SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
Commission File Number: 1-10853
(Exact name of Registrant as specified in its Charter)
|(State of Incorporation)||(I.R.S. Employer Identification No.)|
200 West Second Street
Winston-Salem, North Carolina
|(Address of principal executive offices)||(Zip Code)|
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Securities Exchange Act of 1934:
|Title of each class||
Name of each exchange
on which registered
Common Stock, $5 par value
|New York Stock Exchange|
Depositary Shares each representing 1/1,000th interest in a share of Series D Non-Cumulative Perpetual Preferred Stock
|New York Stock Exchange|
Depositary Shares each representing 1/1,000th interest in a share of Series E Non-Cumulative Perpetual Preferred Stock
|New York Stock Exchange|
Depositary Shares each representing 1/1,000th interest in a share of Series F Non-Cumulative Perpetual Preferred Stock
|New York Stock Exchange|
Depositary Shares each representing 1/1,000th interest in a share of Series G Non-Cumulative Perpetual Preferred Stock
|New York Stock Exchange|
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by references in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|Large accelerated filer||X||Accelerated filer|
|Non-accelerated filer||(Do not check if a smaller reporting company)||Smaller reporting company|
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
At January 31, 2016, the Company had 780,451,430 shares of its Common Stock, $5 par value, outstanding. As of June 30, 2015, the aggregate market value of voting stock held by nonaffiliates of the Company was approximately $29.4 billion.
|Note 16. Parent Company Financial Statements||129|
|Note 17. Fair Value Disclosures||132|
|Note 18. Derivative Financial Instruments||138|
|Note 19. Computation of EPS||142|
|Note 20. Operating Segments||142|
|Item 9||Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - (None to be reported)|
|Item 9A||Controls and Procedures||80|
|Item 9B||Other Information - (None to be reported)|
|Item 10||Directors, Executive Officers and Corporate Governance||*|
|Item 11||Executive Compensation||*|
|Item 12||Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters||*|
|Item 13||Certain Relationships and Related Transactions, and Director Independence||*|
|Item 14||Principal Accounting Fees and Services||*|
|Item 15||Exhibits, Financial Statement Schedules|
|Financial Statements - (see Listing in Item 8 above)|
|Financial Statement Schedules - (None required)|
|*||For information regarding executive officers, refer to “Executive Officers of BB&T” in Part I. The other information required by Item 10 is incorporated herein by reference to the information that appears under the headings “Proposal 1-Election of Directors,” “Corporate Governance Matters” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Registrant’s Proxy Statement for the 2016 Annual Meeting of Shareholders.|
|The information required by Item 11 is incorporated herein by reference to the information that appears under the headings “Compensation Discussion and Analysis,” “Compensation of Executive Officers,” “Compensation Committee Report on Executive Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Compensation of Directors” in the Registrant’s Proxy Statement for the 2016 Annual Meeting of Shareholders.|
|For information regarding the registrant’s securities authorized for issuance under equity compensation plans, refer to “Equity Compensation Plan Information” in Part II.|
The other information required by Item 12 is incorporated herein by reference to the information that appears under the headings “Stock Ownership Information” and “Compensation of Executive Officers” in the Registrant’s Proxy Statement for the 2016 Annual Meeting of Shareholders.
|The information required by Item 13 is incorporated herein by reference to the information that appears under the headings “Corporate Governance Matters” and “Transactions with Executive Officers and Directors” in the Registrant’s Proxy Statement for the 2016 Annual Meeting of Shareholders.|
|The information required by Item 14 is incorporated herein by reference to the information that appears under the headings “Fees to Auditors” and “Corporate Governance Matters” in the Registrant’s Proxy Statement for the 2016 Annual Meeting of Shareholders.|
Glossary of Defined Terms
The following terms may be used throughout this Report, including the consolidated financial statements and related notes.
|2015 Repurchase Plan||Plan for the repurchase of up to 50 million shares of BB&T’s common stock|
|2006 Repurchase Plan||Plan for the repurchase of up to 50 million shares of BB&T’s common stock|
|ACL||Allowance for credit losses|
|Acquired from FDIC||Assets of Colonial Bank acquired from the Federal Deposit Insurance Corporation during 2009, which are currently covered or were formerly covered under loss sharing agreements|
|Agency MBS||Mortgage-backed securities issued by a U.S. government agency or GSE|
|ALLL||Allowance for loan and lease losses|
|American Coastal||American Coastal Insurance Company|
|AOCI||Accumulated other comprehensive income (loss)|
|Basel III||Global regulatory standards on bank capital adequacy and liquidity published by the BCBS|
|BB&T||BB&T Corporation and subsidiaries|
|BCBS||Basel Committee on Bank Supervision|
|BHC||Bank holding company|
|BHCA||Bank Holding Company Act of 1956, as amended|
|Branch Bank||Branch Banking and Trust Company|
|CCAR||Comprehensive Capital Analysis and Review|
|CD||Certificate of deposit|
|CDI||Core deposit intangible assets|
|CISA||Cybersecurity Information Sharing Act|
|CFPB||Consumer Financial Protection Bureau|
|CEO||Chief Executive Officer|
|CRO||Chief Risk Officer|
|CMO||Collateralized mortgage obligation|
|Colonial||Collectively, certain assets and liabilities of Colonial Bank acquired by BB&T in 2009|
|Company||BB&T Corporation and subsidiaries (interchangeable with "BB&T" above)|
|CRA||Community Reinvestment Act of 1977|
|CRE||Commercial real estate|
|CRMC||Credit Risk Management Committee|
|CROC||Compliance Risk Oversight Committee|
|DIF||Deposit Insurance Fund administered by the FDIC|
|Directors’ Plan||Non-Employee Directors’ Stock Option Plan|
|Dodd-Frank Act||Dodd-Frank Wall Street Reform and Consumer Protection Act|
|EITSC||Enterprise IT Steering Committee|
|EPS||Earnings per common share|
|ERP||Enterprise resource planning|
|EVE||Economic value of equity|
|Exchange Act||Securities Exchange Act of 1934, as amended|
|FASB||Financial Accounting Standards Board|
|FATCA||Foreign Account Tax Compliance Act|
|FDIC||Federal Deposit Insurance Corporation|
|FHA||Federal Housing Administration|
|FHC||Financial Holding Company|
|FHLB||Federal Home Loan Bank|
|FHLMC||Federal Home Loan Mortgage Corporation|
|FINRA||Financial Industry Regulatory Authority|
|FNMA||Federal National Mortgage Association|
|FRB||Board of Governors of the Federal Reserve System|
|FTP||Funds transfer pricing|
|GAAP||Accounting principles generally accepted in the United States of America|
|GNMA||Government National Mortgage Association|
|Grandbridge||Grandbridge Real Estate Capital, LLC|
|GSE||U.S. government-sponsored enterprise|
|HFI||Held for investment|
|HMDA||Home Mortgage Disclosure Act|
|HUD-OIG||Office of Inspector General, U.S. Department of Housing and Urban Development|
|IDI||Insured depository institution|
|IMLAFA||International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001|
|IPV||Independent price verification|
|IRC||Internal Revenue Code|
|IRS||Internal Revenue Service|
|ISDA||International Swaps and Derivatives Association, Inc.|
|LCR||Liquidity Coverage Ratio|
|LHFS||Loans held for sale|
|LIBOR||London Interbank Offered Rate|
|MRLCC||Market Risk, Liquidity and Capital Committee|
|MSR||Mortgage servicing right|
|MSRB||Municipal Securities Rulemaking Board|
|NIM||Net interest margin|
|NYSE||NYSE Euronext, Inc.|
|OAS||Option adjusted spread|
|OCI||Other comprehensive income (loss)|
|OREO||Other real estate owned|
|ORMC||Operational Risk Management Committee|
|Parent Company||BB&T Corporation, the parent company of Branch Bank and other subsidiaries|
|Patriot Act||Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001|
|PCI||Purchased credit impaired loans as well as assets of Colonial Bank acquired from the FDIC during 2009, which are currently covered or were formerly covered under loss sharing agreements|
|Peer Group||Financial holding companies included in the industry peer group index|
|RMC||Risk Management Committee|
|RMO||Risk Management Organization|
|RSU||Restricted stock unit|
|RUFC||Reserve for unfunded lending commitments|
|S&P||Standard & Poor's|
|SBIC||Small Business Investment Company|
|SCAP||Supervisory Capital Assessment Program|
|SEC||Securities and Exchange Commission|
|Short-Term Borrowings||Federal funds purchased, securities sold under repurchase agreements and other short-term borrowed funds with original maturities of less than one year|
|Simulation||Interest sensitivity simulation analysis|
|Susquehanna||Susquehanna Bancshares, Inc., acquired by BB&T effective August 1, 2015|
|TBA||To be announced|
|TDR||Troubled debt restructuring|
|U.S.||United States of America|
|U.S. Treasury||United States Department of the Treasury|
|UPB||Unpaid principal balance|
|VA||U.S. Department of Veterans Affairs|
|VIE||Variable interest entity|
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the financial condition, results of operations, business plans and the future performance of BB&T that are based on the beliefs and assumptions of the management of BB&T and the information available to management at the time that these disclosures were prepared. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “projects,” “may,” “will,” “should,” “could,” and other similar expressions are intended to identify these forward-looking statements. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. Such factors include, but are not limited to, the following:
|·||general economic or business conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit, insurance or other services;|
|·||disruptions to the national or global financial markets, including the impact of a downgrade of U.S. government obligations by one of the credit ratings agencies and the adverse effects of recessionary conditions in Europe and the impact of recent market disruptions in China;|
|·||changes in the interest rate environment, including interest rate changes made by the Federal Reserve, and cash flow reassessments may reduce NIM and/or the volumes and values of loans made or held as well as the value of other financial assets held;|
|·||competitive pressures among depository and other financial institutions may increase significantly;|
|·||legislative, regulatory or accounting changes, including changes resulting from the adoption and implementation of the Dodd-Frank Act may adversely affect the businesses in which BB&T is engaged;|
|·||local, state or federal taxing authorities may take tax positions that are adverse to BB&T;|
|·||a reduction may occur in BB&T’s credit ratings;|
|·||adverse changes may occur in the securities markets;|
|·||competitors of BB&T may have greater financial resources or develop products that enable them to compete more successfully than BB&T and may be subject to different regulatory standards than BB&T;|
|·||cyber-security risks, including “denial of service,” “hacking” and “identity theft,” could adversely affect our business and financial performance or our reputation, and we could be liable for financial losses incurred by third parties due to breaches of data shared between financial institutions;|
|·||natural or other disasters, including acts of domestic or foreign terrorism, could have an adverse effect on BB&T in that such events could materially disrupt BB&T’s operations or the ability or willingness of BB&T’s customers to access the financial services BB&T offers;|
|·||costs related to the integration of the businesses of BB&T and its merger partners may be greater than expected;|
|·||failure to execute on strategic or operational plans, including the ability to successfully complete and/or integrate mergers and acquisitions or fully achieve expected cost savings or revenue growth associated with mergers and acquisitions within the expected time frames could adversely impact financial condition and results of operations;|
|·||significant litigation could have a material adverse effect on BB&T;|
|·||deposit attrition, customer loss and/or revenue loss following completed mergers and acquisitions may be greater than expected;|
|·||higher than expected costs related to information technology infrastructure or a failure to successfully implement future system enhancements could adversely impact BB&T’s financial condition and results of operations and could result in significant additional costs to BB&T; and|
|·||widespread system outages, caused by the failure of critical internal systems or critical services provided by third parties, could adversely impact BB&T’s financial conditions and results of operations.|
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Actual results may differ materially from those expressed in or implied by any forward-looking statement. Except to the extent required by applicable law or regulation, BB&T undertakes no obligation to revise or update publicly any forward-looking statements for any reason.
BB&T is a FHC headquartered in Winston-Salem, North Carolina. BB&T conducts its business operations primarily through its bank subsidiary, Branch Bank, and other nonbank subsidiaries.
Branch Bank (Winston-Salem, North Carolina), BB&T’s largest subsidiary, was chartered in 1872 and is the oldest bank headquartered in North Carolina. Branch Bank provides a wide range of banking and trust services for retail and commercial clients in its geographic markets, including small and mid-size businesses, public agencies, local governments and individuals, through 2,139 offices (as of December 31, 2015). Branch Bank’s principal operating subsidiaries include:
|·||BB&T Equipment Finance Corporation (Charlotte, North Carolina) provides loan and lease financing to commercial and small businesses;|
|·||BB&T Insurance Services, Inc. (Raleigh, North Carolina) offers property and casualty, life, health, employee benefits, commercial general liability, surety, title and other insurance products through its agency network;|
|·||BB&T Investment Services, Inc. (Charlotte, North Carolina) is a registered broker-dealer and offers clients non-deposit investment products, including discount brokerage services, equities, fixed-rate, variable-rate and index annuities, mutual funds, government and municipal bonds, and money market funds;|
|·||CRC Insurance Services, Inc. (Birmingham, Alabama) is a wholesale insurance broker authorized to do business nationwide;|
|·||Crump Life Insurance Services, Inc. (Roseland, New Jersey) is a wholesale insurance broker authorized to do business nationwide;|
|·||Grandbridge (Charlotte, North Carolina) specializes in arranging and servicing commercial mortgage loans;|
|·||McGriff, Seibels & Williams, Inc. (Birmingham, Alabama) is authorized to do business nationwide and specializes in providing insurance products on an agency basis to large commercial clients, including many Fortune 500 companies;|
|·||Prime Rate Premium Finance Corporation, Inc. (Florence, South Carolina) and its subsidiaries, which include AFCO Credit Corporation, provide insurance premium financing to clients in the United States and Canada; and|
|·||Susquehanna Commercial Finance, Inc. (Malvern, Pennsylvania) provides loans and lease financing to commercial and small businesses.|
Major Nonbank Subsidiaries
BB&T also has a number of nonbank subsidiaries, including:
|·||BB&T Securities, LLC (Richmond, Virginia) is a registered investment banking and full-service brokerage firm that provides services in retail brokerage, equity and debt underwriting, investment advice, corporate finance and equity research; and facilitates the origination, trading and distribution of fixed-income securities and equity products in both the public and private capital markets. BB&T Securities, LLC also provides correspondent clearing services to broker-dealers and entities involved in the securities industry;|
|·||Regional Acceptance Corporation (Greenville, North Carolina) specializes in nonprime, indirect financing for consumer purchases of primarily mid-model and late-model used automobiles; and|
|·||Sterling Capital Management, LLC (Charlotte, North Carolina) is a registered investment advisor, which provides tailored investment management solutions to meet the specific needs and objectives of individual and institutional clients through a full range of investment strategies.|
BB&T’s subsidiaries offer a variety of services targeted to retail and commercial clients. BB&T’s objective is to offer clients a full array of products to meet all their financial needs. BB&T’s insurance operations primarily consist of a wholesale/agency network.
|Retail Services:||Commercial Services:|
|Asset management||Asset management|
|Automobile lending||Association services|
|Bankcard lending||Capital markets services|
|Consumer finance||Commercial deposit services|
|Home equity lending||Commercial finance|
|Home mortgage lending||Commercial middle market lending|
|Insurance||Commercial mortgage lending|
|Investment brokerage services||Corporate banking|
|Mobile/online banking||Institutional trust services|
|Retail deposit services||Insurance premium finance|
|Sales finance||International banking services|
|Small business lending||Leasing|
|Wealth management/private banking||Merchant services|
|Mortgage warehouse lending|
|Private equity investments|
|Real estate lending|
|Supply chain management|
|The following table reflects BB&T’s deposit market share and branch locations by state:|
|BB&T Deposit Market Share and Branch Locations by State|
|% of BB&T's Deposits (2)||Deposit Market Share Rank (2)||Number of Branches (3)|
|North Carolina (1)||23||%||2nd||357|
|New Jersey (4)||―||―||28|
|(1)||Excludes home office deposits.|
|(2)||Source: FDIC.gov-data as of June 30, 2015.|
|(3)||As of December 31, 2015. Excludes two branches in Indiana and one in Ohio.|
|(4)||Branch locations resulted from the acquisition of Susquehanna on August 1, 2015.|
BB&T operates in markets that have a diverse employment base covering numerous industries. Management strongly believes that BB&T’s community bank approach to providing client service is a competitive advantage that strengthens the Company’s ability to effectively provide financial products and services to businesses and individuals in its markets. Furthermore, BB&T believes its current market area will support growth in assets and deposits in the future.
The financial services industry is highly competitive and constantly evolving. BB&T’s subsidiaries compete actively with national, regional and local financial services providers, including banks, thrifts, securities dealers, mortgage bankers, finance companies and insurance companies. In recent years, competition has increased from institutions not subject to the same regulatory restrictions as domestic banks and BHCs. Consumers have the opportunity to select from a variety of traditional and nontraditional alternatives. The industry frequently sees merger activity, which affects competition by eliminating some regional and local institutions, while strengthening the franchises of acquirers. For additional information concerning markets, BB&T’s competitive position and business strategies and recent government interventions, see “Market Area” above and “General Business Development” below.
General Business Development
BB&T is a regional FHC and has maintained a long-term focus on a strategy that includes expansion of asset size and diversification in terms of revenues and sources of profitability. This strategy encompasses both organic growth and acquisitions of complementary banks and financial businesses.
Merger and Acquisition Strategy
BB&T’s growth in business, profitability and market share has historically been enhanced by strategic mergers and acquisitions. Management intends to remain disciplined and focused with regard to future merger and acquisition opportunities. BB&T will continue to assess bank and thrift acquisitions subject to market conditions, primarily within or contiguous to BB&T’s existing footprint, and will pursue economically advantageous acquisitions of insurance agencies, specialized lending businesses, and fee income generating financial services businesses. BB&T’s strategy is currently focused on meeting the following acquisition criteria:
|·||the organization must be a good fit with BB&T’s culture;|
|·||the acquisition must be strategically attractive – meaning that any bank acquisition should be in BB&T’s existing footprint to allow for cost savings and economies of scale or in contiguous states to provide market diversification, or the transaction must be otherwise strategically compelling;|
|·||any risk-related issues would need to be quantified and addressed; and|
|·||the transaction must meet BB&T’s financial criteria.|
During 2015, BB&T completed the purchases of Susquehanna Bancshares, Inc. and The Bank of Kentucky Financial Corporation. BB&T also acquired 41 retail branches in Texas from Citigroup. During 2014, BB&T purchased 21 retail branches in Texas from Citigroup. See Note 2 “Acquisitions and Divestitures” in the “Notes to the Consolidated Financial Statements” for further information about these transactions.
BB&T has reached an agreement and received approval from applicable banking regulators to acquire National Penn Bancshares, Inc., which had $9.6 billion in assets and $6.7 billion in deposits as of December 31, 2015. This transaction is currently expected to close on April 1, 2016.
The extensive regulatory framework applicable to banks, BHCs and FHCs is intended primarily for the protection of depositors, the DIF and the stability of the financial system, rather than for the protection of shareholders and creditors. Comprehensive reform of the legislative and regulatory landscape occurred with the passage of the Dodd-Frank Act during 2010. Implementation of the Dodd-Frank Act and related rulemaking activities continues to occur. In addition to banking laws, regulations and regulatory agencies, BB&T is subject to various other laws, regulations, supervision and examination by other regulatory agencies, all of which directly or indirectly affect the operations and management of BB&T and its ability to make distributions to shareholders.
BB&T’s earnings are affected by general economic conditions, management policies, changes in state and federal laws and regulations and actions of various regulatory authorities, including those referred to in this section. Proposals to change the laws and regulations to which BB&T is subject are frequently introduced at both the federal and state levels. The likelihood and timing of any such changes and the impact such changes may have on BB&T is impossible to determine with any certainty. The description herein summarizes the significant state and federal laws to which BB&T currently is subject. To the extent statutory or regulatory provisions are described in this section, such descriptions are qualified in their entirety by reference to the particular statutory or regulatory provisions.
Financial Regulatory Reform
During the past several years, there has been a significant increase in regulation and regulatory oversight for U.S. financial services firms, primarily resulting from the Dodd-Frank Act. The Dodd-Frank Act is extensive, complex and comprehensive legislation that impacts practically all aspects of a banking organization, representing a significant overhaul of many aspects of the regulation of the financial services industry. The Dodd-Frank Act implements numerous and far-reaching changes that affect financial companies, including banks, BHCs and FHCs such as BB&T.
Many of the provisions of the Dodd-Frank Act and other laws are subject to further rulemaking, guidance and interpretation by the applicable federal regulators. BB&T will continue to evaluate the impact of any new regulations so promulgated, including changes in regulatory costs and fees, modifications to consumer products or disclosures required by the CFPB and the requirements of the enhanced supervision provisions, among others.
As a BHC and a FHC under federal law, BB&T is subject to regulation under the BHCA and the examination and reporting requirements of the FRB. Branch Bank, a North Carolina state-chartered commercial bank, is subject to regulation, supervision and examination by the North Carolina Commissioner of Banks, the FDIC and the CFPB.
State and federal law govern the activities in which Branch Bank engages, the investments it makes and the aggregate amount of loans that may be granted to one borrower. Various consumer and compliance laws and regulations also affect its operations. Branch Bank is also affected by the actions of the FRB as it implements monetary policy.
In addition to federal and state banking laws and regulations, BB&T and certain of its subsidiaries and affiliates, including those that engage in securities underwriting, dealing, brokerage, investment advisory and insurance activities, are subject to other federal and state laws and regulations as well as supervision and examination by other state and federal regulatory agencies and other regulatory authorities, including the SEC, FINRA, NYSE and various state insurance and securities regulators.
Under current federal law, as a BHC, BB&T has elected to become a FHC, which allows it to offer customers virtually any type of service that is financial in nature or incidental thereto, including banking and activities closely related thereto, securities underwriting, insurance and merchant banking. In order to maintain its status as a FHC, BB&T and all of its affiliated IDIs must be well-capitalized and well-managed and have at least a satisfactory CRA rating. The FRB has responsibility for overseeing compliance with these requirements. If the FRB determines that a FHC is not well-capitalized or well-managed, the FHC has a period of time to comply, but during the period of noncompliance, the FRB can place any limitations on the FHC that it believes to be appropriate. Furthermore, if the FRB determines that a FHC has not maintained a satisfactory CRA rating, the FHC would not be able to commence any new financial activities or acquire a company that engages in such activities, although the FHC would still be allowed to engage in activities closely related to banking and make investments in the ordinary course of conducting banking activities.
Most of the financial activities that are permissible for FHCs also are permissible for a bank’s “financial subsidiary,” except for insurance underwriting, insurance company portfolio investments, real estate investments and development, and merchant banking, which must be conducted by a FHC. In order for a financial subsidiary of a bank to engage in permissible financial activities, federal law requires the parent bank (and its sister-bank affiliates) to be well-capitalized and well-managed; the aggregate consolidated assets of all of that bank’s financial subsidiaries may not exceed the lesser of 45% of its consolidated total assets or $50 billion; the bank must have at least a satisfactory CRA rating; and, if that bank is one of the 100 largest national banks, it must meet certain financial rating or other comparable requirements.
Current federal law also establishes a system of functional regulation under which the FRB is the umbrella regulator for BHCs, but BHC affiliates are principally regulated by functional regulators such as the FDIC for state nonmember bank affiliates, the SEC for securities affiliates and state insurance regulators for insurance affiliates. Certain specific activities, including traditional bank trust and fiduciary activities, may be conducted in the bank without the bank being deemed a “broker” or a “dealer” in securities for purposes of functional regulation. Although states generally must regulate bank insurance activities in a nondiscriminatory manner, states may continue to adopt and enforce rules that specifically regulate bank insurance activities in certain identifiable areas.
The Dodd-Frank Act also imposed new prudential regulation on depository institutions and their holding companies. As such, BB&T is subject to more stringent standards and requirements with respect to (1) bank and nonbank acquisitions and mergers, (2) the “financial activities” in which it engages as a FHC, (3) affiliate transactions and (4) proprietary trading, among other provisions.
Resolution Planning and Regulation QQ
FRB and FDIC regulations require “covered companies” such as BB&T and systemically important financial institutions such as Branch Bank to file, maintain and update plans for a rapid and orderly resolution in the event of material financial distress or failure (a “living will”). Both the FRB and the FDIC must review and evaluate BB&T’s and Branch Bank’s living wills and are authorized to impose restrictions on BB&T’s and Branch Bank’s growth and activities or operations if deemed necessary. The public portions of BB&T’s and Branch Bank’s resolution plans are available in the Additional Disclosures section of the Investor Relations site at www.bbt.com.
CCAR and Stress Test Requirements
Current FRB rules require BB&T and other BHCs with $50 billion or more of total consolidated assets to submit annual capital plans based on pre-defined stress scenarios. BB&T and other such BHCs are also required to collect and report certain related data on a quarterly basis to allow the FRB to monitor progress against the BHCs’ annual capital plans. Covered BHCs, including BB&T, may pay dividends and repurchase stock only in accordance with a capital plan that has been reviewed by the FRB and as to which the FRB has not objected. The rules also require, among other things, that a covered BHC may not make a capital distribution unless, after giving effect to the distribution, it will meet all minimum regulatory capital ratios. See Table 3 for additional information about capital requirements. The FRB did not object to BB&T’s 2015 capital plan, and the 2016 capital plan is expected to be submitted during April 2016.
The Dodd-Frank Act requires the FRB to conduct an annual supervisory stress test for BHCs, such as BB&T, with $50 billion or more of total consolidated assets. The FRB’s stress test rules also require BB&T and other covered BHCs to conduct a separate mid-year stress test, file the results of such test with the FRB and publicly disclose details of the scenario and the impact on its capital. BB&T’s annual and midcycle stress test results are available in the Additional Disclosures section of the Investor Relations site on www.bbt.com.
Effective for 2015, the FRB amended the capital plan and stress test rules to modify the start date of the capital plan and stress test cycles from October 1 to January 1 of the following calendar year. 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 Dodd-Frank Act also requires the FDIC to conduct an annual supervisory stress test for FDIC-insured state nonmember banks such as Branch Bank with $50 billion or more of total consolidated assets and requires such institutions to conduct annual company-run stress tests. The results of the annual supervisory stress test are included in the annual capital plan submitted to the FDIC.
The FDIC has modified the “as-of” dates for financial data that covered banks with more than $10 billion in assets 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 became effective on January 1, 2016.
BB&T complies with numerous laws related to its acquisition activity. Under the BHCA, a BHC may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any BHC or bank or merge or consolidate with another BHC without the prior approval of the FRB.
Current federal law authorizes interstate acquisitions of banks and BHCs without geographic limitation, and a bank headquartered in one state is authorized to merge with a bank headquartered in another state, subject to market share limitations and any state requirement that the target bank shall have been in existence and operating for a minimum period of time. After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable federal or state law. These regulatory considerations are applicable to privately negotiated acquisition transactions.
FRB rules prohibit a financial company from combining with another company if the ratio of the resulting company's liabilities exceeds 10 percent of the aggregate consolidated liabilities of all financial companies.
Other Safety and Soundness Regulations
The FRB has enforcement powers over BHCs and their nonbanking subsidiaries. The FRB has authority to prohibit activities that represent unsafe or unsound practices or constitute violations of law, rule, regulation, administrative order or written agreement with a federal regulator. These powers may be exercised through the issuance of cease and desist orders, civil money penalties or other actions.
There also are a number of obligations and restrictions imposed on BHCs and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance fund in the event the depository institution is insolvent or is in danger of becoming insolvent. For example, under requirements of the FRB with respect to BHC operations, a BHC is required to serve as a source of financial strength to its subsidiary depository institutions and to commit financial resources to support such institutions in circumstances where it might not do so otherwise. In addition, the “cross-guarantee” provisions of federal law require IDIs under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the DIF as a result of the insolvency of commonly controlled IDIs or for any assistance provided by the FDIC to commonly controlled IDIs in danger of failure. The FDIC’s claim for reimbursement under the cross-guarantee provisions is superior to claims of shareholders of the IDI or its holding company but is subordinate to claims of depositors, secured creditors and nonaffiliated holders of subordinated debt of the commonly controlled IDI.
Federal and state banking regulators also have broad enforcement powers over Branch Bank, including the power to impose fines and other civil and criminal penalties, and to appoint a receiver in order to conserve the assets of Branch Bank for the benefit of depositors and other creditors. The North Carolina Commissioner of Banks also has the authority to take possession of a North Carolina state bank in certain circumstances, including, among other things, when it appears that such bank has violated its charter or any applicable laws, is conducting its business in an unauthorized or unsafe manner, is in an unsafe or unsound condition to transact its business or has an impairment of its capital stock.
Payment of Dividends; Capital Requirements
The Parent Company is a legal entity separate and distinct from Branch Bank and its subsidiaries. The majority of the Parent Company’s revenue is from dividends paid by Branch Bank. Branch Bank is subject to laws and regulations that limit the amount of dividends it can pay. In addition, BB&T and Branch Bank are subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above regulatory minimums, and to remain “well-capitalized” under the prompt corrective action regulations summarized elsewhere in this section. Federal banking regulators have indicated that banking organizations should generally pay dividends only if (1) the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends and (2) the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. BB&T’s future capital actions will depend on the FRB’s review of BB&T’s annual capital plans.
North Carolina law states that, provided a bank does not make distributions that reduce its capital below its applicable required capital, the board of directors of a bank chartered under the laws of North Carolina may declare such distributions as the directors deem proper.
The federal banking agencies are required to take “prompt corrective action” in respect of IDIs and their BHCs that do not meet minimum capital requirements. The law establishes five capital categories for this purpose: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” To be considered “well-capitalized” under these standards, an IDI must maintain the ratios shown above and must not be subject to any order or written directive to meet and maintain a specific capital level for any capital measure.
Federal law also requires the regulatory agencies to implement systems for “prompt corrective action” for institutions that fail to meet minimum capital requirements within the five capital categories, with progressively more severe restrictions on operations, management and capital distributions according to the category in which an institution is placed. Additionally, failure to meet capital requirements may cause an institution to be directed to raise additional capital. Federal law further mandates that the agencies adopt safety and soundness standards generally relating to operations and management, asset quality and executive compensation, and authorizes administrative action against an institution that fails to meet such standards.
In addition, failure to meet capital guidelines may subject a banking organization to a variety of other enforcement remedies, including additional substantial restrictions on its operations and activities, termination of deposit insurance by the FDIC and, under certain conditions, the appointment of a conservator or receiver.
U.S. Implementation of Basel III
During 2013, the FRB published final rules establishing a new comprehensive capital framework for U.S. banking organizations known as Basel III. The rules substantially revise the risk-based capital requirements applicable to BHCs and IDIs, including BB&T and Branch Bank. The rules define the components of capital and address other issues affecting banking institutions' regulatory capital ratios. The rules also address risk weights and other issues affecting the denominator in banking institutions' regulatory capital ratios and replace the existing risk-weighting approach, which was derived from Basel I capital accords of the BCBS, with a more risk-sensitive approach based, in part, on the standardized approach in the BCBS's 2004 “Basel II” capital accords. The Basel III rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies' rules. BB&T qualifies as a standardized approach banking organization and was required to comply with the new requirements beginning on January 1, 2015.
Institutions with greater than $250 billion in assets or $10 billion in foreign assets are considered advanced approaches banking organizations, which results in a more complex calculation of RWA that includes an assessment of the impact of operational risk, among other changes. In addition, advanced approaches institutions have additional reporting requirements and must calculate capital under both the standardized approach and the advanced approaches and use the more conservative result. BB&T is preparing to comply with the advanced approaches requirements as it would become subject to these requirements upon exceeding either of the asset thresholds.
The Basel III rules, among other things, (1) introduce a new capital measure referred to as common equity Tier 1; (2) specify that Tier 1 capital consist of Tier 1 common equity and additional Tier 1 capital instruments meeting specified requirements; (3) define Tier 1 common equity narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to Tier 1 common equity and not to the other components of capital; and (4) expand the scope of the deductions/adjustments from capital as compared to existing regulations.
The Basel III rules prescribe a standardized approach for risk weightings that expand the risk-weighting categories from the four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets. The Basel III risk weight classifications generally range from 0% for U.S. government securities to 600% for certain equity exposures, with a maximum risk weight classification of 1,250% for certain securitizations. This results in higher risk weights for a variety of asset categories. In addition, the rules provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.
The Basel III rules revise the “prompt corrective action” directives by establishing more conservative ratio levels for well-capitalized status. In addition to the minimum risk-based capital requirements, all banks must hold additional capital, the capital conservation buffer (which is in the form of common equity), to avoid being subject to limits on capital distributions, such as dividend payments, discretionary payments on Tier 1 instruments, share buybacks, and certain discretionary bonus payments to executive officers, including heads of major business lines and similar employees. The required amount of the capital conservation buffer will be phased-in annually through January 1, 2019.
BB&T is considered to be a “modified LCR” holding company. BB&T would be subject to full LCR requirements if its operations were to fall under the “internationally active” rules, which would generally be triggered if BB&T’s assets were to increase above $250 billion. BB&T produces LCR calculations to effectively manage the position of High-Quality Liquid Assets and the balance sheet deposit mix to optimize BB&T’s liquidity position. BB&T’s LCR was approximately 130% at December 31, 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 following table summarizes the capital requirements and BB&T’s internal targets under Basel III:|
|Capital Under Basel III|
|Minimum||Well-||Minimum Capital Plus Capital Conservation Buffer||BB&T|
|Common equity Tier 1 to risk-weighted assets||4.5||%||6.5||%||5.125||%||5.750||%||6.375||%||7.000||%||8.5||%|
|Tier 1 capital to risk-weighted assets||6.0||8.0||6.625||7.250||7.875||8.500||10.0|
|Total capital to risk-weighted assets||8.0||10.0||8.625||9.250||9.875||10.500||12.0|
|(1)||BB&T's goal is to maintain capital levels above the 2019 requirements.|
|BB&T's capital ratios are shown in the following table:|
|Capital Adequacy Ratios|
|December 31, 2015|
|Common equity Tier 1 to risk-weighted assets||10.3||%||11.3||%|
|Tier 1 capital to risk-weighted assets||11.8||11.3|
|Total capital to risk-weighted assets||14.3||13.4|
The CFPB has issued final rules changing the reporting requirements for lenders under the HMDA. The new rules expand the range of transactions subject to these requirements to include 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.
Enhanced Prudential Standards for BHCs and Foreign Banking
The FRB has adopted amendments to Regulation YY to implement certain components of the enhanced prudential standards required to be established under Section 165 of the Dodd-Frank Act. The amendments became effective during 2014. The enhanced prudential standards include risk-based and leverage capital requirements, liquidity standards, requirements for overall risk management, stress-test requirements, and a 15-to-1 debt-to-equity limit for companies that the Financial Stability Oversight Council has determined pose a grave threat to financial stability. The amendments also establish risk committee requirements and capital stress-testing requirements for certain BHCs and foreign banking organizations with total consolidated assets of $10 billion or more.
FATCA and Conforming Regulations
During 2014, the IRS issued Notice 2014-33 (the “Notice”) regarding FATCA and its related withholding provisions. The Notice announced that calendar years 2014 and 2015 are 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 announced 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. The new requirements became effective on December 31, 2015. BB&T is in compliance with the applicable requirements.
The Volcker Rule implements section 619 of the Dodd-Frank Act and prohibits IDIs and affiliated companies ("banking entities") from engaging in short-term proprietary trading of certain securities, derivatives, and commodity futures, and options on these instruments, for their own account. The final rules also impose limits on banking entities' investments in, and other relationships with, hedge funds or private equity funds. Like the Dodd-Frank Act, the rules provide exemptions for certain activities, including market making, underwriting, hedging, trading in government obligations, insurance company activities, and organizing and offering hedge funds or private equity funds. The rules also clarify that certain activities are not prohibited, including acting as agent, broker, or custodian.
The compliance requirements under the rules vary based on the size of the banking entity and the scope of activities conducted. Banking entities with significant trading operations will be required to establish a detailed compliance program, and their CEOs will be required to attest that the program is reasonably designed to achieve compliance with the final rules. Independent testing and analysis of an institution's compliance program also will be required. The final rules reduce the burden on smaller, less-complex institutions by limiting their compliance and reporting requirements. Additionally, a banking entity that does not engage in covered trading activities will not need to establish a compliance program.
Banking entities were required to conform proprietary trading activities to the final rule by July 21, 2015. The FRB extended the compliance deadline to July 21, 2016 (and announced the intention to further extend the deadline to July 21, 2017) for purposes of conforming investments in and relationships with covered funds and foreign funds that were in place prior to December 31, 2013. Complying with these requirements is not expected to have a material impact on BB&T’s consolidated financial position, results of operations or cash flows.
Deposit Insurance Assessments
Branch Bank’s deposits are insured by the DIF of the FDIC up to the limits set forth under applicable law. The FDIC imposes a risk-based deposit premium assessment system that determines assessment rates for an IDI based on an assessment rate calculator, which is based on a number of elements to measure the risk each IDI poses to the DIF. The assessment rate is applied to total average assets less tangible equity, as defined under the Dodd-Frank Act. The assessment rate schedule can change from time to time at the discretion of the FDIC, subject to certain limits. Under the current system, premiums are assessed quarterly.
Pursuant to an existing FDIC rule, regular assessment rates for all banks will decline when the reserve ratio reaches 1.15%, which the FDIC expects will occur in early 2016. However, during 2015, the FDIC proposed a rule that would impose on banks with at least $10 billion in assets a surcharge of 4.5 cents per $100 of their assessment base, after making certain adjustments, for a period estimated by the FDIC to be two years. BB&T estimates that the net effect of the proposed changes would increase BB&T’s total annual assessment by an amount within the range of $40 million to $50 million.
Consumer Protection Laws and Regulations
In connection with its lending and leasing activities, Branch Bank is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and their respective state law counterparts.
The CFPB has broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the laws referenced above, fair lending laws and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets, their service providers and certain non-depository entities such as debt collectors and consumer reporting agencies. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products.
The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.
The CFPB has concentrated much of its rulemaking efforts on a variety of mortgage-related topics required under the Dodd-Frank Act, including mortgage origination disclosures, minimum underwriting standards and ability to repay, high-cost mortgage lending, and servicing practices. The rules related to ability to repay, qualified mortgage standards and mortgage servicing became effective during 2014, while the escrow and loan originator compensation rules became effective during 2013.
A final rule integrating mortgage loan disclosures required by the Truth in Lending Act (“TILA”) and the Real Estate Settlement and Procedures Act (“RESPA”) became effective during October 2015. The final rule consolidated four existing and separate disclosures required under TILA and RESPA for closed-end credit transactions secured by real property into two forms with a view towards making the mortgage loan disclosures less confusing and more consumer friendly. Branch Bank delivered the functionality required to meet the effective date of October 3, 2015 for the new integrated disclosures.
As a result of these rules, BB&T transferred the management of certain home equity loans from direct retail lending within the Community Banking segment to the Residential Mortgage Banking segment during 2014.
The FRB adopted rules establishing standards for assessing whether the interchange fees that may be charged with respect to certain electronic debit transactions are “reasonable and proportional” to the costs incurred by issuers for such transactions. Interchange fees, or “swipe” fees, are charges that merchants pay to BB&T and other card-issuing banks for processing electronic payment transactions.
During 2013, a U.S. Federal District Court judge ruled against the debit card interchange fee limits imposed by the FRB, resulting in the potential for further reductions to these caps. During March 2014, the Washington, D.C. Circuit Court of Appeals overturned the 2013 lower court decision. During January 2015, the U.S. Supreme Court declined to hear the case, which preserved the limits established by the FRB.
Federal law contains extensive customer privacy protection provisions, including substantial customer privacy protections provided under the Financial Services Modernization Act of 1999 (commonly known as the Gramm-Leach-Bliley Act). Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. These provisions also provide that, except for certain limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. Federal law makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.
The CRA requires Branch Bank’s primary federal bank regulatory agency, the FDIC, to assess the bank’s record in meeting the credit needs of the communities served by the bank, including low- and moderate-income neighborhoods and persons. Institutions are assigned one of four ratings: “Outstanding,” “Satisfactory,” “Needs to Improve” or “Substantial Noncompliance.” This assessment is reviewed for any bank that applies to merge or consolidate with or acquire the assets or assume the liabilities of an IDI, or to open or relocate a branch office. The CRA record of each subsidiary bank of a FHC, such as BB&T, also is assessed by the FRB in connection with any acquisition or merger application.
Automated Overdraft Payment Regulation
The FRB and FDIC have enacted consumer protection regulations related to automated overdraft payment programs offered by financial institutions. Regulation E prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machine and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. Financial institutions must also provide consumers with a notice that explains the financial institution’s overdraft services, including the fees associated with the service and the consumer’s choices. In addition, FDIC-supervised institutions must monitor overdraft payment programs for “excessive or chronic” customer use and undertake “meaningful and effective” follow-up action with customers that overdraw their accounts more than six times during a rolling 12-month period. Financial institutions must also impose daily limits on overdraft charges, review and modify check-clearing procedures, prominently distinguish account balances from available overdraft coverage amounts and ensure board and management oversight regarding overdraft payment programs.
The Patriot Act is intended to strengthen the ability of U.S. law enforcement agencies and intelligence communities to cooperate in the prevention, detection and prosecution of international money laundering and the financing of terrorism. The Patriot Act contains anti-money laundering measures affecting IDIs, broker-dealers and certain other financial institutions. The Patriot Act includes the IMLAFA, which requires such financial institutions to implement policies and procedures to combat money laundering and the financing of terrorism and grants the Secretary of the U.S. Treasury broad authority to establish regulations and to impose requirements and restrictions on financial institutions’ operations. The U.S. Treasury continues to issue regulations to implement the Patriot Act, which impose substantial obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing. Failure to comply with these regulations may result in fines, penalties, lawsuits, regulatory sanctions, reputation damage, or restrictions on business. In addition, the Patriot Act requires the federal bank regulatory agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing bank mergers and BHC acquisitions. BB&T expects to continue to devote significant resources to its Bank Secrecy Act/anti-money laundering (“BSA/AML”) program, particularly as risks persistently emerge and evolve and as regulatory expectations escalate.
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.
The CISA, which became effective on December 18, 2015, is intended to improve cybersecurity in the U.S. by enhanced sharing of information about security threats among the U.S. government and private sector entities, including financial institutions. The CISA also authorizes companies to monitor their own systems notwithstanding any other provision of law, and allows companies to carry out defensive measures on their own systems from cyber attacks. The law includes liability protections for companies that share cyber threat information with third parties so long as such sharing activity is conducted in accordance with CISA.
Other Regulatory Matters
BB&T is subject to examinations by federal and state banking regulators, as well as the SEC, the FINRA, the NYSE, various taxing authorities and various state insurance and securities regulators. BB&T periodically receives requests for information from regulatory authorities in various states, including state insurance commissions and state attorneys general, securities regulators and other regulatory authorities, concerning BB&T’s business and accounting practices. Such requests are considered incidental to the normal conduct of business.
At December 31, 2015, BB&T had approximately 37,200 employees, the majority of which were full time, compared to approximately 33,400 employees at December 31, 2014.
Website Access to BB&T’s Filings with the SEC
BB&T’s electronic filings with the SEC, including the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act, as amended, are made available at no cost in the Investor Relations section of the Company’s website, www.bbt.com, as soon as reasonably practicable after BB&T files such material with, or furnishes it to, the SEC. BB&T’s SEC filings are also available through the SEC’s website at www.sec.gov.
Information with respect to BB&T’s Board of Directors, Executive Officers and corporate governance policies and principles is presented on BB&T’s website, www.bbt.com, and includes:
|·||Corporate Governance Guidelines|
|·||Corporate Board of Directors, including Biographical Information|
|·||Committees of the Corporate Board of Directors and Committee Charters|
|·||Codes of Ethics for Directors, Senior Financial Officers and Associates|
|·||Executive Officers, including Biographical Information|
|·||Policy and Procedures for Accounting, Securities and Legal Complaints, including Whistleblower Procedures|
|·||Statement of Political Activity|
BB&T intends to disclose any substantive amendments or waivers to the Codes of Ethics for Directors or Senior Financial Officers on BB&T’s website at www.bbt.com.
Executive Officers of BB&T
|Executive Officer||Recent Work Experience||Years of Service||Age|
|Kelly S. King||Chairman since January 2010. Chief Executive Officer since January 2009.||43||67|
|Chairman and Chief Executive Officer|
|Christopher L. Henson||Chief Operating Officer since January 2009.||31||54|
|Chief Operating Officer|
|Daryl N. Bible||Chief Financial Officer since January 2009.||8||54|
|Senior Executive Vice President and|
|Chief Financial Officer|
|W. Bennett Bradley||President, Payment Solutions since September||30||54|
|Senior Executive Vice President and||2005. Chief Digital Officer since January 2016.|
|Chief Digital Officer|
|Ricky K. Brown||President, Community Banking since July 2004.||38||60|
|Senior Executive Vice President and|
|President, Community Banking|
|Barbara F. Duck||Enterprise Risk Manager from July 2009 to December 2015. Data and Technology Services Manager since January 2016.||28||49|
|Senior Executive Vice President and|
|Data and Technology Services Manager|
|Donna C. Goodrich||Deposit Services Manager since April 2004. Deposit and Operations Services Manager since January 2016.||30||53|
|Senior Executive Vice President and|
|Deposit and Operations Services Manager|
|Robert J. Johnson, Jr.||General Counsel, Secretary and Chief Corporate Governance Officer since September 2010.||11||43|
Senior Executive Vice President and
General Counsel, Secretary and Chief Corporate Governance Officer
|Clarke R. Starnes III||Chief Risk Officer since July 2009.||33||56|
|Senior Executive Vice President and|
|Chief Risk Officer|
|David H. Weaver||Community Banking Group Executive since||20||49|
Senior Executive Vice President and
Community Banking Group Executive
|Steven B. Wiggs||Chief Marketing Officer since February 2005. Lending Group Manager since July 2009.||36||58|
|Senior Executive Vice President and|
|Chief Marketing Officer and Lending|
|Cynthia A. Williams||Chief Corporate Communications Officer since June 2009.||30||63|
|Senior Executive Vice President and|
|Chief Corporate Communications Officer|
|W. Rufus Yates||President and CEO of BB&T Securities since January 2013. President and CEO of Scott & Stringfellow, LLC from 2009 through 2012.||29||58|
|Senior Executive Vice President and|
|Capital Markets Manager|
The following discussion sets forth some of the more important risk factors that could materially affect BB&T’s financial condition and operations. When a risk factor spans several risk categories, the below risks have been listed by their primary risk category. Other factors that could affect the Company’s financial condition and operations are discussed in the “Forward-Looking Statements” section above. However, there may be additional risks that are not presently material or known, and factors besides those discussed below, or elsewhere in this or other reports that BB&T filed or furnished with the SEC, that also could adversely affect the Company.
Changes in banking laws could have a material adverse effect on BB&T.
BB&T is extensively regulated under federal and state banking laws and regulations that are intended primarily for the protection of depositors, federal DIFs and the banking system as a whole. In addition, BB&T is subject to changes in federal and state laws as well as changes in banking and credit regulations and governmental economic and monetary policies. Any of these changes could adversely and materially affect BB&T. The current regulatory environment for financial institutions entails significant potential increases in compliance requirements and associated costs, including those related to consumer credit, with a focus on mortgage lending.
Federal and state banking regulators also possess broad powers to take supervisory actions as they deem appropriate. These supervisory actions may result in higher capital requirements, higher deposit insurance premiums and limitations on BB&T’s activities that could have a material adverse effect on its business and profitability.
The ongoing implementation of the Dodd-Frank Act, and its related rulemaking activities, may result in lower revenues, higher costs and ratings downgrades. In addition, failure to meet the FRB’s capital planning and adequacy requirements and liquidity requirements under the Dodd-Frank Act and other banking laws may limit the ability to pay dividends, pursue acquisitions and repurchase common stock.
The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial services industry, addressing, among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, interchange fees, derivatives, lending limits, and changes among the bank regulatory agencies. Under Dodd-Frank, BB&T is deemed to be a “systemically important” institution. Federal agencies continue to implement the provisions of the Dodd-Frank Act. Many of these provisions remain subject to further rulemaking, guidance, and interpretation by the applicable federal regulators, such as the Council, which will regulate the systemic risk of the financial system. Additionally, the CFPB has finalized a number of significant rules that impact nearly every aspect of the lifecycle of a residential mortgage. These rules implement the Dodd-Frank Act amendments to the Equal Credit Opportunity Act, the Truth in Lending Act and the Real Estate Settlement Procedures Act. These rules have a direct impact on BB&T’s operations, as BB&T is both a mortgage originator and a servicer.
Due to BB&T’s size, it is subject to additional regulations such as the “living will” requirements relating to the rapid and orderly resolution of systemically important financial institutions in the event of material financial distress or failure. BB&T cannot predict the additional effects that compliance with the Dodd-Frank Act or any regulations will have on BB&T’s businesses or its ability to pursue future business opportunities. Additional regulations resulting from the Dodd-Frank Act may materially adversely affect BB&T’s business, financial condition or results of operations. See “Regulatory Considerations” for additional information regarding the Dodd-Frank Act and its impact upon BB&T.
In addition, BB&T has been subject to assessment by the FRB as part of the CCAR program. CCAR is an annual exercise by the FRB to ensure that institutions have forward-looking capital planning processes that account for their risks and sufficient capital to continue operations throughout times of economic and financial stress. BB&T cannot be certain that the FRB will have no objections to BB&T’s future capital plans submitted through the CCAR program. Failure to pass the CCAR review could adversely affect BB&T’s ability to pay dividends, enter into acquisitions and repurchase common stock.
BB&T may be subject to more stringent capital requirements, which could diminish its ability to pay dividends or require BB&T to reduce its operations.
The Dodd-Frank Act requires federal banking agencies to establish more stringent risk-based capital requirements and leverage limits applicable to banks and BHCs. The FRB approved final rules that established a new comprehensive capital framework for U.S. banking organizations and established a more conservative definition of capital. These requirements, known as Basel III, became effective on January 1, 2015, and as a result, BB&T became subject to enhanced minimum capital and leverage ratios. These requirements, and any other new regulations, including those that have been proposed but not yet implemented as a result of the requirements established by the BCBS, could adversely affect BB&T’s ability to pay dividends, or could require BB&T to limit certain business activities or to raise capital, which may adversely affect its results of operations or financial condition. With approximately $209.9 billion in assets at December 31, 2015, BB&T currently qualifies as a standardized approach banking organization under Basel III. Financial institutions with greater than $250 billion in assets or $10 billion in foreign assets are considered advanced approaches banking organizations, which results in a more complex calculation of RWA that includes an assessment of the impact of operational risk, among other changes. BB&T is preparing to comply with the advanced approaches requirements and these more stringent requirements, or BB&T’s failure to properly comply with them, could materially and adversely impact BB&T’s financial results and regulatory status. In addition, the costs associated with complying with more stringent capital requirements, such as the requirement to formulate and submit capital plans based on pre-defined stress scenarios on an annual basis, could have a material adverse effect on BB&T. See “Regulatory Considerations” for additional information regarding the capital requirements under the Dodd-Frank Act and Basel III.
BB&T is subject to extensive and expanding government regulation and supervision, which can lead to costly enforcement actions while increasing the cost of doing business and limiting BB&T’s ability to generate revenue.
The financial services industry is facing more intense scrutiny from bank supervisors in the examination process and more aggressive enforcement of regulations on both the federal and state levels, particularly with respect to mortgage- related practices and other consumer compliance matters, and compliance with anti-money laundering, Bank Secrecy Act and Office of Foreign Assets Control efforts, and economic sanctions against certain foreign countries and nationals. Federal banking law grants substantial enforcement powers to federal banking regulators. This enforcement authority includes, among other things, the ability to assess significant civil or criminal monetary penalties, fines, or restitution; to issue cease and desist or removal orders; and to initiate injunctive actions against banking organizations and institution-affiliated parties. These enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Failure to comply with these and other regulations, and supervisory expectations related thereto, may result in fines, penalties, lawsuits, regulatory sanctions, reputation damage, or restrictions on business. In addition, federal bank regulatory agencies are required to consider the effectiveness of a financial institution’s anti-money laundering activities and other regulatory compliance matters when reviewing bank mergers and BHC acquisitions and, consequently, non-compliance with the applicable regulations could materially impair BB&T’s ability to enter into or complete mergers and acquisitions.
Differences in interpretation of tax laws and regulations and any potential resulting litigation may adversely impact BB&T’s financial statements.
Local, state or federal tax authorities may interpret tax laws and regulations differently than BB&T and challenge tax positions that BB&T has taken on its tax returns. This may result in differences in the treatment of revenues, deductions, credits and/or differences in the timing of these items. The differences in treatment may result in payment of additional taxes, interest or penalties that could have a material adverse effect on BB&T’s results. For example, as discussed in Note 12 “Income Taxes” in the “Notes to Consolidated Financial Statements,” during 2010, BB&T received an IRS statutory notice of deficiency for tax years 2002-2007 asserting a liability for taxes, penalties and interest of approximately $892 million. Related developments resulted in a $516 million charge during 2013. Potential developments in BB&T’s litigation or in similar cases could adversely affect BB&T’s financial position or results of operations.
Changes in national, regional and local economic conditions and deterioration in the geographic and financial markets in which BB&T operates could lead to higher loan charge-offs and reduce BB&T’s net income and growth.
BB&T’s business is subject to periodic fluctuations based on national, regional and local economic conditions, as well as conditions that may be specific to particular sectors or industries. These fluctuations are not predictable, cannot be controlled, and may have a material adverse impact on BB&T’s operations and financial condition even if other favorable events occur. BB&T’s banking operations are locally oriented and community-based. Accordingly, BB&T expects to continue to be dependent upon local business conditions as well as conditions in the local residential and CRE markets it serves. For example, an increase in unemployment, a decrease in real estate values or increases in interest rates, as well as other factors, could weaken the economies of the communities BB&T serves. Weakness in BB&T’s market area could depress its earnings and consequently its financial condition because:
|·||customers may not want or need BB&T’s products or services;|
|·||borrowers may not be able or willing to repay their loans;|
|·||the value of the collateral securing loans to borrowers may decline; and|
|·||the quality of BB&T’s loan portfolio may decline.|
Any of the latter three scenarios could require BB&T to charge off a higher percentage of loans and/or increase provisions for credit losses, which would reduce BB&T’s net income. Credit deterioration, combined with flat to declining real estate values, would result in increased loan charge-offs and higher provisions for credit losses, which may negatively impact BB&T’s net income. For example, as of December 31, 2015, loan balances related to the oil and gas industry represented approximately 1% of our total loan portfolio. This amount generally consists of loans for oilfield services, oil and gas exploration and production, and pipeline transportation of gas and crude oil. Beginning in late 2014, oil prices began declining, which has had an adverse effect on some of our borrowers in this portfolio and on the value of the collateral securing some of these loans. If such downturn in the oil and gas industry continues, the cash flows of our customers in this industry could be adversely impacted, which could impair their ability to service any loans outstanding to them and/or reduce demand for loans. These factors could result in higher delinquencies and greater charge-offs in future periods, which could adversely affect our business, financial condition or results of operations.
A systemic lack of available credit, a lack of confidence in the financial sector, volatility in the financial markets and/or reduced business activity could materially adversely affect BB&T’s business, financial condition and results of operations.
Potential downgrades of U.S. government securities by one or more of the credit ratings agencies could have a material adverse effect on BB&T’s operations, earnings and financial condition.
A possible future downgrade of the sovereign credit ratings of the U.S. government and a decline in the perceived creditworthiness of U.S. government-related obligations could impact BB&T’s ability to obtain funding that is collateralized by affected instruments, as well as affect the pricing of that funding when it is available. A downgrade may also adversely affect the market value of such instruments. BB&T cannot predict if, when or how any changes to the credit ratings or perceived creditworthiness of these organizations will affect economic conditions. Such ratings actions could result in a significant adverse impact on BB&T. For example, BB&T’s securities portfolio consists largely of MBS issued by GSEs, such as FHLMC and FNMA. Among other things, a further downgrade in the U.S. government’s credit rating could adversely impact the value of these securities and may trigger requirements that the Company post additional collateral for trades relative to these securities. A downgrade of the sovereign credit ratings of the U.S. government or the credit ratings of related institutions, agencies or instruments would significantly exacerbate the other risks to which BB&T is subject and any related adverse effects on the business, financial condition and results of operations.
The soundness of other financial institutions could adversely affect BB&T.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. BB&T has exposure to many different industries and counterparties, and BB&T and certain of its subsidiaries routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutions. Many of these transactions expose BB&T to credit risk in the event of default of its counterparty. In addition, BB&T’s credit risk may be exacerbated when collateral is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure. These types of losses could materially and adversely affect BB&T’s results of operations or financial condition.
BB&T’s liquidity could be impaired by an inability to access the capital markets, an unforeseen outflow of cash or a reduction in the credit ratings for BB&T or its subsidiaries.
Liquidity is essential to BB&T’s businesses. When volatility or disruptions occur in the capital markets, BB&T’s ability to access capital could be materially impaired. Additionally, other factors outside of BB&T’s control, such as a general market disruption or an operational problem that affects third parties, could impair BB&T’s ability to access capital markets or create an unforeseen outflow of cash or deposits. BB&T’s inability to access the capital markets could constrain its ability to make new loans, to meet its existing lending commitments and ultimately jeopardize its overall liquidity and capitalization.
BB&T’s credit ratings are also important to its liquidity. Rating agencies regularly evaluate BB&T and its subsidiaries, and their ratings are based on a number of factors, including the financial strength of BB&T and its subsidiaries, as well as factors not entirely within BB&T’s control, including conditions affecting the financial services industry generally. As a result, there can be no assurance that BB&T will maintain its current ratings. A reduction in BB&T’s credit ratings could adversely affect BB&T’s liquidity and competitive position, increase its borrowing costs, limit its access to the capital markets or trigger unfavorable contractual obligations.
Turmoil and volatility in global financial markets could have a material adverse effect on BB&T’s operations, earnings and financial condition.
The negative impact on economic conditions and global markets from foreign sovereign debt matters could adversely affect BB&T’s business, financial condition and liquidity. Global conflicts and political activity could cause turmoil and volatility in the financial markets, which could reduce the value of BB&T’s assets or cause a reduction in liquidity that adversely impacts BB&T’s financial condition and results of operations.
The monetary, tax and other policies of governmental agencies, including the FRB, have a significant impact on market interest rates, and BB&T’s business and financial performance is impacted significantly by such interest rates.
BB&T’s businesses and earnings are affected by the fiscal and other policies adopted by various regulatory authorities of the U.S., non-U.S. governments and international agencies. The FRB regulates the supply of money and credit in the U.S. The federal policies determine in large part the cost of funds for lending and investing and the return earned on those loans and investments. The market impact from such policies can also materially decrease the value of certain of BB&T’s financial assets, most notably debt securities. Changes in the federal policies are beyond BB&T’s control and, consequently, the impact of these changes on BB&T’s activities and results of operations is difficult to predict.
Changes in interest rates may have an adverse effect on BB&T’s profitability.
BB&T’s earnings and financial condition are largely dependent on net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest rate spreads could adversely affect BB&T’s earnings and financial condition. BB&T cannot control or predict with certainty changes in interest rates. Regional and local economic conditions, competitive pressures and the policies of regulatory authorities, including monetary policies of the FRB, affect interest income and interest expense. As discussed in “Market Risk Management – Interest Rate Market Risk (Other than Trading),” BB&T has ongoing policies and procedures designed to manage the risks associated with changes in market interest rates. However, changes in interest rates still may have an adverse effect on BB&T’s profitability. For example, rising interest rates could adversely affect BB&T’s mortgage banking business because higher interest rates could cause customers to apply for fewer mortgages. Similarly, rising interest rates may increase the cost of BB&T’s deposits, which are a primary source of funding. BB&T is also subject to the risk of a negative interest rate scenario, which implies that a depositor would pay a premium for a financial institution to hold funds on deposit. In such a scenario, some depositors may choose to withdraw their deposits in lieu of paying an interest rate to BB&T to hold such deposits. Negative rates would also diminish the spreads on loans and securities. This scenario could have a material adverse effect on BB&T’s financial condition and results of operations. While BB&T actively manages against these risks through hedging and other risk mitigation strategies, if BB&T’s assumptions regarding borrower behavior are wrong or overall economic conditions are significantly different than anticipated, the Company’s risk mitigation techniques may be insufficient.
Loss of deposits or a change in deposit mix could increase the Company’s funding costs.
Deposits are a low cost and stable source of funding. BB&T competes with banks and other financial institutions for deposits. Funding costs may increase because the Company may lose deposits and replace them with more expensive sources of funding, clients may shift their deposits into higher cost products or the Company may need to raise its interest rates to avoid losing deposits. Higher funding costs reduce the Company’s NIM, net interest income and net income.
BB&T faces cybersecurity risks, including “denial of service attacks,” “hacking” and “identity theft” that could result in the disclosure of confidential information, adversely affect BB&T’s business or reputation and create significant legal and financial exposure.
BB&T’s computer systems and network infrastructure are subject to security risks and could be susceptible to cyber attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber attacks and other means. Denial of service attacks have been launched against a number of large financial services institutions, including BB&T. None of these events resulted in a breach of BB&T’s client data or account information; however, the performance of BB&T’s website, www.bbt.com, was adversely affected, and in some instances customers were prevented from accessing BB&T’s website. BB&T expects to be subject to similar attacks in the future. While events to date primarily resulted in inconvenience, future cyber attacks could be more disruptive and damaging. Hacking and identity theft risks, in particular, could cause serious reputational harm. Cyber threats are rapidly evolving and BB&T may not be able to anticipate or prevent all such attacks. BB&T may incur increasing costs in an effort to minimize these risks and could be held liable for any security breach or loss.
Despite efforts to ensure the integrity of its systems, BB&T will not be able to anticipate all security breaches of these types, and BB&T may not be able to implement effective preventive measures against such security breaches. The techniques used by cyber criminals change frequently and can originate from a wide variety of sources, including outside groups such as external service providers, organized crime affiliates, terrorist organizations or hostile foreign governments. Those parties may also attempt to fraudulently induce employees, customers or other users of BB&T’s systems to disclose sensitive information in order to gain access to its data or that of its clients. These risks may increase in the future as the Company continues to increase its mobile-payment and other internet-based product offerings and expands its internal usage of web-based products and applications.
A successful penetration or circumvention of system security could cause serious negative consequences to BB&T, including disruption of operations, misappropriation of confidential information of BB&T or its customers, or damage to computer systems of BB&T or its customers and counterparties. A security breach could result in violations of applicable privacy and other laws, financial loss to BB&T or to its customers, loss of confidence in BB&T’s security measures, significant litigation exposure, and harm to BB&T’s reputation, all of which could have a material adverse effect.
BB&T relies on its employees, systems and certain counterparties, and certain failures could materially adversely affect operations.
BB&T’s business is dependent on the ability to process, record and monitor a large number of complex transactions. The Company could be materially adversely affected if one or more of its employees causes a significant operational breakdown or failure, either as a result of human error or intentionally. Financial, accounting, or other data processing systems may fail or have other significant shortcomings that materially adversely affect BB&T’s business. BB&T’s systems may not be able to handle certain scenarios, such as a negative interest rate environment. In addition, products, services and processes are continually changing and BB&T may not fully identify new operational risks that may arise from such changes. Any of these occurrences could diminish the ability to operate one or more BUs or result in potential liability to clients, increased operating expenses, higher litigation costs (including fines and sanctions), reputational damage, regulatory intervention or weaker competitive standing, any of which could be material to the Company.
If personal, confidential or proprietary information of clients were to be mishandled or misused, significant regulatory consequences, reputational damage and financial loss could occur. Such mishandling or misuse could include circumstances where, for example, such information was erroneously provided to parties who are not permitted to have the information, either through the fault of systems, employees, or counterparties, or where such information was intercepted or otherwise inappropriately taken by third parties.
BB&T may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control, which may include, for example, security breaches; electrical or telecommunications outages; failures of computer servers or other damage to property or assets; natural disasters; health emergencies or pandemics; or events arising from political events, including terrorist acts. There can be no assurance that disaster recovery or other plans will fully mitigate all potential business continuity risks. Any failures or disruptions of systems or operations could impact BB&T’s ability to service its clients, which could adversely affect BB&T’s results of operations by subjecting BB&T to losses, litigation, regulatory fines or penalties or by requiring the expenditure of significant resources to correct the failure or disruption.
Significant litigation could have a material adverse effect on BB&T.
BB&T faces legal risks in its business, and the volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remains high. Substantial legal liability or significant regulatory action against BB&T may have material adverse financial effects or cause significant reputational harm to BB&T, which in turn could seriously harm BB&T’s business prospects.
BB&T faces significant operational and other risks related to its activities, which could expose it to negative publicity, litigation and/or regulatory action.
BB&T is exposed to many types of risks, including operational, reputational, legal and compliance risk, the risk of fraud or theft by employees or outsiders (including identity and information theft), unauthorized transactions by employees or operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Negative public opinion can result from BB&T’s actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, activities related to asset sales and balance sheet management and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect BB&T’s ability to attract and keep customers and can expose it to litigation and regulatory action.
Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. BB&T’s necessary dependence upon automated systems to record and process its transaction volume may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. BB&T also may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. BB&T is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as is BB&T) and to the risk that BB&T’s (or its vendors’) business continuity and data security systems prove to be inadequate.
BB&T relies on other companies to provide certain key components of its business infrastructure.
Third party vendors provide certain key components of BB&T’s business infrastructure such as internet connections, network access and mutual fund distribution. While BB&T has selected these third party vendors carefully, it does not control their operations. Any failure by these third parties to perform or provide agreed upon goods and services for any reason, or their poor performance of services, could adversely affect BB&T’s ability to deliver products and services to its customers and otherwise conduct its business. Replacing these third party vendors could also entail significant delay and expense.
BB&T may not be able to successfully integrate bank or nonbank mergers and acquisitions.
Difficulties may arise in the integration of the business and operations of BHCs, banks and other nonbank entities BB&T acquires and, as a result, BB&T may not be able to achieve the cost savings and synergies that it expects will result from such transactions. Achieving cost savings is dependent on consolidating certain operational and functional areas, eliminating duplicative positions and terminating certain agreements for outside services. Additional operational savings are dependent upon the integration of the acquired or merged entity’s businesses with BB&T or one of BB&T’s subsidiaries, the conversion of core operating systems, data systems and products and the standardization of business practices. Complications or difficulties in the conversion of core operating systems, data systems and products may result in the loss of customers, damage to BB&T’s reputation within the financial services industry, operational problems, one-time costs currently not anticipated or reduced cost savings resulting from such mergers or acquisitions. Annual cost savings in each such transaction may be materially less than anticipated if the holding company, bank merger or nonbank merger or acquisition is delayed unexpectedly, the integration of operations is delayed beyond what is anticipated or the conversion to a single set of data systems is not accomplished on a timely basis.
Difficulty in integrating an acquired company may prevent BB&T from realizing expected revenue increases, cost savings, increases in geographic or product presence and/or other projected benefits from the acquisition. The integration could result in higher than expected deposit attrition, loss of key employees, disruption of BB&T’s businesses or the businesses of the acquired company, or otherwise adversely affect BB&T’s ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition. Also, the negative effect of any divestitures required by regulatory authorities in acquisitions or business combinations may be greater than expected. As a result of these and other factors, BB&T could incur losses on acquired assets and increased expenses resulting from the failure to successfully integrate an acquired company, which could adversely impact its financial condition or results of operations.
BB&T may not be able to successfully implement future information technology system enhancements, which could adversely affect BB&T’s business operations and profitability.
BB&T invests significant resources in information technology system enhancements in order to provide functionality and security at an appropriate level. BB&T may not be able to successfully implement and integrate future system enhancements, which could adversely impact the ability to provide timely and accurate financial information in compliance with legal and regulatory requirements, which could result in sanctions from regulatory authorities. Such sanctions could include fines and suspension of trading in BB&T stock, among others. In addition, future system enhancements could have higher than expected costs and/or result in operating inefficiencies, which could increase the costs associated with the implementation as well as ongoing operations.
Failure to properly utilize system enhancements that are implemented in the future could result in impairment charges that adversely impact BB&T’s financial condition and results of operations and could result in significant costs to remediate or replace the defective components. In addition, BB&T may incur significant training, licensing, maintenance, consulting and amortization expenses during and after systems implementations, and any such costs may continue for an extended period of time.
Strategic and Other Risk
BB&T may experience significant competition from new or existing competitors, which may reduce its customer base or cause it to lower prices for its products and services in order to maintain market share.
There is intense competition among commercial banks in BB&T’s market area. In addition, BB&T competes with other providers of financial services, such as savings and loan associations, credit unions, consumer finance companies, securities firms, insurance companies, commercial finance and leasing companies, the mutual funds industry, full-service brokerage firms and discount brokerage firms, some of which are subject to less extensive regulations than BB&T is with respect to the products and services they provide. BB&T’s success depends, in part, on its ability to adapt its products and services to evolving industry standards and customer expectations. There is increasing pressure to provide products and services at lower prices. Lower prices can reduce BB&T’s NIM and revenues from its fee-based products and services.
In addition, the adoption of new technologies by competitors, including internet banking services, mobile phone applications and advanced ATM functionality could require BB&T to make substantial expenditures to modify or adapt its existing products and services. Also, these and other capital investments in BB&T’s business may not produce expected growth in earnings anticipated at the time of the expenditure. BB&T may not be successful in introducing new products and services, achieving market acceptance of its products and services, anticipating or reacting to consumers’ changing technological preferences or developing and maintaining loyal customers. In addition, BB&T could lose market share to the shadow banking system or other non-traditional banking organizations.
Some of BB&T’s larger competitors, including certain national banks that have a significant presence in BB&T’s market area, may have greater capital and resources than BB&T, may have higher lending limits and may offer products and services not offered by BB&T. Any potential adverse reactions to BB&T’s financial condition or status in the marketplace, as compared to its competitors, could limit BB&T’s ability to attract and retain customers and to compete for new business opportunities. The inability to attract and retain customers or to effectively compete for new business may have a material and adverse effect on BB&T’s financial condition and results of operations.
BB&T also experiences competition from nonbank companies inside and outside of its market area and, in some cases, from companies other than those traditionally considered financial sector participants. In particular, technology companies have begun to focus on the financial sector and offer software and products primarily over the Internet, with an increasing focus on mobile device delivery. These companies generally are not subject to the comparable regulatory burdens as financial institutions and may accordingly realize certain cost savings and offer products and services at more favorable rates and with greater convenience to the customer. For example, a number of companies offer bill pay and funds transfer services that allow customers to avoid using a bank. Technology companies are generally positioned and structured to quickly adapt to technological advances and directly focus resources on implementing those advances. This competition could result in the loss of fee income and customer deposits and related income. In addition, changes in consumer spending and saving habits could adversely affect BB&T’s operations, and the Company may be unable to develop competitive and timely new products and services in response. As the pace of technology and change advance, continuous innovation is expected to exert long-term pressure on the financial services industry.
BB&T may not be able to complete future acquisitions.
BB&T must generally satisfy a number of meaningful conditions before it can complete an acquisition of another bank or BHC, including federal and/or state regulatory approvals. In determining whether to approve a proposed bank or BHC acquisition, bank regulators will consider, among other factors, the effect of the acquisition on competition, financial condition and future prospects, including current and projected capital ratios and levels, the competence, experience and integrity of management and record of compliance with laws and regulations, the convenience and needs of the communities to be served, including the acquiring institution’s record of compliance under the CRA, the effectiveness of the acquiring institution in combating money laundering activities and protests from various stakeholders of both BB&T and its acquisition partner. Also, under the Dodd-Frank Act, U.S. regulators must now take systemic risk into account when evaluating whether to approve a potential acquisition transaction involving a large financial institution like BB&T. BB&T cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted. In specific cases, BB&T may be required to sell banks or branches, or take other actions as a condition to receiving regulatory approval. An inability to satisfy other conditions necessary to consummate an acquisition transaction, such as third-party litigation, a judicial order blocking the transaction or lack of shareholder approval, could also prevent BB&T from completing an announced acquisition.
Catastrophic events could have a material adverse effect on BB&T.
The occurrence of catastrophic events such as hurricanes, tropical storms, tornados, winter storms and other large scale catastrophes could adversely affect BB&T’s consolidated financial condition or results of operations. BB&T has operations and customers along the Gulf and Atlantic coasts as well as other parts of the southeastern United States, which could be adversely impacted by hurricanes and other severe weather in those regions. Unpredictable natural and other disasters could have an adverse effect on BB&T in that such events could materially disrupt its operations or the ability or willingness of its customers to access the financial services offered by BB&T. Although BB&T carries insurance to mitigate its exposure to certain catastrophic events, these events could nevertheless reduce BB&T’s earnings and cause volatility in its financial results for any fiscal quarter or year and have a material adverse effect on BB&T’s financial condition and/or results of operations.
BB&T leases its headquarters at 200 West Second Street, Winston-Salem, North Carolina 27101 and owns or leases other significant office space in the vicinity of its headquarters. BB&T owns free-standing operations centers, with its primary operations and information technology centers located in various locations in the southeastern United States. Offices are either owned or operated under long-term leases. BB&T operates retail branches in a number of states, primarily concentrated in the southeastern and mid-Atlantic United States. See Table 1 for a list of BB&T’s branches by state. BB&T also operates numerous insurance agencies and other businesses that occupy facilities. Management believes that the premises are well-located and suitably equipped to serve as financial services facilities. See Note 5 “Premises and Equipment” in the “Notes to Consolidated Financial Statements” in this report for additional disclosures related to properties and other fixed assets.
BB&T’s common stock is traded on the NYSE under the symbol “BBT.” The common stock was held by approximately 384,000 shareholders at December 31, 2015 compared to approximately 346,000 shareholders at December 31, 2014. The following table sets forth the quarterly high and low trading prices and closing sales prices for BB&T’s common stock and the dividends declared per share of common stock for each of the last eight quarters.
|Quarterly Summary of Market Prices and Cash Dividends Declared on Common Stock|
|Sales Prices||Dividends||Sales Prices||Dividends|
Common Stock, Dividends and Share Repurchases
BB&T’s ability to pay dividends is primarily dependent on earnings from operations, the adequacy of capital and the availability of liquid assets for distribution and is subject to the FRB not objecting to its capital plan. BB&T’s ability to generate liquid assets for distribution is dependent on the ability of Branch Bank to pay dividends to the Parent Company. The payment of cash dividends is an integral part of providing a competitive return on shareholders’ investments. The Company’s policy is to accomplish this while retaining sufficient capital to support future growth and to meet regulatory requirements. Management has established a guideline that the common dividend payout ratio will be between 30% and 50% and the total payout ratio (including dividends and share repurchases) will be between 30% and 80% of basic EPS during normal economic conditions. BB&T’s common dividend payout ratio, computed by dividing dividends declared per common share by basic EPS, was 40.5% in 2015 compared to 34.4% in 2014. BB&T has paid a cash dividend to shareholders every year since 1903. BB&T expects common dividend declarations, if declared, to occur in January, April, July and October with payment dates on or about the first of March, June, September and December. A discussion of dividend restrictions is included in Note 15 “Regulatory Requirements and Other Restrictions” in the “Notes to Consolidated Financial Statements” and in the “Regulatory Considerations” section.
BB&T has periodically repurchased shares of its own common stock. In accordance with North Carolina law, repurchased shares cannot be held as treasury stock, but revert to the status of authorized and unissued shares upon repurchase.
The Board of Directors had previously granted authority under the 2006 Repurchase Plan for the repurchase of up to 50 million shares of BB&T’s common stock. No shares were repurchased in connection with the 2006 Repurchase Plan during 2015, 2014, or 2013.
During June 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. The 2015 Repurchase Plan replaces the 2006 Repurchase Plan and does not have a specified termination date. No shares were repurchased in connection with the 2015 Repurchase Plan during 2015.
|Share Repurchase Activity|
|Number of Shares|
|Total||Average||Total Shares Repurchased||Available for Repurchase|
|Shares||Price Paid||Pursuant to||Pursuant to|
|Repurchased (1)||Per Share (2)||Publicly-Announced Plan||Publicly-Announced Plan|
|(shares in thousands)|
|(1)||Repurchases reflect shares exchanged or surrendered in connection with the exercise of equity-based awards under BB&T’s equity-based compensation plans.|
See Note 10 “Shareholders’ Equity” in the “Notes to Consolidated Financial Statements” for information about BB&T’s preferred stock.
Equity Compensation Plan Information
The following table provides information concerning securities to be issued upon the exercise of outstanding equity-based awards, the weighted average price of such awards and the securities remaining available for future issuance as of December 31, 2015.
|Equity Compensation Plan Information|
|Number of securities||Weighted-average||Number of securities remaining|
|to be issued upon||exercise price of||available for future issuance|
|exercise of outstanding||outstanding options,||under equity compensation plans|
|Plan Category||options, warrants and rights||warrants and rights||(excluding securities reflected in (a))|
|Approved by security holders||32,215,501||$||34.89||22,015,930|
|Not approved by security holders||―||―||―|
|(1)||Includes 11,638,316 RSUs.|
|(2)||Excludes RSUs because they do not have an exercise price.|
|(3)||All awards remaining available for future issuance will be issued under the terms of the 2012 Incentive Plan.|
Set forth below are graphs comparing the total returns (assuming reinvestment of dividends) of BB&T common stock, the S&P 500 Index, and an industry Peer Group. The companies in the Peer Group were Comerica Incorporated, Fifth-Third Bancorp, Huntington Bancshares, Incorporated, KeyCorp, M&T Bank Corporation, PNC Financial Services Group, Inc., Regions Financial Corporation, SunTrust Banks, Inc., U.S. Bancorp and Zions Bancorporation.
|*||$100 invested on December 31, 1995, 2005 or 2010, including reinvestment of dividends. Fiscal year ended December 31.|
|Cumulative Total Return Through December 31,||Cumulative Total Return|
|2010||2011||2012||2013||2014||2015||Through December 31, 2015|
|$100 Invested December 31, 2010||10 Year||20 Year|
|S&P 500 Index||100.00||102.11||118.43||156.77||178.22||180.67||202.41||481.73|
|BB&T’s Peer Group||100.00||88.66||108.49||147.24||164.75||164.96||118.28||388.14|
Overview of Significant Events and Financial Results
Net income available to common shareholders totaled $1.9 billion for 2015, a 2.4% decline from the prior year. On a diluted per common share basis, earnings for 2015 were $2.56, compared to $2.72 for 2014. BB&T’s results of operations for 2015 produced a return on average assets of 1.08% and a return on average common shareholders’ equity of 8.34% compared to prior year ratios of 1.19% and 9.32%, respectively. These results include merger-related and restructuring charges of $165 million for 2015, which reflects current year acquisition activity, compared to $46 million for 2014. Net interest income and noninterest income were both higher following the current year acquisition activity. Noninterest expense was higher due to increases in headcount and locations, primarily the result of the acquisitions, and the provision for credit losses increased after an allowance release in the prior year.
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 14 “Commitments and Contingencies” for additional information.
During 2015, BB&T acquired Susquehanna Bancshares, Inc., which provided $18.3 billion in assets, $14.1 billion in deposits and 245 branches in Pennsylvania, New Jersey, West Virginia and Maryland. BB&T also acquired The Bank of Kentucky Financial Corporation, which provided $2.0 billion in assets, $1.6 billion in deposits and 32 branches in the northern Kentucky/Cincinnati market, and completed the purchase of 41 retail branches in Texas, providing $1.9 billion in deposits. Additionally, BB&T reached an agreement to acquire National Penn Bancshares, Inc., which had $9.6 billion in assets, $6.7 billion in deposits and 124 branches in Pennsylvania, New Jersey and Maryland as of December 31, 2015.
Industry-wide sustained low interest rates represented a significant challenge for the Company during 2015 and for the past several years. From a NIM perspective, the negative impact associated with lower yields on loans and securities was partially mitigated by a decrease in funding costs from 0.65% to 0.60%, primarily driven by a decline in the cost of interest-bearing deposits and the early extinguishment of certain higher-cost FHLB advances during 2015 and 2014.
BB&T’s revenues for 2015 were $9.8 billion on a FTE basis, an increase of $384 million compared to 2014. Net interest income on a FTE basis was $221 million higher than the prior year, which reflects a $187 million increase in interest income and a $34 million decrease in interest expense. Noninterest income increased $163 million for the year, driven by improvements in FDIC loss share income and higher mortgage banking income.
The provision for credit losses was $428 million, compared to $251 million for the prior year. This increase reflects the stabilization in the rate of credit improvement and prior year loan sales that generated gains through the release of the related ALLL.
Asset quality improved significantly during 2015 as NPAs declined $70 million, or 9.0%, compared to 2014. This decline included a $40 million decrease in NPLs primarily due to continuing strong asset quality within commercial lending, and a $30 million decrease in foreclosed real estate and other property. Net charge-offs for 2015 were $436 million, compared to $538 million for the prior year. The ratio of the ALLL to net charge-offs was 3.36x for 2015, compared to 2.74x in 2014.
Noninterest expense increased $414 million primarily due to higher personnel expense and merger-related and restructuring charges, both of which were primarily the result of acquisition activity. These increases were partially offset by lower loan-related and other expense as the prior year included $118 million of charges related to the FHA-insured loan origination process.
During 2015, the U.S. Court of Appeals overturned a portion of an earlier ruling related to tax benefits previously disallowed in connection with a financing transaction that resulted in the recognition of income tax benefits of $107 million.
BB&T’s total assets at December 31, 2015 were $209.9 billion, an increase of $23.1 billion compared to December 31, 2014. This includes a $15.7 billion increase in loans and leases due to acquisitions and organic growth. Commercial and industrial loans were up $7.0 billion, CRE-income producing properties loans were up $2.7 billion and direct retail lending loans were up $3.0 billion. Mortgage loans declined $557 million due to management’s continuing decision to sell substantially all conforming mortgage loan production and the impact of certain NPL sales, partially offset by acquisition activity. AFS securities totaled $25.3 billion at December 31, 2015, compared to $20.9 billion at December 31, 2014. HTM securities were $18.5 billion at December 31, 2015 compared to $20.2 billion in the prior year. Goodwill, CDI and other intangible assets were also higher as the result of acquisitions.
Total deposits at December 31, 2015 were $149.1 billion, an increase of $20.1 billion from the prior year. Noninterest-bearing deposits increased $6.9 billion, interest checking increased $5.1 billion and money market and savings increased $9.9 billion. Time deposits declined $1.8 billion. The overall growth in lower-cost deposits reflects acquisition activity and continued organic growth. The average cost of interest-bearing deposits for 2015 was 0.24%, a decline of two basis points compared to the prior year.
Total shareholders’ equity increased $3.0 billion, or 12.2%, compared to the prior year. This increase was primarily driven by net income in excess of dividends totaling $1.2 billion, combined with common stock issued in connection with acquisitions. BB&T’s Tier 1 risk-based capital and total risk-based capital ratios at December 31, 2015 were 11.8% and 14.3%, respectively, compared to 12.4% and 14.9% at December 31, 2014, respectively. Common equity tier 1 was 10.3% at December 31, 2015.
On February 24, 2016 BB&T reached an agreement to acquire CGSC North America Holdings Corporation from Cooper Gay Swett & Crawford.
BB&T’s business has become more dynamic and complex in recent years. Consequently, management has annually evaluated and, as necessary, adjusted the Company’s business strategy in the context of the current operating environment. During this process, management considers the current financial condition and performance of the Company and its expectations for future economic activity from both a national and local market perspective. The achievement of BB&T’s key strategic objectives and established long-term financial goals is subject to many uncertainties and challenges. In the opinion of management, the challenges that are most relevant and likely to have a near term impact on performance are presented below:
|·||Intense competition within the financial services industry given the challenge in growing assets during a period of sustained low interest rates.|
|·||New technologies and evolving consumer preferences will put pressure on market share and customer loyalty.|
|·||Global economic and geopolitical risk, including potential financial system instability and ramifications of sovereign debt issues.|
|·||Cost and risk associated with regulatory reform and initiatives and IT projects.|
|·||Merger integration risk.|
In addition, certain other challenges and unforeseen events could have a near term impact on BB&T’s financial condition and results of operations. See the section titled “Forward-Looking Statements” for additional examples of such challenges.
Net Interest Income and NIM
Net interest income is BB&T’s primary source of revenue. Net interest income is influenced by a number of factors, including the volume, mix and maturity of interest-earning assets and interest-bearing liabilities and the interest rates earned and paid thereon. The difference between rates earned on interest-earning assets and the cost of funds (with a FTE adjustment made to tax-exempt items to provide comparability with taxable items) is measured by the NIM.
2015 compared to 2014
For 2015, net interest income on a FTE basis totaled $5.7 billion, an increase of $221 million or 4.0% compared to the prior year. The increase reflects higher interest income due to acquisitions and organic loan growth, partially offset by lower yields on new loans and securities and runoff in the loan portfolio acquired from the FDIC. Interest expense declined, reflecting lower rates and improvement in the mix of funding sources. The average cost of interest-bearing deposits declined two basis points to 0.24%, reflecting reductions in time deposits and growth in interest checking and money market and savings. The average cost of long-term debt declined from 2.36% to 2.13%, primarily due to the early extinguishment of $2.0 billion of higher-cost FHLB advances during the last two years.
The FTE-adjusted NIM is the primary measure used in evaluating the gross profit margin from the portfolios of earning assets. The FTE-adjusted NIM was 3.32% in 2015 compared with 3.42% in 2014. The decline in the NIM reflects lower yields on loans and securities, partially offset by the lower funding costs described above. The average annualized FTE yield for total loans and leases was 4.26% for 2015, compared to 4.42% for the prior year. The decrease was primarily due to lower yields on new loan originations and the runoff of higher yielding loans acquired from the FDIC, partially offset by acquisition impact. The FTE yield on the total securities portfolio was 2.36% for the year ended December 31, 2015, compared to 2.45% for the prior year.
The average rate paid on interest-bearing deposits for 2015 dropped to 0.24%, from 0.26% in 2014. This improvement was driven by changes in mix, with time deposits representing a lower percentage of interest-bearing deposits at December 31, 2015.
The rate paid on average short-term borrowings was 0.15% in 2015, compared to 0.13% in 2014. The average rate on long-term debt during 2015 was 2.13%, compared to 2.36% for the prior year. This decline reflects the previously mentioned early extinguishment of higher-cost FHLB advances. At December 31, 2015, the targeted Federal funds rate was a range of 0.25% to 0.50%, following the first rate increase in several years.
2014 compared to 2013
For 2014, net interest income on a FTE basis totaled $5.5 billion, a decrease of $245 million or 4.3% compared to the prior year. The decrease in net interest income reflects lower yields on new loans and securities and runoff in the loan portfolio acquired from the FDIC, partially offset by lower funding costs, which declined $123 million compared to 2013. The improvement in funding costs reflects a six basis point reduction in the average cost of interest-bearing deposits due to improved mix and a 67 basis point reduction in the average cost of long-term debt primarily due to the early extinguishment of $1.1 billion of higher-cost FHLB advances during the third quarter and lower rates on new issuances.
The FTE-adjusted NIM was 3.42% in 2014 compared with 3.68% in 2013. The decline in the NIM reflects lower yields on loans and securities, partially offset by the lower funding costs described above. The average annualized FTE yield for total loans and leases was 4.42% for 2014, compared to 4.85% for the prior year. The decrease was primarily due to lower yields on new loan originations and the runoff of higher yielding loans acquired from the FDIC. The FTE yield on the total securities portfolio was 2.45% for the year ended December 31, 2014, compared to 2.51% for the prior year.
The average rate paid on interest-bearing deposits for 2014 dropped to 0.26%, from 0.32% in 2013. This improvement was driven by an 18 basis point reduction in the cost of time deposits.
The rates paid on average short-term borrowings declined to 0.13% in 2014 from 0.16% in 2013. At December 31, 2014, the targeted Federal funds rate was a range of zero percent to 0.25%. The average rate on long-term debt during 2014 was 2.36%, compared to 3.03% for the prior year. This decline reflects the previously mentioned early extinguishment of $1.1 billion of higher-cost FHLB advances and lower rates on new issuances.
The following table sets forth the major components of net interest income and the related yields and rates, as well as the variances between the periods caused by changes in interest rates versus changes in volumes. Changes attributable to the mix of assets and liabilities have been allocated proportionally between the changes due to rate and the changes due to volume.
|FTE Net Interest Income and Rate / Volume Analysis (1)|
|Year Ended December 31, 2015, 2014 and 2013|
|2015 vs. 2014||2014 vs. 2013|
|Average Balances (7)||Yield/Rate||Income/Expense||Increase||Change due to||Increase||Change due to|
|(Dollars in millions)|
|Total securities, at amortized cost: (2)|
|MBS issued by GSE||30,683||29,504||27,598||1.98||2.00||2.00||605||589||552||16||(6)||22||37||―||37|
|States and political subdivisions||1,913||1,827||1,836||5.62||5.78||5.80||108||106||107||2||(3)||5||(1)||―||(1)|
|Acquired from FDIC||827||932||1,067||12.22||13.35||12.82||101||125||137||(24)||(10)||(14)||(12)||5||(17)|
|Other earning assets (3)||2,768||1,881||2,412||1.39||2.13||1.39||38||40||34||(2)||(17)||15||6||15||(9)|
|Loans and leases, net of unearned income: (4)(5)|
|Commercial and industrial||44,648||39,537||38,206||3.21||3.35||3.63||1,434||1,325||1,386||109||(57)||166||(61)||(108)||47|
|CRE-income producing properties||11,806||10,489||9,916||3.66||3.49||3.72||432||366||368||66||18||48||(2)||(23)||21|
|CRE-construction and development||3,196||2,616||2,589||3.57||3.51||3.86||114||92||100||22||2||20||(8)||(9)||1|
|Dealer floor plan||1,068||985||619||1.85||1.87||2.18||20||18||14||2||―||2||4||(2)||6|
|Direct retail lending (6)||9,375||8,249||15,952||4.07||4.10||4.64||381||338||741||43||(2)||45||(403)||(78)||(325)|
|Residential mortgage (6)||30,252||31,528||23,598||4.15||4.20||4.22||1,255||1,325||996||(70)||(16)||(54)||329||(5)||334|
|Other lending subsidiaries||12,291||10,848||10,468||8.68||9.08||10.20||1,067||985||1,068||82||(45)||127||(83)||(121)||38|
|Total loans and leases HFI||126,100||117,272||114,357||4.27||4.42||4.88||5,379||5,188||5,582||191||(103)||294||(394)||(373)||(21)|
|Total loans and leases||127,802||118,830||117,527||4.26||4.42||4.85||5,441||5,253||5,696||188||(112)||300||(443)||(356)||(87)|
|Total earning assets||172,673||161,252||156,711||3.75||3.90||4.25||6,473||6,286||6,654||187||(145)||332||(368)||(315)||(53)|
|Liabilities and Shareholders’ Equity|
|Money market and savings||56,592||49,728||48,640||0.19||0.15||0.13||107||74||64||33||22||11||10||9||1|
|Foreign office deposits - interest-bearing||593||722||672||0.12||0.07||0.08||1||1||1||―||―||―||―||―||―|
|Total interest-bearing deposits||95,682||91,750||94,623||0.24||0.26||0.32||233||239||301||(6)||22||(28)||(62)||(36)||(26)|
|Total interest-bearing liabilities||122,246||117,381||118,383||0.60||0.65||0.75||735||769||892||(34)||(32)||(2)||(123)||(176)||53|
|Total liabilities and shareholders’ equity||$||197,347||$||185,095||$||181,282|
|Average interest rate spread||3.15||%||3.25||%||3.50||%|
|NIM / net interest income||3.32||%||3.42||%||3.68||%||$||5,738||$||5,517||$||5,762||$||221||$||(113)||$||334||$||(245)||$||(139)||$||(106)|
|(1)||Yields are stated on a FTE basis assuming tax rates in effect for the periods presented.|
|(2)||Total securities include AFS and HTM securities at amortized cost.|
|(3)||Includes Federal funds sold, securities purchased under resale agreements or similar arrangements, interest-bearing deposits with banks, trading securities, FHLB stock and other earning assets.|
|(4)||Loan fees, which are not material for any of the periods shown, have been included for rate calculation purposes.|
|(5)||NPLs have been included in the average balances.|
|(6)||During the first quarter of 2014, $8.3 billion in loans were transferred from direct retail lending to residential mortgage.|
|(7)||Excludes basis adjustments for fair value hedges.|
Provision for Credit Losses
2015 compared to 2014
The provision for credit losses was $428 million in 2015, an increase of $177 million compared to the prior year. The increase in the provision for credit losses reflects allowance releases on loan sales in the prior year and stabilization in credit trends after an extended period of improvements. The ratio of the ALLL to net charge-offs was 3.36x for 2015, compared to 2.74x for 2014. During the prior year, loan sales resulted in a combined $66 million in gains recognized through the release of the ALLL.
Net charge-offs were 0.35% of average loans and leases held for investment for 2015, compared to 0.46% of average loans and leases held for investment during 2014. Net charge-offs declined $102 million, or 19.0%, with improvement across several loan portfolios led by commercial and industrial loans, which declined $45 million, and residential mortgage-nonguaranteed, which declined $38 million.
2014 compared to 2013
The provision for credit losses was $251 million in 2014, a decrease of $341 million compared to the prior year. The decrease in the provision for credit losses reflects continued improvement in credit trends and outlook, as net charge-offs in 2014 decreased 32.1% compared to the prior year. Improving credit conditions also resulted in an increase in the ratio of the ALLL to net charge-offs, which increased to 2.74x for 2014, compared to 2.19x for 2013.
During 2014, approximately $550 million of residential mortgage loans that were primarily performing TDRs and approximately $140 million of residential mortgage loans that were primarily nonperforming were sold at a pre-tax gain of $42 million and $24 million, respectively. Both of these gains were recognized as a reduction to the provision for credit losses.
Net charge-offs were 0.46% of average loans and leases held for investment for 2014, compared to 0.69% of average loans and leases held for investment during 2013. Net charge-offs declined $254 million, or 32.1%, with improvement across most loan portfolios led by commercial and industrial loans, which declined $112 million compared to 2013. Net charge-offs in other lending subsidiaries were $15 million higher primarily due to a process change that resulted in the accelerated recognition of charge-offs in the nonprime automobile lending portfolio.
Noninterest income is a significant contributor to BB&T’s financial results. Management focuses on diversifying its sources of revenue to further reduce BB&T’s reliance on traditional spread-based interest income, as certain fee-based activities are a relatively stable revenue source during periods of changing interest rates.
|Year Ended December 31,||% Change|
|2015||2014||2013||2015 vs. 2014||2014 vs. 2013|
|(Dollars in millions)|
|Service charges on deposits||631||632||619||(0.2)||2.1|
|Mortgage banking income||455||395||565||15.2||(30.1)|
|Investment banking and brokerage fees and commissions||398||387||383||2.8||1.0|
|Trust and investment advisory revenues||240||221||200||8.6||10.5|
|Bankcard fees and merchant discounts||218||207||202||5.3||2.5|
|Operating lease income||124||95||77||30.5||23.4|
|Income from bank-owned life insurance||113||110||113||2.7||(2.7)|
|FDIC loss share income, net||(253)||(343)||(293)||(26.2)||17.1|
|Securities gains (losses), net||(3)||(3)||51||―||(105.9)|
|Total noninterest income||$||4,019||$||3,856||$||4,036||4.2||(4.5)|
2015 compared to 2014
Noninterest income was a record $4.0 billion for 2015, an increase of $163 million compared to 2014. This increase was driven by improved FDIC loss share income, higher mortgage banking income and higher operating lease income, partially offset by lower insurance income and lower other income.
FDIC loss share income improved by $90 million, primarily due to a $58 million reduction in negative accretion related to credit losses on covered loans and a $20 million change in the offset to the provision for covered loans. See “Acquired from the FDIC and FDIC Loss Share Receivable/Payable” for additional information.
Mortgage banking income increased $60 million, primarily due to higher volume and $17 million of higher MSR valuation adjustments.
Operating lease income increased $29 million, primarily due to a larger leasing portfolio size as this business has continued to demonstrate steady growth.
Income from BB&T’s insurance agency/brokerage operations was the largest source of noninterest income in 2015. Insurance income totaled $1.6 billion for 2015, a decline of $47 million compared to 2014. The second quarter sale of American Coastal resulted in a $79 million decline in insurance income, which was partially offset by higher volume in the property and casualty business.
Other income totaled $326 million for 2015, a decline of $23 million from 2014. This decline is primarily due to the $26 million loss on sale of American Coastal during the second quarter of 2015 and $18 million of lower income related to assets for certain post-employment benefits (which is offset in personnel expense). These declines were partially offset by higher partnerships and other investment income, which was the result of an opportunistic sale that resulted in a $28 million gain during the third quarter of 2015.
2014 compared to 2013
Noninterest income was $3.9 billion for 2014, compared to $4.0 billion for 2013. This decrease was driven by declines in mortgage banking income, FDIC loss share income, net securities gains and other income, partially offset by growth in insurance income.
Income from BB&T’s insurance agency/brokerage operations was the largest source of noninterest income in 2014. Insurance income was $1.6 billion, up $126 million compared to 2013, as increased volume and improving market conditions drove broad-based increases across the insurance business. This growth was led by a $95 million increase in property and casualty commissions and a $17 million increase in contingent insurance commissions.
Mortgage banking income totaled $395 million in 2014, a decrease of $170 million compared to the prior year. The decrease in mortgage banking income includes a $182 million decrease in residential mortgage production revenues primarily due to decreases in the volume and margins on loan sales, which have come under pressure due to increased competition and sustained low interest rates. The decline also reflects an $18 million reduction in fees primarily due to a reduction in volume. These declines were partially offset by increased servicing income due to a larger servicing portfolio as well as an increase in derivative income.
Net securities gains declined $54 million as the prior year contained a $46 million gain on the sale of GNMA securities. FDIC loss share income, net, was $50 million worse than 2013, primarily due to a $29 million change in the offset to the provision for covered loans, which was a benefit in 2014 due to improved credit quality on the acquired loans.
Trust and investment advisory revenues increased $21 million to a record $221 million, primarily the result of higher investment advisory revenues during the current year. Other income decreased $96 million in 2014, primarily due to a $31 million gain on the sale of a consumer lending subsidiary in 2013, a $24 million decrease in income from assets related to certain post-employment benefits, which is offset in personnel expense, and an $8 million decrease in letter of credit fees. These declines and other smaller declines were partially offset by a $19 million increase in leasing income.
The following table provides a breakdown of BB&T’s noninterest expense:
|Year Ended December 31,||% Change|
|2015||2014||2013||2015 vs. 2014||2014 vs. 2013|
|(Dollars in millions)|
|Occupancy and equipment expense||708||682||692||3.8||(1.4)|
|Outside IT services||135||115||89||17.4||29.2|
|Amortization of intangibles||105||91||106||15.4||(14.2)|
|Foreclosed property expense||53||40||55||32.5||(27.3)|
|Merger-related and restructuring charges, net||165||46||46||NM||―|
|Loss on early extinguishment of debt||172||122||―||41.0||NM|
|Total noninterest expense||$||6,266||$||5,852||$||5,777||7.1||1.3|
2015 compared to 2014
Noninterest expense totaled $6.3 billion for 2015, an increase of $414 million from 2014. This increase was driven by higher personnel expense, merger-related and restructuring charges and loss on early extinguishment of debt, partially offset by lower loan-related expense.
Personnel expense is the largest component of noninterest expense and includes salaries, wages and incentives, as well as pension and other employee benefit costs. Personnel expense totaled $3.5 billion, a $289 million increase compared to 2014. This increase was driven by a $114 million increase in salaries, which was primarily due to additional headcount from acquisitions. Personnel expense also increased due to a $74 million increase in pension expense that reflects higher amortization, service and interest costs, partially offset by the estimated return on higher plan assets. Additionally, personnel expense reflects a $50 million increase in employee medical and insurance benefits and a $32 million increase in incentives.
Merger-related and restructuring charges totaled $165 million, an increase of $119 million compared to 2014. This increase was primarily related to the Susquehanna acquisition, with additional amounts related to The Bank of Kentucky and the planned acquisition of National Penn.
Loss on early extinguishment of debt was $172 million for 2015, compared to $122 million for 2014. The combined debt extinguishments for the two years totaled $2.0 billion of FHLB advances with a weighted average interest rate of 4.5%.
Occupancy and equipment expense totaled $708 million for 2015, compared to $682 million for 2014. The increase reflects the acquisition activity occurring during the year.
Loan-related expense totaled $150 million for 2015, a decrease of $117 million compared to the prior year. This decrease is largely the result of lower claims and chargeoffs in the current year, as well as charges recorded in the prior year of $33 million related to the FHA-insured loan origination process and $27 million related to a review of mortgage lending processes.
2014 compared to 2013
Personnel expense totaled $3.2 billion, a decrease of $113 million compared to 2013. This decline was driven by a $110 million reduction in qualified pension plan expense, primarily due to a higher expected return on plan assets and a change in the actuarial discount rate used to determine the projected benefit obligation as of the beginning of the year that resulted in reduced amortization expense during 2014.
Professional services expense totaled $139 million, a decrease of $50 million compared to the prior year. This decrease was driven by a reduction in legal fees as well as services associated with regulatory initiatives. Regulatory charges totaled $106 million for 2014, a decline of $37 million compared to 2013, which primarily reflects a reduction in FDIC insurance due to long-term debt issuances and improved credit conditions.
Loan-related expense totaled $267 million for 2014, an increase of $79 million compared to the prior year. This increase includes a $33 million mortgage loan indemnification reserve adjustment, which represents an increase in estimated losses that may be incurred on FHA-insured mortgage loans that have not yet defaulted, and a mortgage reserve adjustment of $27 million related to a review of mortgage lending processes.
Outside IT services totaled $115 million during 2014, compared to $89 million for 2013. This increase was due to third-party costs associated with the new ERP and commercial loan systems.
A loss on early extinguishment of debt of $122 million was recorded during 2014 in connection with the early termination of $1.1 billion of higher cost FHLB advances. The transaction occurred during the third quarter of 2014 and had a beneficial impact to net interest income for the remainder of the year.
Other expense was $890 million for 2014, an increase of $72 million compared to 2013. During June 2014, BB&T received notice from the HUD-OIG that BB&T had been selected for an audit/survey to assess BB&T's compliance with FHA loan origination and quality control requirements. In late 2014 and in 2015, BB&T received subpoenas from the HUD-OIG and the Department of Justice seeking additional information regarding its lending practices in connection with loans insured by the FHA. BB&T is cooperating with the investigation. While the outcome of the investigation is unknown and neither the Department of Justice nor the HUD-OIG has asserted any claims, similar reviews and related matters with other financial institutions have resulted in cash settlements and other remedial actions. BB&T identified a potential exposure related to losses incurred by the FHA on defaulted loans that ranges from $25 million to $105 million and recognized an $85 million charge during 2014. The income statement impact of this adjustment was included in other expense on the Consolidated Statements of lncome. The ultimate resolution of this matter is uncertain and the estimates of this exposure are subject to the application of significant judgment and therefore cannot be predicted with certainty at this time.
The increase in other expense also includes a $17 million increase in depreciation related to operating leases. These increases were partially offset by a $15 million favorable franchise tax adjustment and a decline in expense due to the prior year $11 million write-down of owned real estate.
Merger-Related and Restructuring Charges
BB&T has incurred certain merger-related and restructuring charges, which are reflected in BB&T’s Consolidated Statements of Income as a category of noninterest expense. Merger-related and restructuring expenses or credits include:
|·||severance and personnel-related costs or credits, which typically occur in corporate support and data processing functions;|
|·||occupancy and equipment charges or credits, which relate to costs or gains associated with lease terminations, obsolete equipment write-offs and the sale of duplicate facilities and equipment;|
|·||professional services, which relate to investment banking advisory fees and other consulting services pertaining to the transaction;|
|·||systems conversion and related charges, which represent costs to integrate the acquired entity’s information technology systems; and|
|·||other merger-related and restructuring charges or credits, which include expenses necessary to convert and combine the acquired branches and operations of merged companies, direct media advertising related to the acquisitions, asset and supply inventory write-offs, and other similar charges.|
Merger-related and restructuring accruals are established when the costs are incurred or once all requirements for a plan to dispose of certain business functions have been approved by management. In general, a major portion of accrued costs are utilized in conjunction with or immediately following the systems conversion, when most of the duplicate positions are eliminated and the terminated employees begin to receive severance. Other accruals are utilized over time based on the sale, closing or disposal of duplicate facilities or equipment or the expiration of lease contracts. Merger and restructuring accruals are re-evaluated periodically and adjusted as necessary. The remaining accruals at December 31, 2015 are generally expected to be utilized within one year, unless they relate to specific contracts that expire later.
|The following table presents a summary of activity with respect to merger-related and restructuring accruals:|
|Merger-related and Restructuring Accrual Activity|
|Year Ended December 31, 2015|
|Beginning Balance||Merger-Related Charges, net||Utilized||Ending Balance|
|(Dollars in millions)|
|Severance and personnel-related||$||2||$||60||$||(36)||$||26|
|Occupancy and equipment||7||16||(12)||11|
|Systems conversion and related charges||―||25||(25)||―|
Provision for Income Taxes
BB&T’s provision for income taxes totaled $794 million, $921 million and $1.6 billion for 2015, 2014 and 2013, respectively. BB&T’s effective tax rates for the years ended 2015, 2014 and 2013 were 27.2%, 29.5% and 47.3%, respectively. The changes in the effective tax rates during 2015, 2014 and 2013 were primarily due to adjustments for uncertain tax positions as discussed below.
During 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 during 2010 and filed a lawsuit seeking a refund in the U.S. Court of Federal Claims. During 2013, the court denied the refund claim, and BB&T recorded $516 million of income tax charges. 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 of 2015. 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, which has not rendered a decision on whether it will hear the case.
BB&T has extended credit to and invested in the obligations of states and municipalities and their agencies and has made other investments and loans that produce tax-exempt income. The income generated from these investments, together with certain other transactions that have favorable tax treatment, have reduced BB&T’s overall effective tax rate from the statutory rate in all periods presented.
Refer to Note 12 “Income Taxes” in the “Notes to Consolidated Financial Statements” for a reconciliation of the effective tax rate to the statutory tax rate and a discussion of uncertain tax positions and other tax matters.
See Note 20 “Operating Segments” in the “Notes to Consolidated Financial Statements” herein for additional disclosures related to BB&T’s operating segments, the internal accounting and reporting practices used to manage these segments and financial disclosures for these segments.
Fluctuations in noninterest income and noninterest expense incurred directly by the segments are more fully discussed in the “Noninterest Income” and “Noninterest Expense” sections above.
2015 compared to 2014
Community Banking had a network of 2,139 banking offices at the end of 2015, an increase of 300 offices compared to December 31, 2014. The increase in offices was primarily driven by the acquisition of 41 branches in Texas, 32 branches with the acquisition of The Bank of Kentucky and 245 branches with the acquisition of Susquehanna Bancshares, partially offset by the consolidation of nearby financial centers and the closure of certain lower volume branches within the BB&T branch network.
Community Banking net income was $978 million in 2015, an increase of $68 million, or 7.5%, compared to 2014. Net income results include the impact of the current year acquisitions as described previously.
Segment net interest income increased $159 million to $3.1 billion, primarily driven by growth in commercial loans and direct retail loans due to organic growth and the acquisitions, partially offset by lower interest rates on new loans and lower funding spreads on deposits.
Noninterest income decreased $18 million driven by lower service charges on deposits, international factoring commissions and letter of credit fees. Intersegment net referral fee income increased $15 million driven by higher loan referrals to the Residential Mortgage Banking segment and higher capital markets referrals to the Financial Services segment.
The allocated provision for credit losses decreased $56 million as a result of lower commercial and retail loan net charge-offs. Noninterest expense increased $89 million driven by higher salary, incentive, pension and franchise tax expense as well as higher merger-related charges. The increase in salary expense reflects the acquisition activity. Allocated corporate expense increased $21 million driven by internal business initiatives.
Residential Mortgage Banking
Residential Mortgage Banking net income was $244 million in 2015, an increase of $40 million, or 19.6%, compared to 2014. Mortgage originations totaled $18.1 billion in 2015, an increase of $706 million compared to $17.4 billion in 2014. BB&T’s residential mortgage servicing portfolio, which includes both retained loans and loans serviced for others, totaled $122.2 billion at the end of 2015, compared to $122.3 billion at December 31, 2014.
Segment net interest income decreased $46 million to $452 million, primarily the result of lower loans HFI balances reflecting the current strategy of selling substantially all conforming mortgage loan production, partially offset by higher credit spreads. Noninterest income increased $45 million, driven by higher gains on residential mortgage loan production and sales and an increase in net MSR income, primarily due to improved MSR hedging results.
The allocated provision for credit losses reflected a charge of $9 million in 2015, compared to a benefit of $107 million in 2014, partially attributable to stabilization in the rate of improvement in credit trends. Earlier period results reflect the impact of loan sales that generated a combined $66 million in gains through the release of the related ALLL. Noninterest expense decreased $184 million, primarily due to prior-year adjustments totaling $118 million relating to the previously discussed FHA-insured loan exposures and a $27 million prior-year charge related to a review of mortgage processes. The decrease in noninterest expense was also partially attributable to lower costs associated with repurchased loans.
Dealer Financial Services
Dealer Financial Services net income was $180 million in 2015, a decrease of $3 million, or 1.6%, compared to 2014.
Segment net interest income increased $53 million to $728 million, primarily driven by growth in the Dealer Finance and Regional Acceptance loan portfolios, the inclusion of dealer floor plan loans in the segment results beginning in the first quarter of 2015 and the acquisition of Susquehanna’s consumer auto leasing business.
The allocated provision for credit losses increased $17 million, primarily due to higher charge-offs. Noninterest expense increased $37 million driven by higher personnel, professional services, loan processing and other expenses.
Dealer Financial Services grew average loans by $911 million, or 7.1%, compared to 2014 as a result of strong growth in the prime and nonprime auto lending businesses and the acquisition of Susquehanna’s consumer auto leasing business.
Specialized Lending net income was $268 million in 2015, an increase of $11 million, or 4.3%, compared to 2014.
Segment net interest income increased $33 million to $465 million, driven by strong growth in small ticket consumer loans and the acquisition of Susquehanna’s small business equipment finance portfolio, partially offset by lower rates on new loans. Noninterest income increased $39 million driven by higher commercial mortgage and operating lease income.
The allocated provision for credit losses increased $9 million, primarily due to higher net charge-offs in the small ticket consumer and commercial finance loan portfolios. Noninterest expense increased $45 million, primarily due to higher personnel expense and higher depreciation of property under operating leases.
Specialized Lending grew average loans by $2.0 billion, or 12.7%, compared to 2014 as a result of strong growth in small ticket consumer, commercial mortgage and governmental finance loans and the acquisition of the small business equipment finance portfolio.
Insurance Services net income was $182 million in 2015, a decrease of $51 million, or 21.9%, compared to 2014.
Insurance Service’s noninterest income of $1.6 billion decreased $55 million, which primarily reflects lower direct commercial property and casualty insurance premiums due to the previously discussed sale of American Coastal, partially offset by higher new and renewal commercial property and casualty insurance business.
Noninterest expense increased $2 million driven by higher salary, employee insurance and pension expense as well as higher merger-related charges, partially offset by lower business referral and insurance claims expense. Allocated corporate expenses increased $13 million primarily due to the centralization of certain corporate support functions during mid-2014.
Financial Services net income was $319 million in 2015, an increase of $37 million, or 13.1%, compared to 2014.
Segment net interest income increased $80 million to $526 million, driven by Corporate Banking and BB&T Wealth loan and deposit growth, partially offset by lower rates on new loans. Noninterest income increased $68 million as a result of higher investment commissions and brokerage fees, trust and investment advisory fees, commercial unused commitment fees and income from SBIC private equity investments. Client invested assets totaled $130.6 billion as of December 31, 2015, an increase of $11.7 billion, or 9.8%, compared to 2014.
The allocated provision for credit losses increased $40 million as a result of the Corporate Banking loan growth, portfolio mix and risk expectations related to the oil and energy sector. Noninterest expense increased $46 million compared to 2014, driven by higher salary, incentive, pension and professional services expense.
Financial Services continues to generate significant loan growth through expanded lending strategies, with Corporate Banking’s average loan balances increasing $2.6 billion, or 28.4%, compared to 2014, while BB&T Wealth’s average loan balances increased $367 million, or 32.7%. BB&T Wealth also grew transaction account balances by $595 million, or 21.5%, and money market and savings balances by $974 million, or 14.5%, compared to 2014, partially attributable to the ongoing identification and servicing of wealth clients in the Community Bank.
Other, Treasury & Corporate
Other, Treasury & Corporate generated a net loss of $48 million in 2015, compared to net income of $137 million in 2014.
Segment net interest income decreased $62 million to $339 million, driven by lower average PCI loan balances as well as lower yields on the securities portfolio, partially offset by higher funding spreads on deposits. Noninterest income increased $79 million, primarily due to improved FDIC loss share income, partially offset by the loss on the previously discussed sale of American Coastal.
The allocated provision for credit losses reflected a benefit of $15 million in 2015, compared to a benefit of $66 million in 2014, primarily due to a release in the RUFC in the earlier period driven by improvements related to the mix of unfunded lending exposures and a lower provision benefit for PCI loans attributable to improvements in credit quality in the earlier period.
Noninterest expense increased $365 million, driven by higher salary, employee insurance and pension expense, partially attributable to the Susquehanna acquisition, as well as higher IT professional services and software expense, franchise taxes and merger-related charges. In addition, noninterest expense for the current year includes the previously discussed $172 million loss on early extinguishment of FHLB advances, compared to a similar loss of $122 million in the prior year. Intersegment net referral fee expenses decreased $22 million driven largely by higher mortgage loan referrals shared by other segments. Amortization of intangibles increased $25 million primarily due to core deposit intangible amortization for acquisitions occurring during 2015. Allocated corporate expense decreased $53 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.
2014 compared to 2013
Community Banking had a network of 1,839 banking offices at the end of 2014, an increase of 14 offices compared to December 31, 2013. During the second quarter of 2014, BB&T completed the acquisition of 21 branches in Texas, which included $1.2 billion in deposits and $112 million in loans. The increase in offices was primarily driven by the acquisition, partially offset by the closure of certain lower volume branches.
Community Banking net income was $910 million in 2014, an increase of $26 million, or 2.9%, compared to 2013. Segment net interest income totaled $2.9 billion, a decrease of $134 million compared to 2013, primarily due to lower yields on new loans and lower funding spreads earned on deposits, partially offset by loan and noninterest-bearing deposit growth. Noninterest income of $1.2 billion increased $4 million, primarily due to higher service charges on deposits, checkcard fees and bankcard fees.
The allocated provision for credit losses decreased $156 million driven by lower business and consumer loan charge-offs, partially offset by stabilization in loss factors. Noninterest expense totaled $1.4 billion for 2014. The $145 million decrease was primarily attributable to lower personnel, occupancy and equipment and professional services expense and lower restructuring charges. Intersegment net referral fees decreased $58 million driven by lower mortgage banking referrals. Allocated corporate expenses increased $81 million, primarily driven by internal business initiatives, including the implementation of the ERP system.
Residential Mortgage Banking
Residential Mortgage Banking net income was $204 million in 2014, a decrease of $179 million, or 46.7%, compared to 2013. Mortgage originations totaled $17.4 billion in 2014, a decrease of $14.2 billion compared to $31.6 billion in 2013. BB&T’s residential mortgage servicing portfolio, which includes both retained loans and loans serviced for others, totaled $122.3 billion at the end of 2014, compared to $121.2 billion at the end of 2013.
Segment net interest income decreased $87 million to $498 million, primarily the result of lower average loan balances. Noninterest income decreased $171 million driven by lower gains on residential mortgage loan sales due to lower origination volume and tighter pricing due to competitive factors. This decrease was partially offset by an increase in net servicing income of $31 million, primarily due to slower prepayment speeds and a $2.8 billion, or 3.2%, increase in the investor-owned servicing portfolio.
The allocated provision for credit losses was a benefit of $107 million in 2014, compared to expense of $12 million in 2013, reflecting the benefit of the previously discussed sales of residential mortgage loans during 2014 and a decrease in loan balances consistent with the current strategy of selling substantially all conforming mortgage loan production. Noninterest expense increased $141 million, which primarily reflects a $27 million charge in the fourth quarter of 2014 related to the previously discussed ongoing review of mortgage processes, as well as adjustments in the second quarter of 2014 totaling $118 million related to the previously discussed FHA-insured loan exposures.
Dealer Financial Services
Dealer Financial Services net income was $183 million in 2014, a decrease of $21 million, or 10.3%, compared to 2013.
The allocated provision for credit losses increased $23 million primarily due to higher charge-offs in the nonprime automobile loan portfolio as credit trends in that portfolio continue to normalize. Noninterest expense increased $8 million, driven by higher personnel expense, primarily related to Regional Acceptance Corporation’s geographic expansion, and operating charge-offs.
Dealer Financial Services grew average loans by $1.1 billion, or 10.5%, compared to 2013 as a result of strong growth in both the prime and nonprime auto lending businesses.
Specialized Lending net income was $257 million in 2014, a decrease of $16 million, or 5.9%, compared to 2013.
Segment net interest income decreased $120 million to $432 million, which primarily reflects the sale of a consumer lending subsidiary during the fourth quarter of 2013 and lower credit spreads on loans earned during 2014. Noninterest income increased $10 million driven by higher operating lease income.
The sale of the specialized lending subsidiary also had a beneficial impact on the allocated provision for credit losses, which decreased $46 million. Noninterest expense decreased $34 million driven by lower personnel, occupancy and equipment, loan processing and professional services expense.
Small ticket consumer finance, equipment finance, governmental finance and commercial mortgage experienced strong loan growth compared to 2013.
Insurance Services net income was $233 million in 2014, an increase of $46 million, or 24.6%, compared to 2013.
Insurance Services’ noninterest income of $1.7 billion increased $128 million, primarily due to increased commissions on new and renewal property and casualty business, higher performance-based commissions and an increase in employee benefit commissions. Noninterest expense increased $54 million driven by higher salaries, performance-based incentives, operating charge-offs and business referral expense.
Financial Services net income was $282 million in 2014, a decrease of $23 million, or 7.5%, compared to 2013.
Noninterest income increased $22 million, primarily due to higher trust, investment advisory and investment banking income. Client invested assets totaled $119.0 billion as of December 31, 2014, an increase of $7.8 billion, or 7.0%, compared to 2013.
The allocated provision for credit losses increased $7 million compared to the prior year as a result of growth in the Corporate Banking and BB&T Wealth loan portfolios. Noninterest expense increased $30 million, primarily due to higher personnel expense, operating charge-offs, sub-advisory fees and occupancy and equipment expense. Allocated corporate expenses increased $19 million, primarily driven by internal business initiatives and growth in the segment.
Financial Services continued to generate significant loan growth through expanded lending strategies. Corporate Banking’s average loan balances increased $1.7 billion, or 23.4%, compared to 2013, while BB&T Wealth’s average loan balances increased $229 million, or 25.6%. BB&T Wealth also grew transaction account balances by $438 million, or 18.8%, and money market and savings balances by $534 million, or 8.6%, compared to 2013.
Other, Treasury & Corporate
Other, Treasury & Corporate net income was $137 million in 2014 compared to a net loss of $506 million in 2013. Results in the prior year include $516 million in adjustments for uncertain income tax positions as previously discussed.
Segment net interest income increased $103 million to $401 million, primarily due to an increase in the investment portfolio, lower funding credits on deposits allocated to Community Banking and Financial Services and lower corporate borrowing costs, partially offset by runoff in the PCI loan portfolio.
Noninterest income decreased $170 million primarily due to lower securities gains in the investment portfolio, lower FDIC loss share income, the sale of a consumer lending subsidiary during the fourth quarter of 2013 and lower income from assets related to certain post-employment benefits.
The allocated provision for credit losses was a benefit of $66 million compared to a benefit of $16 million in 2013. Results from 2014 included a $29 million benefit for loans acquired from the FDIC and a $29 million reduction in the reserve for unfunded lending commitments driven by improvements related to the mix of lines of credit, letters of credit, and bankers’ acceptances. Noninterest expense increased $36 million, primarily due to $122 million in expense related to early extinguishment of FHLB debt, and higher outside IT services and merger-related expense, partially offset by lower personnel, professional services and tax and license expense. Intersegment net referral fee expense decreased $59 million as a result of a lower level of mortgage banking referral income that was allocated to both Community Banking and Financial Services.
Analysis of Financial Condition
BB&T’s board-approved investment policy is carried out by the MRLCC, which meets regularly to review the economic environment and establish investment strategies. The MRLCC also has much broader responsibilities, which are discussed in the “Market Risk Management” section in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein.
Investment strategies are reviewed by the MRLCC based on the interest rate environment, balance sheet mix, actual and anticipated loan demand, funding opportunities and the overall interest rate sensitivity of the Company. In general, the goals of the investment portfolio are: (i) to provide a sufficient margin of liquid assets to meet unanticipated deposit and loan fluctuations and overall funds management objectives; (ii) to provide eligible securities to secure public funds, trust deposits as prescribed by law and other borrowings; and (iii) to earn the maximum return on funds invested that is commensurate with meeting the requirements of (i) and (ii).
Branch Bank invests in securities allowable under bank regulations. These securities may include obligations of the U.S. Treasury, U.S. government agencies, GSEs (including MBS), bank eligible obligations of any state or political subdivision, non-agency MBS, structured notes, bank eligible corporate obligations (including corporate debentures), commercial paper, negotiable CDs, bankers acceptances, mutual funds and limited types of equity securities. Branch Bank also may deal in securities subject to the provisions of the Gramm-Leach-Bliley Act. BB&T’s full-service brokerage and investment banking subsidiary engages in the underwriting, trading and sales of equity and debt securities subject to the risk management policies of the Company.
|The following table provides information regarding the composition of the securities portfolio for the years presented:|
|Composition of Securities Portfolio|
|(Dollars in millions)|
|AFS securities (at fair value):|
|States and political subdivisions||2,079||1,974||1,851|
|Acquired from FDIC||1,064||1,243||1,393|
|Total AFS securities||25,297||20,907||22,104|
|HTM securities (at amortized cost):|
|States and political subdivisions||63||22||33|
|Total HTM securities||18,530||20,240||18,101|
The securities portfolio totaled $43.8 billion at December 31, 2015, compared to $41.1 billion at December 31, 2014. The increase was driven by higher AFS portfolio balances, primarily due to purchases of agency MBS and U.S. Treasury securities during the year.
As of December 31, 2015, approximately 12.4% of the securities portfolio was variable rate, compared to 14.0% as of December 31, 2014. The effective duration of the securities portfolio was 4.0 years at December 31, 2015, compared to 3.9 years at the end of 2014. The duration of the securities portfolio excludes equity securities, auction rate securities, and certain non-agency MBS acquired from the FDIC.
Agency MBS represented 73.7% of the total securities portfolio at year-end 2015, compared to 71.1% as of prior year end. As of December 31, 2015, the AFS securities portfolio also includes $1.1 billion of securities that were acquired from the FDIC as part of the Colonial acquisition. Effective October 1, 2014, securities subject to the commercial loss sharing agreement with the FDIC related to the Colonial acquisition were no longer subject to loss sharing; however, any gains on the sale of these securities through September 30, 2017 would be shared with the FDIC. Since these securities are in a significant unrealized gain position, they are effectively covered as any declines in the unrealized gains of the securities down to a contractually specified amount would reduce the liability to the FDIC at the applicable percentage. Securities acquired from the FDIC consisted of $768 million of non-agency MBS and $296 million of states and political subdivisions securities as of December 31, 2015.
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.
BB&T recognized $4 million in OTTI charges for 2015 and $6 million in OTTI charges for 2014.
Refer to Note 3 “Securities” in the “Notes to Consolidated Financial Statements” herein for additional disclosures related to the evaluation of securities for OTTI.
|The following table presents the securities portfolio at December 31, 2015, segregated by major category with ranges of maturities and average yields disclosed:|
|December 31, 2015|
|Fair Value||Yield (1)||Amortized Cost||Yield (1)|
|(Dollars in millions)|
|Within one year||$||246||0.49||%||$||―||―||%|
|One to five years||1,392||1.29||1,097||2.21|
|Five to ten years||194||2.02||―||―|
|One to five years||―||―||1,000||1.56|
|Five to ten years||51||2.14||4,045||2.21|
|Agency MBS: (2)|
|One to five years||10||3.82||―||―|
|Five to ten years||18||2.34||―||―|
|After ten years||20,018||1.81||12,267||2.11|
|States and political subdivisions: (3)|
|Within one year||12||6.93||―||―|
|One to five years||79||6.27||―||―|
|Five to ten years||620||5.65||17||1.33|
|After ten years||1,368||6.30||46||0.98|
|Non-agency MBS: (2)|
|After ten years||221||7.96||―||―|
|Within one year||4||0.48||1||1.29|
|After ten years||―||―||57||1.69|
|Acquired from FDIC:|
|Within one year||2||4.51||―||―|
|One to five years||186||3.70||―||―|
|Five to ten years||108||4.00||―||―|
|After ten years||768||17.72||―||―|
|(1)||Yields represent interest computed at the end of the period using the effective interest method on an FTE basis applying the statutory federal income tax rate of 35% and the amortized cost of the securities.|
|(2)||For purposes of the maturity table, MBS, which are not due at a single maturity date, have been included in maturity groupings based on the contractual maturity. The expected life of MBS will differ from contractual maturities because borrowers may have the right to call or prepay the underlying mortgage loans.|
|(3)||Weighted-average yield excludes the effect of pay-fixed swaps hedging municipal securities.|
The primary goal of the BB&T lending function is to help clients achieve their financial goals by providing quality loan products that are fair to the client and profitable to the Company. Management believes that this purpose can best be accomplished by building strong, profitable client relationships over time, with BB&T becoming an important contributor to the prosperity and well-being of its clients. In addition to the importance placed on client knowledge and continuous involvement with clients, BB&T’s lending process incorporates the standards of a consistent company-wide credit culture and an in-depth local market knowledge. Furthermore, the Company employs strict underwriting criteria governing the degree of assumed risk and the diversity of the loan portfolio in terms of type, industry and geographical concentration. In this context, BB&T strives to meet the credit needs of clients in its markets while pursuing a balanced strategy of loan profitability, loan growth and loan quality.
|Quarterly Average Balances of Loans and Leases|
|For the Three Months Ended|
|(Dollars in millions)|
|Commercial and industrial||$||48,047||$||46,462||$||42,541||$||41,448||$||40,383|
|CRE - income producing properties||13,264||12,514||10,730||10,680||10,681|
|CRE - construction and development||3,766||3,502||2,767||2,734||2,772|
|Dealer floor plan||1,164||1,056||1,010||1,040||1,053|
|Direct retail lending||10,896||9,926||8,449||8,191||8,085|