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EX-31.2 - EXHIBIT 31.2 - BB&T CORPexhibit312.htm
 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the quarterly period ended: March 31, 2015

Commission file number: 1-10853

 

BB&T CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

   
North Carolina 56-0939887
(State of Incorporation)

(I.R.S. Employer

Identification No.)

 

   
200 West Second Street 27101

Winston-Salem, North Carolina

(Address of Principal Executive Offices)

(Zip Code)

(336) 733-2000

(Registrant’s Telephone Number, Including Area Code)

 

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

 

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

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

 

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 Exchange Act).     Yes  [  ]   No  [X]

At March 31, 2015, 723,159,499 shares of the Registrant’s common stock, $5 par value, were outstanding.

 

 

 
 
 

 

 

BB&T CORPORATION
FORM 10-Q
March 31, 2015
INDEX
      Page No.
PART I  
Item 1. Financial Statements  
  Consolidated Balance Sheets (Unaudited) 3
  Consolidated Statements of Income (Unaudited) 4
  Consolidated Statements of Comprehensive Income (Unaudited) 5
  Consolidated Statements of Changes in Shareholders' Equity (Unaudited) 6
  Consolidated Statements of Cash Flows (Unaudited) 7
  Notes to Consolidated Financial Statements (Unaudited)  
    Note 1. Basis of Presentation 8
    Note 2. Business Combinations 9
    Note 3. Securities 9
    Note 4. Loans and ACL 12
    Note 5. Loan Servicing 18
    Note 6. Deposits 20
    Note 7. Long-Term Debt 20
    Note 8. Shareholders' Equity 21
    Note 9. AOCI 22
    Note 10. Income Taxes 22
    Note 11. Benefit Plans 23
    Note 12. Commitments and Contingencies 23
    Note 13. Fair Value Disclosures 25
    Note 14. Derivative Financial Instruments 31
    Note 15. Computation of EPS 35
    Note 16. Operating Segments 35
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
Item 3. Quantitative and Qualitative Disclosures About Market Risk (see Market Risk Management) 54
Item 4. Controls and Procedures 62
PART II  
Item 1. Legal Proceedings 63
Item 1A. Risk Factors 63
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 63
Item 3. Defaults Upon Senior Securities - (not applicable.)  
Item 4. Mine Safety Disclosures - (not applicable.)  
Item 5. Other Information - (none to be reported.)  
Item 6. Exhibits 63
 
 

Glossary of Defined Terms

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

 

Term   Definition
2006 Repurchase Plan   Plan for the repurchase of up to 50 million shares of BB&T’s common stock
ACL   Allowance for credit losses
Acquired from FDIC   Assets of Colonial Bank acquired from the Federal Deposit Insurance Corporation during 2009, which are currently covered or were formerly covered under loss sharing agreements
AFS   Available-for-sale
ALLL   Allowance for loan and lease losses
AOCI   Accumulated other comprehensive income (loss)
BankAtlantic   BankAtlantic, a federal savings association acquired by BB&T from BankAtlantic Bancorp, Inc.
Basel III   Global regulatory standards on bank capital adequacy and liquidity published by the BCBS
BB&T   BB&T Corporation and subsidiaries
BCBS   Basel Committee on Bank Supervision
BHC   Bank holding company
BHCA   Bank Holding Company Act of 1956, as amended
Branch Bank   Branch Banking and Trust Company
CCAR   Comprehensive Capital Analysis and Review
CD   Certificate of deposit
CDI   Core deposit intangible assets
CFPB   Consumer Financial Protection Bureau
CEO   Chief Executive Officer
CRO   Chief Risk Officer
CMO   Collateralized mortgage obligation
Colonial   Collectively, certain assets and liabilities of Colonial Bank acquired by BB&T in 2009
Company   BB&T Corporation and subsidiaries (interchangeable with "BB&T" above)
Council   Financial Stability Oversight Council
CRA   Community Reinvestment Act of 1977
CRE   Commercial real estate
CRMC   Credit Risk Management Committee
CROC   Compliance Risk Oversight Committee
Crump Insurance   The life and property and casualty insurance operations acquired from the Crump Group
DIF   Deposit Insurance Fund administered by the FDIC
Directors’ Plan   Non-Employee Directors’ Stock Option Plan
Dodd-Frank Act   Dodd-Frank Wall Street Reform and Consumer Protection Act
EITSC   Enterprise IT Steering Committee
EPS   Earnings per common share
ERP   Enterprise resource planning
EU   European Union
EVE   Economic value of equity
Exchange Act   Securities Exchange Act of 1934, as amended
FASB   Financial Accounting Standards Board
FATCA   Foreign Account Tax Compliance Act
FDIC   Federal Deposit Insurance Corporation
FHA   Federal Housing Administration
FHC   Financial Holding Company
FHLB   Federal Home Loan Bank
FHLMC   Federal Home Loan Mortgage Corporation
FINRA   Financial Industry Regulatory Authority
FNMA   Federal National Mortgage Association
FRB   Board of Governors of the Federal Reserve System
FTE   Fully taxable-equivalent
FTP   Funds transfer pricing
GAAP   Accounting principles generally accepted in the United States of America
GNMA   Government National Mortgage Association
1

 

Term   Definition
Grandbridge   Grandbridge Real Estate Capital, LLC
GSE   U.S. government-sponsored enterprise
HFI   Held for investment
HMDA   Home Mortgage Disclosure Act
HTM   Held-to-maturity
HUD-OIG   Office of Inspector General, U.S. Department of Housing and Urban Development
IDI   Insured depository institution
IMLAFA   International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001
IPV   Independent price verification
IRA   Individual retirement account
IRC   Internal Revenue Code
IRS   Internal Revenue Service
ISDA   International Swaps and Derivatives Association, Inc.
LCR   Liquidity Coverage Ratio
LHFS   Loans held for sale
LIBOR   London Interbank Offered Rate
LOB   Line of business
MBS   Mortgage-backed securities
MRLCC   Market Risk, Liquidity and Capital Committee
MSR   Mortgage servicing right
MSRB   Municipal Securities Rulemaking Board
NIM   Net interest margin
NPA   Nonperforming asset
NPL   Nonperforming loan
NPR   Notice of Proposed Rulemaking
NYSE   NYSE Euronext, Inc.
OAS   Option adjusted spread
OCC   Office of the Comptroller of the Currency
OCI   Other comprehensive income (loss)
OREO   Other real estate owned
ORMC   Operational Risk Management Committee
OTTI   Other-than-temporary impairment
Parent Company   BB&T Corporation, the parent company of Branch Bank and other subsidiaries
Patriot Act   Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
Peer Group   Financial holding companies included in the industry peer group index
Reform Act   Federal Deposit Insurance Reform Act of 2005
RMC   Risk Management Committee
RMO   Risk Management Organization
RSU   Restricted stock unit
RUFC   Reserve for unfunded lending commitments
S&P   Standard & Poor's
SBIC   Small Business Investment Company
SCAP   Supervisory Capital Assessment Program
SEC   Securities and Exchange Commission
Short-Term Borrowings   Federal funds purchased, securities sold under repurchase agreements and other short-term borrowed funds with original maturities of less than one year
Simulation   Interest sensitivity simulation analysis
TBA   To be announced
TDR   Troubled debt restructuring
U.S.   United States of America
U.S. Treasury   United States Department of the Treasury
UPB   Unpaid principal balance
VA   U.S. Department of Veterans Affairs
VaR   Value-at-risk
VIE   Variable interest entity
2

 

BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions, except per share data, shares in thousands)
                   
          March 31,   December 31,
          2015   2014
Assets          
  Cash and due from banks $  1,452    $  1,639 
  Interest-bearing deposits with banks    325       529 
  Federal funds sold and securities purchased under resale agreements or similar          
    arrangements    222       157 
  Restricted cash    513       374 
  AFS securities at fair value    21,674       20,907 
  HTM securities (fair value of $20,658 and $20,313 at March 31, 2015          
     and December 31, 2014, respectively)    20,415       20,240 
  LHFS at fair value    2,121       1,423 
  Loans and leases    119,906       119,884 
  ALLL    (1,464)      (1,474)
    Loans and leases, net of ALLL    118,442       118,410 
                   
  Premises and equipment    1,879       1,827 
  Goodwill    6,950       6,869 
  Core deposit and other intangible assets    530       505 
  Residential MSRs at fair value    764       844 
  Other assets    13,941       13,110 
      Total assets $  189,228    $  186,834 
                   
Liabilities and Shareholders’ Equity          
  Deposits:          
    Noninterest-bearing deposits $  41,414    $  38,786 
    Interest-bearing deposits    89,815       90,254 
      Total deposits    131,229       129,040 
                   
  Short-term borrowings    3,130       3,717 
  Long-term debt    23,437       23,312 
  Accounts payable and other liabilities    6,694       6,388 
      Total liabilities    164,490       162,457 
                   
  Commitments and contingencies (Note 12)          
  Shareholders’ equity:          
    Preferred stock, $5 par, liquidation preference of $25,000 per share    2,603       2,603 
    Common stock, $5 par    3,616       3,603 
    Additional paid-in capital    6,524       6,517 
    Retained earnings    12,632       12,317 
    AOCI, net of deferred income taxes    (733)      (751)
    Noncontrolling interests    96       88 
      Total shareholders’ equity    24,738       24,377 
      Total liabilities and shareholders’ equity $  189,228    $  186,834 
                   
  Common shares outstanding    723,159       720,698 
  Common shares authorized    2,000,000       2,000,000 
  Preferred shares outstanding    107       107 
  Preferred shares authorized    5,000       5,000 

 

 

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

3

 

 

BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in millions, except per share data, shares in thousands)
                                 
                Three Months Ended
                    March 31,
                          2015      2014 
Interest Income                      
  Interest and fees on loans and leases             $  1,237    $  1,295 
  Interest and dividends on securities                240       236 
  Interest on other earning assets                16       15 
      Total interest income                1,493       1,546 
Interest Expense                      
  Interest on deposits                55       60 
  Interest on short-term borrowings                1       1 
  Interest on long-term debt                125       138 
      Total interest expense                181       199 
Net Interest Income                1,312       1,347 
  Provision for credit losses                99       60 
Net Interest Income After Provision for Credit Losses                1,213       1,287 
Noninterest Income                      
  Insurance income                440       427 
  Service charges on deposits                145       150 
  Mortgage banking income                110       74 
  Investment banking and brokerage fees and commissions                94       88 
  Bankcard fees and merchant discounts                50       46 
  Trust and investment advisory revenues                56       54 
  Checkcard fees                39       38 
  Income from bank-owned life insurance                30       27 
  FDIC loss share income, net                (79)      (84)
  Other income                112       105 
  Securities gains (losses), net                      
    Gross realized gains                ―         6 
    Gross realized losses                ―         (3)
    OTTI charges                ―         (23)
    Non-credit portion recognized in OCI                ―         22 
      Total securities gains (losses), net                ―         2 
        Total noninterest income                997       927 
Noninterest Expense                      
  Personnel expense                830       782 
  Occupancy and equipment expense                167       176 
  Loan-related expense                38       51 
  Software expense                44       43 
  Professional services                24       33 
  Outside IT services                30       27 
  Regulatory charges                23       29 
  Amortization of intangibles                21       23 
  Foreclosed property expense                13       9 
  Merger-related and restructuring charges, net                13       8 
  Other expense                219       204 
      Total noninterest expense                1,422       1,385 
Earnings                      
  Income before income taxes                788       829 
  Provision for income taxes                241       256 
    Net Income                547       573 
  Noncontrolling interests                22       40 
  Dividends on preferred stock                37       37 
    Net Income Available to Common Shareholders             $  488    $  496 
EPS                      
    Basic             $  0.68    $  0.70 
    Diluted             $  0.67    $  0.68 
  Cash dividends declared             $  0.24    $  0.23 
                                 
Weighted Average Shares Outstanding                      
    Basic                721,639       712,842 
    Diluted                731,511       724,283 

 

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

4

 

BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in millions)
                                 
                        Three Months Ended
                        March 31,
                        2015   2014
                                 
Net Income             $  547    $  573 
OCI, Net of Tax:                      
  Change in unrecognized net pension and postretirement costs                9       1 
  Change in unrealized net gains (losses) on cash flow hedges                (54)      11 
  Change in unrealized net gains (losses) on AFS securities                57       79 
  Net change in FDIC's share of unrealized gains/losses on AFS securities                10       6 
  Other, net                (4)      (4)
    Total OCI                18       93 
    Total Comprehensive Income             $  565    $  666 
                                 
                                 
Income Tax Effect of Items Included in OCI:                      
  Change in unrecognized net pension and postretirement costs             $  6    $  1 
  Change in unrealized net gains (losses) on cash flow hedges                (32)      7 
  Change in unrealized net gains (losses) on AFS securities                34       45 
  Net change in FDIC's share of unrealized gains/losses on AFS securities                5       3 
  Other, net                ―         (1)

 

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

5

 

BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
Three Months Ended March 31, 2015 and 2014
(Dollars in millions, shares in thousands)
                                                     
                                                   
          Shares of               Additional                   Total
          Common   Preferred   Common   Paid-In   Retained       Noncontrolling   Shareholders’
          Stock   Stock   Stock   Capital   Earnings   AOCI   Interests   Equity
Adjusted Balance, January 1, 2014  706,620    $  2,603    $  3,533    $  6,172    $  11,015    $  (593)   $  50    $  22,780 
Add (Deduct):                                            
  Net income  ―         ―         ―         ―         533       ―         40       573 
  Net change in AOCI  ―         ―         ―         ―         ―         93       ―         93 
  Stock transactions:                                            
    Issued in connection with equity awards  13,448       ―         67       195       ―         ―         ―         262 
    Shares repurchased in connection with equity awards  (2,155)      ―         (11)      (69)      ―         ―         ―         (80)
    Excess tax benefits in connection with equity awards  ―         ―         ―         48       ―         ―         ―         48 
    Issued in connection with dividend reinvestment plan  192       ―         1       6       ―         ―         ―         7 
    Issued in connection with 401(k) plan  392       ―         2       13       ―         ―         ―         15 
  Cash dividends declared on common stock  ―         ―         ―         ―         (163)      ―         ―         (163)
  Cash dividends declared on preferred stock  ―         ―         ―         ―         (37)      ―         ―         (37)
  Equity-based compensation expense  ―         ―         ―         20       ―         ―         ―         20 
  Other, net  ―         ―         ―         ―         (1)      ―         4       3 
Balance, March 31, 2014  718,497    $  2,603    $  3,592    $  6,385    $  11,347    $  (500)   $  94    $  23,521 
                                                     
Adjusted Balance, January 1, 2015  720,698    $  2,603    $  3,603    $  6,517    $  12,317    $  (751)   $  88    $  24,377 
Add (Deduct):                                            
  Net income  ―         ―         ―         ―         525       ―         22       547 
  Net change in AOCI  ―         ―         ―         ―         ―         18       ―         18 
  Stock transactions:                                            
    Issued in connection with equity awards  3,369       ―         18       13       ―         ―         ―         31 
    Shares repurchased in connection with equity awards  (908)      ―         (5)      (30)      ―         ―         ―         (35)
    Excess tax benefits in connection with equity awards  ―         ―         ―         1       ―         ―         ―         1 
  Cash dividends declared on common stock  ―         ―         ―         ―         (173)      ―         ―         (173)
  Cash dividends declared on preferred stock  ―         ―         ―         ―         (37)      ―         ―         (37)
  Equity-based compensation expense  ―         ―         ―         23       ―         ―         ―         23 
  Other, net  ―         ―         ―         ―         ―         ―         (14)      (14)
Balance, March 31, 2015  723,159    $  2,603    $  3,616    $  6,524    $  12,632    $  (733)   $  96    $  24,738 

 

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

6

 

BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
              Three Months Ended
              March 31,
              2015   2014
Cash Flows From Operating Activities:          
  Net income $  547    $  573 
  Adjustments to reconcile net income to net cash from operating activities:          
    Provision for credit losses    99       60 
    Depreciation    86       81 
    Amortization of intangibles    21       23 
    Equity-based compensation    23       20 
    (Gain) loss on securities, net    ―         (2)
    Net change in operating assets and liabilities:          
      LHFS    (698)      122 
      Other assets    (688)      75 
      Accounts payable and other liabilities    (44)      (159)
    Other, net    71       (161)
        Net cash from operating activities    (583)      632 
                       
Cash Flows From Investing Activities:          
  Proceeds from sales of AFS securities    71       1,080 
  Proceeds from maturities, calls and paydowns of AFS securities    1,126       940 
  Purchases of AFS securities    (1,856)      (275)
  Proceeds from maturities, calls and paydowns of HTM securities    696       297 
  Purchases of HTM securities    (866)      (3,013)
  Originations and purchases of loans and leases, net of principal collected    (250)      (916)
  Net cash for business combinations    1,916       (10)
  Other, net    (54)      232 
        Net cash from investing activities    783       (1,665)
                       
Cash Flows From Financing Activities:          
  Net change in deposits    281       1 
  Net change in short-term borrowings    (587)      (853)
  Proceeds from issuance of long-term debt    18       2,407 
  Repayment of long-term debt    (2)      (523)
  Net cash from common stock transactions    (3)      245 
  Cash dividends paid on common stock    (173)      (156)
  Cash dividends paid on preferred stock    (37)      (37)
  Other, net    (23)      4 
        Net cash from financing activities    (526)      1,088 
Net Change in Cash and Cash Equivalents    (326)      55 
Cash and Cash Equivalents at Beginning of Period    2,325       2,165 
Cash and Cash Equivalents at End of Period $  1,999    $  2,220 
                       
Supplemental Disclosure of Cash Flow Information:          
  Cash paid during the period for:          
    Interest $  144    $  172 
    Income taxes    117       47 
  Noncash investing activities:          
    Transfers of loans to foreclosed assets    128       123 

 

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

7

NOTE 1. Basis of Presentation

 

See the Glossary of Defined Terms at the beginning of this Report for terms used throughout the consolidated financial statements and related notes of this Form 10-Q.

 

General

 

These consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with GAAP. In the opinion of management, all normal recurring adjustments necessary for a fair statement of the consolidated financial position and consolidated results of operations have been made. The year-end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. The information contained in the financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2014 should be referred to in connection with these unaudited interim consolidated financial statements.

 

Reclassifications

 

Certain amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation. Such reclassifications had no effect on previously reported cash flows, shareholders’ equity or net income.

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change include the determination of the ACL, determination of fair value for financial instruments, valuation of goodwill, intangible assets and other purchase accounting related adjustments, benefit plan obligations and expenses, and tax assets, liabilities and expense.

 

Changes in Accounting Principles and Effects of New Accounting Pronouncements

 

In April 2015, the FASB issued new guidance related to Internal-Use Software. Under the new guidance, if a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

 

In April 2015, the FASB issued new guidance related to Debt Issuance Costs. The new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. This guidance is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.

 

In February 2015, the FASB issued new guidance related to Consolidation. The new guidance provides an additional requirement for a limited partnership or similar entity to qualify as a voting interest entity, amending the criteria for consolidating such an entity and eliminating the deferral provided under previous guidance for investment companies. In addition, the new guidance amends the criteria for evaluating fees paid to a decision maker or service provider as a variable interest and amends the criteria for evaluating the effect of fee arrangements and related parties on a VIE primary beneficiary determination. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

 

In May 2014, the FASB issued new guidance related to Revenue from Contracts with Customers. This guidance supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Accounting Standards Codification. The guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

 

8

Effective January 1, 2015, the Company adopted new guidance related to Receivables. The new guidance requires that a government guaranteed mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if certain conditions are met. The adoption of this guidance was not material to the consolidated financial statements.

 

Effective January 1, 2015, the Company adopted new guidance related to Repurchase-to-Maturity Transactions and Repurchase Financings. The new guidance changes the accounting for repurchase-to-maturity transactions to secured borrowing accounting. The guidance also requires separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty, which results in secured borrowing accounting for the repurchase agreement. The adoption of this guidance was not material to the consolidated financial statements.

 

Effective January 1, 2015, the Company adopted new guidance related to Investments in Qualified Affordable Housing Projects. The Company used the retrospective method of adoption and has elected the proportional amortization method to account for these investments. The proportional amortization method allows an entity to amortize the initial cost of the investment in proportion to the amount of tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of the provision for income taxes. See Note 12 “Commitments and Contingencies” for the impact of the adoption of this guidance.

 

NOTE 2. Business Combinations

 

During the first quarter of 2015, BB&T purchased 41 bank branches in Texas from Citigroup, Inc., resulting in the acquisition of $1.9 billion in deposits, $61 million in loans and $1.7 billion in cash and net other assets/liabilities. Goodwill of $77 million and CDI of $46 million were preliminarily recognized in connection with the transaction.

 

During the second quarter of 2014, BB&T purchased 21 bank branches in Texas from Citigroup, Inc., resulting in the acquisition of $1.2 billion in deposits, $112 million in loans and $1.1 billion in cash and other assets. Goodwill of $29 million and CDI of $20 million were preliminarily recognized in connection with the transaction.

 

BB&T has reached agreements to acquire Susquehanna Bancshares, Inc. and The Bank of Kentucky Financial Corporation. BB&T also announced an agreement to increase its partnership interest in AmRisc, LP and to sell American Coastal Insurance Company. The pending transactions are subject to regulatory approval.

 

NOTE 3. Securities

 

          Amortized   Gross Unrealized   Fair  
  March 31, 2015   Cost   Gains   Losses   Value  
                                 
          (Dollars in millions)  
  AFS securities:                          
    U.S. Treasury   $  1,326    $  8    $  —      $  1,334   
    MBS issued by GSE      16,954       116       201       16,869   
    States and political subdivisions      1,924       117       71       1,970   
    Non-agency MBS      226       28       —         254   
    Other      40       1       —         41   
    Securities acquired from FDIC      866       340       —         1,206   
      Total AFS securities   $  21,336    $  610    $  272    $  21,674   
                                 
  HTM securities:                          
    U.S. Treasury   $  1,097    $  41    $  —      $  1,138   
    GSE      5,394       33       39       5,388   
    MBS issued by GSE      13,302       197       3       13,496   
    States and political subdivisions      22       1       —         23   
    Other      600       13       —         613   
      Total HTM securities   $  20,415    $  285    $  42    $  20,658   

 

9

 

          Amortized   Gross Unrealized   Fair  
  December 31, 2014   Cost   Gains   Losses   Value  
                                 
          (Dollars in millions)  
  AFS securities:                          
    U.S. Treasury   $  1,230    $  1    $  —      $  1,231   
    MBS issued by GSE      16,358       93       297       16,154   
    States and political subdivisions      1,913       120       59       1,974   
    Non-agency MBS      232       32       —         264   
    Other      41       —         —         41   
    Securities acquired from FDIC      886       357       —         1,243   
      Total AFS securities   $  20,660    $  603    $  356    $  20,907   
                                 
  HTM securities:                          
    U.S. Treasury   $  1,096    $  23    $  —      $  1,119   
    GSE      5,394       17       108       5,303   
    MBS issued by GSE      13,120       137       12       13,245   
    States and political subdivisions      22       2       —         24   
    Other      608       14       —         622   
      Total HTM securities   $  20,240    $  193    $  120    $  20,313   

 

The fair value of securities acquired from the FDIC included non-agency MBS of $895 million and $931 million as of March 31, 2015 and December 31, 2014, respectively, and states and political subdivisions securities of $311 million and $312 million as of March 31, 2015 and December 31, 2014. Effective October 1, 2014, securities subject to the commercial loss sharing agreement with the FDIC related to the Colonial acquisition were no longer covered by loss sharing; however, any gains on the sale of these securities through September 30, 2017 would be shared with the FDIC. Since these securities are in a significant unrealized gain position, they continue to be effectively covered as any declines in the unrealized gains of the securities down to a contractually specified amount would reduce the liability to the FDIC at the applicable percentage. The contractually-specified amount is the acquisition date fair value less any paydowns, redemptions or maturities and OTTI and totaled approximately $592 million at March 31, 2015. Any further declines below the contractually-specified amount would not be covered.

 

Certain investments in marketable debt securities and MBS issued by FNMA and FHLMC exceeded ten percent of shareholders’ equity at March 31, 2015. The FNMA investments had total amortized cost and fair value of $13.6 billion and $13.5 billion, respectively. The FHLMC investments had total amortized cost and fair value of $5.9 billion and $5.8 billion respectively.

 

The following table reflects changes in credit losses on securities with OTTI (excluding securities acquired from the FDIC) where a portion of the unrealized loss was recognized in OCI:

 

          Three Months Ended  
          March 31,  
            2015     2014  
                     
          (Dollars in millions)  
  Balance at beginning of period $  64    $  78   
    Credit losses on securities without previous OTTI    ―         1   
    Reductions for securities sold/settled during the period    (2)      (3)  
    Credit recoveries through yield    (1)      ―     
  Balance at end of period $  61    $  76   

 

The amortized cost and estimated fair value of the securities portfolio by contractual maturity are shown in the following table. The expected life of MBS may differ from contractual maturities because borrowers have the right to prepay the underlying mortgage loans with or without prepayment penalties.

 

10

 

          AFS   HTM  
          Amortized   Fair   Amortized   Fair  
  March 31, 2015   Cost   Value   Cost   Value  
                                 
          (Dollars in millions)  
  Due in one year or less   $  528    $  528    $  ―      $  ―     
  Due after one year through five years      1,045       1,064       751       745   
  Due after five years through ten years      573       597       6,007       6,052   
  Due after ten years      19,190       19,485       13,657       13,861   
    Total debt securities   $  21,336    $  21,674    $  20,415    $  20,658   

 

The following tables present the fair values and gross unrealized losses of investments based on the length of time that individual securities have been in a continuous unrealized loss position:
                                               
            Less than 12 months   12 months or more   Total  
            Fair   Unrealized   Fair   Unrealized   Fair   Unrealized  
  March 31, 2015   Value   Losses   Value   Losses   Value   Losses  
                                               
            (Dollars in millions)  
  AFS securities:                                      
    MBS issued by GSE   $  2,055    $  16    $  6,498    $  185    $  8,553    $  201   
    States and political subdivisions      44       —         448       71       492       71   
      Total   $  2,099    $  16    $  6,946    $  256    $  9,045    $  272   
                                               
  HTM securities:                                      
    GSE   $  1,356    $  7    $  2,018    $  32    $  3,374    $  39   
    MBS issued by GSE      445       1       490       2       935       3   
      Total   $  1,801    $  8    $  2,508    $  34    $  4,309    $  42   

 

            Less than 12 months   12 months or more   Total  
            Fair   Unrealized   Fair   Unrealized   Fair   Unrealized  
  December 31, 2014   Value   Losses   Value   Losses   Value   Losses  
                                               
            (Dollars in millions)  
  AFS securities:                                      
    MBS issued by GSE   $  2,285    $  19    $  6,878    $  278    $  9,163    $  297   
    States and political subdivisions      13       ―         449       59       462       59   
      Total   $  2,298    $  19    $  7,327    $  337    $  9,625    $  356   
                                               
  HTM securities:                                      
    GSE   $  896    $  5    $  3,968    $  103    $  4,864    $  108   
    MBS issued by GSE      1,329       5       800       7       2,129       12   
      Total   $  2,225    $  10    $  4,768    $  110    $  6,993    $  120   

 

The unrealized losses on GSE securities and MBS issued by GSE were the result of increases in market interest rates compared to the date the securities were acquired rather than the credit quality of the issuers or underlying loans.

 

At March 31, 2015, $68 million of the unrealized loss on states and political subdivisions securities was the result of fair value hedge basis adjustments that are a component of amortized cost. These securities in an unrealized loss position are evaluated for credit impairment through a qualitative analysis of issuer performance and the primary source of repayment. None of these securities had other than temporary credit impairment as a result of the evaluation.

11

NOTE 4. Loans and ACL

 

During the first quarter of 2014, approximately $8.3 billion of nonguaranteed, closed-end, first and second lien position residential mortgage loans, along with the related allowance, were transferred from direct retail lending to residential mortgage to facilitate compliance with a series of new rules related to mortgage servicing associated with first and second lien position mortgages collateralized by real estate.

 

During the third quarter of 2014, approximately $550 million of loans, which were primarily performing residential mortgage TDRs, with a related ALLL of $57 million were sold for a gain of $42 million. During the fourth quarter of 2014, approximately $140 million of loans, which were primarily residential mortgage NPLs, with a related ALLL of $19 million were sold for a gain of $24 million. Both gains were recognized as reductions to the provision for credit losses.

 

Effective October 1, 2014, loans subject to the commercial loss sharing agreement with the FDIC related to the Colonial acquisition were no longer covered by loss sharing. At March 31, 2015, these loans had a carrying value of $476 million, a UPB of $730 million and an allowance of $38 million and are included in acquired from FDIC loans. Loans with a carrying value of $634 million at March 31, 2015 continue to be covered by loss sharing and are included in the acquired from FDIC balance.

 

          Accruing            
                    90 Days Or          
              30-89 Days   More Past          
  March 31, 2015   Current   Past Due   Due   Nonaccrual   Total  
                                       
          (Dollars in millions)  
  Commercial:                                
    Commercial and industrial   $  42,044    $  20    $  ―      $  230    $  42,294   
    CRE-income producing properties      10,649       7       ―         63       10,719   
    CRE-construction and development      2,635       2       ―         18       2,655   
    Other lending subsidiaries      5,149       13       ―         5       5,167   
  Retail:                                
    Direct retail lending      8,192       40       9       47       8,288   
    Revolving credit      2,361       19       10       ―         2,390   
    Residential mortgage-nonguaranteed      29,078       356       59       183       29,676   
    Residential mortgage-government guaranteed      269       70       518       ―         857   
    Sales finance      10,554       49       3       7       10,613   
    Other lending subsidiaries      5,953       138       ―         46       6,137   
  Acquired from FDIC      909       47       154       ―         1,110   
      Total   $  117,793    $  761    $  753    $  599    $  119,906   

 

            Accruing            
                      90 Days Or          
                30-89 Days   More Past          
  December 31, 2014   Current   Past Due   Due   Nonaccrual   Total  
                                         
            (Dollars in millions)  
  Commercial:                                
    Commercial and industrial   $  41,192    $  23    $  ―      $  239    $  41,454   
    CRE-income producing properties      10,644       4       ―         74       10,722   
    CRE-construction and development      2,708       1       ―         26       2,735   
    Other lending subsidiaries      5,337       15       ―         4       5,356   
  Retail:                                
    Direct retail lending      8,045       41       12       48       8,146   
    Revolving credit      2,428       23       9       ―         2,460   
    Residential mortgage-nonguaranteed      29,468       392       83       164       30,107   
    Residential mortgage-government guaranteed      251       82       648       2       983   
    Sales finance      10,528       62       5       5       10,600   
    Other lending subsidiaries      5,830       222       ―         54       6,106   
  Acquired from FDIC      994       33       188       ―         1,215   
      Total   $  117,425    $  898    $  945    $  616    $  119,884   

 

12

 

The following tables present the carrying amount of loans by risk rating. Loans acquired from the FDIC are excluded because their related ALLL is determined by loan pool performance.
 
                CRE -   CRE -      
          Commercial   Income Producing   Construction and   Other Lending  
  March 31, 2015   & Industrial   Properties   Development   Subsidiaries  
                                 
          (Dollars in millions)  
  Commercial:                          
    Pass   $  40,847    $  10,316    $  2,545    $  5,138   
    Special mention      214       52       15       1   
    Substandard-performing      1,003       288       77       23   
    Nonperforming      230       63       18       5   
      Total   $  42,294    $  10,719    $  2,655    $  5,167   

 

          Direct Retail   Revolving   Residential   Sales   Other Lending  
          Lending   Credit   Mortgage   Finance   Subsidiaries  
                                       
          (Dollars in millions)  
  Retail:                                
    Performing   $  8,241    $  2,390    $  30,350    $  10,606    $  6,091   
    Nonperforming      47       ―         183       7       46   
      Total   $  8,288    $  2,390    $  30,533    $  10,613    $  6,137   

 

                CRE -   CRE -      
          Commercial   Income Producing   Construction and   Other Lending  
  December 31, 2014   & Industrial   Properties   Development   Subsidiaries  
                                 
          (Dollars in millions)  
  Commercial:                          
    Pass   $  40,055    $  10,253    $  2,615    $  5,317   
    Special mention      163       67       7       10   
    Substandard-performing      997       328       87       25   
    Nonperforming      239       74       26       4   
      Total   $  41,454    $  10,722    $  2,735    $  5,356   

 

            Direct Retail   Revolving   Residential   Sales   Other Lending  
            Lending   Credit   Mortgage   Finance   Subsidiaries  
                                         
            (Dollars in millions)  
  Retail:                                
    Performing   $  8,098    $  2,460    $  30,924    $  10,595    $  6,052   
    Nonperforming      48       ―         166       5       54   
      Total   $  8,146    $  2,460    $  31,090    $  10,600    $  6,106   

 

13

 

      ACL Rollforward  
        Beginning   Charge-         Provision   Ending  
  Three Months Ended March 31, 2015   Balance   Offs   Recoveries   (Benefit)   Balance  
                                     
        (Dollars in millions)  
  Commercial:                                
    Commercial and industrial   $  421    $  (14)   $  8    $  33    $  448   
    CRE-income producing properties      162       (9)      2       (2)      153   
    CRE-construction and development      48       (2)      4       (8)      42   
    Other lending subsidiaries      21       (3)      1       3       22   
  Retail:                                
    Direct retail lending      110       (12)      8       5       111   
    Revolving credit      110       (18)      5       9       106   
    Residential mortgage-nonguaranteed      217       (11)      ―         (6)      200   
    Residential mortgage-government guaranteed      36       ―         ―         (6)      30   
    Sales finance      50       (6)      3       11       58   
    Other lending subsidiaries      235       (64)      8       58       237   
  Acquired from FDIC      64       (1)      ―         (6)      57   
  ALLL      1,474       (140)      39       91       1,464   
  RUFC      60       ―         ―         8       68   
  ACL   $  1,534    $  (140)   $  39    $  99    $  1,532   

 

      ACL Rollforward  
        Beginning   Charge-         Provision         Ending  
  Three Months Ended March 31, 2014   Balance   Offs   Recoveries   (Benefit)   Other   Balance  
                                           
        (Dollars in millions)  
  Commercial:                                      
    Commercial and industrial   $  454    $  (33)   $  9    $  (7)   $  ―      $  423   
    CRE-income producing properties      149       (8)      2       (7)      ―         136   
    CRE-construction and development      76       (4)      3       (10)      ―         65   
    Other lending subsidiaries      15       (1)      ―         2       ―         16   
  Retail:                                      
    Direct retail lending      209       (19)      8       7       (85)      120   
    Revolving credit      115       (18)      5       13       ―         115   
    Residential mortgage-nonguaranteed      269       (21)      1       (7)      85       327   
    Residential mortgage-government guaranteed      62       ―         ―         7       ―         69   
    Sales finance      45       (7)      3       4       ―         45   
    Other lending subsidiaries      224       (84)      8       74       ―         222   
  Acquired from FDIC      114       (3)      ―         (7)      ―         104   
  ALLL      1,732       (198)      39       69       ―         1,642   
  RUFC      89       ―         ―         (9)      ―         80   
  ACL   $  1,821    $  (198)   $  39    $  60    $  ―      $  1,722   

 

14

 

The following table provides a summary of loans that are collectively evaluated for impairment.
                                 
          March 31, 2015   December 31, 2014  
      Recorded Investment   Related ALLL   Recorded Investment   Related ALLL  
                                 
          (Dollars in millions)  
  Commercial:                          
    Commercial and industrial   $  41,977    $  408    $  41,120    $  379   
    CRE-income producing properties      10,598       141       10,583       147   
    CRE-construction and development      2,608       34       2,670       39   
    Other lending subsidiaries      5,162       21       5,351       20   
  Retail:                          
    Direct retail lending      8,191       88       8,048       86   
    Revolving credit      2,352       91       2,419       94   
    Residential mortgage-nonguaranteed      29,227       163       29,660       181   
    Residential mortgage-government guaranteed      531       3       622       4   
    Sales finance      10,593       54       10,579       46   
    Other lending subsidiaries      5,958       207       5,930       204   
  Acquired from FDIC      1,110       57       1,215       64   
      Total   $  118,307    $  1,267    $  118,197    $  1,264   

 

The following tables set forth certain information regarding impaired loans, excluding purchased impaired loans and LHFS, that were individually evaluated for reserves.
               
                            Average   Interest  
            Recorded       Related   Recorded   Income  
  As Of / For The Three Months Ended March 31, 2015   Investment   UPB   ALLL   Investment   Recognized  
                                         
            (Dollars in millions)  
  With no related ALLL recorded:                                
    Commercial:                                
      Commercial and industrial   $  83    $  120    $  ―      $  84    $  ―     
      CRE-income producing properties      17       25       ―         17       ―     
      CRE-construction and development      10       14       ―         12       ―     
      Other lending subsidiaries      1       2       ―         1       ―     
    Retail:                                
      Direct retail lending      13       45       ―         13       ―     
      Residential mortgage-nonguaranteed      124       186       ―         100       1   
      Residential mortgage-government guaranteed      4       4       ―         3       ―     
      Sales finance      1       2       ―         1       ―     
      Other lending subsidiaries      3       7       ―         3       ―     
  With an ALLL recorded:                                
    Commercial:                                
      Commercial and industrial      234       243       40       238       1   
      CRE-income producing properties      104       107       12       115       1   
      CRE-construction and development      37       38       8       45       ―     
      Other lending subsidiaries      4       5       1       5       ―     
    Retail:                                
      Direct retail lending      84       86       23       84       1   
      Revolving credit      38       38       15       40       ―     
      Residential mortgage-nonguaranteed      325       336       37       349       4   
      Residential mortgage-government guaranteed      322       322       27       347       3   
      Sales finance      19       19       4       20       ―     
      Other lending subsidiaries      176       179       30       175       6   
        Total   $  1,599    $  1,778    $  197    $  1,652    $  17   

 

15

 

                            Average   Interest  
            Recorded       Related   Recorded   Income  
  As Of / For The Year Ended December 31, 2014   Investment   UPB   ALLL   Investment   Recognized  
                                         
            (Dollars in millions)  
  With no related ALLL recorded:                                
    Commercial:                                
      Commercial and industrial   $  87    $  136    $  ―      $  138    $  2   
      CRE-income producing properties      18       25       ―         36       ―     
      CRE-construction and development      14       21       ―         20       ―     
      Other lending subsidiaries      ―         1       ―         ―         ―     
    Retail:                                
      Direct retail lending      13       49       ―         14       1   
      Residential mortgage-nonguaranteed      87       141       ―         147       5   
      Residential mortgage-government guaranteed      3       4       ―         7       ―     
      Sales finance      1       2       ―         1       ―     
      Other lending subsidiaries      3       7       ―         3       ―     
  With an ALLL recorded:                                
    Commercial:                                
      Commercial and industrial      247       254       42       279       5   
      CRE-income producing properties      121       123       15       133       4   
      CRE-construction and development      51       52       9       65       2   
      Other lending subsidiaries      5       5       1       4       ―     
    Retail:                                
      Direct retail lending      85       87       24       95       5   
      Revolving credit      41       41       16       45       2   
      Residential mortgage-nonguaranteed      360       370       36       700       31   
      Residential mortgage-government guaranteed      358       358       32       402       17   
      Sales finance      20       21       4       20       1   
      Other lending subsidiaries      173       175       31       148       22   
        Total   $  1,687    $  1,872    $  210    $  2,257    $  97   

 

The following table provides a summary of TDRs, all of which are considered impaired.
                   
        March 31,   December 31,  
        2015   2014  
                   
        (Dollars in millions)  
  Performing TDRs:            
    Commercial:            
      Commercial and industrial $  54    $  64   
      CRE-income producing properties    15       27   
      CRE-construction and development    25       30   
    Direct retail lending    84       84   
    Sales finance    18       19   
    Revolving credit    38       41   
    Residential mortgage-nonguaranteed    269       261   
    Residential mortgage-government guaranteed    325       360   
    Other lending subsidiaries    168       164   
      Total performing TDRs    996       1,050   
  Nonperforming TDRs (also included in NPL disclosures)    127       126   
      Total TDRs $  1,123    $  1,176   
                   
  ALLL attributable to TDRs $  152    $  159   
16

 

The following table summarizes the primary reason loan modifications were classified as TDRs and includes newly designated TDRs as well as modifications made to existing TDRs. Balances represent the recorded investment at the end of the quarter in which the modification was made. Rate modifications in this table include TDRs made with below market interest rates that also include modifications of loan structures.

 

              Three Months Ended March 31,  
              2015   2014  
              Types of       Types of      
              Modifications   Impact To   Modifications   Impact To  
              Rate   Structure   Allowance   Rate   Structure   Allowance  
                                                 
              (Dollars in millions)  
Commercial:                                    
  Commercial and industrial $  9    $  14    $  1    $  19    $  19    $  1   
  CRE-income producing properties    2       3       ―         8       5       ―     
  CRE-construction and development    ―         3       ―         5       3       ―     
Retail:                                    
  Direct retail lending    3       ―         1       11       2       3   
  Revolving credit    4       ―         1       7       ―         1   
  Residential mortgage-nonguaranteed    23       12       3       32       9       11   
  Residential mortgage-government guaranteed    60       ―         2       39       ―         3   
  Sales finance    ―         2       ―         ―         5       1   
  Other lending subsidiaries    31       ―         4       29       ―         5   
                                                 
Charge-offs and forgiveness of principal and interest for TDRs were immaterial for all periods presented.

 

The pre-default balance for modifications that experienced a payment default that had been classified as TDRs during the previous 12 months was $20 million and $21 million for the three months ended March 31, 2015 and 2014, respectively. Payment default is defined as movement of the TDR to nonaccrual status, foreclosure or charge-off, whichever occurs first.

 

Changes in the carrying value and accretable yield of loans acquired from the FDIC are presented in the following table:
                                                   
      Three Months Ended March 31, 2015   Year Ended December 31, 2014
      Purchased Impaired   Purchased Nonimpaired   Purchased Impaired   Purchased Nonimpaired
      Accretable   Carrying   Accretable   Carrying   Accretable   Carrying   Accretable   Carrying
      Yield   Value   Yield   Value   Yield   Value   Yield   Value
                                                   
      (Dollars in millions)
Balance at beginning of period $  134    $  579    $  244    $  636    $  187    $  863    $  351    $  1,172 
  Accretion    (19)      19       (27)      27       (107)      107       (169)      169 
  Payments received, net    ―         (64)      ―         (87)      ―         (391)      ―         (705)
  Other, net    12       ―         8       ―         54       ―         62       ―   
Balance at end of period $  127    $  534    $  225    $  576    $  134    $  579    $  244    $  636 
                                                   
Outstanding UPB at end of period       $  802          $  783          $  864          $  860 

 

The following table presents additional information about BB&T’s loans and leases:
                   
        March 31,   December 31,  
        2015   2014  
                   
        (Dollars in millions)  
  Unearned income and net deferred loan fees and costs $  120    $  147   
  Residential mortgage loans in process of foreclosure    317       379   
17

NOTE 5. Loan Servicing

 

Residential Mortgage Banking Activities

 

The following tables summarize residential mortgage banking activities. Mortgage and home equity loans managed exclude loans serviced for others with no other continuing involvement.

 

        March 31,   December 31,  
        2015   2014  
        (Dollars in millions)  
  Mortgage and home equity loans managed $  33,538    $  33,742   
  Less:            
    LHFS    1,694       1,317   
    Mortgage loans acquired from FDIC    662       668   
    Mortgage loans sold with recourse    649       667   
  Mortgage loans held for investment $  30,533    $  31,090   
                   
  UPB of mortgage loan servicing portfolio $  114,658    $  115,476   
  UPB of home equity loan servicing portfolio    6,421       6,781   
  UPB of residential mortgage and home equity loan servicing portfolio $  121,079    $  122,257   
  UPB of residential mortgage loans serviced for others (primarily agency            
    conforming fixed rate) $  89,192    $  90,230   
  Maximum recourse exposure from mortgage loans sold with recourse liability    346       344   
  Indemnification, recourse and repurchase reserves    88       94   
  FHA-insured mortgage loan reserve    85       85   

 

The potential exposure related to losses incurred by the FHA on defaulted loans ranges from $25 million to $105 million.

 

        As Of / For The  
        Three Months Ended March 31,  
        2015   2014  
                       
        (Dollars in millions)  
  UPB of residential mortgage loans sold from the LHFS portfolio $  2,790      $  2,875     
  Pre-tax gains recognized on mortgage loans sold and held for sale    38         15     
  Servicing fees recognized from mortgage loans serviced for others    68         69     
  Approximate weighted average servicing fee on the outstanding balance of                
    residential mortgage loans serviced for others    0.29  %      0.30  %  
  Weighted average interest rate on mortgage loans serviced for others    4.19         4.23     

 

          Three Months Ended March 31,  
            2015     2014  
                     
          (Dollars in millions)  
  Residential MSRs, carrying value, January 1, $  844    $  1,047   
    Additions    26       33   
    Change in fair value due to changes in valuation inputs or assumptions:            
      Prepayment speeds    (76)      (34)  
      Weighted average OAS    5       (9)  
    Realization of expected net servicing cash flows, passage of time and other    (35)      (29)  
  Residential MSRs, carrying value, March 31, $  764    $  1,008   
                     
  Gains (losses) on derivative financial instruments used to mitigate the            
    income statement effect of changes in fair value $  81    $  45   

 

18

 

The sensitivity of the fair value of the residential MSRs to changes in key assumptions is included in the accompanying table:
                                               
        March 31, 2015   December 31, 2014  
        Range   Weighted   Range   Weighted  
        Min   Max   Average   Min   Max   Average  
                                               
        (Dollars in millions)  
  Prepayment speed  12.5  %    14.9  %      14.0  %    10.8  %    12.8  %      12.0  %  
    Effect on fair value of a 10% increase             $  (30)                 $  (30)    
    Effect on fair value of a 20% increase                (58)                    (58)    
                                               
  OAS  8.9  %    9.7  %      9.1  %    9.1  %    9.9  %      9.3  %  
    Effect on fair value of a 10% increase             $  (22)                 $  (26)    
    Effect on fair value of a 20% increase                (42)                    (50)    
                                               
  Composition of loans serviced for others:                                        
    Fixed-rate residential mortgage loans                99.4  %                  99.4  %  
    Adjustable-rate residential mortgage loans                0.6                     0.6     
      Total                100.0  %                  100.0  %  
                                               
  Weighted average life                5.1  yrs                  5.7  yrs  

 

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

 

Commercial Mortgage Banking Activities

 

CRE mortgage loans serviced for others are not included in loans and leases on the accompanying Consolidated Balance Sheets. The following table summarizes commercial mortgage banking activities for the periods presented:

 

          March 31,   December 31,  
          2015   2014  
                     
          (Dollars in millions)  
  UPB of CRE mortgages serviced for others $  27,805    $  27,599   
  CRE mortgages serviced for others covered by recourse provisions    4,235       4,264   
  Maximum recourse exposure from CRE mortgages            
    sold with recourse liability    1,267       1,278   
  Recorded reserves related to recourse exposure    7       7   
  Originated CRE mortgages during the year    1,304       5,265   
19

NOTE 6. Deposits

 

A summary of deposits is presented in the accompanying table:
                     
          March 31,   December 31,  
          2015   2014  
                     
          (Dollars in millions)  
  Noninterest-bearing deposits $  41,414    $  38,786   
  Interest checking    21,070       20,262   
  Money market and savings    53,198       50,604   
  Time deposits    15,547       19,388   
    Total deposits $  131,229    $  129,040   
                     
  Time deposits $100,000 and greater $  6,469    $  9,782   
  Time deposits $250,000 and greater   2,531       5,753   

 

NOTE 7. Long-Term Debt

 

            March 31,   December 31,  
            2015   2014  
                       
            (Dollars in millions)  
  BB&T Corporation:            
    3.95% senior notes due 2016 $  500    $  500   
    3.20% senior notes due 2016    1,000       1,000   
    2.15% senior notes due 2017    749       749   
    1.60% senior notes due 2017    749       749   
    1.45% senior notes due 2018    500       500   
    Floating rate senior notes due 2018 (LIBOR-based, 1.13% at March 31, 2015)    400       400   
    2.05% senior notes due 2018    599       599   
    6.85% senior notes due 2019    539       539   
    2.25% senior notes due 2019    648       648   
    Floating rate senior notes due 2019 (LIBOR-based, 0.91% at March 31, 2015)    450       450   
    2.45% senior notes due 2020    1,298       1,298   
    Floating rate senior notes due 2020 (LIBOR-based, 0.95% at March 31, 2015)    200       200   
    5.20% subordinated notes due 2015    934       933   
    4.90% subordinated notes due 2017    354       353   
    5.25% subordinated notes due 2019    586       586   
    3.95% subordinated notes due 2022    298       298   
                       
  Branch Bank:            
    1.45% senior notes due 2016    750       750   
    Floating rate senior notes due 2016 (LIBOR-based, 0.69% at March 31, 2015)    500       500   
    1.05% senior notes due 2016    500       500   
    1.00% senior notes due 2017    599       599   
    1.35% senior notes due 2017    750       750   
    2.30% senior notes due 2018    750       750   
    2.85% senior notes due 2021    699       699   
    5.63% subordinated notes due 2016    386       386   
    Floating rate subordinated notes due 2016 (LIBOR-based, 0.59% at March 31, 2015)    350       350   
    Floating rate subordinated note due 2017 (LIBOR-based, 0.56% at March 31, 2015)    262       262   
    3.80% subordinated notes due 2026    848       848   
                       
  FHLB advances to Branch Bank:            
    Varying maturities to 2034    6,498       6,496   
                       
  Other long-term debt    136       119   
                       
  Fair value hedge-related basis adjustments    605       501   
      Total long-term debt $  23,437    $  23,312   

 

20

 

The following table reflects the carrying amounts and effective interest rates for long-term debt:
                           
      March 31, 2015   December 31, 2014
      Carrying   Effective   Carrying   Effective
  Amount   Rate   Amount   Rate
                           
      (Dollars in millions)
BB&T Corporation fixed rate senior notes $  6,706    2.20  %   $  6,669    2.39  %
BB&T Corporation floating rate senior notes    1,050    1.09         1,050    1.07   
BB&T Corporation fixed rate subordinated notes    2,363    2.15         2,362    2.30   
Branch Bank fixed rate senior notes    4,086    1.52         4,060    1.72   
Branch Bank floating rate senior notes    500    0.75         500    0.72   
Branch Bank fixed rate subordinated notes    1,318    2.68         1,299    2.86   
Branch Bank floating rate subordinated notes    612    3.45         612    3.27   
FHLB advances (weighted average maturity of 5.7 years at March 31, 2015)    6,666    4.02         6,641    4.03   
Other long-term debt    136             119       
  Total long-term debt $  23,437          $  23,312       

 

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

 

NOTE 8. Shareholders’ Equity

 

The activity relating to options and RSUs during the period are presented in the following tables:

 

          Wtd. Avg.  
          Exercise  
      Options   Price  
               
      (Shares in thousands)  
  Outstanding at January 1, 2015  28,374    $  35.09   
    Granted  434       38.22   
    Exercised  (824)      29.10   
    Forfeited or expired  (5,585)      38.65   
  Outstanding at March 31, 2015  22,399       34.48   
               
  Exercisable at March 31, 2015  20,664       34.62   
               
  Exercisable and expected to vest at March 31, 2015  22,277    $  34.50   

 

          Wtd. Avg.  
      Restricted Grant Date  
      Shares/Units   Fair Value  
               
      (Shares in thousands)  
  Nonvested at January 1, 2015  12,075    $  27.38   
    Granted  3,621       33.28   
    Vested  (2,450)      25.33   
    Forfeited  (79)      29.26   
  Nonvested at March 31, 2015  13,167       29.37   
  Expected to vest at March 31, 2015  12,045       29.40   
21

NOTE 9. AOCI

 

Three Months Ended March 31, 2015   Unrecognized Net Pension and Postretirement Costs   Unrealized Net Gains (Losses) on Cash Flow Hedges   Unrealized Net Gains (Losses) on AFS Securities   FDIC's Share of Unrealized (Gains) Losses on AFS Securities   Other, net   Total
                                     
            (Dollars in millions)
AOCI balance, January 1, 2015   $  (626)   $  (54)   $  152    $  (207)   $  (16)   $  (751)
  OCI before reclassifications, net of tax      2       (67)      67       2       (5)      (1)
  Amounts reclassified from AOCI:                                    
    Personnel expense      12       ―         ―         ―         ―         12 
    Interest income      ―         ―         (16)      ―         1       (15)
    Interest expense      ―         21       ―         ―         ―         21 
    FDIC loss share income, net      ―         ―         ―         13       ―         13 
      Total before income taxes      12       21       (16)      13       1       31 
      Less: Income taxes      5       8       (6)      5       ―         12 
        Net of income taxes      7       13       (10)      8       1       19 
  Net change in AOCI      9       (54)      57       10       (4)      18 
AOCI balance, March 31, 2015   $  (617)   $  (108)   $  209    $  (197)   $  (20)   $  (733)

 

Three Months Ended March 31, 2014   Unrecognized Net Pension and Postretirement Costs   Unrealized Net Gains (Losses) on Cash Flow Hedges   Unrealized Net Gains (Losses) on AFS Securities   FDIC's Share of Unrealized (Gains) Losses on AFS Securities   Other, net   Total
                                     
            (Dollars in millions)
AOCI balance, January 1, 2014   $  (303)   $  2    $  (42)   $  (235)   $  (15)   $  (593)
  OCI before reclassifications, net of tax      1       (2)      85       ―         (5)      79 
  Amounts reclassified from AOCI:                                    
    Interest income      ―         ―         (8)      ―         1       (7)
    Interest expense      ―         21       ―         ―         ―         21 
    FDIC loss share income, net      ―         ―         ―         10       ―         10 
    Securities (gains) losses, net      ―         ―         (2)      ―         ―         (2)
      Total before income taxes      ―         21       (10)      10       1       22 
      Less: Income taxes      ―         8       (4)      4       ―         8 
        Net of income taxes      ―         13       (6)      6       1       14 
  Net change in AOCI      1       11       79       6       (4)      93 
AOCI balance, March 31, 2014   $  (302)   $  13    $  37    $  (229)   $  (19)   $  (500)

 

NOTE 10. Income Taxes

 

The effective tax rates for the three months ended March 31, 2015 and 2014 were 30.6% and 30.9%, respectively. Effective January 1, 2015, the Company adopted new accounting guidance related to investments in qualified affordable housing projects. See Note 12 “Commitments and Contingencies” for additional information.

 

In February 2010, BB&T received an IRS statutory notice of deficiency for tax years 2002-2007 asserting a liability for taxes, penalties and interest of approximately $892 million related to the disallowance of foreign tax credits and other deductions claimed by a subsidiary in connection with a financing transaction. BB&T paid the disputed tax, penalties and interest in March 2010 and filed a lawsuit seeking a refund in the U.S. Court of Federal Claims. On September 20, 2013, the court denied the refund claim. BB&T appealed the decision to the U.S. Court of Appeals for the Federal Circuit. Oral arguments were heard in the appeal on January 7, 2015; however, no decision has been rendered. As of March 31, 2015, the exposure for this financing transaction is fully reserved.

 

It is reasonably possible that the litigation associated with the financing transaction may conclude within the next twelve months; however, further proceedings could delay a final resolution. Changes in the amount of unrecognized tax benefits, penalties and interest could result in a benefit of up to approximately $700 million. The ultimate resolution of these matters may take longer.

22

NOTE 11. Benefit Plans

 

          Qualified Plan   Nonqualified Plans  
  Three Months Ended March 31,   2015   2014   2015   2014  
                                 
          (Dollars in millions)  
  Service cost   $  43    $  33    $  3    $  3   
  Interest cost      34       31       4       4   
  Estimated return on plan assets      (81)      (74)      ―         ―     
  Amortization and other      12       ―         4       3   
    Net periodic benefit cost   $  8    $  (10)   $  11    $  10   

 

BB&T makes contributions to the qualified pension plan in amounts between the minimum required for funding and the maximum amount deductible for federal income tax purposes. Discretionary contributions totaling $117 million were made during the three months ended March 31, 2015. There are no required contributions for the remainder of 2015, though BB&T may elect to make additional contributions.

 

NOTE 12. Commitments and Contingencies

 

          As Of / For the Year-To-Date Period Ended
          March 31, 2015   December 31, 2014
                   
          (Dollars in millions)
Letters of credit and financial guarantees $  3,422    $  3,462 
Carrying amount of the liability for letter of credit guarantees    24       22 
                   
Investments in affordable housing and historic building rehabilitation projects:          
  Carrying amount    1,515       1,416 
  Amount of future funding commitments included in carrying amount    536       459 
  Lending exposure    178       169 
  Tax credits subject to recapture    297       300 
  Amortization recognized in the provision for income taxes    46       161 
  Tax credits and other tax benefits recognized in the provision for income taxes    65       222 
                   
Investments in private equity and similar investments    366       329 
Future funding commitments to consolidated private equity funds    184       202 

 

Effective January 1, 2015, BB&T adopted new guidance related to investments in qualified affordable housing projects and elected the proportional amortization method to account for these investments. The following table summarizes the impact to certain previously reported amounts.

 

                  Three Months Ended March 31, 2014  
                         
                    (Dollars in millions)  
  Increase in other income       $  34   
  Increase in provision for income taxes          (39)  
  Decrease in net income and net income available to common shareholders   $  (5)  
                         
  Decrease in diluted EPS       $  (0.01)  
                         
              January 1,  
              2015   2014  
                         
              (Dollars in millions)  
  Decrease to retained earnings $  (49)   $  (29)  
23

 

Legal Proceedings

 

The nature of BB&T’s business ordinarily results in a certain amount of claims, litigation, investigations and legal and administrative cases and proceedings, all of which are considered incidental to the normal conduct of business. BB&T believes it has meritorious defenses to the claims asserted against it in its currently outstanding legal proceedings and, with respect to such legal proceedings, intends to continue to defend itself vigorously, litigating or settling cases according to management’s judgment as to what is in the best interests of BB&T and its shareholders.

 

On at least a quarterly basis, liabilities and contingencies in connection with outstanding legal proceedings are assessed utilizing the latest information available. For those matters where it is probable that BB&T will incur a loss and the amount of the loss can be reasonably estimated, a liability is recorded in the consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments on at least a quarterly basis. For other matters, where a loss is not probable or the amount of the loss is not estimable, legal reserves are not accrued. While the outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel and available insurance coverage, management believes that the established legal reserves are adequate and the liabilities arising from legal proceedings will not have a material adverse effect on the consolidated financial position, consolidated results of operations or consolidated cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the consolidated financial position, consolidated results of operations or consolidated cash flows of BB&T.

 

Pledged Assets

 

Certain assets were pledged to secure municipal deposits, securities sold under agreements to repurchase, borrowings, and borrowing capacity, subject to certain limits, at the FHLB and FRB as well as for other purposes as required or permitted by law. The following table provides the total carrying amount of pledged assets by asset type, of which the majority are pursuant to agreements that do not permit the other party to sell or repledge the collateral. Assets related to employee benefit plans have been excluded from the following table.

 

        March 31,   December 31,  
        2015   2014  
                   
        (Dollars in millions)  
  Pledged securities $  14,859    $  14,636   
  Pledged loans   67,312       67,248   
24

NOTE 13. Fair Value Disclosures

 

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

 

The following tables present fair value information for assets and liabilities measured at fair value on a recurring basis:
                                 
  March 31, 2015   Total   Level 1   Level 2   Level 3  
                                 
          (Dollars in millions)  
  Assets:                          
    Trading securities   $  873    $  303    $  570    $  ―     
    AFS securities:                          
      U.S. Treasury      1,334       ―         1,334       ―     
      MBS issued by GSE      16,869       ―         16,869       ―     
      States and political subdivisions      1,970       ―         1,970       ―     
      Non-agency MBS      254       ―         254       ―     
      Other      41       5       36       ―     
      Acquired from FDIC      1,206       ―         487       719   
    LHFS      2,121       ―         2,121       ―     
    Residential MSRs      764       ―         ―         764   
    Derivative assets:                          
      Interest rate contracts      1,403       ―         1,373       30   
      Foreign exchange contracts      10       ―         10       ―     
    Private equity and similar investments      366       ―         ―         366   
      Total assets   $  27,211    $  308    $  25,024    $  1,879   
                                 
  Liabilities:                          
    Derivative liabilities:                          
      Interest rate contracts   $  1,220    $  ―      $  1,213    $  7   
      Foreign exchange contracts      8       ―         8       ―     
    Short-term borrowings      236       ―         236       ―     
      Total liabilities   $  1,464    $  ―      $  1,457    $  7   

 

25

 

  December 31, 2014   Total   Level 1   Level 2   Level 3  
                                 
          (Dollars in millions)  
  Assets:                          
    Trading securities   $  482    $  289    $  193    $  ―     
    AFS securities:                          
      U.S. Treasury      1,231       ―         1,231       ―     
      MBS issued by GSE      16,154       ―         16,154       ―     
      States and political subdivisions      1,974       ―         1,974       ―     
      Non-agency MBS      264       ―         264       ―     
      Other      41       6       35       ―     
      Acquired from FDIC      1,243       ―         498       745   
    LHFS      1,423       ―         1,423       ―     
    Residential MSRs      844       ―         ―         844   
    Derivative assets:                          
      Interest rate contracts      1,114       ―         1,094       20   
      Foreign exchange contracts      8       ―         8       ―     
    Private equity and similar investments      329       ―         ―         329   
      Total assets   $  25,107    $  295    $  22,874    $  1,938   
                                 
  Liabilities:                          
    Derivative liabilities:                          
      Interest rate contracts   $  1,007    $  ―      $  1,004    $  3   
      Foreign exchange contracts      6       ―         6       ―     
    Short-term borrowings      148       ―         148       ―     
      Total liabilities   $  1,161    $  ―      $  1,158    $  3   

 

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

 

A third-party pricing service is generally utilized in determining the fair value of the securities portfolio. Management independently evaluates the fair values provided by the pricing service through comparisons to other third party pricing sources, review of additional information provided by the third party pricing service and other third party sources for selected securities and back-testing to compare the price realized on any security sales to the daily pricing information received from the pricing service. Fair value measurements are derived from market-based pricing matrices that were developed using observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads and broker quotes. As described by security type below, additional inputs may be used, or some inputs may not be applicable. In the event that market observable data was not available, which would generally occur due to the lack of an active market for a given security, the valuation of the security would be subjective and may involve substantial judgment by management.

 

Trading securities: Trading securities include various types of debt and equity securities, primarily consisting of debt securities issued by the U.S. Treasury, GSEs, or states and political subdivisions. The valuation techniques used for these investments are more fully discussed below.

 

U.S. Treasury securities: Treasury securities are valued using quoted prices in active over the counter markets.

 

GSE securities and MBS issued by GSE: GSE pass-through securities are valued using market-based pricing matrices that are based on observable inputs including benchmark TBA security pricing and yield curves that were estimated based on U.S. Treasury yields and certain floating rate indices. The pricing matrices for these securities may also give consideration to pool-specific data supplied directly by the GSE. GSE CMOs are valued using market-based pricing matrices that are based on observable inputs including offers, bids, reported trades, dealer quotes and market research reports, the characteristics of a specific tranche, market convention prepayment speeds and benchmark yield curves as described above.

 

States and political subdivisions: These securities are valued using market-based pricing matrices that are based on observable inputs including MSRB reported trades, issuer spreads, material event notices and benchmark yield curves.

 

Non-agency MBS: Pricing matrices for these securities are based on observable inputs including offers, bids, reported trades, dealer quotes and market research reports, the characteristics of a specific tranche, market convention prepayment speeds and benchmark yield curves as described above.

 

26

Other securities: These securities consist primarily of mutual funds and corporate bonds. These securities are valued based on a review of quoted market prices for assets as well as through the various other inputs discussed previously.

 

Acquired from FDIC securities: Securities acquired from the FDIC consist of re-remic non-agency MBS, municipal securities and non-agency MBS. State and political subdivision securities and certain non-agency MBS acquired from the FDIC are valued in a manner similar to the approach described above for those asset classes. The re-remic non-agency MBS, which are categorized as Level 3, are valued based on broker dealer quotes that reflected certain unobservable market inputs.

 

LHFS: Certain mortgage loans are originated to be sold to investors, which are carried at fair value. The fair value is primarily based on quoted market prices for securities backed by similar types of loans. The changes in fair value of these assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage LHFS.

 

Residential MSRs: Residential MSRs are valued using an OAS valuation model to project cash flows over multiple interest rate scenarios, which are then discounted at risk-adjusted rates. The model considers portfolio characteristics, contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. Fair value estimates and assumptions are compared to industry surveys, recent market activity, actual portfolio experience and, when available, other observable market data.

 

Derivative assets and liabilities: The fair values of derivatives are determined based on quoted market prices and internal pricing models that are primarily sensitive to market observable data. The fair values of interest rate lock commitments, which are related to mortgage loan commitments and are categorized as Level 3, are based on quoted market prices adjusted for commitments that are not expected to fund and include the value attributable to the net servicing fees.

 

Private equity and similar investments: Private equity and similar investments are measured at fair value based on the investment’s net asset value. In many cases there are no observable market values for these investments and therefore management must estimate the fair value based on a comparison of the operating performance of the company to multiples in the marketplace for similar entities. This analysis requires significant judgment, and actual values in a sale could differ materially from those estimated.

 

Short-term borrowings: Short-term borrowings represent debt securities sold short that are entered into as a hedging strategy for the purposes of supporting institutional and retail client trading activities.

 

The following tables summarize activity for Level 3 assets and liabilities:
                           
Three Months Ended March 31, 2015   Acquired from FDIC Securities   Residential MSRs   Net Derivatives   Private Equity and Similar Investments
     
              (Dollars in millions)
Balance at January 1, 2015   $  745    $  844    $  17    $  329 
  Total realized and unrealized gains (losses):                        
    Included in earnings:                        
      Interest income      11       ―         ―         ―   
      Mortgage banking income      ―         (71)      28       ―   
      Other noninterest income      ―         ―         (4)      16 
    Included in unrealized net holding gains (losses) in OCI      (14)      ―         ―         ―   
  Purchases      ―         ―         ―         42 
  Issuances      ―         26       38       ―   
  Sales      ―         ―         ―         (19)
  Settlements      (23)      (35)      (56)      (2)
Balance at March 31, 2015   $  719    $  764    $  23    $  366 
                                   
Change in unrealized gains (losses) included in earnings for the period,                        
  attributable to assets and liabilities still held at March 31, 2015   $  11    $  (71)   $  23    $  16 

 

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Three Months Ended March 31, 2014   Acquired from FDIC Securities   Residential MSRs   Net Derivatives   Private Equity and Similar Investments
     
              (Dollars in millions)
Balance at January 1, 2014   $  861    $  1,047    $  (11)   $  291 
  Total realized and unrealized gains (losses):                        
    Included in earnings:                        
      Interest income      15       ―         ―         ―   
      Mortgage banking income      ―         (43)      15       ―   
      Other noninterest income      ―         ―         ―         3 
    Included in unrealized net holding gains (losses) in OCI      (18)      ―         ―         ―   
  Purchases      ―         ―         ―         38 
  Issuances      ―         33       12       ―   
  Sales      ―         ―         ―         (1)
  Settlements      (26)      (29)      (12)      (3)
Balance at March 31, 2014   $  832    $  1,008    $  4    $  328 
                                   
Change in unrealized gains (losses) included in earnings for the period,                        
  attributable to assets and liabilities still held at March 31, 2014   $  15    $  (43)   $  4    $  2 

 

BB&T’s policy is to recognize transfers between fair value levels as of the end of a reporting period. There were no transfers between fair value levels during the quarters ended March 31, 2015 and March 31, 2014.

 

The majority of BB&T’s private equity and similar investments are in SBIC qualified funds, which primarily focus on equity and subordinated debt investments in privately-held middle market companies. The majority of these investments are not redeemable and distributions are received as the underlying assets of the funds liquidate. The timing of distributions, which are expected to occur on various dates through 2025, is uncertain and dependent on various events such as recapitalizations, refinance transactions and ownership changes, among others. Excluding the investment of future funds, BB&T estimates these investments have a weighted average remaining life of approximately two years; however, the timing and amount of distributions may vary significantly. As of March 31, 2015, restrictions on the ability to sell the investments include, but are not limited to, consent of a majority member or general partner’s approval for transfer of ownership. BB&T’s investments are spread over numerous privately-held middle market companies, and thus the sensitivity to a change in fair value for any single investment is limited. The significant unobservable inputs for these investments are EBITDA multiples that ranged from 5x to 11x, with a weighted average of 8x, at March 31, 2015.

 

The following table details the fair value and UPB of LHFS that were elected to be carried at fair value:
                                             
          March 31, 2015   December 31, 2014  
          Fair   Aggregate       Fair   Aggregate      
          Value   UPB   Difference   Value   UPB   Difference  
                                             
          (Dollars in millions)  
  LHFS reported at fair value $  2,121    $  2,086    $  35    $  1,423    $  1,390    $  33   

 

Excluding government guaranteed, LHFS that were nonaccrual or 90 days or more past due and still accruing interest were not material at March 31, 2015.

 

The following table provides information about certain financial assets measured at fair value on a nonrecurring basis, which are primarily collateral dependent and may be subject to liquidity adjustments. These assets are considered to be Level 3 assets (excludes acquired from FDIC):
                                 
          As Of / For the Year-To-Date Period Ended  
          March 31, 2015   December 31, 2014  
          Carrying Value   Valuation Adjustments   Carrying Value   Valuation Adjustments  
                                 
          (Dollars in millions)  
  Impaired loans   $  117    $  (12)   $ 109    $  (52)  
  Foreclosed real estate      90       (40)     87       (176)  

 

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For financial instruments not recorded at fair value, estimates of fair value are based on relevant market data and information about the instrument and are based on the value of one trading unit without regard to any premium or discount that may result from concentrations of ownership, possible tax ramifications, estimated transaction costs that may result from bulk sales or the relationship between various instruments.

 

An active market does not exist for certain financial instruments. Fair value estimates for these instruments are based on current economic conditions, currency and interest rate risk characteristics, loss experience and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. In addition, changes in assumptions could significantly affect these fair value estimates. The following assumptions were used to estimate the fair value of these financial instruments.

 

Cash and cash equivalents and restricted cash: For these short-term instruments, the carrying amounts are a reasonable estimate of fair values.

 

HTM securities: The fair values of HTM securities are based on a market approach using observable inputs such as benchmark yields and securities, TBA prices, reported trades, issuer spreads, current bids and offers, monthly payment information and collateral performance.

 

Loans receivable: The fair values for loans are estimated using discounted cash flow analyses, applying interest rates currently being offered for loans with similar terms and credit quality, which are deemed to be indicative of orderly transactions in the current market. For commercial loans and leases, discount rates may be adjusted to address additional credit risk on lower risk grade instruments. For residential mortgage and other consumer loans, internal prepayment risk models are used to adjust contractual cash flows. Loans are aggregated into pools of similar terms and credit quality and discounted using a LIBOR based rate. The carrying amounts of accrued interest approximate fair values.

 

FDIC loss share receivable and payable: The fair values of the receivable and payable are estimated using discounted cash flow analyses, applying a risk free interest rate that is adjusted for the uncertainty in the timing and amount of the cash flows. The expected cash flows to/from the FDIC related to loans were estimated using the same assumptions that were used in determining the accounting values for the related loans. The expected cash flows to/from the FDIC related to securities are based upon the fair value of the related securities and the payment that would be required if the securities were sold for that amount. The loss share agreements are not transferrable and, accordingly, there is no market for the receivable or payable.

 

Deposit liabilities: The fair values for demand deposits are equal to the amount payable on demand. Fair values for CDs are estimated using a discounted cash flow calculation that applies current interest rates to aggregate expected maturities. BB&T has developed long-term relationships with its deposit customers, commonly referred to as CDIs, that have not been considered in the determination of the deposit liabilities’ fair value.

 

Short-term borrowings: The carrying amounts of short-term borrowings approximate their fair values.

 

Long-term debt: The fair values of long-term debt instruments are estimated based on quoted market prices for the instrument if available, or for similar instruments if not available, or by using discounted cash flow analyses, based on current incremental borrowing rates for similar types of instruments.

 

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

 

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Financial assets and liabilities not recorded at fair value are summarized below:
     
          Carrying   Total          
  March 31, 2015   Amount   Fair Value   Level 2   Level 3  
                         
          (Dollars in millions)  
  Financial assets:                          
    HTM securities   $  20,415    $  20,658    $  20,658    $  ―     
    Loans and leases, net of ALLL excluding acquired from FDIC      117,389       117,237       ―         117,237   
    Acquired from FDIC loans, net of ALLL      1,053       1,253       ―         1,253   
    FDIC loss share receivable      444       72       ―         72   
                                 
  Financial liabilities:                          
    Deposits      131,229       131,395       131,395       ―     
    FDIC loss share payable      700       697       ―         697   
    Long-term debt      23,437       24,262       24,262       ―     

 

          Carrying   Total          
  December 31, 2014   Amount   Fair Value   Level 2   Level 3