T does not currently intend to dispose of the acquired securities.
Following the conclusion of the 10 year loss share period in 2019, should actual aggregate losses, excluding securities, be less than an amount determined in accordance with these agreements, BB&T will pay the FDIC a portion of the difference. As of September 30, 2015, BB&T projects that in 2019 it would owe the FDIC approximately $183 million under the aggregate loss calculation. This liability is expensed over time and BB&T has recognized total expense of approximately $145 million through September 30, 2015.
Deposits
Deposits totaled $147.8 billion at September 30, 2015, an increase of $18.8 billion from December 31, 2014. The acquisition of Susquehanna added $14.1 billion in deposits. Noninterest-bearing deposits increased $5.9 billion (up $3.9 billion excluding Susquehanna), interest checking increased $3.3 billion (up $46 million excluding Susquehanna) and money market and savings increased $11.1 billion (up $6.5 billion excluding Susquehanna). Time deposits declined $1.5 billion (down $5.5 billion excluding Susquehanna). The acquisitions of Texas retail branches and The Bank of Kentucky added $3.5 billion in deposits.
Average deposits for the third quarter were $143.8 billion, an increase of $12.0 billion compared to the prior quarter. The acquisition of Susquehanna contributed $1.5 billion in average noninterest-bearing deposits, $2.2 billion in average interest checking balances, $3.1 billion in average money market and savings and $2.7 billion in average time deposit balances. The acquisition of The Bank of Kentucky accounted for growth of $424 million in average noninterest-bearing deposits, $415 million in average interest checking balances, $285 million in average money market and savings and $245 million in average time deposit balances. Excluding these transactions, average deposits grew $1.2 billion, or 3.6% annualized.
Excluding these acquisitions, noninterest-bearing deposits increased $721 million (6.9% annualized), average money market and savings balances increased $2.1 billion (15.5% annualized), while average interest checking balances declined $924 million (17.5% annualized) and time deposits declined $878 million (23.6% annualized).
Noninterest-bearing deposits represented 30.7% of total average deposits for the third quarter, compared to 31.5% for the prior quarter and 29.2% a year ago. The change in composition from the second quarter to the third quarter was driven by the mix of deposits acquired from Susquehanna and The Bank of Kentucky.
The cost of interest-bearing deposits was 0.24% for the third quarter, flat compared to the prior quarter.
Borrowings
At September 30, 2015, short-term borrowings totaled $2.6 billion, a decrease of $1.1 billion compared to December 31, 2014. Long-term debt totaled $24.9 billion at September 30, 2015, an increase of $1.6 billion from the balance at December 31, 2014. During the third quarter of 2015, $1.2 billion of subordinated bank notes with a stated interest rate of 3.63% were issued. During the second quarter of 2015, higher cost FHLB advances totaling $931 million with a weighted average interest rate of 4.84% were extinguished, and $1.0 billion of medium term senior notes with a stated interest rate of 2.625% were issued.
Shareholders’ Equity
Total shareholders’ equity at September 30, 2015 was $27.3 billion, an increase of $2.9 billion compared to December 31, 2014. This increase was primarily driven by net income of $1.6 billion and stock issuances for acquisitions totaling $2.2 billion, partially offset by common and preferred dividends totaling $690 million and a reduction of $222 million for the purchase of additional ownership interest in AmRisc, LP. BB&T’s book value per common share at September 30, 2015 was $31.56, compared to $30.09 at December 31, 2014.
Merger-Related and Restructuring Activities
In conjunction with the consummation of an acquisition and completion of other requirements, BB&T typically accrues certain merger-related expenses related to estimated severance and other personnel-related costs, costs to terminate lease contracts, costs related to the disposal of duplicate facilities and equipment, costs to terminate data processing contracts and other costs associated with the acquisition. Merger-related and restructuring accruals are re-evaluated periodically and adjusted as necessary. The remaining accruals at September 30, 2015 are expected to be utilized within one year, unless they relate to specific contracts that expire later. The following table presents a summary of BB&T’s merger accrual activity.
Critical Accounting Policies
The accounting and reporting policies of BB&T are in accordance with GAAP and conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. BB&T’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Different assumptions in the application of these policies could result in material changes in the consolidated financial position and/or consolidated results of operations and related disclosures. The more critical accounting and reporting policies include accounting for the ACL, determining fair value of financial instruments, intangible assets, costs and benefit obligations associated with pension and postretirement benefit plans, and income taxes. Understanding BB&T’s accounting policies is fundamental to understanding the consolidated financial position and consolidated results of operations. Accordingly, the critical accounting policies are discussed in detail in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in BB&T’s Annual Report on Form 10-K for the year ended December 31, 2014. Significant accounting policies and changes in accounting principles and effects of new accounting pronouncements are discussed in detail in Note 1 in the “Notes to Consolidated Financial Statements” in BB&T’s Annual Report on Form 10-K for the year ended December 31, 2014. There have been no changes to the significant accounting policies during 2015. Additional disclosures regarding the effects of new accounting pronouncements are included in Note 1 “Basis of Presentation” included herein.
Risk Management
BB&T has a strong and consistent risk culture, based on established risk values, which promotes predictable and consistent performance within an environment of open communication and effective challenge. The strong culture influences all associates in the organization daily and helps them evaluate whether risks are acceptable or unacceptable while making decisions that balance quality, profitability and growth appropriately. BB&T’s effective risk management framework establishes an environment which enables it to achieve superior performance relative to peers, ensures that BB&T is viewed among the safest of banks and assures the operational freedom to act on opportunities.
BB&T ensures that there is an appropriate return for the amount of risk taken, and that the expected return is in line with its strategic objectives and business plan. Risk-taking activities are evaluated and prioritized to identify those that present attractive risk-adjusted returns while preserving asset value. BB&T only undertakes risks that are understood and can be managed effectively. By managing risk well, BB&T ensures sufficient capital is available to maintain and grow core business operations in a safe and sound manner.
Regardless of financial gain or loss to the Company, associates are held accountable if they do not follow the established risk management policies and procedures. Compensation decisions take into account an associate’s adherence to and successful implementation of BB&T’s risk values. The compensation structure supports the Company’s core values and sound risk management practices in an effort to promote judicious risk-taking behavior.
BB&T’s risk culture encourages transparency and open dialogue between all levels in the performance of organizational functions, such as the development, marketing and implementation of a product or service.
The principal types of inherent risk include compliance, credit, liquidity, market, operational, reputation and strategic risks. Refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2014 for disclosures related to each of these risks under the section titled “Risk Management.”
Market Risk Management
The effective management of market risk is essential to achieving BB&T’s strategic financial objectives. As a financial institution, BB&T’s most significant market risk exposure is interest rate risk in its balance sheet; however, market risk also includes product liquidity risk, price risk and volatility risk in BB&T’s BUs. The primary objectives of market risk management are to minimize any adverse effect that changes in market risk factors may have on net interest income, net income and capital and to offset the risk of price changes for certain assets recorded at fair value. At BB&T, market risk management also includes the enterprise-wide IPV function.
Interest Rate Market Risk (Other than Trading)
BB&T actively manages market risk associated with asset and liability portfolios with a focus on the strategic pricing of asset and liability accounts and management of appropriate maturity mixes of assets and liabilities. The goal of these activities is the development of appropriate maturity and repricing opportunities in BB&T’s portfolios of assets and liabilities that will produce reasonably consistent net interest income during periods of changing interest rates. These portfolios are analyzed for proper fixed-rate and variable-rate mixes under various interest rate scenarios.
The asset/liability management process is designed to achieve relatively stable NIM and assure liquidity by coordinating the volumes, maturities or repricing opportunities of earning assets, deposits and borrowed funds. Among other things, this process gives consideration to prepayment trends related to securities, loans and leases and certain deposits that have no stated maturity. Prepayment assumptions are developed using a combination of market data and internal historical prepayment experience for residential mortgage-related loans and securities, and internal historical prepayment experience for client deposits with no stated maturity and loans that are not residential mortgage related. These assumptions are subject to monthly back-testing, and are adjusted as deemed necessary to reflect changes in interest rates relative to the reference rate of the underlying assets or liabilities. On a monthly basis, BB&T evaluates the accuracy of its Simulation model, which includes an evaluation of its prepayment assumptions, to ensure that all significant assumptions inherent in the model appropriately reflect changes in the interest rate environment and related trends in prepayment activity. It is the responsibility of the MRLCC to determine and achieve the most appropriate volume and mix of earning assets and interest-bearing liabilities, as well as to ensure an adequate level of liquidity and capital, within the context of corporate performance goals. The MRLCC also sets policy guidelines and establishes long-term strategies with respect to interest rate risk exposure and liquidity. The MRLCC meets regularly to review BB&T’s interest rate risk and liquidity positions in relation to present and prospective market and business conditions, and adopts funding and balance sheet management strategies that are intended to ensure that the potential impacts on earnings and liquidity as a result of fluctuations in interest rates are within acceptable tolerance guidelines.
BB&T uses derivatives primarily to manage economic risk related to securities, commercial loans, MSRs and mortgage banking operations, long-term debt and other funding sources. BB&T also uses derivatives to facilitate transactions on behalf of its clients. As of September 30, 2015, BB&T had derivative financial instruments outstanding with notional amounts totaling $73.0 billion, with a net fair value gain of $286 million. See Note 15 “Derivative Financial Instruments” in the “Notes to Consolidated Financial Statements” herein for additional disclosures.
The majority of BB&T’s assets and liabilities are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Fluctuations in interest rates and actions of the FRB to regulate the availability and cost of credit have a greater effect on a financial institution’s profitability than do the effects of higher costs for goods and services. Through its balance sheet management function, which is monitored by the MRLCC, management believes that BB&T is positioned to respond to changing needs for liquidity, changes in interest rates and inflationary trends.
Management uses the Simulation to measure the sensitivity of projected earnings to changes in interest rates. The Simulation projects net interest income and interest rate risk for a rolling two-year period of time. The Simulation takes into account the current contractual agreements that BB&T has made with its customers on deposits, borrowings, loans, investments and commitments to enter into those transactions. Furthermore, the Simulation considers the impact of expected customer behavior. Management monitors BB&T’s interest sensitivity by means of a model that incorporates the current volumes, average rates earned and paid, and scheduled maturities and payments of asset and liability portfolios, together with multiple scenarios that include projected prepayments, repricing opportunities and anticipated volume growth. Using this information, the model projects earnings based on projected portfolio balances under multiple interest rate scenarios. This level of detail is needed to simulate the effect that changes in interest rates and portfolio balances may have on the earnings of BB&T. This method is subject to the accuracy of the assumptions that underlie the process, but management believes that it provides a better illustration of the sensitivity of earnings to changes in interest rates than other analyses such as static or dynamic gap. In addition to the Simulation, BB&T uses EVE analysis to focus on projected changes in capital given potential changes in interest rates. This measure also allows BB&T to analyze interest rate risk that falls outside the analysis window contained in the Simulation. The EVE model is a discounted cash flow of the portfolio of assets, liabilities, and derivative instruments. The difference in the present value of assets minus the present value of liabilities is defined as the economic value of equity.
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.
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:
If a rate change of 200 basis points cannot be modeled due to a low level of rates, a proportional limit applies. Management currently only models a negative 25 basis point decline because larger declines would have resulted in a Federal funds rate of less than zero. In a situation such as this, the maximum negative impact on net interest income is adjusted on a proportional basis. Regardless of the proportional limit, the negative risk exposure limit will be the greater of 1% or the proportional limit.
Management has also established a maximum negative impact on net interest income of 4% for an immediate 100 basis points change in rates and 8% for an immediate 200 basis points change in rates. These “interest rate shock” limits are designed to create an outer band of acceptable risk based upon a significant and immediate change in rates.
Management must also consider how the balance sheet and interest rate risk position could be impacted by changes in balance sheet mix. Liquidity in the banking industry has been very strong during the current economic cycle. Much of this liquidity increase has been due to a significant increase in noninterest-bearing demand deposits. Consistent with the industry, Branch Bank has seen a significant increase in this funding source. The behavior of these deposits is one of the most important assumptions used in determining the interest rate risk position of BB&T. A loss of these deposits in the future would reduce the asset sensitivity of BB&T’s balance sheet as the Company increases interest-bearing funds to offset the loss of this advantageous funding source.
Beta represents the correlation between overall market interest rates and the rates paid by BB&T on interest-bearing deposits. BB&T applies an average beta of approximately 80% to its managed rate deposits for determining its interest rate sensitivity. Managed rate deposits are high beta, premium money market and interest checking accounts, which attract significant client funds when needed to support balance sheet growth. BB&T regularly conducts sensitivity on other key variables to determine the impact they could have on the interest rate risk position. This allows BB&T to evaluate the likely impact on its balance sheet management strategies due to a more extreme variation in a key assumption than expected.
The following table shows the effect that the loss of demand deposits and an associated increase in managed rate deposits would have on BB&T’s interest-rate sensitivity position. For purposes of this analysis, BB&T modeled the incremental beta for the replacement of the lost demand deposits at 100%.
If rates increased 200 basis points, BB&T could absorb the loss of $11.8 billion, or 26.3%, of noninterest bearing deposits and replace them with managed rate deposits with a beta of 100% before becoming neutral to interest rate changes.
The following table shows the effect that the indicated changes in interest rates would have on EVE. Key assumptions in the preparation of the table include prepayment speeds of mortgage-related and other assets, cash flows and maturities of derivative financial instruments, loan volumes and pricing and deposit sensitivity.
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 September 30, 2015 and 2014 were each less than $1 million. Market risk disclosures under Basel II.5 are available in the Additional Disclosures section of the Investor Relations site on www.bbt.com.
Contractual Obligations, Commitments, Contingent Liabilities, Off-Balance Sheet Arrangements and Related Party Transactions
Refer to BB&T’s Annual Report on Form 10-K for the year ended December 31, 2014 for discussion with respect to BB&T’s quantitative and qualitative disclosures about its fixed and determinable contractual obligations. Additional disclosures about BB&T’s contractual obligations, commitments and derivative financial instruments are included in Note 13 “Commitments and Contingencies” and Note 14 “Fair Value Disclosures” in the “Notes to Consolidated Financial Statements.”
Liquidity
Liquidity represents the continuing ability to meet funding needs, including deposit withdrawals, timely repayment of borrowings and other liabilities, and funding of loan commitments. In addition to the level of liquid assets, such as cash, cash equivalents and AFS securities, many other factors affect the ability to meet liquidity needs, including access to a variety of funding sources, maintaining borrowing capacity in national money markets, growing core deposits, the repayment of loans and the ability to securitize or package loans for sale.
BB&T monitors the ability to meet customer demand for funds under both normal and stressed market conditions. In considering its liquidity position, management evaluates BB&T’s funding mix based on client core funding, client rate-sensitive funding and non-client rate-sensitive funding. In addition, management also evaluates exposure to rate-sensitive funding sources that mature in one year or less. Management also measures liquidity needs against 30 days of stressed cash outflows for Branch Bank. To ensure a strong liquidity position, management maintains a liquid asset buffer of cash on hand and highly liquid unpledged securities. The Company has established a policy that the liquid asset buffer would be a minimum of 5% of total assets, but intends to maintain the ratio well in excess of this level. As of September 30, 2015 and December 31, 2014, BB&T’s liquid asset buffer was 13.3% and 13.6%, respectively, of total assets.
During 2014, the FDIC, FRB and OCC finalized a rule concerning the U.S. implementation of the Basel III LCR rule. Under the final rule, BB&T would currently be considered a “modified LCR” holding company. BB&T would be subject to full LCR requirements if its operations were to fall under the “internationally active” rules, which would generally be triggered if BB&T’s assets were to increase above $250 billion. BB&T implemented balance sheet changes to support its compliance with the rule and to optimize its balance sheet based on the final rule. These actions included changing the mix of the investment portfolio to include more GNMA and U.S. Treasury securities, which qualify as Level 1 under the rule, and changing its deposit mix to increase retail and commercial deposits. As of September 30, 2015, BB&T is considered a “modified LCR” holding company. BB&T’s LCR was approximately 136% at September 30, 2015, compared to the regulatory minimum for such entities of 90%, which puts BB&T in full compliance with the rule. The regulatory minimum will increase to 100% on January 1, 2017. The final rule requires each financial institution to have a method for determining “operational deposits” as defined by the rule.
Parent Company
The purpose of the Parent Company is to serve as the primary capital financing vehicle for the operating subsidiaries. The assets of the Parent Company primarily consist of cash on deposit with Branch Bank, equity investments in subsidiaries, advances to subsidiaries, accounts receivable from subsidiaries, and other miscellaneous assets. The principal obligations of the Parent Company are principal and interest payments on long-term debt. The main sources of funds for the Parent Company are dividends and management fees from subsidiaries, repayments of advances to subsidiaries, and proceeds from the issuance of equity and long-term debt. The primary uses of funds by the Parent Company are for investments in subsidiaries, advances to subsidiaries, dividend payments to common and preferred shareholders, retirement of common stock and interest and principal payments due on long-term debt.
Liquidity at the Parent Company is more susceptible to market disruptions. BB&T prudently manages cash levels at the Parent Company to cover a minimum of one year of projected contractual cash outflows which includes unfunded external commitments, debt service, preferred dividends and scheduled debt maturities without the benefit of any new cash infusions. Generally, BB&T maintains a significant buffer above the projected one year of contractual cash outflows. In determining the buffer, BB&T considers cash requirements for common and preferred dividends, unfunded commitments to affiliates, being a source of strength to its banking subsidiaries and being able to withstand sustained market disruptions that could limit access to the capital markets. As of September 30, 2015 and December 31, 2014, the Parent Company had 32 months and 31 months, respectively, of cash on hand to satisfy projected contractual cash outflows as described above.
Branch Bank
BB&T carefully manages liquidity risk at Branch Bank. Branch Bank’s primary source of funding is customer deposits. Continued access to customer deposits is highly dependent on the confidence the public has in the stability of the bank and its ability to return funds to the client when requested. BB&T maintains a strong focus on its reputation in the market to ensure continued access to client deposits. BB&T integrates its risk appetite into its overall risk management framework to ensure the bank does not exceed its risk tolerance through its lending and other risk taking functions and thus risk becoming undercapitalized. BB&T believes that sufficient capital is paramount to maintaining the confidence of its depositors and other funds providers. BB&T has extensive capital management processes in place to ensure it maintains sufficient capital to absorb losses and maintain a highly capitalized position that will instill confidence in the bank and allow continued access to deposits and other funding sources. Branch Bank monitors many liquidity metrics at the bank including funding concentrations, diversification, maturity distribution, contingent funding needs and ability to meet liquidity requirements under times of stress.
Branch Bank has several major sources of funding to meet its liquidity requirements, including access to capital markets through issuance of senior or subordinated bank notes and institutional CDs, access to the FHLB system, dealer repurchase agreements and repurchase agreements with commercial clients, access to the overnight and term Federal funds markets, use of a Cayman branch facility, access to retail brokered CDs and a borrower in custody program with the FRB for the discount window. As of September 30, 2015, Branch Bank has approximately $69.8 billion of secured borrowing capacity, which represents approximately 8.7 times the amount of one year wholesale funding maturities.
Capital
The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. BB&T’s principal goals related to the maintenance of capital are to provide adequate capital to support BB&T’s risk profile consistent with the Board-approved risk appetite, provide financial flexibility to support future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, achieve optimal credit ratings for BB&T and its subsidiaries and provide a competitive return to shareholders.
Management regularly monitors the capital position of BB&T on both a consolidated and bank level basis. In this regard, management’s overriding policy is to maintain capital at levels that are in excess of the operating capital guidelines, which are above the regulatory “well capitalized” levels. Management has implemented stressed capital ratio minimum guidelines to evaluate whether capital ratios calculated with planned capital actions are likely to remain above minimums specified by the FRB for the annual CCAR. Breaches of stressed minimum guidelines prompt a review of the planned capital actions included in BB&T’s capital plan.
While nonrecurring events or management decisions may result in the Company temporarily falling below its operating minimum guidelines for one or more of these ratios, it is management’s intent through capital planning to return to these targeted operating minimums within a reasonable period of time. Such temporary decreases below the operating minimums shown above are not considered an infringement of BB&T’s overall capital policy provided the Company and Branch Bank remain “well-capitalized.”
Basel III capital requirements became effective on January 1, 2015. Risk-based capital ratios for the quarter ended September 30, 2015, which include common equity tier 1, Tier 1 capital, total capital and leverage capital, are calculated based on Basel III regulatory transitional guidance related to the measurement of capital, risk-weighted assets and average assets.
The Company’s estimated common equity tier 1 ratio using the Basel III standardized approach on a fully phased-in basis was 9.8% at September 30, 2015.
Share Repurchase Activity
No shares were repurchased in connection with the 2006 Repurchase Plan during 2015. During June of 2015, the Board of Directors authorized a new plan, the 2015 Repurchase Plan, to repurchase up to 50 million shares of the Company’s common stock. Repurchases under the 2015 Repurchase Plan may be effected through open market purchases or privately negotiated transactions. The timing and exact amount of repurchases will be consistent with the Company’s capital plan and subject to various factors, including the Company’s capital position, liquidity, financial performance, alternative uses of capital, stock trading price and general market conditions, and may be suspended at any time. Shares that are repurchased pursuant to the 2015 Repurchase Plan will constitute authorized but unissued shares of the Company and will therefore be available for future issuances. The 2015 Repurchase Plan replaces the 2006 Repurchase Plan. No shares have been repurchased in connection with the 2015 Repurchase Plan during 2015.
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 September 30, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Refer to the “Commitments and Contingencies” and “Income Taxes” notes in the “Notes to Consolidated Financial Statements.”
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors disclosed in BB&T’s Annual Report on Form 10-K for the year ended December 31, 2014. Additional risks and uncertainties not currently known to BB&T or that management has deemed to be immaterial also may materially adversely affect BB&T’s business, financial condition, and/or operating results.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Refer to “Share Repurchase Activity” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section herein.
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.
(Registrant)
Daryl N. Bible, Senior Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Cynthia B. Powell, Executive Vice President andCorporate Controller
(Principal Accounting Officer)
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