Companies: 10,652     total market cap: $140.484 T
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Truist Financial Corporation
TFC
#360
Rank
$66.39 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$51.90
Share price
0.68%
Change (1 day)
11.83%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Truist Financial Corporation
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2019 Q3

Truist Financial Corporation - 10-Q quarterly report FY2019 Q3


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

☒ Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended: September 30, 2019
Commission File Number: 1-10853
_____________________________
BB&T CORPORATION
(Exact name of registrant as specified in its charter)
_____________________________
North Carolina
56-0939887
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
 
 
200 West Second Street
 
 
Winston-Salem,
North Carolina
27101
(Address of principal executive offices)
(Zip Code)
 
 
 
Registrant's telephone number, including area code:
(336)
733-2000
______________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, $5 par value
 
BBT
 
New York Stock Exchange
Depositary Shares each representing 1/1,000th interest in a share of Series F Non-Cumulative Perpetual Preferred Stock
 
BBT PrF
 
New York Stock Exchange
Depositary Shares each representing 1/1,000th interest in a share of Series G Non-Cumulative Perpetual Preferred Stock
 
BBT PrG
 
New York Stock Exchange
Depositary Shares each representing 1/1,000th interest in a share of Series H Non-Cumulative Perpetual Preferred Stock
 
BBT PrH
 
New York Stock Exchange

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  ☒   No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☒   No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
 
Accelerated filer
☐
Non-accelerated filer
☐
 
Smaller reporting company
☐
 
 
 
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ☐   No  ☒
At September 30, 2019, 766,303,490 shares of the registrant's common stock, $5 par value, were outstanding.
 
 
 
 
 


TABLE OF CONTENTS
BB&T CORPORATION
FORM 10-Q
September 30, 2019
 
 
Page No.
PART I - Financial Information
 
Glossary of Defined Terms
1
 
Forward-Looking Statements
3
Item 1.
Financial Statements
 
 
Consolidated Balance Sheets (Unaudited)
4
 
Consolidated Statements of Income (Unaudited)
5
 
Consolidated Statements of Comprehensive Income (Unaudited)
6
 
Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
7
 
Consolidated Statements of Cash Flows (Unaudited)
8
 
Notes to Consolidated Financial Statements (Unaudited)
 
 
Note 1. Basis of Presentation
9
 
Note 2. Business Combinations
10
 
Note 3. Securities
11
 
Note 4. Loans and ACL
13
 
Note 5. Other Assets and Liabilities
18
 
Note 6. Goodwill and Other Intangible Assets
18
 
Note 7. Loan Servicing
19
 
Note 8. Deposits
20
 
Note 9. Long-Term Debt
20
 
Note 10. Shareholders' Equity
21
 
Note 11. AOCI
22
 
Note 12. Income Taxes
23
 
Note 13. Benefit Plans
23
 
Note 14. Commitments and Contingencies
23
 
Note 15. Fair Value Disclosures
25
 
Note 16. Derivative Financial Instruments
30
 
Note 17. Computation of EPS
34
 
Note 18. Operating Segments
34
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
59
PART II - Other Information
Item 1.
Legal Proceedings
59
Item 1A.
Risk Factors
59
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
59
Item 3.
Defaults Upon Senior Securities - (none)
 
Item 4.
Mine Safety Disclosures - (not applicable)
 
Item 5.
Other Information - (none to be reported)
 
Item 6.
Exhibits
60



Glossary of Defined Terms
The following terms may be used throughout this Report, including the consolidated financial statements and related notes. 
Term
Definition
ACL
Allowance for credit losses
AFS
Available-for-sale
Agency MBS
Mortgage-backed securities issued by a U.S. government agency or GSE
ALLL
Allowance for loan and lease losses
ARRC
Alternative Reference Rates Committee of the FRB and the Federal Reserve Bank of New York
AOCI
Accumulated other comprehensive income (loss)
Basel III
Global regulatory standards on bank capital adequacy and liquidity published by the BCBS
BB&T
BB&T Corporation and subsidiaries
BCBS
Basel Committee on Banking Supervision
BHC
Bank holding company
Branch Bank
Branch Banking and Trust Company
BU
Business Unit
CB-Commercial
Community Banking Commercial, an operating segment
CB-Retail
Community Banking Retail and Consumer Finance, an operating segment
CCAR
Comprehensive Capital Analysis and Review
CCRC
Culture and Conduct Risk Committee
CD
Certificate of deposit
CDI
Core deposit intangible assets
CEO
Chief Executive Officer
CFO
Chief Financial Officer
CET1
Common equity Tier 1
CMO
Collateralized mortgage obligation
Company
BB&T Corporation and subsidiaries (interchangeable with "BB&T" above)
CRE
Commercial real estate
DIF
Deposit Insurance Fund administered by the FDIC
EGRRCPA
Economic Growth, Regulatory Relief, and Consumer Protection Act
EPS
Earnings per common share
EVE
Economic value of equity
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FDIC
Federal Deposit Insurance Corporation
FHA
Federal Housing Administration
FHC
Financial Holding Company
FHLB
Federal Home Loan Bank
FHLMC
Federal Home Loan Mortgage Corporation
FNMA
Federal National Mortgage Association
FRB
Board of Governors of the Federal Reserve System
FS&CF
Financial Services and Commercial Finance, an operating segment
FTE
Full-time equivalent employee
GAAP
Accounting principles generally accepted in the United States of America
GNMA
Government National Mortgage Association
Grandbridge
Grandbridge Real Estate Capital, LLC
GSE
U.S. government-sponsored enterprise
HFI
Held for investment
HQLA
High-quality liquid assets
HTM
Held-to-maturity
IDI
Insured depository institution
IH
Insurance Holdings, an operating segment
IPV
Independent price verification
LCR
Liquidity Coverage Ratio
LHFS
Loans held for sale
LIBOR
London Interbank Offered Rate
MBS
Mortgage-backed securities
MRLCC
Market Risk, Liquidity and Capital Committee

BB&T Corporation 1


Term
Definition
MRM
Model Risk Management
MSR
Mortgage servicing right
MSRB
Municipal Securities Rulemaking Board
N/A
Not applicable
NCCOB
North Carolina Office of the Commissioner of Banks
NIM
Net interest margin, computed on a TE basis
NM
Not meaningful
NPA
Nonperforming asset
NPL
Nonperforming loan
NYSE
NYSE Euronext, Inc.
OAS
Option adjusted spread
OCI
Other comprehensive income (loss)
OPEB
Other post-employment benefit
OREO
Other real estate owned
ORMC
Operational Risk Management Committee
OT&C
Other, Treasury and Corporate
OTTI
Other-than-temporary impairment
Parent Company
BB&T Corporation, the parent company of Branch Bank and other subsidiaries
PCI
Purchased credit impaired loans
Peer Group
Financial holding companies included in the industry peer group index
PSU
Performance share units
Re-REMICs
Re-securitizations of Real Estate Mortgage Investment Conduits
Regions Insurance
Regions Insurance Group, acquired by BB&T effective July 2, 2018
ROU Assets
Right-of-use assets
RSU
Restricted stock unit
RUFC
Reserve for unfunded lending commitments
SBIC
Small Business Investment Company
SEC
Securities and Exchange Commission
Short-Term Borrowings
Federal funds purchased, securities sold under repurchase agreements and other short-term borrowed funds with original maturities of less than one year
Simulation
Interest sensitivity simulation analysis
SunTrust
SunTrust Banks, Inc.
TBA
To be announced
TDR
Troubled debt restructuring
TE
Taxable-equivalent
Truist
Truist Financial Corporation
U.S.
United States of America
U.S. Treasury
United States Department of the Treasury
UPB
Unpaid principal balance
VaR
Value-at-risk
VIE
Variable interest entity

2 BB&T Corporation

Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the financial condition, results of operations, business plans and the future performance of BB&T that are based on the beliefs and assumptions of the management of BB&T and the information available to management at the time that these disclosures were prepared. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "plans," "projects," "may," "will," "should," "could," and other similar expressions are intended to identify these forward-looking statements. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. Such factors include, but are not limited to, the following:
l 
risks, uncertainties and other factors relating to the merger of SunTrust with and into BB&T, including the ability to obtain regulatory approvals and meet other closing conditions to the merger, and delay in closing the merger;
l 
general economic or business conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, slower deposit and/or asset growth, and a deterioration in credit quality and/or a reduced demand for credit, insurance or other services;
l 
disruptions to the national or global financial markets, including the impact of a downgrade of U.S. government obligations by one of the credit ratings agencies, the economic instability and recessionary conditions in Europe;
l 
changes in the interest rate environment, including interest rate changes made by the Federal Reserve, the discontinuation of LIBOR as an interest rate benchmark, as well as cash flow reassessments may reduce net interest margin and/or the volumes and values of loans and deposits as well as the value of other financial assets and liabilities;
l 
competitive pressures among depository and other financial institutions may increase significantly;
l 
legislative, regulatory or accounting changes may adversely affect the businesses in which BB&T is engaged;
l 
local, state or federal taxing authorities may take tax positions that are adverse to BB&T;
l 
a reduction may occur in BB&T's credit ratings;
l 
adverse changes may occur in the securities markets;
l 
competitors of BB&T may have greater financial resources or develop products that enable them to compete more successfully than BB&T and may be subject to different regulatory standards than BB&T;
l 
cyber security risks could adversely affect BB&T's business and financial performance or reputation, and BB&T could be liable for financial losses incurred by third parties due to breaches of data shared between financial institutions;
l 
higher-than-expected costs related to information technology infrastructure or a failure to successfully implement future system enhancements could adversely impact BB&T's financial condition and results of operations and could result in significant additional costs to BB&T;
l 
natural or other disasters, including acts of terrorism, could have an adverse effect on BB&T, materially disrupting BB&T's operations or the ability or willingness of customers to access BB&T's products and services;
l 
costs related to the integration of the businesses of BB&T and its merger partners may be greater than expected;
l 
failure to execute on strategic or operational plans, including the ability to successfully complete and/or integrate mergers and acquisitions or fully achieve expected cost savings or revenue growth associated with mergers and acquisitions within the expected time frames could adversely impact financial condition and results of operations;
l 
significant litigation and regulatory proceedings could have a material adverse effect on BB&T;
l 
unfavorable resolution of legal proceedings or other claims and regulatory and other governmental investigations or other inquiries could result in negative publicity, protests, fines, penalties, restrictions on BB&T's operations or ability to expand its business and other negative consequences, all of which could cause reputational damage and adversely impact BB&T's financial conditions and results of operations;
l 
risks resulting from the extensive use of models;
l 
risk management measures may not be fully effective;
l 
fraud or misconduct by internal or external parties, which BB&T may not be able to prevent, detect or mitigate;
l 
deposit attrition, customer loss and/or revenue loss following completed mergers/acquisitions may exceed expectations; and
l 
widespread system outages, caused by the failure of critical internal systems or critical services provided by third parties, could adversely impact BB&T's financial condition and results of operations.

These and other risk factors are more fully described in this report and in BB&T's Annual Report on Form 10-K for the year ended December 31, 2018 under the sections entitled "Item 1A. Risk Factors" and from time to time, in other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Actual results may differ materially from those expressed in or implied by any forward-looking statement. Except to the extent required by applicable law or regulation, BB&T undertakes no obligation to revise or update publicly any forward-looking statements for any reason. Readers should, however, consult any further disclosures of a forward-looking nature BB&T may make in any subsequent Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q, or Current Reports on Form 8‑K.


BB&T Corporation 3


ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS
BB&T CORPORATION AND SUBSIDIARIES
Unaudited
(Dollars in millions, except per share data, shares in thousands)
September 30, 2019
 
December 31, 2018
Assets
 
 
 
Cash and due from banks
$
2,027

 
$
2,753

Interest-bearing deposits with banks
866

 
984

Cash equivalents
114

 
143

Restricted cash
11

 
107

AFS securities at fair value
35,997

 
25,038

HTM securities (fair value of $18,970 and $20,047 at September 30, 2019 and December 31, 2018, respectively)
18,768

 
20,552

LHFS at fair value
1,442

 
988

Loans and leases
149,413

 
149,013

ALLL
(1,573
)
 
(1,558
)
Loans and leases, net of ALLL
147,840

 
147,455

Premises and equipment
2,022

 
2,118

Goodwill
9,832

 
9,818

CDI and other intangible assets
678

 
758

MSRs at fair value
919

 
1,108

Other assets
16,234

 
13,875

Total assets
$
236,750

 
$
225,697

Liabilities
 
 
 
Deposits
$
162,280

 
$
161,199

Short-term borrowings
10,405

 
5,178

Long-term debt
25,520

 
23,709

Accounts payable and other liabilities
6,242

 
5,433

Total liabilities
204,447

 
195,519

Commitments and contingencies (Note 14)

 

Shareholders' Equity
 
 
 
Preferred stock, $5 par, liquidation preference of $25,000 per share
3,057

 
3,053

Common stock, $5 par
3,832

 
3,817

Additional paid-in capital
6,931

 
6,849

Retained earnings
19,440

 
18,118

AOCI, net of deferred income taxes
(1,026
)
 
(1,715
)
Noncontrolling interests
69

 
56

Total shareholders' equity
32,303

 
30,178

Total liabilities and shareholders' equity
$
236,750

 
$
225,697

Common shares outstanding
766,303

 
763,326

Common shares authorized
2,000,000

 
2,000,000

Preferred shares outstanding
125

 
126

Preferred shares authorized
5,000

 
5,000


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

4 BB&T Corporation


CONSOLIDATED STATEMENTS OF INCOME
BB&T CORPORATION AND SUBSIDIARIES
Unaudited
(Dollars in millions, except per share data, shares in thousands)
Three Months Ended September 30,
 
Nine Months Ended September 30,
2019
 
2018
 
2019
 
2018
Interest Income
 
 
 
 
 
 
 
Interest and fees on loans and leases
$
1,886

 
$
1,772

 
$
5,611

 
$
5,064

Interest and dividends on securities
315

 
283

 
917

 
868

Interest on other earning assets
17

 
14

 
69

 
52

Total interest income
2,218

 
2,069

 
6,597

 
5,984

Interest Expense
 
 
 
 
 
 
 
Interest on deposits
271

 
172

 
797

 
438

Interest on short-term borrowings
54

 
29

 
136

 
72

Interest on long-term debt
193

 
181

 
578

 
497

Total interest expense
518

 
382

 
1,511

 
1,007

Net Interest Income
1,700

 
1,687

 
5,086

 
4,977

Provision for credit losses
117

 
135

 
444

 
420

Net Interest Income After Provision for Credit Losses
1,583

 
1,552

 
4,642

 
4,557

Noninterest Income
 
 
 
 
 
 
 
Insurance income
487

 
448

 
1,563

 
1,365

Service charges on deposits
188

 
183

 
540

 
527

Investment banking and brokerage fees and commissions
130

 
116

 
372

 
338

Mortgage banking income
112

 
79

 
288

 
272

Trust and investment advisory revenues
71

 
71

 
209

 
215

Bankcard fees and merchant discounts
72

 
72

 
219

 
213

Checkcard fees
57

 
56

 
171

 
165

Operating lease income
36

 
37

 
106

 
110

Income from bank-owned life insurance
29

 
27

 
91

 
88

Other income
121

 
150

 
298

 
347

Securities gains (losses), net
 
 
 
 
 
 
 
Gross realized gains
—

 
—

 
42

 
1

Gross realized losses
—

 
—

 
(42
)
 
—

Total securities gains (losses), net
—

 
—

 
—

 
1

Total noninterest income
1,303

 
1,239

 
3,857

 
3,641

Noninterest Expense
 
 
 
 
 
 
 
Personnel expense
1,161

 
1,104

 
3,368

 
3,217

Occupancy and equipment expense
186

 
189

 
557

 
570

Software expense
77

 
70

 
220

 
202

Outside IT services
28

 
33

 
87

 
97

Regulatory charges
20

 
37

 
57

 
116

Amortization of intangibles
29

 
33

 
93

 
97

Loan-related expense
26

 
28

 
81

 
83

Professional services
47

 
33

 
109

 
95

Merger-related and restructuring charges, net
34

 
18

 
137

 
70

Other expense
232

 
197

 
650

 
601

Total noninterest expense
1,840

 
1,742

 
5,359

 
5,148

Earnings
 
 
 
 
 
 
 
Income before income taxes
1,046

 
1,049

 
3,140

 
3,050

Provision for income taxes
218

 
210

 
629

 
598

Net income
828

 
839

 
2,511

 
2,452

Noncontrolling interests
3

 
7

 
8

 
13

Dividends on preferred stock
90

 
43

 
177

 
130

Net income available to common shareholders
$
735

 
$
789

 
$
2,326

 
$
2,309

Basic EPS
$
0.96

 
$
1.02

 
$
3.04

 
$
2.98

Diluted EPS
0.95

 
1.01

 
3.00

 
2.94

Basic weighted average shares outstanding
766,167

 
771,562

 
765,428

 
775,642

Diluted weighted average shares outstanding
775,791

 
781,867

 
774,907

 
786,140


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

BB&T Corporation 5


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
BB&T CORPORATION AND SUBSIDIARIES
Unaudited
(Dollars in millions)
Three Months Ended September 30,
 
Nine Months Ended September 30,
2019
 
2018
 
2019
 
2018
Net income
$
828

 
$
839

 
$
2,511

 
$
2,452

OCI, net of tax:
 

 
 

 
 

 
 

Change in unrecognized net pension and postretirement costs
(38
)
 
(12
)
 
(2
)
 
15

Change in unrealized net gains (losses) on cash flow hedges
13

 
20

 
(80
)
 
124

Change in unrealized net gains (losses) on AFS securities
118

 
(155
)
 
769

 
(522
)
Other, net
—

 
1

 
2

 
(2
)
Total OCI
93

 
(146
)
 
689

 
(385
)
Total comprehensive income
$
921

 
$
693

 
$
3,200

 
$
2,067

Income Tax Effect of Items Included in OCI:
 
 
 
 
 
 
 
Change in unrecognized net pension and postretirement costs
$
(11
)
 
$
(5
)
 
$
—

 
$
4

Change in unrealized net gains (losses) on cash flow hedges
4

 
6

 
(25
)
 
40

Change in unrealized net gains (losses) on AFS securities
37

 
(48
)
 
237

 
(163
)
Other, net
(1
)
 
—

 
—

 
1


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


6 BB&T Corporation


CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
BB&T CORPORATION AND SUBSIDIARIES
Unaudited
(Dollars in millions, shares in thousands)
Shares of Common Stock
 
Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
AOCI
 
Noncontrolling Interests
 
Total Shareholders' Equity
Balance, July 1, 2018
774,447

 
$
3,053

 
$
3,872

 
$
7,364

 
$
17,197

 
$
(1,706
)
 
$
52

 
$
29,832

Net income
—

 
—

 
—

 
—

 
832

 
—

 
7

 
839

OCI
—

 
—

 
—

 
—

 
—

 
(146
)
 
—

 
(146
)
Issued in connection with equity awards, net
108

 
—

 
1

 
—

 
—

 
—

 
—

 
1

Repurchase of common stock
(3,935
)
 
—

 
(20
)
 
(180
)
 
—

 
—

 
—

 
(200
)
Cash dividends declared on common stock
—

 
—

 
—

 
—

 
(313
)
 
—

 
—

 
(313
)
Cash dividends declared on preferred stock
—

 
—

 
—

 
—

 
(43
)
 
—

 
—

 
(43
)
Equity-based compensation expense
—

 
—

 
—

 
37

 
—

 
—

 
—

 
37

Balance, September 30, 2018
770,620


$
3,053


$
3,853


$
7,221


$
17,673


$
(1,852
)

$
59


$
30,007

Balance, July 1, 2019
766,010

 
$
3,053

 
$
3,830

 
$
6,889

 
$
19,050

 
$
(1,119
)
 
$
61

 
$
31,764

Net income
—

 
—

 
—

 
—

 
825

 
—

 
3

 
828

OCI
—

 
—

 
—

 
—

 
—

 
93

 
—

 
93

Issued in connection with equity awards, net
368

 
—

 
2

 
6

 
—

 
—

 
—

 
8

Issued in connection with preferred stock offerings
—

 
1,683

 
—

 
—

 
—

 
—

 
—

 
1,683

Repurchase of common stock
(75
)
 
—

 
—

 
(3
)
 
—

 
—

 
—

 
(3
)
Redemption of preferred stock
—

 
(1,679
)
 
—

 
—

 
(46
)
 
—

 
—

 
(1,725
)
Cash dividends declared on common stock
—

 
—

 
—

 
—

 
(345
)
 
—

 
—

 
(345
)
Cash dividends declared on preferred stock
—

 
—

 
—

 
—

 
(44
)
 
—

 
—

 
(44
)
Equity-based compensation expense
—

 
—

 
—

 
39

 
—

 
—

 
—

 
39

Other, net
—

 
—

 
—

 
—

 
—

 
—

 
5

 
5

Balance, September 30, 2019
766,303

 
$
3,057

 
$
3,832

 
$
6,931

 
$
19,440

 
$
(1,026
)
 
$
69

 
$
32,303

Balance, January 1, 2018
782,006

 
$
3,053

 
$
3,910

 
$
7,893

 
$
16,259

 
$
(1,467
)
 
$
47

 
$
29,695

Net income
—

 
—

 
—

 
—

 
2,439

 
—

 
13

 
2,452

OCI
—

 
—

 
—

 
—

 
—

 
(385
)
 
—

 
(385
)
Issued in connection with equity awards, net
4,163

 
—

 
21

 
(22
)
 
—

 
—

 
—

 
(1
)
Repurchase of common stock
(15,549
)
 
—

 
(78
)
 
(752
)
 
—

 
—

 
—

 
(830
)
Cash dividends declared on common stock
—

 
—

 
—

 
—

 
(895
)
 
—

 
—

 
(895
)
Cash dividends declared on preferred stock
—

 
—

 
—

 
—

 
(130
)
 
—

 
—

 
(130
)
Equity-based compensation expense
—

 
—

 
—

 
113

 
—

 
—

 
—

 
113

Other, net
—

 
—

 
—

 
(11
)
 
—

 
—

 
(1
)
 
(12
)
Balance, September 30, 2018
770,620

 
$
3,053

 
$
3,853

 
$
7,221

 
$
17,673

 
$
(1,852
)
 
$
59

 
$
30,007

Balance, January 1, 2019
763,326

 
$
3,053

 
$
3,817

 
$
6,849

 
$
18,118

 
$
(1,715
)
 
$
56

 
$
30,178

Net income
—

 
—

 
—

 
—

 
2,503

 
—

 
8

 
2,511

OCI
—

 
—

 
—

 
—

 
—

 
689

 
—

 
689

Issued in connection with equity awards, net
3,052

 
—

 
15

 
(37
)
 
—

 
—

 
—

 
(22
)
Issued in connection with preferred stock offerings
—

 
1,683

 
—

 
—

 
—

 
—

 
—

 
1,683

Repurchase of common stock
(75
)
 
—

 
—

 
(3
)
 
—

 
—

 
—

 
(3
)
Redemption of preferred stock
—

 
(1,679
)
 
—

 
—

 
(46
)
 
—

 
—

 
(1,725
)
Cash dividends declared on common stock
—

 
—

 
—

 
—

 
(964
)
 
—

 
—

 
(964
)
Cash dividends declared on preferred stock
—

 
—

 
—

 
—

 
(131
)
 
—

 
—

 
(131
)
Equity-based compensation expense
—

 
—

 
—

 
119

 
—

 
—

 
—

 
119

Other, net
—

 
—

 
—

 
3

 
(40
)
 
—

 
5

 
(32
)
Balance, September 30, 2019
766,303

 
$
3,057

 
$
3,832

 
$
6,931

 
$
19,440

 
$
(1,026
)
 
$
69

 
$
32,303


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

BB&T Corporation 7


CONSOLIDATED STATEMENTS OF CASH FLOWS
BB&T CORPORATION AND SUBSIDIARIES
Unaudited
Nine Months Ended September 30,
(Dollars in millions)
2019
 
2018
Cash Flows From Operating Activities:
 
 
 
Net income
$
2,511

 
$
2,452

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

 
 
Provision for credit losses
444

 
420

Depreciation
324

 
316

Amortization of intangibles
93

 
97

Equity-based compensation expense
119

 
113

(Gain) loss on securities, net
—

 
(1
)
Net change in operating assets and liabilities:
 

 
 
LHFS
(531
)
 
77

Trading and equity securities
(104
)
 
(503
)
Other assets, accounts payable and other liabilities
(1,458
)
 
221

Other, net
566

 
(214
)
Net cash from operating activities
1,964

 
2,978

Cash Flows From Investing Activities:
 

 
 
Proceeds from sales of AFS securities
4,255

 
294

Proceeds from maturities, calls and paydowns of AFS securities
3,051

 
2,919

Purchases of AFS securities
(17,220
)
 
(3,630
)
Proceeds from maturities, calls and paydowns of HTM securities
1,762

 
1,919

Purchases of HTM securities
—

 
(39
)
Originations and purchases of loans and leases, net of sales and principal collected
(1,060
)
 
(3,657
)
Other, net
(188
)
 
(539
)
Net cash from investing activities
(9,400
)
 
(2,733
)
Cash Flows From Financing Activities:
 

 
 
Net change in deposits
1,096

 
(2,806
)
Net change in short-term borrowings
5,317

 
4,714

Proceeds from issuance of long-term debt
5,653

 
1,770

Repayment of long-term debt
(4,259
)
 
(1,845
)
Repurchase of common stock
(3
)
 
(830
)
Net proceeds from preferred stock issued
1,683

 
—

Redemption of preferred stock
(1,725
)
 
—

Cash dividends paid on common stock
(964
)
 
(895
)
Cash dividends paid on preferred stock
(131
)
 
(130
)
Other, net
(200
)
 
(153
)
Net cash from financing activities
6,467

 
(175
)
Net Change in Cash, Cash Equivalents and Restricted Cash
(969
)
 
70

Cash, Cash Equivalents and Restricted Cash, January 1
3,987

 
3,083

Cash, Cash Equivalents and Restricted Cash, September 30
$
3,018

 
$
3,153

Supplemental Disclosure of Cash Flow Information:
 
 
 
Net cash paid (received) during the period for:
 
 
 
Interest expense
$
1,486

 
$
948

Income taxes
409

 
(34
)

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


8 BB&T Corporation


NOTE 1. Basis of Presentation

General
 
See the Glossary of Defined Terms at the beginning of this Report for terms used herein. 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, 2018 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.
 
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. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change include the determination of the ACL, determination of fair value for financial instruments, valuation of MSRs, goodwill, intangible assets and other purchase accounting related adjustments, benefit plan obligations and expenses, and tax assets, liabilities and expense.

Leases - Lessee

BB&T has operating and finance leases for data centers, corporate offices, branches, retail centers, and certain equipment. BB&T determines if an arrangement is a lease at inception. Operating leases with an original lease term in excess of one year are included in other assets and accounts payable and other liabilities in the Consolidated Balance Sheets. Finance leases are included in premises and equipment and long-term debt in the Consolidated Balance Sheets. 

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating and finance lease assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. BB&T uses an implicit interest rate in determining the present value of lease payments when readily determinable, and a collateralized incremental borrowing rate when an implicit rate is not available. Lease terms consider options to extend or terminate based on the determination of whether such renewal or termination options are deemed reasonably certain. Rent expense and rental income on operating leases is generally recorded using the straight-line method over the appropriate lease terms.

Lease agreements that contain non-lease components are generally accounted for as a single lease component. Variable costs, such as maintenance expenses, property and sales taxes, association dues and index based rate increases, are expensed as they are incurred.

Leases - Lessor

BB&T's commercial lease portfolio consists of dealer-based financing of equipment for small businesses and commercial equipment leasing. The fair market value of the leased asset is generally equal to the original capitalized cost. Assets under operating leases are included in other assets in the Consolidated Balance Sheets. Depreciation expense for assets under operating leases is generally recorded using the straight-line method over the appropriate lease terms in other expense in the Consolidated Statements of Income.


BB&T Corporation 9


Changes in Accounting Principles and Effects of New Accounting Pronouncements
Standard/Adoption Date
Description
Effects on the Financial Statements
Standards Adopted During the Current Year
Leases
Jan 1, 2019
Requires lessees to recognize assets and liabilities related to certain operating leases on the balance sheet, requires additional disclosures by lessees, and contains targeted changes to accounting by lessors.
BB&T established ROU assets of $860 million and lease liabilities of $997 million. The net impact to equity was a reduction of $40 million. There was no material impact to its Consolidated Statements of Income. BB&T adopted the guidance on a prospective basis and did not reassess whether any expired or existing contract contains a lease, the classification of leases or the initial direct costs.
Standards Not Yet Adopted
Credit Losses
Jan 1, 2020
Replaces the incurred loss impairment methodology with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit deteriorated loans will receive an allowance for expected credit losses. Any credit impairment on AFS debt securities for which the fair value is less than cost will be recorded through an allowance for expected credit losses. The standard also requires expanded disclosures related to credit losses and asset quality.
BB&T's CECL implementation efforts are continuing to focus on model validation, developing new disclosures, establishing formal policies and procedures and other governance and control documentation. BB&T performed comprehensive parallel testing of its CECL models during the third quarter of 2019. The results of this testing preliminarily indicate the potential for an increase in the ACL that ranges from approximately 30% to 50%. However, the magnitude of the increase is highly dependent on existing and forecasted economic conditions at the adoption date. This estimate does not incorporate the anticipated impact of the merger with SunTrust, which is expected to be consummated during the fourth quarter of 2019.


NOTE 2. Business Combinations

On February 7, 2019, BB&T and SunTrust announced that both companies' Boards of Directors unanimously approved an agreement to combine in an all-stock merger-of-equals. Upon closing, each SunTrust share will be exchanged for 1.295 shares of BB&T stock. On July 10, 2019, BB&T received regulatory approval from the NCCOB for the pending merger-of-equals with SunTrust. The merger is expected to close in the fourth quarter of 2019, subject to satisfaction of closing conditions, including receipt of remaining regulatory approvals. The merger is subject to a break-up fee of approximately $1.1 billion, payable in customary circumstances. On July 30, 2019, BB&T and SunTrust shareholders approved the merger. In addition, BB&T's shareholders approved Truist Financial Corporation to be the name of the new combined company.


10 BB&T Corporation


NOTE 3. Securities

The following tables summarize AFS and HTM securities:
September 30, 2019
(Dollars in millions)
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
 
 
Gains
 
Losses
 
AFS securities:
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
1,142

 
$
1

 
$
5

 
$
1,138

GSE
 
251

 
4

 
1

 
254

Agency MBS
 
33,457

 
283

 
133

 
33,607

States and political subdivisions
 
564

 
35

 
6

 
593

Non-agency MBS
 
197

 
177

 
—

 
374

Other
 
31

 
—

 
—

 
31

Total AFS securities
 
$
35,642

 
$
500

 
$
145

 
$
35,997

HTM securities:
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
1,100

 
$
5

 
$
—

 
$
1,105

GSE
 
2,200

 
36

 
—

 
2,236

Agency MBS
 
15,467

 
185

 
24

 
15,628

States and political subdivisions
 
1

 
—

 
—

 
1

Total HTM securities
 
$
18,768

 
$
226

 
$
24

 
$
18,970

 
 
 
 
 
 
 
 
 
December 31, 2018
(Dollars in millions)
 
Amortized Cost
 
Gross Unrealized
 
Fair Value
 
 
Gains
 
Losses
 
AFS securities:
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
3,503

 
$
22

 
$
84

 
$
3,441

GSE
 
209

 
—

 
9

 
200

Agency MBS
 
20,927

 
15

 
787

 
20,155

States and political subdivisions
 
694

 
25

 
18

 
701

Non-agency MBS
 
321

 
184

 
—

 
505

Other
 
35

 
1

 
—

 
36

Total AFS securities
 
$
25,689

 
$
247

 
$
898

 
$
25,038

HTM securities:
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
1,099

 
$
—

 
$
6

 
$
1,093

GSE
 
2,199

 
4

 
43

 
2,160

Agency MBS
 
17,248

 
27

 
487

 
16,788

States and political subdivisions
 
5

 
—

 
—

 
5

Other
 
1

 
—

 
—

 
1

Total HTM securities
 
$
20,552

 
$
31

 
$
536

 
$
20,047



Certain securities issued by FNMA and FHLMC exceeded 10% of shareholders' equity at September 30, 2019. The FNMA investments had total amortized cost and fair value of $16.5 billion and $16.6 billion respectively. The FHLMC investments had total amortized cost and fair value of $12.4 billion.

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.
 
 
AFS
 
HTM
September 30, 2019
(Dollars in millions)
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
Due in one year or less
 
$
255

 
$
256

 
$
—

 
$
—

Due after one year through five years
 
1,178

 
1,174

 
3,300

 
3,342

Due after five years through ten years
 
258

 
272

 
529

 
530

Due after ten years
 
33,951

 
34,295

 
14,939

 
15,098

Total debt securities
 
$
35,642

 
$
35,997

 
$
18,768

 
$
18,970




BB&T Corporation 11


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
September 30, 2019
(Dollars in millions)
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
AFS securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
791

 
$
5

 
$
—

 
$
—

 
$
791

 
$
5

GSE
 
46

 
—

 
78

 
1

 
124

 
1

Agency MBS
 
7,285

 
42

 
4,299

 
91

 
11,584

 
133

States and political subdivisions
 
79

 
1

 
144

 
5

 
223

 
6

Total
 
$
8,201

 
$
48

 
$
4,521

 
$
97

 
$
12,722

 
$
145

HTM securities:
 
 

 
 

 
 

 
 

 
 

 
 

Agency MBS
 
$
1,622

 
$
9

 
$
1,274

 
$
15

 
$
2,896

 
$
24

Total
 
$
1,622

 
$
9

 
$
1,274

 
$
15

 
$
2,896

 
$
24

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 months
 
12 months or more
 
Total
December 31, 2018
(Dollars in millions)
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
AFS securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
 
$
111

 
$
—

 
$
2,121

 
$
84

 
$
2,232

 
$
84

GSE
 
3

 
—

 
176

 
9

 
179

 
9

Agency MBS
 
322

 
2

 
18,478

 
785

 
18,800

 
787

States and political subdivisions
 
100

 
1

 
288

 
17

 
388

 
18

Total
 
$
536

 
$
3

 
$
21,063

 
$
895

 
$
21,599

 
$
898

HTM securities:
 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
 
$
698

 
$
3

 
$
395

 
$
3

 
$
1,093

 
$
6

GSE
 
—

 
—

 
1,749

 
43

 
1,749

 
43

Agency MBS
 
264

 
3

 
14,976

 
484

 
15,240

 
487

Total
 
$
962

 
$
6

 
$
17,120

 
$
530

 
$
18,082

 
$
536


Substantially all of the unrealized losses on the securities portfolio were the result of changes in market interest rates compared to the date the securities were acquired rather than the credit quality of the issuers or underlying loans.


12 BB&T Corporation


NOTE 4. Loans and ACL

During the third quarter of 2019, a residential mortgage loan portfolio totaling $4.3 billion was sold. The following tables present loans and leases HFI by aging category:
 
 
Accruing
 
 
 
 
September 30, 2019
(Dollars in millions)
 
Current
 
30-89 Days Past Due
 
90 Days Or More Past Due
 
Nonperforming
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
64,118

 
$
34

 
$
—

 
$
172

 
$
64,324

CRE
 
20,854

 
1

 
—

 
29

 
20,884

Lease financing
 
2,353

 
1

 
—

 
2

 
2,356

Retail:
 
 
 
 
 
 
 
 
 
 
Residential mortgage
 
27,412

 
432

 
347

 
106

 
28,297

Direct
 
11,346

 
54

 
7

 
56

 
11,463

Indirect
 
17,947

 
423

 
9

 
82

 
18,461

Revolving credit
 
3,194

 
31

 
16

 
—

 
3,241

PCI
 
347

 
16

 
24

 
—

 
387

Total
 
$
147,571

 
$
992

 
$
403

 
$
447

 
$
149,413

 
 
 
 
 
 
 
 
 
 
 
 
 
Accruing
 
 
 
 
December 31, 2018
(Dollars in millions)
 
Current
 
30-89 Days Past Due
 
90 Days Or More Past Due
 
Nonperforming
 
Total
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
61,701

 
$
34

 
$
—

 
$
200

 
$
61,935

CRE
 
20,990

 
5

 
—

 
65

 
21,060

Lease financing
 
2,014

 
1

 
—

 
3

 
2,018

Retail:
 
 

 
 

 
 

 
 

 
 
Residential mortgage
 
30,413

 
456

 
405

 
119

 
31,393

Direct
 
11,463

 
61

 
7

 
53

 
11,584

Indirect
 
16,901

 
436

 
6

 
82

 
17,425

Revolving credit
 
3,090

 
28

 
14

 
—

 
3,132

PCI
 
413

 
23

 
30

 
—

 
466

Total
 
$
146,985

 
$
1,044

 
$
462

 
$
522

 
$
149,013


The following table presents the carrying amount of loans by risk rating. PCI loans are excluded because their related ALLL is determined by loan pool performance and revolving credit loans are excluded as the loans are charged-off rather than reclassifying to nonperforming:
 
 
September 30, 2019
 
December 31, 2018
(Dollars in millions)
 
Commercial & Industrial
 
CRE
 
Lease Financing
 
Commercial & Industrial
 
CRE
 
Lease Financing
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
Pass
 
$
62,968

 
$
20,491

 
$
2,344

 
$
60,655

 
$
20,712

 
$
2,012

Special mention
 
332

 
59

 
1

 
216

 
61

 
—

Substandard-performing
 
852

 
305

 
9

 
864

 
222

 
3

Nonperforming
 
172

 
29

 
2

 
200

 
65

 
3

Total
 
$
64,324

 
$
20,884

 
$
2,356

 
$
61,935

 
$
21,060

 
$
2,018

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Mortgage
 
Direct
 
Indirect
 
Residential Mortgage
 
Direct
 
Indirect
Retail:
 
 
 
 
 
 
 
 
 
 
 
 
Performing
 
$
28,191

 
$
11,407

 
$
18,379

 
$
31,274

 
$
11,531

 
$
17,343

Nonperforming
 
106

 
56

 
82

 
119

 
53

 
82

Total
 
$
28,297

 
$
11,463

 
$
18,461

 
$
31,393

 
$
11,584

 
$
17,425









BB&T Corporation 13



The following tables present activity in the ACL:
(Dollars in millions)
 
Balance at Jul 1, 2018
 
Charge-Offs
 
Recoveries
 
Provision (Benefit)
 
Balance at Sep 30, 2018
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
535

 
$
(28
)
 
$
13

 
$
21

 
$
541

CRE
 
191

 
—

 
1

 
(1
)
 
191

Lease financing
 
10

 
(1
)
 
—

 
1

 
10

Retail:
 
 
 
 
 
 
 
 
 
 
Residential mortgage
 
221

 
(4
)
 
—

 
8

 
225

Direct
 
97

 
(17
)
 
6

 
11

 
97

Indirect
 
353

 
(94
)
 
15

 
79

 
353

Revolving credit
 
105

 
(20
)
 
4

 
22

 
111

PCI
 
18

 
(2
)
 
—

 
(6
)
 
10

ALLL
 
1,530

 
(166
)
 
39

 
135

 
1,538

RUFC
 
110

 
—

 
—

 
—

 
110

ACL
 
$
1,640

 
$
(166
)
 
$
39

 
$
135

 
$
1,648

 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Balance at Jul 1, 2019
 
Charge-Offs
 
Recoveries
 
Provision (Benefit)
 
Balance at Sep 30, 2019
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
574

 
$
(28
)
 
$
5

 
$
25

 
$
576

CRE
 
201

 
(2
)
 
3

 
(6
)
 
196

Lease financing
 
10

 
(1
)
 
1

 
—

 
10

Retail:
 
 
 
 
 
 
 
 
 
 
Residential mortgage
 
224

 
(3
)
 
—

 
(22
)
 
199

Direct
 
99

 
(22
)
 
6

 
17

 
100

Indirect
 
359

 
(106
)
 
15

 
94

 
362

Revolving credit
 
120

 
(27
)
 
6

 
23

 
122

PCI
 
8

 
—

 
—

 
—

 
8

ALLL
 
1,595

 
(189
)
 
36

 
131

 
1,573

RUFC
 
94

 
—

 
—

 
(14
)
 
80

ACL
 
$
1,689

 
$
(189
)
 
$
36

 
$
117

 
$
1,653

 
 
 
 
 
 
 
 
 
 
 
(Dollars in millions)
 
Balance at Jan 1, 2018
 
Charge-Offs
 
Recoveries
 
Provision (Benefit)
 
Balance at Sep 30, 2018
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
522

 
$
(74
)
 
$
32

 
$
61

 
$
541

CRE
 
160

 
(8
)
 
4

 
35

 
191

Lease financing
 
9

 
(3
)
 
1

 
3

 
10

Retail:
 
 

 
 

 
 

 
 

 
 
Residential mortgage
 
209

 
(13
)
 
1

 
28

 
225

Direct
 
106

 
(53
)
 
18

 
26

 
97

Indirect
 
348

 
(283
)
 
47

 
241

 
353

Revolving credit
 
108

 
(62
)
 
14

 
51

 
111

PCI
 
28

 
(2
)
 
—

 
(16
)
 
10

ALLL
 
1,490

 
(498
)
 
117

 
429

 
1,538

RUFC
 
119

 
—

 
—

 
(9
)
 
110

ACL
 
$
1,609

 
$
(498
)
 
$
117

 
$
420

 
$
1,648

 
 
 
 
 
 
 
 
 
 
 


14 BB&T Corporation


(Dollars in millions)
 
Balance at Jan 1, 2019
 
Charge-Offs
 
Recoveries
 
Provision (Benefit)
 
Balance at Sep 30, 2019
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
546

 
$
(67
)
 
$
19

 
$
78

 
$
576

CRE
 
190

 
(28
)
 
7

 
27

 
196

Lease financing
 
11

 
(2
)
 
1

 
—

 
10

Retail:
 
 

 
 

 
 

 
 

 
 
Residential mortgage
 
232

 
(13
)
 
1

 
(21
)
 
199

Direct
 
97

 
(62
)
 
19

 
46

 
100

Indirect
 
356

 
(306
)
 
51

 
261

 
362

Revolving credit
 
117

 
(78
)
 
16

 
67

 
122

PCI
 
9

 
—

 
—

 
(1
)
 
8

ALLL
 
1,558

 
(556
)
 
114

 
457

 
1,573

RUFC
 
93

 
—

 
—

 
(13
)
 
80

ACL
 
$
1,651

 
$
(556
)
 
$
114

 
$
444

 
$
1,653



The following table provides a summary of loans that are collectively evaluated for impairment:
 
 
September 30, 2019
 
December 31, 2018
(Dollars in millions)
 
Recorded Investment
 
Related ALLL
 
Recorded Investment
 
Related ALLL
Commercial:
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
64,050

 
$
551

 
$
61,629

 
$
521

CRE
 
20,834

 
192

 
20,960

 
181

Lease financing
 
2,354

 
10

 
2,015

 
11

Retail:
 
 
 
 
 
 
 
 
Residential mortgage
 
27,542

 
143

 
30,539

 
164

Direct
 
11,400

 
96

 
11,517

 
92

Indirect
 
18,110

 
299

 
17,099

 
299

Revolving credit
 
3,210

 
110

 
3,104

 
106

PCI
 
387

 
8

 
466

 
9

Total
 
$
147,887

 
$
1,409

 
$
147,329

 
$
1,383




BB&T Corporation 15


The following tables set forth certain information regarding impaired loans, excluding PCI and LHFS, that were individually evaluated for impairment:

UPB
 
Recorded Investment
 
Related ALLL
 
Average Recorded Investment
 
Interest Income Recognized
As of / For The Nine Months Ended September 30, 2019
(Dollars in millions)
 
Without an ALLL
 
With an ALLL
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
286

 
$
76

 
$
198

 
$
25

 
$
302

 
$
5

CRE
51

 
8

 
42

 
4

 
85

 
1

Lease financing
2

 
—

 
2

 
—

 
2

 
—

Retail:
 
 
 
 
 
 
 
 
 
 
 
Residential mortgage
803

 
118

 
637

 
56

 
824

 
26

Direct
79

 
26

 
37

 
4

 
65

 
3

Indirect
361

 
5

 
346

 
63

 
333

 
39

Revolving credit
31

 
—

 
31

 
12

 
29

 
1

Total
$
1,613

 
$
233

 
$
1,293

 
$
164

 
$
1,640

 
$
75

 
 
 
 
 
 
 
 
 
 
 
 
 
UPB
 
Recorded Investment
 
Related ALLL
 
Average Recorded Investment
 
Interest Income Recognized
As of / For The Year Ended December 31, 2018
(Dollars in millions)
 
Without an ALLL
 
With an ALLL
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
318

 
$
95

 
$
211

 
$
25

 
$
343

 
$
6

CRE
102

 
29

 
71

 
9

 
97

 
2

Lease financing
3

 
—

 
3

 
—

 
6

 
—

Retail:
 
 
 

 
 

 
 

 
 

 
 

Residential mortgage
904

 
122

 
732

 
68

 
841

 
34

Direct
86

 
26

 
41

 
5

 
72

 
4

Indirect
335

 
6

 
320

 
57

 
306

 
46

Revolving credit
28

 
—

 
28

 
11

 
29

 
1

Total
$
1,776

 
$
278

 
$
1,406

 
$
175

 
$
1,694

 
$
93


The following table presents a summary of TDRs, all of which are considered impaired:
(Dollars in millions)
 
Sep 30, 2019
 
Dec 31, 2018
Performing TDRs:
 
 
 
 
Commercial:
 
 
 
 
Commercial and industrial
 
$
69

 
$
65

CRE
 
7

 
10

Retail:
 
 
 
 
Residential mortgage
 
570

 
656

Direct
 
52

 
55

Indirect
 
328

 
305

Revolving credit
 
31

 
28

Total performing TDRs
 
1,057

 
1,119

Nonperforming TDRs (also included in NPL disclosures)
 
115

 
176

Total TDRs
 
$
1,172

 
$
1,295

ALLL attributable to TDRs
 
$
138

 
$
146




16 BB&T Corporation


The primary reason loan modifications were classified as TDRs is summarized below. Balances represent the recorded investment at the end of the quarter in which the modification was made. Rate modifications consist of TDRs made with below market interest rates, including those that also have modifications of loan structures.
 
2019
 
2018
Three Months Ended September 30,
(Dollars in millions)
Type of Modification
 
ALLL Impact
 
Type of Modification
 
ALLL Impact
Rate
 
Structure
 
 
Rate
 
Structure
 
Newly designated TDRs:
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
2

 
$
5

 
$
—

 
$
39

 
$
3

 
$
—

CRE
—

 
—

 
—

 
—

 
1

 
—

Retail:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage
51

 
7

 
3

 
53

 
7

 
3

Direct
2

 
1

 
—

 
2

 
1

 
—

Indirect
61

 
1

 
7

 
52

 
1

 
6

Revolving credit
6

 
—

 
1

 
4

 
—

 
1

Re-modification of previously designated TDRs
12

 
2

 
—

 
13

 
1

 
—

 
 
 
 
 
 
 
 
 
 
 
 
 
2019
 
2018
Nine Months Ended September 30,
(Dollars in millions)
Type of Modification
 
ALLL Impact
 
Type of Modification
 
ALLL Impact
Rate
 
Structure
 
 
Rate
 
Structure
 
Newly designated TDRs:
 
 
 
 
 
 
 
 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
52

 
$
11

 
$
2

 
$
69

 
$
46

 
$
—

CRE
1

 
1

 
—

 
27

 
3

 
—

Retail:
 

 
 

 
 

 
 

 
 

 
 

Residential mortgage
173

 
21

 
10

 
193

 
22

 
12

Direct
7

 
3

 
—

 
6

 
2

 
—

Indirect
159

 
3

 
19

 
139

 
3

 
16

Revolving credit
17

 
—

 
3

 
13

 
—

 
3

Re-modification of previously designated TDRs
49

 
18

 
—

 
65

 
11

 
—



Charge-offs and forgiveness of principal and interest for TDRs were immaterial for all periods presented.
 
The pre-default balance for modifications that had been classified as TDRs during the previous 12 months that experienced a payment default was $19 million and $19 million for the three months ended September 30, 2019 and 2018, respectively, and $58 million and $55 million for the nine months ended September 30, 2019 and 2018, respectively. Payment default is defined as movement of the TDR to nonperforming status, foreclosure or charge-off, whichever occurs first.

Unearned income, discounts and net deferred loan fees and costs were immaterial for all periods presented. Residential mortgage loans in the process of foreclosure were $227 million at September 30, 2019 and $253 million at December 31, 2018.


BB&T Corporation 17


NOTE 5. Other Assets and Liabilities
 
Lessee Operating and Finance Leases

Operating lease costs were $48 million and $146 million for the three and nine months ended September 30, 2019, respectively.

The following table presents additional information on operating and finance leases:
September 30, 2019
(Dollars in millions)
Operating Leases
 
Finance Leases
ROU assets
$
841

 
$
17

Maturities of lease liabilities:
 
 
 
2019
$
32

 
$
2

2020
209

 
7

2021
180

 
6

2022
154

 
5

2023
123

 
3

2024
97

 
2

Thereafter
312

 
3

Total lease payments
1,107

 
28

Less: imputed interest
139

 
5

Total lease liabilities
$
968

 
$
23

Weighted average remaining term
7.6 years

 
4.9 years

Weighted average discount rate
3.1
%
 
7.2
%


Lessor Operating Leases

The following tables present a summary of assets under operating leases and activity related to assets under operating leases. These tables exclude subleases on assets included in premises and equipment.
(Dollars in millions)
Sep 30, 2019
 
Dec 31, 2018
Assets held under operating leases
$
1,381

 
$
1,378

Accumulated depreciation
(403
)
 
(374
)
Net
$
978

 
$
1,004


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
2019
 
2018
 
2019
 
2018
Depreciation expense for assets under operating leases
$
35

 
$
30

 
$
93

 
$
90



The residual value of assets no longer under operating leases was immaterial.

NOTE 6. Goodwill and Other Intangible Assets

The following table, which excludes fully amortized intangibles, presents information for identifiable intangible assets:
 
 
September 30, 2019
 
December 31, 2018
(Dollars in millions)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
CDI
 
$
436

 
$
(322
)
 
$
114

 
$
605

 
$
(460
)
 
$
145

Other, primarily customer relationship intangibles
 
1,324

 
(760
)
 
564

 
1,329

 
(716
)
 
613

Total
 
$
1,760

 
$
(1,082
)
 
$
678

 
$
1,934

 
$
(1,176
)
 
$
758




18 BB&T Corporation


NOTE 7. Loan Servicing

Residential Mortgage Banking Activities

The following tables summarize residential mortgage banking activities:
(Dollars in millions)
 
Sep 30, 2019
 
Dec 31, 2018
UPB of residential mortgage loan servicing portfolio
 
$
116,269

 
$
118,605

UPB of residential mortgage loans serviced for others, primarily agency conforming fixed rate
 
87,147

 
87,270

Mortgage loans sold with recourse
 
369

 
419

Maximum recourse exposure from mortgage loans sold with recourse liability
 
200

 
223

Indemnification, recourse and repurchase reserves
 
27

 
24

 
 


 


As of / For the Nine Months Ended September 30,
(Dollars in millions)
 
2019
 
2018
UPB of residential mortgage loans sold from LHFS
 
$
11,108

 
$
8,436

Pre-tax gains recognized on mortgage loans sold and held for sale
 
90

 
98

Servicing fees recognized from mortgage loans serviced for others
 
187

 
191

Approximate weighted average servicing fee on the outstanding balance of residential mortgage loans serviced for others
 
0.28
%
 
0.28
%
Weighted average interest rate on mortgage loans serviced for others
 
4.09

 
4.03



The following table presents a roll forward of the carrying value of residential MSRs recorded at fair value:
Nine Months Ended September 30,
(Dollars in millions)
 
2019
 
2018
Residential MSRs, carrying value, January 1
 
$
957

 
$
914

Additions
 
101

 
96

Change in fair value due to changes in valuation inputs or assumptions:
 
 
 
 
Prepayment speeds
 
(213
)
 
47

OAS
 
36

 
70

Servicing costs
 
—

 
—

Realization of expected net servicing cash flows, passage of time and other
 
(105
)
 
(104
)
Residential MSRs, carrying value, September 30
 
$
776

 
$
1,023

Gains (losses) on derivative financial instruments used to mitigate the income statement effect of changes in residential MSR fair value
 
$
211

 
$
(119
)

 
The sensitivity of the fair value of the residential MSRs to changes in key assumptions is presented in the following table:
 
 
September 30, 2019
 
December 31, 2018
 
 
Range
 
Weighted Average
 
Range
 
Weighted Average
(Dollars in millions)
 
Min
 
Max
 
 
Min
 
Max
 
Prepayment speed
 
10.7
%
 
16.6
%
 
15.4
%
 
9.1
%
 
10.5
%
 
9.9
%
Effect on fair value of a 10% increase
 
 
 
 
 
$
(41
)
 
 
 
 
 
$
(34
)
Effect on fair value of a 20% increase
 
 
 
 
 
(78
)
 
 
 
 
 
(66
)
OAS
 
5.3
%
 
7.9
%
 
6.0
%
 
6.6
%
 
8.3
%
 
7.0
%
Effect on fair value of a 10% increase
 
 
 
 
 
$
(16
)
 
 
 
 
 
$
(24
)
Effect on fair value of a 20% increase
 
 
 
 
 
(30
)
 
 
 
 
 
(47
)
Composition of loans serviced for others:
 
 
 
 
 
 
 
 
 
 
Fixed-rate residential mortgage loans
 
 
 
 
 
99.3
%
 
 
 
 
 
99.2
%
Adjustable-rate residential mortgage loans
 
 
 
 
 
0.7

 
 
 
 
 
0.8

Total
 
 

 
 

 
100.0
%
 
 
 
 
 
100.0
%
Weighted average life
 
 

 
 

 
4.5 years

 
 
 
 
 
6.1 years



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

BB&T Corporation 19


Commercial Mortgage Banking Activities

The following table summarizes commercial mortgage banking activities for the periods presented:
(Dollars in millions)
Sep 30, 2019
 
Dec 31, 2018
UPB of CRE mortgages serviced for others
$
27,951

 
$
27,761

CRE mortgages serviced for others covered by recourse provisions
4,748

 
4,699

Maximum recourse exposure from CRE mortgages sold with recourse liability
1,331

 
1,317

Recorded reserves related to recourse exposure
6

 
6

CRE mortgages originated during the year-to-date period
5,505

 
7,072

Commercial MSRs at fair value
143

 
151



NOTE 8. Deposits
 
The composition of deposits is presented in the following table:
(Dollars in millions)
 
Sep 30, 2019
 
Dec 31, 2018
Noninterest-bearing deposits
 
$
52,667

 
$
53,025

Interest checking
 
27,723

 
28,130

Money market and savings
 
64,454

 
63,467

Time deposits
 
16,526

 
16,577

 Foreign office deposits - interest-bearing
 
910

 
—

Total deposits
 
$
162,280

 
$
161,199

Time deposits greater than $250,000
 
$
5,215

 
$
5,713


 
NOTE 9. Long-Term Debt

The following table presents a summary of long-term debt:
 
 
Sep 30, 2019
 
Dec 31, 2018
 
 
 
 
 
 
Stated Rate
 
Effective Rate
 
Carrying Amount
 
Carrying Amount
(Dollars in millions)
 
Maturity
 
Min
 
Max
 
 
 
BB&T Corporation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate senior notes
 
2020
to
2025
 
2.05
%
 
5.38
%
 
2.69
%
 
$
12,844

 
$
10,408

Floating rate senior notes
 
2020
 
2022
 
2.46

 
3.02

 
2.77

 
1,948

 
2,398

Fixed rate subordinated notes
 
2019
 
2029
 
3.88

 
5.25

 
2.32

 
1,603

 
903

Branch Bank:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate senior notes
 
2020
 
2022
 
2.10

 
2.85

 
2.43

 
3,456

 
4,895

Floating rate senior notes
 
2020
 
2020
 
2.35

 
2.75

 
2.68

 
900

 
1,149

Fixed rate subordinated notes
 
2025
 
2029
 
2.64

 
3.80

 
2.78

 
2,961

 
2,075

FHLB advances (1)
 
2019
 
2034
 
—

 
5.50

 
1.65

 
1,640

 
1,749

Other long-term debt
 
 
 
 
 
 
 
 
 
 
 
168

 
132

Total long-term debt
 
 
 
 
 
 
 
 
 
 
 
$
25,520

 
$
23,709


(1)
FHLB advances had a weighted average maturity of 4.1 years at September 30, 2019.

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


20 BB&T Corporation


NOTE 10. Shareholders' Equity

Preferred Stock

On July 29, 2019, BB&T issued $1.7 billion of series N non-cumulative perpetual preferred stock with a stated dividend rate of 4.800% per annum for net proceeds of $1.7 billion. Dividends, if declared by the Board of Directors, are payable on the first day of March and September of each year, commencing on March 1, 2020. The dividend rate will reset on September 1, 2024, and on each following fifth anniversary of the reset date to the five-year U.S. Treasury rate plus 3.003%. BB&T issued depositary shares, each of which represents a fractional ownership interest in a share of the 68,000 shares of the Company's series N preferred stock. The preferred stock has no stated maturity and redemption is solely at the option of the Company in whole, but not in part, upon the occurrence of a regulatory capital treatment event, as defined. In addition, the preferred stock may be redeemed in whole or in part, on any dividend payment date after September 1, 2024.

During the third quarter of 2019, BB&T redeemed all outstanding 23,000 shares of series D and 46,000 shares of series E non-cumulative perpetual preferred stock, and the corresponding depositary shares representing fractional interests in each series for $1.7 billion. Regular dividends on the redeemed shares were paid during the third quarter of 2019. In connection with the redemptions, net income available to common shareholders was reduced by $46 million to recognize the difference in the redemption price and the carrying value.

Dividends

The following table presents the dividends declared related to common stock. For information related to preferred stock dividends, see Note 9. Shareholders' Equity of the Annual Report on Form 10-K for the year ended December 31, 2018.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Cash dividends declared per share
 
$
0.450

 
$
0.405

 
$
1.260

 
$
1.155



Equity-Based Compensation Plans

The following table presents the activity related to awards of RSUs, PSUs and restricted shares:
(Shares in thousands)
 
Units/Shares
 
Wtd. Avg. Grant Date Fair Value
Nonvested at January 1, 2019
 
12,060

 
$
38.03

Granted
 
3,919

 
44.39

Vested
 
(3,394
)
 
35.27

Forfeited
 
(345
)
 
42.43

Nonvested at September 30, 2019
 
12,240

 
40.70




BB&T Corporation 21


NOTE 11. AOCI

AOCI includes the after-tax change in unrecognized net costs related to defined benefit pension and OPEB plans, and unrealized gains and losses on cash flow hedges and AFS securities.
Three Months Ended
(Dollars in millions)
Pension and OPEB Costs
 
Cash Flow Hedges
 
AFS Securities
 
Other, net
 
Total
AOCI balance, July 1, 2018
$
(977
)
 
$
12

 
$
(723
)
 
$
(18
)
 
$
(1,706
)
OCI before reclassifications, net of tax
(27
)
 
20

 
(162
)
 
1

 
(168
)
Amounts reclassified from AOCI:
 
 
 
 
 
 
 
 
 
Before tax
19

 
—

 
9

 
—

 
28

Tax effect
4

 
—

 
2

 
—

 
6

Amounts reclassified, net of tax
15

 
—

 
7

 
—

 
22

Total OCI, net of tax
(12
)
 
20

 
(155
)
 
1

 
(146
)
AOCI balance, September 30, 2018
$
(989
)
 
$
32

 
$
(878
)
 
$
(17
)
 
$
(1,852
)
AOCI balance, July 1, 2019
$
(1,128
)
 
$
(124
)
 
$
151

 
$
(18
)
 
$
(1,119
)
OCI before reclassifications, net of tax
(58
)

3


116

 
—

 
61

Amounts reclassified from AOCI:
 
 
 
 
 
 
 
 
 
Before tax
27

 
14

 
2

 
—

 
43

Tax effect
7

 
4

 
—

 
—

 
11

Amounts reclassified, net of tax
20

 
10

 
2

 
—

 
32

Total OCI, net of tax
(38
)
 
13

 
118

 
—

 
93

AOCI balance, September 30, 2019
$
(1,166
)
 
$
(111
)
 
$
269

 
$
(18
)
 
$
(1,026
)
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2019 and 2018
(Dollars in millions)
Pension and OPEB Costs
 
Cash Flow Hedges
 
AFS Securities
 
Other, net
 
Total
AOCI balance, January 1, 2018
$
(1,004
)
 
$
(92
)
 
$
(356
)
 
$
(15
)
 
$
(1,467
)
OCI before reclassifications, net of tax
(27
)
 
113

 
(544
)
 
(3
)
 
(461
)
Amounts reclassified from AOCI:
 
 
 
 
 
 
 
 
 
Before tax
55

 
14

 
29

 
1

 
99

Tax effect
13

 
3

 
7

 
—

 
23

Amounts reclassified, net of tax
42

 
11

 
22

 
1

 
76

Total OCI, net of tax
15

 
124

 
(522
)
 
(2
)
 
(385
)
AOCI balance, September 30, 2018
(989
)
 
32

 
(878
)
 
(17
)
 
(1,852
)
AOCI balance, January 1, 2019
$
(1,164
)
 
$
(31
)
 
$
(500
)
 
$
(20
)
 
$
(1,715
)
OCI before reclassifications, net of tax
(58
)
 
(88
)
 
776

 
2

 
632

Amounts reclassified from AOCI:
 
 
 
 
 
 
 
 
 
Before tax
74

 
11

 
(10
)
 
—

 
75

Tax effect
18

 
3

 
(3
)
 
—

 
18

Amounts reclassified, net of tax
56

 
8

 
(7
)
 
—

 
57

Total OCI, net of tax
(2
)
 
(80
)
 
769

 
2

 
689

AOCI balance, September 30, 2019
$
(1,166
)
 
$
(111
)
 
$
269

 
$
(18
)
 
$
(1,026
)
Primary income statement location of amounts reclassified from AOCI
Other expense
 
Net interest income
 
Net interest income
 
Net interest income
 
 



22 BB&T Corporation


NOTE 12. Income Taxes

The effective tax rates for the three months ended September 30, 2019 and 2018 were 20.8% and 20.0%, respectively.

The effective tax rates for the nine months ended September 30, 2019 and 2018 were 20.0% and 19.6%, respectively.

NOTE 13. Benefit Plans

The components of net periodic benefit cost for defined benefit pension plans are summarized in the following table:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Location
2019
 
2018
 
2019
 
2018
Service cost
Personnel expense
$
52

 
$
59

 
$
161

 
$
179

Interest cost
Other expense
58

 
50

 
169

 
150

Estimated return on plan assets
Other expense
(116
)
 
(112
)
 
(343
)
 
(336
)
Amortization and other
Other expense
29

 
21

 
80

 
60

Net periodic benefit cost
 
$
23

 
$
18

 
$
67

 
$
53



BB&T makes contributions to the qualified pension plan in amounts between the minimum required for funding and the maximum deductible for federal income tax purposes. Discretionary contributions totaling $876 million were made during the nine months ended September 30, 2019. There are no required contributions for the remainder of 2019, though BB&T may elect to make additional discretionary contributions.

NOTE 14. Commitments and Contingencies

The following table summarizes certain commitments and contingencies. Refer to Note 15. Fair Value Disclosures for additional disclosures related to off-balance sheet financial instruments.
(Dollars in millions)
 
Sep 30, 2019
 
Dec 31, 2018
Investments in affordable housing projects:
 
 
 
 
Carrying amount
 
$
2,179

 
$
2,088

Amount of future funding commitments included in carrying amount
 
864

 
919

Lending exposure
 
402

 
460

Tax credits subject to recapture
 
537

 
523

Private equity and certain other equity method investments:
 
 
 
 
Carrying amount
 
544

 
458

Amount of future funding commitments not included in carrying amount
 
322

 
331



Legal Proceedings

The nature of BB&T's business ordinarily results in a certain amount of claims, litigation, investigations and legal and administrative cases and proceedings, all of which are considered incidental to the normal conduct of business. BB&T believes it has meritorious defenses to the claims asserted against it in its currently outstanding legal proceedings and, with respect to such legal proceedings, intends to continue to defend itself vigorously, litigating or settling cases according to management's judgment as to what is in the best interests of BB&T and its shareholders.
 
On at least a quarterly basis, liabilities and contingencies in connection with outstanding legal proceedings are assessed utilizing the latest information available. For those matters where it is probable that BB&T will incur a loss and the amount of the loss can be reasonably estimated, and is more than nominal, a liability is recorded in the consolidated financial statements. These legal reserves may be increased or decreased to reflect any relevant developments on at least a quarterly basis. For other matters, where a loss is not probable or the amount of the loss is not estimable, legal reserves are not accrued. While the outcome of legal proceedings is inherently uncertain, based on information currently available, advice of counsel and available insurance coverage, management believes that the established legal reserves are adequate and the liabilities arising from legal proceedings will not have a material adverse effect on the consolidated financial position, consolidated results of operations or consolidated cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters, if unfavorable, may be material to the consolidated financial position, consolidated results of operations or consolidated cash flows of BB&T.


BB&T Corporation 23


Following the announcement of the proposed merger with SunTrust, six civil actions were filed challenging, among other things, the adequacy of the disclosures contained in the preliminary proxy statement/prospectus filed with the SEC in connection with the proposed transaction. Five of these suits were filed by purported SunTrust stockholders against SunTrust and its board of directors, with one suit also asserting a claim against BB&T. The sixth suit was filed by a purported BB&T stockholder against BB&T and its board of directors. Following discussions, SunTrust and BB&T reached agreement with plaintiffs to resolve these actions by making certain supplemental disclosures in the joint proxy statement/prospectus filed with the SEC in connection with the proposed transaction, which became definitive on June 19, 2019. To date, one of the suits filed by purported SunTrust stockholders has been dismissed with prejudice, and the suit filed by a purported BB&T stockholder has been discontinued with prejudice. Plaintiffs in the four remaining suits have similarly agreed to dismiss their actions in their entirety, with prejudice as to the named plaintiffs only and without prejudice to all other members of the putative class.

Pledged Assets
 
Certain assets were pledged to secure municipal deposits, securities sold under agreements to repurchase, borrowings and borrowing capacity, subject to any applicable asset discount, at the FHLB and FRB as well as for other purposes as required or permitted by law. The following table provides the total carrying amount of pledged assets by asset type, of which the majority are pursuant to agreements that do not permit the other party to sell or repledge the collateral, excluding assets related to employee benefit plans:
(Dollars in millions)
 
Sep 30, 2019
 
Dec 31, 2018
Pledged securities
 
$
11,881

 
$
13,237

Pledged loans
 
74,458

 
77,847




24 BB&T Corporation


NOTE 15. Fair Value Disclosures

The following tables present fair value information for assets and liabilities measured at fair value on a recurring basis:
September 30, 2019
(Dollars in millions)
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments (1)
Assets:
 
 

 
 

 
 

 
 

 
 
AFS securities:
 
 

 
 
 
 
 
 
 
 
U.S. Treasury
 
$
1,138

 
$
—

 
$
1,138

 
$
—

 
$
—

GSE
 
254

 
—

 
254

 
—

 
—

Agency MBS
 
33,607

 
—

 
33,607

 
—

 
—

States and political subdivisions
 
593

 
—

 
593

 
—

 
—

Non-agency MBS
 
374

 
—

 
—

 
374

 
—

Other
 
31

 
—

 
31

 
—

 
—

Total AFS securities
 
35,997

 
—

 
35,623

 
374

 
—

LHFS
 
1,442

 
—

 
1,442

 
—

 
—

MSRs
 
919

 
—

 
—

 
919

 
—

Other assets:
 

 
 
 
 
 
 
 
 
Trading and equity securities
 
871

 
464

 
407

 
—

 
—

Derivative assets
 
680

 
—

 
892

 
20

 
(232
)
Private equity investments
 
467

 
—

 
—

 
467

 
—

Total assets
 
$
40,376

 
$
464


$
38,364


$
1,780

 
$
(232
)
Liabilities:
 
 

 
 

 
 

 
 

 
 
Derivative liabilities
 
$
39

 
$
1

 
$
150

 
$
16

 
$
(128
)
Securities sold short
 
113

 
—

 
113

 
—

 
—

Total liabilities
 
$
152

 
$
1

 
$
263

 
$
16

 
$
(128
)
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
(Dollars in millions)
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Netting Adjustments (1)
Assets:
 
 
 
 
 
 
 
 
 
 
AFS securities:
 
 

 
 

 
 

 
 

 
 
U.S. Treasury
 
$
3,441

 
$
—

 
$
3,441

 
$
—

 
$
—

GSE
 
200

 
—

 
200

 
—

 
—

Agency MBS
 
20,155

 
—

 
20,155

 
—

 
—

States and political subdivisions
 
701

 
—

 
701

 
—

 
—

Non-agency MBS
 
505

 
—

 
114

 
391

 
—

Other
 
36

 
—

 
36

 
—

 
—

Total AFS securities
 
25,038

 
—

 
24,647

 
391

 
—

LHFS
 
988

 
—

 
988

 
—

 
—

MSRs
 
1,108

 
—

 
—

 
1,108

 
—

Other assets:
 
 
 
 
 
 
 
 
 
 
Trading and equity securities
 
767

 
374

 
390

 
3

 
—

Derivative assets
 
246

 
—

 
234

 
12

 
—

Private equity investments
 
393

 
—

 
—

 
393

 
—

Total assets
 
$
28,540

 
$
374

 
$
26,259

 
$
1,907

 
$
—

Liabilities:
 
 

 
 

 
 

 
 

 
 
Derivative liabilities
 
$
247

 
$
1

 
$
246

 
$
—

 
$
—

Securities sold short
 
145

 
—

 
145

 
—

 
—

Total liabilities
 
$
392

 
$
1

 
$
391

 
$
—

 
$
—

(1) Refer to Note 16. Derivative Financial Instruments for additional discussion on netting adjustments.

Accounting standards define fair value as the exchange price that would be received on the measurement date to sell an asset or the price paid to transfer a liability in the principal or most advantageous market available to the entity in an orderly transaction between market participants, with a three level valuation input hierarchy. The following discussion focuses on the valuation techniques and significant inputs for Level 2 and Level 3 assets and liabilities.


BB&T Corporation 25


A third-party pricing service is generally utilized in determining the fair value of the securities portfolio. Management independently evaluates the fair values provided by the pricing service through comparisons to other external pricing sources, review of additional information provided by the pricing service and other third party sources for selected securities and back-testing to compare the price realized on any security sales to the daily pricing information received from the pricing service. Fair value measurements are derived from market-based pricing matrices that were developed using observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads and broker quotes. As described by security type below, additional inputs may be used, or some inputs may not be applicable. In the event that market observable data was not available, which would generally occur due to the lack of an active market for a given security, the valuation of the security would be subjective and may involve substantial judgment by management.
 
U.S. Treasury securities: Treasury securities are valued using quoted prices in active over-the-counter markets.
 
GSE securities and agency MBS: GSE pass-through securities are valued using market-based pricing matrices that reference observable inputs including benchmark TBA security pricing and yield curves that were estimated based on U.S. Treasury yields and certain floating rate indices. The pricing matrices for these securities may also give consideration to pool-specific data supplied directly by the GSE. GSE CMOs are valued using market-based pricing matrices that are based on observable inputs including offers, bids, reported trades, dealer quotes and market research reports, the characteristics of a specific tranche, market convention prepayment speeds and benchmark yield curves as described above.
 
States and political subdivisions: These securities are valued using market-based pricing matrices that reference observable inputs including MSRB reported trades, issuer spreads, material event notices and benchmark yield curves.
 
Non-agency MBS: Pricing matrices for these securities are based on observable inputs including offers, bids, reported trades, dealer quotes and market research reports, the characteristics of a specific tranche, market convention prepayment speeds and benchmark yield curves as described above. Non-agency MBS include investments in Re-REMIC trusts that primarily hold non-agency MBS, which are valued based on broker pricing models that use baseline securities yields and tranche-level yield adjustments to discount cash flows modeled using market convention prepayment speed and default assumptions.
 
Other securities: These securities consist primarily of corporate bonds. These securities are valued based on a review of quoted market prices for assets as well as through the various other inputs discussed previously.
 
LHFS: Certain mortgage loans are originated to be sold to investors, which are carried at fair value. The fair value is primarily based on quoted market prices for securities backed by similar types of loans. The changes in fair value of these assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage LHFS.
 
MSRs: Residential MSRs are valued using an OAS valuation model to project cash flows over multiple interest rate scenarios, which are discounted at risk-adjusted rates. The model considers portfolio characteristics, contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. Fair value estimates and assumptions are compared to industry surveys, recent market activity, actual portfolio experience and, when available, other observable market data. Commercial MSRs are valued using a cash flow valuation model that calculates the present value of estimated future net servicing cash flows. BB&T considers actual and expected loan prepayment rates, discount rates, servicing costs and other economic factors that are determined based on current market conditions.
 
Trading and equity securities: Trading and equity securities primarily consist of exchange traded equity securities, and debt securities issued by the U.S. Treasury, GSEs, or states and political subdivisions. The valuation techniques for debt securities are more fully discussed above.

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

Private equity investments: In many cases there are no observable market values for these investments and therefore management must estimate the fair value based on a comparison of the operating performance of the company to multiples in the marketplace for similar entities. This analysis requires significant judgment, and actual values in a sale could differ materially from those estimated.
 
Securities sold short: Securities sold short represent debt securities sold short that are entered into as a hedging strategy for the purposes of supporting institutional and retail client trading activities.


26 BB&T Corporation


Activity for Level 3 assets and liabilities is summarized below:
Three Months Ended
(Dollars in millions)
 
Trading and Equity Securities
 
Non-agency MBS
 
MSRs
 
Net Derivatives
 
Private Equity Investments
Balance at July 1, 2018
 
$
—

 
$
425

 
$
1,143

 
$
4

 
$
399

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

 
2

 
36

 
6

 
35

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

 
(7
)
 
—

 
—

 
—

Purchases
 
1

 
—

 
—

 
—

 
18

Issuances
 
—

 
—

 
42

 
5

 
—

Sales
 
(1
)
 
—

 
—

 
—

 
(7
)
Settlements
 
—

 
(13
)
 
(42
)
 
(16
)
 
(18
)
Balance at September 30, 2018
 
$
—

 
$
407

 
$
1,179

 
$
(1
)
 
$
427

Balance at July 1, 2019
 
$
—

 
$
382

 
$
970

 
$
7

 
$
449

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

 
15

 
(79
)
 
53

 
6

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

 
(8
)
 
—

 
—

 
—

Purchases
 
4

 
—

 
—

 
(1
)
 
34

Issuances
 
—

 
—

 
69

 
30

 
—

Sales
 
(4
)
 
—

 
—

 
—

 
(1
)
Settlements
 
—

 
(15
)
 
(41
)
 
(85
)
 
(21
)
Balance at September 30, 2019
 
$
—

 
$
374

 
$
919

 
$
4

 
$
467

Change in unrealized gains (losses) included in earnings for the period, attributable to assets and liabilities still held at September 30, 2019
 
$
—

 
$
6

 
$
(79
)
 
$
13

 
$
4

 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2019 and 2018
(Dollars in millions)
 
Trading and Equity Securities
 
Non-agency MBS
 
MSRs
 
Net Derivatives
 
Private Equity Investments
Balance at January 1, 2018
 
$
—

 
$
432

 
$
1,056

 
$
3

 
$
404

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

 
8

 
127

 
7

 
46

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

 
7

 
—

 
—

 
—

Purchases
 
2

 
—

 
—

 
—

 
45

Issuances
 
—

 
—

 
125

 
11

 
—

Sales
 
(2
)
 
—

 
—

 
—

 
(31
)
Settlements
 
—

 
(40
)
 
(129
)
 
(22
)
 
(37
)
Balance at September 30, 2018
 
$
—

 
$
407

 
$
1,179

 
$
(1
)
 
$
427

Balance at January 1, 2019
 
$
3

 
$
391

 
$
1,108

 
$
12

 
$
393

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

 
10

 
(184
)
 
74

 
30

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

 
4

 
—

 
—

 
—

Purchases
 
19

 
—

 
—

 
(1
)
 
102

Issuances
 
—

 
—

 
121

 
64

 
—

Sales
 
(22
)
 
—

 
—

 
—

 
(35
)
Settlements
 
—

 
(31
)
 
(126
)
 
(135
)
 
(23
)
Transfers into Level 3
 
—

 
—

 
—

 
(10
)
 
—

Balance at September 30, 2019
 
$
—

 
$
374

 
$
919

 
$
4

 
$
467

Change in unrealized gains (losses) included in earnings for the period, attributable to assets and liabilities still held at September 30, 2019
 
$
—

 
$
9

 
$
(184
)
 
$
13

 
$
8

Primary income statement location of realized gains (losses) included in earnings
 
Interest income
 
Interest income
 
Mortgage banking income
 
Mortgage banking income
 
Other income



BB&T Corporation 27


The non-agency MBS categorized as Level 3 represent ownership interests in various tranches of Re-REMIC trusts. These securities are valued at a discount, which is unobservable in the market, to the fair value of the underlying securities owned by the trusts. The Re-REMIC tranches do not have an active market and therefore are categorized as Level 3. At September 30, 2019, the fair value of Re-REMIC non-agency MBS represented a discount of 24.0% to the fair value of the underlying securities owned by the Re-REMIC trusts.

The majority of private equity investments are in SBIC qualified funds, which primarily focus on equity and subordinated debt investments in privately-held middle market companies. The majority of these VIE investments are not redeemable and distributions are received as the underlying assets of the funds liquidate. The timing of distributions, which are expected to occur on various dates on an approximately ratable basis through 2029, is uncertain and dependent on various events such as recapitalizations, refinance transactions and ownership changes among others. As of September 30, 2019, restrictions on the ability to sell the investments include, but are not limited to, consent of a majority member or general partner approval for transfer of ownership. These investments are spread over numerous privately-held middle market companies, and thus the sensitivity to a change in fair value for any single investment is limited. The significant unobservable inputs for these investments are EBITDA multiples that ranged from 6x to 13x, with a weighted average of 8x, at September 30, 2019.

The following table details the fair value and UPB of LHFS that were elected to be carried at fair value:
 
 
September 30, 2019
 
December 31, 2018
(Dollars in millions)
 
Fair Value
 
UPB
 
Difference
 
Fair Value
 
UPB
 
Difference
LHFS at fair value
 
$
1,442

 
$
1,430

 
$
12

 
$
988

 
$
975

 
$
13



Excluding government guaranteed, LHFS that were nonperforming or 90 days or more past due and still accruing interest were not material at September 30, 2019.

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

 
2019
 
2018
As of / For The Nine Months Ended September 30,
(Dollars in millions)
 
Carrying Value
 
Valuation Adjustments
 
Carrying Value
 
Valuation Adjustments
Impaired loans
 
$
98

 
$
(21
)
 
$
185

 
$
(31
)
Foreclosed real estate
 
33

 
(180
)
 
39

 
(171
)

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


28 BB&T Corporation


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

Contractual commitments: The fair values of commitments are estimated using the fees charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The fair values of guarantees and letters of credit are estimated based on the counterparties' creditworthiness and average default rates for loan products with similar risks. These respective fair value measurements are categorized within Level 3 of the fair value hierarchy. Retail lending and revolving credit commitments have an immaterial fair value as BB&T typically has the ability to cancel such commitments.
 
Financial assets and liabilities not recorded at fair value are summarized below:
 
 
September 30, 2019
 
December 31, 2018
(Dollars in millions)
Fair Value Hierarchy
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial assets:
 
 
 
 
 
 
 
 
HTM securities
Level 2
$
18,768

 
$
18,970

 
$
20,552

 
$
20,047

Loans and leases HFI, net of ALLL
Level 3
147,840

 
148,172

 
147,455

 
145,591

Financial liabilities:
 
 

 
 

 
 

 
 

Time deposits
Level 2
16,526

 
16,587

 
16,577

 
16,617

Long-term debt
Level 2
25,520

 
25,861

 
23,709

 
23,723



The following is a summary of selected information pertaining to off-balance sheet financial instruments:
 
September 30, 2019
 
December 31, 2018
(Dollars in millions)
Notional/Contract Amount
 
Fair Value
 
Notional/Contract Amount
 
Fair Value
Commitments to extend, originate or purchase credit
$
76,603

 
$
299

 
$
72,435

 
$
280

Residential mortgage loans sold with recourse
369

 
3

 
419

 
3

CRE mortgages serviced for others covered by recourse provisions
4,748

 
6

 
4,699

 
6

Letters of credit
2,139

 
13

 
2,389

 
18




BB&T Corporation 29


NOTE 16. Derivative Financial Instruments

The following table provides a summary of derivative strategies and the related accounting treatment:
 
Cash Flow Hedges
Fair Value Hedges
Derivatives Not Designated as Hedges
Risk exposure
Variability in cash flows of interest payments on floating rate business loans, overnight funding and various LIBOR funding instruments.
Changes in value on fixed rate long-term debt, CDs, FHLB advances, loans and state and political subdivision securities due to changes in interest rates.
Risk associated with an asset or liability, including mortgage banking operations and MSRs, or for client needs. Includes exposure to changes in market rates and conditions subsequent to the interest rate lock and funding date for mortgage loans originated for sale.
Risk management objective
Hedge the variability in the interest payments and receipts on future cash flows for forecasted transactions related to the first unhedged payments and receipts of variable interest.
Convert the fixed rate paid or received to a floating rate, primarily through the use of swaps.
For interest rate lock commitment derivatives and LHFS, use mortgage-based derivatives such as forward commitments and options to mitigate market risk. For MSRs, mitigate the income statement effect of changes in the fair value of the MSRs. For client swaps, hedges are executed with dealer counterparties to offset market risk.
Treatment during the hedge period
Changes in value of the hedging instruments are recognized in AOCI until the related cash flows from the hedged item are recognized in earnings.
Changes in value of both the hedging instruments and the assets or liabilities being hedged are recognized in the income statement line item associated with the instrument being hedged.
Entire change in fair value recognized in current period income.
Treatment if hedge ceases to be highly effective or is terminated
Hedge is dedesignated. Changes in value recorded in AOCI before dedesignation are amortized to yield over the period the forecasted hedged transactions impact earnings.
If hedged item remains outstanding, the basis adjustment that resulted from hedging is amortized into earnings over the lesser of the designated hedged period or the maturity date of the instrument, and cash flows from terminations are reported in the same category as the cash flows from the hedged item.
Not applicable
Treatment if transaction is no longer probable of occurring during forecast period or within a short period thereafter
Hedge accounting ceases and any gain or loss in AOCI is reported in earnings immediately.
Not applicable
Not applicable



30 BB&T Corporation


Impact of Derivatives on the Consolidated Balance Sheets

In the second quarter of 2019, BB&T began applying the offsetting provisions for contracts that are covered by legally enforceable master netting agreements. Application of these provisions was not material to BB&T's consolidated financial statements. Gross amounts are presented in the December 31, 2018 consolidated balance sheet. The following table presents the notional amount and estimated fair value of derivative instruments:
 
 
 
 
September 30, 2019
 
December 31, 2018
 
 
Hedged Item or Transaction
 
Notional Amount
 
Fair Value
 
Notional Amount
 
Fair Value
(Dollars in millions)
 
 
 
Gain
 
Loss
 
 
Gain
 
Loss
Cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pay fixed swaps
 
3 mo. LIBOR funding
 
$
—

 
$
—

 
$
—

 
$
6,500

 
$
—

 
$
—

Fair value hedges:
 
 
 
 

 
 

 
 

 
 
 
 
 
 
Interest rate contracts:
 
 
 
 

 
 

 
 

 
 
 
 
 
 
Receive fixed swaps
 
Long-term debt
 
17,934

 
195

 
(29
)
 
12,908

 
5

 
(74
)
Options
 
Long-term debt
 
4,785

 
—

 
(3
)
 
4,785

 
—

 
(2
)
Pay fixed swaps
 
Commercial loans
 
44

 
—

 
—

 
505

 
2

 
—

Pay fixed swaps
 
Municipal securities
 
—

 
—

 
—

 
259

 
—

 
—

Total
 
 
 
22,763

 
195

 
(32
)
 
18,457

 
7

 
(76
)
Not designated as hedges:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Client-related and other risk management:
 
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Receive fixed swaps
 
 
 
14,210

 
657

 
(1
)
 
11,577

 
128

 
(98
)
Pay fixed swaps
 
 
 
13,512

 
—

 
(84
)
 
11,523

 
19

 
(32
)
Other
 
 
 
1,336

 
3

 
(3
)
 
1,143

 
2

 
(3
)
Forward commitments
 
 
 
6,171

 
7

 
(16
)
 
2,883

 
11

 
(13
)
Foreign exchange contracts
 
651

 
4

 
(2
)
 
529

 
5

 
(2
)
Total
 
 
 
35,880

 
671

 
(106
)
 
27,655

 
165

 
(148
)
Mortgage banking:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Interest rate lock commitments
 
2,376

 
20

 
(5
)
 
702

 
12

 
—

When issued securities, forward rate agreements and forward commitments
 
3,183

 
6

 
(16
)
 
1,753

 
2

 
(20
)
Other
 
 
 
75

 
—

 
(1
)
 
271

 
2

 
(1
)
Total
 
 
 
5,634

 
26

 
(22
)
 
2,726

 
16

 
(21
)
MSRs:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Interest rate contracts:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Receive fixed swaps
 
 
 
3,338

 
—

 
—

 
4,328

 
—

 
—

Pay fixed swaps
 
 
 
2,245

 
—

 
—

 
3,224

 
—

 
—

Options
 
 
 
884

 
17

 
—

 
3,155

 
48

 
(2
)
When issued securities, forward rate agreements and forward commitments
 
1,199

 
3

 
(7
)
 
1,590

 
10

 
—

Other
 
 
 
157

 
—

 
—

 
103

 
—

 
—

Total
 
 
 
7,823

 
20

 
(7
)
 
12,400

 
58

 
(2
)
Total derivatives not designated as hedges
 
49,337

 
717

 
(135
)
 
42,781

 
239

 
(171
)
Total derivatives
 
 
 
$
72,100

 
912

 
(167
)
 
$
67,738

 
246

 
(247
)
Gross amounts in the Consolidated Balance Sheets:
 
 
 

 
 

 
 

 
 

 
 

Amounts subject to master netting arrangements
 
 
 
(49
)
 
49

 
 

 
(47
)
 
47

Cash collateral (received) posted for amounts subject to master netting arrangements
 
 

 
(183
)
 
79

 
 

 
(53
)
 
82

Net amount
 
 
 
 

 
$
680

 
$
(39
)
 
 

 
$
146

 
$
(118
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments under master netting agreements
 
 
 
$
233

 
$
(137
)
 
 
 
$
102

 
$
(131
)
Derivative instruments not under master netting agreements
 
 
 
679

 
(30
)
 
 
 
144

 
(116
)
Total derivatives
 
 
 
 
 
$
912

 
$
(167
)
 
 
 
$
246

 
$
(247
)



BB&T Corporation 31


The following table presents additional information for fair value hedging relationships:
 
 
September 30, 2019
 
December 31, 2018
 
 
 
 
Hedge Basis Adjustment
 
 
 
Hedge Basis Adjustment
(Dollars in millions)
 
Hedged Asset / Liability Basis
 
Items Currently Designated
 
Items No Longer Designated
 
Hedged Asset / Liability Basis
 
Items Currently Designated
 
Items No Longer Designated
AFS securities
 
$
474

 
$
—

 
$
66

 
$
493

 
$
5

 
$
54

Loans and leases
 
559

 
3

 
15

 
562

 
—

 
(3
)
Long-term debt
 
20,750

 
347

 
(8
)
 
15,397

 
(98
)
 
12



Impact of Derivatives on the Consolidated Statements of Income and Comprehensive Income

No portion of the change in fair value of derivatives designated as hedges has been excluded from effectiveness testing.
The following table summarizes amounts related to cash flow hedges, which consist of interest rate contracts:

Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
2019
 
2018
 
2019
 
2018
Pre-tax gain (loss) recognized in OCI:
 
 
 
 
 
 
 
Deposits
$
1

 
$
6

 
$
(42
)
 
$
35

Short-term borrowings
—

 
2

 
2

 
4

Long-term debt
2

 
18

 
(76
)
 
111

Total
$
3

 
$
26

 
(116
)
 
$
150

Pre-tax gain (loss) reclassified from AOCI into interest expense:
 
 
 
 
 
 
 
Deposits
$
(1
)
 
1

 
—

 
(2
)
Short-term borrowings
(5
)
 
—

 
(4
)
 
—

Long-term debt
(8
)
 
(1
)
 
(7
)
 
(12
)
Total
$
(14
)
 
$
—

 
$
(11
)
 
$
(14
)

The following table summarizes the impact on net interest income related to fair value hedges, which consist of interest rate contracts:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
2019
 
2018
 
2019
 
2018
AFS securities:
 
 
 
 
 
 


Amounts related to interest settlements
$
—

 
$
—

 
$
—

 
$
(4
)
Recognized on derivatives
1

 
4

 
(16
)
 
20

Recognized on hedged items
(3
)
 
(6
)
 
10

 
(22
)
Net income (expense) recognized
(2
)
 
(2
)
 
(6
)
 
$
(6
)
Loans and leases:
 
 
 
 
 
 
 
Amounts related to interest settlements
—

 
—

 
—

 
(1
)
Recognized on derivatives
—

 
4

 
(22
)
 
10

Recognized on hedged items
(1
)
 
(4
)
 
21

 
(10
)
Net income (expense) recognized
(1
)
 
—

 
(1
)
 
(1
)
Long-term debt:


 


 


 


Amounts related to interest settlements
(17
)
 
(13
)
 
(55
)
 
(12
)
Recognized on derivatives
35

 
(50
)
 
343

 
(293
)
Recognized on hedged items
(30
)
 
62

 
(326
)
 
329

Net income (expense) recognized
(12
)
 
(1
)
 
(38
)
 
24

Net income (expense) recognized, total
$
(15
)
 
$
(3
)
 
$
(45
)
 
$
17



32 BB&T Corporation


The following table presents pre-tax gain (loss) recognized in income for derivative instruments not designated as hedges:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
 
2019
 
2018
 
2019
 
2018
Client-related and other risk management:
 
 

 
 

 
 
 
 
Interest rate contracts
Other noninterest income
$
33

 
$
11

 
$
59

 
$
36

Foreign exchange contracts
Other noninterest income
7

 
1

 
8

 
14

Equity
Other noninterest income
(2
)
 
—

 
(2
)
 
—

Mortgage banking:
 
 
 
 
 
 

 
 

Interest rate contracts
Mortgage banking income
10

 
7

 
5

 
3

MSRs:
 
 
 
 
 
 

 
 

Interest rate contracts
Mortgage banking income
84

 
(36
)
 
221

 
(126
)
Total
 
$
132

 
$
(17
)
 
$
291

 
$
(73
)


The following table presents information about BB&T's cash flow and fair value hedges:
(Dollars in millions)
 
Sep 30, 2019
 
Dec 31, 2018
Cash flow hedges:
 
 
 
 

Net unrecognized after-tax gain (loss) on active hedges recorded in AOCI
 
$
—

 
$
(18
)
Net unrecognized after-tax gain (loss) on terminated hedges recorded in AOCI (to be recognized in earnings through 2022)
 
(111
)
 
(13
)
Estimated portion of net after-tax gain (loss) on active and terminated hedges to be reclassified from AOCI into earnings during the next 12 months
 
(41
)
 
4

Maximum time period over which BB&T is hedging a portion of the variability in future cash flows for forecasted transactions excluding those transactions relating to the payment of variable interest on existing instruments
 
N/A

 
4 years

Fair value hedges:
 
 

 
 
Unrecognized pre-tax net gain (loss) on terminated hedges (to be recognized as interest primarily through 2029)
 
(90
)
 
(39
)
Portion of pre-tax net gain (loss) on terminated hedges to be recognized as a change in interest during the next 12 months
 
(10
)
 
15


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


BB&T Corporation 33


Derivatives Credit Risk – Risk Participation Agreements

BB&T has entered into risk participation agreements to share the credit exposure with other financial institutions on client-related interest rate derivative contracts. These amounts are included with other client-related and other risk management interest rate contracts in the table presenting the impact of derivatives on the consolidated balance sheets. The following table presents additional information related to interest rate derivative risk participation agreements:
(Dollars in millions)
Sep 30, 2019
 
Dec 31, 2018
Notional amount
$
819

 
$
446

Maximum exposure assuming all underlying third party customers referenced in the interest rate contracts defaulted in a zero LIBOR rate environment
52

 
26



The following table summarizes collateral positions with counterparties:
(Dollars in millions)
Sep 30, 2019
 
Dec 31, 2018
Dealer counterparties:
 
 
 
Cash collateral received from dealer counterparties
$
186

 
$
56

Derivatives in a net gain position secured by collateral received
184

 
55

Unsecured positions in a net gain with dealer counterparties after collateral postings
1

 
2

Cash collateral posted to dealer counterparties
75

 
75

Derivatives in a net loss position secured by collateral received
74

 
76

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

 
1

Central clearing parties:
 
 
 
Cash collateral, including initial margin, posted to central clearing parties
17

 
17

Derivatives in a net loss position
15

 
8

Securities pledged to central clearing parties
155

 
124

 

NOTE 17. Computation of EPS
 
Basic and diluted EPS calculations are presented in the following table:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions, except per share data, shares in thousands)
2019
 
2018
 
2019
 
2018
Net income available to common shareholders
$
735

 
$
789

 
$
2,326

 
$
2,309

Weighted average number of common shares
766,167

 
771,562

 
765,428

 
775,642

Effect of dilutive outstanding equity-based awards
9,624

 
10,305

 
9,479

 
10,498

Weighted average number of diluted common shares
775,791

 
781,867

 
774,907

 
786,140

Basic EPS
$
0.96

 
$
1.02

 
$
3.04

 
$
2.98

Diluted EPS
$
0.95

 
$
1.01

 
$
3.00

 
$
2.94

Anti-dilutive awards
—

 
61

 
—

 
80


 
NOTE 18. Operating Segments
 
BB&T's business segment structure aligns with how management reviews performance and makes decisions by client, segment and business unit. There are four major reportable business segments: CB-Retail, CB-Commercial, FS&CF and IH. In addition, there is an OT&C segment. For additional information, see Note 19. Operating Segments of the Annual Report on Form 10-K for the year ended December 31, 2018.


34 BB&T Corporation


The following table presents results by segment:
Three Months Ended September 30,
(Dollars in millions)
CB-Retail
 
CB-Commercial
 
FS&CF
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Net interest income (expense)
$
871

 
$
880

 
$
519

 
$
513

 
$
196

 
$
171

Net intersegment interest income (expense)
141

 
76

 
69

 
58

 
18

 
26

Segment net interest income
1,012

 
956

 
588

 
571

 
214

 
197

Allocated provision for credit losses
115

 
121

 
12

 
18

 
3

 
5

Segment net interest income after provision
897

 
835

 
576

 
553

 
211

 
192

Noninterest income
372

 
347

 
116

 
110

 
351

 
308

Noninterest expense
681

 
657

 
259

 
262

 
327

 
312

Income (loss) before income taxes
588

 
525

 
433

 
401

 
235

 
188

Provision (benefit) for income taxes
142

 
129

 
95

 
90

 
50

 
39

Segment net income (loss)
$
446

 
$
396

 
$
338

 
$
311

 
$
185

 
$
149

 
 
 
 
 
 
 
 
 
 
 
 
 
IH
 
OT&C (1)
 
Total
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Net interest income (expense)
$
39

 
$
32

 
$
75

 
$
91

 
$
1,700

 
$
1,687

Net intersegment interest income (expense)
(11
)
 
(9
)
 
(217
)
 
(151
)
 
—

 
—

Segment net interest income
28

 
23

 
(142
)
 
(60
)
 
1,700

 
1,687

Allocated provision for credit losses
2

 
1

 
(15
)
 
(10
)
 
117

 
135

Segment net interest income after provision
26

 
22

 
(127
)
 
(50
)
 
1,583

 
1,552

Noninterest income
491

 
452

 
(27
)
 
22

 
1,303

 
1,239

Noninterest expense
435

 
416

 
138

 
95

 
1,840

 
1,742

Income (loss) before income taxes
82

 
58

 
(292
)
 
(123
)
 
1,046

 
1,049

Provision (benefit) for income taxes
21

 
15

 
(90
)
 
(63
)
 
218

 
210

Segment net income (loss)
$
61

 
$
43

 
$
(202
)
 
$
(60
)
 
$
828

 
$
839

 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
(Dollars in millions)
CB-Retail
 
CB-Commercial
 
FS&CF
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Net interest income (expense)
$
2,564

 
$
2,570

 
$
1,596

 
$
1,467

 
$
582

 
$
499

Net intersegment interest income (expense)
376

 
194

 
160

 
182

 
52

 
64

Segment net interest income
2,940

 
2,764

 
1,756

 
1,649

 
634

 
563

Allocated provision for credit losses
368

 
354

 
70

 
97

 
18

 
(3
)
Segment net interest income after provision
2,572

 
2,410

 
1,686

 
1,552

 
616

 
566

Noninterest income
1,081

 
1,042

 
339

 
325

 
964

 
912

Noninterest expense
1,981

 
1,978

 
765

 
769

 
935

 
924

Income (loss) before income taxes
1,672

 
1,474

 
1,260

 
1,108

 
645

 
554

Provision (benefit) for income taxes
403

 
362

 
275

 
249

 
135

 
116

Segment net income (loss)
$
1,269

 
$
1,112

 
$
985

 
$
859

 
$
510

 
$
438

 
 
 
 
 
 
 
 
 
 
 
 
Identifiable assets (period end)
$
72,843

 
$
73,117

 
$
56,489

 
$
56,687

 
$
32,754

 
$
30,586

 
 
 
 
 
 
 
 
 
 
 
 
 
IH
 
OT&C (1)
 
Total
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Net interest income (expense)
$
108

 
$
87

 
$
236

 
$
354

 
$
5,086

 
$
4,977

Net intersegment interest income (expense)
(32
)
 
(23
)
 
(556
)
 
(417
)
 
—

 
—

Segment net interest income
76

 
64

 
(320
)
 
(63
)
 
5,086

 
4,977

Allocated provision for credit losses
7

 
2

 
(19
)
 
(30
)
 
444

 
420

Segment net interest income after provision
69

 
62

 
(301
)
 
(33
)
 
4,642

 
4,557

Noninterest income
1,576

 
1,375

 
(103
)
 
(13
)
 
3,857

 
3,641

Noninterest expense
1,296

 
1,199

 
382

 
278

 
5,359

 
5,148

Income (loss) before income taxes
349

 
238

 
(786
)
 
(324
)
 
3,140

 
3,050

Provision (benefit) for income taxes
89

 
61

 
(273
)
 
(190
)
 
629

 
598

Segment net income (loss)
$
260

 
$
177

 
$
(513
)
 
$
(134
)
 
$
2,511

 
$
2,452

 
 
 
 
 
 
 
 
 
 
 
 
Identifiable assets (period end)
$
6,744

 
$
6,455

 
$
67,920

 
$
56,040

 
$
236,750

 
$
222,885


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


BB&T Corporation 35


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Regulatory Considerations
 
The extensive regulatory framework applicable to financial institutions is intended primarily for the protection of depositors, the DIF and the stability of the financial system, rather than for the protection of shareholders and creditors. In addition to banking laws, regulations and regulatory agencies, BB&T is subject to various other laws, regulations, supervision and examination by other regulatory agencies, all of which affect the operations and management of BB&T and its ability to make distributions to shareholders. Refer to BB&T's Annual Report on Form 10-K for the year ended December 31, 2018 for additional disclosures with respect to significant laws and regulations affecting BB&T.

In April 2019, the FRB terminated its cease and desist order related to BB&T's anti-money laundering program. No money laundering activity was identified and no financial penalty was levied in relation to this order.

In July 2019, the federal bank regulatory agencies issued a final rule that reduces regulatory burden by simplifying the capital treatment for mortgage servicing rights, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions and minority interest. The final rule applies to non-advanced approaches banking organizations and is effective April 1, 2020.

In July 2019, the FDIC amended the rules related to recordkeeping requirements and timely deposit insurance determination to allow covered IDIs an optional one year extension of the original compliance deadline to April 1, 2021. The rule requires IDIs with two million or more deposit accounts to maintain complete and accurate data on each depositor's ownership interest by right and capacity and to develop the capability to calculate the insured and uninsured amounts for each deposit owner by ownership right and capacity.

In October 2019, the federal bank regulatory agencies issued a final rule that will tailor rules for large banking companies based on risk profile. The final rule creates five broad categories of firms, with each category having a specific set of tailored regulatory requirements. Under the final rule, firms with between $250 billion and $700 billion in assets, and less than $75 billion in certain other risk-related exposures, will be permitted to exclude AOCI from the calculation of regulatory capital and will no longer be subject to the advanced approaches calculation for risk-based capital. Additionally, these firms will be subject to a reduced daily LCR and NSFR and will only be required to report company run stress tests every other year. The rule will be effective 60 days after publication in the federal register.

Executive Overview
 
Overview of Significant Events and Financial Results

On February 7, 2019, BB&T entered into an agreement and plan of merger, by and between BB&T and SunTrust, pursuant to which SunTrust will merge with and into BB&T, with BB&T as the surviving entity in the merger. Immediately following the merger, SunTrust's wholly owned subsidiary, SunTrust Bank, will merge with and into Branch Bank, with Branch Bank as the surviving entity. Under the terms of the merger agreement, shareholders of SunTrust will receive 1.295 shares of BB&T common stock for each share of SunTrust common stock. The merger agreement was unanimously approved by both companies' Boards of Directors. The merger is expected to close in the fourth quarter of 2019, subject to satisfaction of closing conditions, including receipt of remaining regulatory approvals. The merger is subject to a mutual break-up fee of approximately $1.1 billion, payable in customary circumstances. Merger-of-equals significant milestones and updates include:

•
On July 10, 2019, BB&T received regulatory approval from the NCCOB for the pending merger-of-equals with SunTrust. Management is continuing to work with regulators on the remaining approvals.
•
On July 16, 2019, BB&T and SunTrust announced the Truist Bank Community Benefits Plan under which the combined company will lend or invest $60 billion to low and moderate-income borrowers and communities over a three-year period from 2020 to 2022.
•
Management agreed on a one-time bonus to be paid to certain associates of Truist following the closing of the merger. The estimated bonus payments total approximately $70 million.
•
On July 24, 2019, the U.S. House Committee on Financial Services held a hearing on the merger. BB&T and SunTrust executives delivered testimony and responded to questions from Committee members.
•
On July 30, 2019, BB&T and SunTrust shareholders approved the merger. In addition, BB&T's shareholders approved Truist Financial Corporation to be the name of the combined company.
•
In September 2019, BB&T and SunTrust named approximately 75% of Truist leadership roles, finalized a vast majority of key technology ecosystem decisions and completed a legal day one readiness testing exercise for key workstreams.


36 BB&T Corporation


Consolidated net income available to common shareholders for the third quarter of 2019 was $735 million. On a diluted per common share basis, earnings for the third quarter of 2019 were $0.95, a decrease of $0.06 compared to the third quarter of 2018.

Results for the third quarter of 2019, included $34 million ($26 million after-tax) of merger-related and restructuring charges and $52 million ($40 million after-tax) of incremental operating expenses related to the merger of equals with SunTrust. In addition, results included an after-tax reduction in net income available to common shareholders of $46 million from the redemption of preferred stock, partially offset by a $15 million after-tax impact from the sale of $4.3 billion of residential mortgage loans. Results for the third quarter of 2018 included $18 million ($13 million after-tax) of merger-related and restructuring charges primarily related to facilities optimization activities and the Regions Insurance acquisition.
 
BB&T's results of operations for the third quarter of 2019 produced an annualized return on average assets of 1.41% and an annualized return on average common shareholders' equity of 10.04%, compared to ratios for the same quarter of the prior year of 1.49% and 11.69%, respectively.

Total revenues on a TE basis were $3.0 billion for the third quarter of 2019, an increase of $73 million compared to the same period in 2018, which reflects an increase of $9 million in TE net interest income and an increase of $64 million in noninterest income.

The provision for credit losses was $117 million compared to $135 million for the third quarter of 2018. The decrease in the provision for credit losses was primarily due to the residential mortgage loan sale in the current quarter and a decrease in the reserve for unfunded commitments. Net charge-offs were 0.41% of average loans and leases on an annualized basis for the third quarter of 2019, up six basis points compared to the third quarter of 2018.

Noninterest income for the third quarter of 2019 increased $64 million compared to the earlier quarter primarily due to increases in insurance income, mortgage banking income, and investment banking and brokerages fees and commissions. These increases were partially offset by a decrease in other income.

Noninterest expense for the third quarter of 2019 was up $98 million compared to the earlier quarter. Excluding merger-related and restructuring charges and incremental operating expenses related to the merger, noninterest expense was up $30 million.

The provision for income taxes was $218 million for the third quarter of 2019, compared to $210 million for the earlier quarter. This produced an effective tax rate for the third quarter of 2019 of 20.8%, compared to 20.0% for the earlier quarter.

BB&T issued $1.7 billion of preferred stock during the quarter and redeemed a similar amount from two higher-cost issuances. In connection with the redemptions, net income available to common shareholders was reduced by $46 million to recognize the difference in the redemption price and the carrying value.

BB&T declared common dividends of $0.450 per share during the third quarter of 2019, which resulted in a dividend payout ratio of 46.9%. As previously communicated, BB&T has suspended its share repurchase program due to the merger-of-equals.

Analysis of Results of Operations

Net Interest Income and NIM
 
Third Quarter 2019 compared to Third Quarter 2018
 
Net interest income on a TE basis was $1.7 billion for the third quarter of 2019, an increase of $9 million compared to the same period in 2018. Interest income increased $145 million, which reflects higher rates and loan growth. Interest expense increased $136 million primarily due to higher funding costs reflecting the impact of rate increases.
 
Net interest margin was 3.37%, down ten basis points compared to the earlier quarter. Average earning assets increased $7.2 billion. The increase in average earning assets reflects a $4.6 billion increase in average total loans and leases and a $2.6 billion increase in average securities. Average interest-bearing liabilities increased $7.1 billion compared to the earlier quarter. Average interest-bearing deposits increased $6.4 billion and average short-term borrowings increased $2.3 billion, while average long-term debt decreased $1.6 billion. The yield on the total loan portfolio for the third quarter of 2019 was 4.98%, up 15 basis points compared to the earlier quarter, reflecting the impact of rate increases. The yield on the average securities portfolio was 2.60%, up 13 basis points compared to the earlier period.

The average cost of total deposits was 0.67%, up 24 basis points compared to the earlier quarter. The average cost of interest-bearing deposits was 0.99%, up 33 basis points compared to the earlier quarter. The average rate on long-term debt was 3.42%, up 43 basis points compared to the earlier quarter. The average rate on short-term borrowings was 2.55%, up 61 basis points compared to the earlier quarter. The higher rates on interest-bearing liabilities reflect the impact of rate increases.


BB&T Corporation 37


Nine Months of 2019 compared to Nine Months of 2018
 
Net interest income on a TE basis was $5.2 billion for the nine months ended September 30, 2019, an increase of $108 million compared to the same period in 2018. Interest income increased $612 million, which reflects higher rates and loan growth. Interest expense increased $504 million primarily due to higher funding costs reflecting the impact of rate increases.

Net interest margin was 3.43% for the nine months ended September 30, 2019, down two basis points compared to the same period of 2018. The yield for the total loan portfolio for the nine months ended September 30, 2019 was 5.03%, up 33 basis points compared to the corresponding period of 2018. The increase was primarily due to rate increases. The yield on the average securities portfolio for the nine months ended September 30, 2019 was 2.61%, up 13 basis points compared to the same period of 2018.
 
The average cost of total deposits for the nine months ended September 30, 2019 was 0.66%, up 29 basis points compared to the prior year. The average cost of interest-bearing deposits for the nine months ended September 30, 2019 was 0.99%, up 42 basis points compared to the prior year. The average rate on short-term borrowings was 2.44% for the nine months ended September 30, 2019, up 72 basis points compared to the same period in 2018. The average rate on long-term debt for the nine months ended September 30, 2019 was 3.35%, up 57 basis points compared to the same period in 2018. The higher rates on interest-bearing liabilities reflect the impact of rate increases.

The major components of net interest income and the related annualized yields and rates as well as the variances between the periods caused by changes in interest rates versus changes in volumes are summarized below.


38 BB&T Corporation


Table 1-1: TE Net Interest Income and Rate / Volume Analysis (1)
Three Months Ended September 30,
(Dollars in millions)
Average Balances (6)
 
Annualized Yield/Rate
 
Income/Expense
 
Incr.
(Decr.)
 
Change due to
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
 
Rate
 
Volume
Assets
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total securities, at amortized cost: (2)
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
$
2,240

 
$
3,561

 
2.04
%
 
1.80
%
 
$
11

 
$
15

 
$
(4
)
 
$
2

 
$
(6
)
GSE
2,449

 
2,399

 
2.25

 
2.23

 
14

 
13

 
1

 
—

 
1

Agency MBS
43,415

 
39,111

 
2.57

 
2.45

 
279

 
239

 
40

 
12

 
28

States and political subdivisions
566

 
849

 
3.44

 
3.50

 
5

 
10

 
(5
)
 
—

 
(5
)
Non-agency MBS
198

 
340

 
18.77

 
11.32

 
9

 
8

 
1

 
5

 
(4
)
Other
32

 
39

 
3.67

 
3.79

 
—

 
1

 
(1
)
 
—

 
(1
)
Total securities
48,900

 
46,299

 
2.60

 
2.47

 
318

 
286

 
32

 
19

 
13

Other earning assets (3)
2,466

 
2,412

 
2.67

 
2.52

 
17

 
15

 
2

 
2

 
—

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

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Commercial and industrial
63,768

 
59,900

 
4.18

 
4.04

 
671

 
612

 
59

 
21

 
38

CRE
20,767

 
21,496

 
4.88

 
4.80

 
256

 
260

 
(4
)
 
4

 
(8
)
Lease financing
2,260

 
1,941

 
3.17

 
3.04

 
18

 
17

 
1

 
—

 
1

Residential mortgage
28,410

 
30,500

 
4.02

 
4.08

 
285

 
313

 
(28
)
 
(5
)
 
(23
)
Direct
11,468

 
11,613

 
5.75

 
5.34

 
166

 
155

 
11

 
13

 
(2
)
Indirect
18,362

 
17,282

 
8.04

 
7.56

 
372

 
335

 
37

 
19

 
18

Revolving credit
3,218

 
2,947

 
9.61

 
9.47

 
78

 
63

 
15

 
2

 
13

PCI
411

 
518

 
24.23

 
20.14

 
25

 
26

 
(1
)
 
5

 
(6
)
Total loans and leases HFI
148,664

 
146,197

 
5.00

 
4.83

 
1,871

 
1,781

 
90

 
59

 
31

LHFS
3,378

 
1,292

 
4.16

 
4.28

 
35

 
14

 
21

 
—

 
21

Total loans and leases
152,042

 
147,489

 
4.98

 
4.83

 
1,906

 
1,795

 
111

 
59

 
52

Total earning assets
203,408

 
196,200

 
4.38

 
4.24

 
2,241

 
2,096

 
145

 
80

 
65

Nonearning assets
29,012

 
26,474

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Total assets
$
232,420

 
$
222,674

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Liabilities and Shareholders' Equity
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Interest-bearing deposits:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Interest-checking
$
27,664

 
$
26,655

 
0.67

 
0.45

 
47

 
28

 
19

 
18

 
1

Money market and savings
64,920

 
62,957

 
0.95

 
0.68

 
156

 
109

 
47

 
44

 
3

Time deposits
16,643

 
13,353

 
1.62

 
0.98

 
67

 
34

 
33

 
24

 
9

Foreign office deposits - interest-bearing
265

 
132

 
2.13

 
1.93

 
1

 
1

 
—

 
—

 
—

Total interest-bearing deposits (7)
109,492

 
103,097

 
0.99

 
0.66

 
271

 
172

 
99

 
86

 
13

Short-term borrowings
8,307

 
6,023

 
2.55

 
1.94

 
54

 
29

 
25

 
11

 
14

Long-term debt
22,608

 
24,211

 
3.42

 
2.99

 
193

 
181

 
12

 
25

 
(13
)
Total interest-bearing liabilities
140,407

 
133,331

 
1.47

 
1.14

 
518

 
382

 
136

 
122

 
14

Noninterest-bearing deposits (7)
52,500

 
54,174

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Other liabilities
6,769

 
5,282

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Shareholders' equity
32,744

 
29,887

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total liabilities and shareholders' equity
$
232,420

 
$
222,674

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Average interest-rate spread
 

 
 
 
2.91
%
 
3.10
%
 
 

 
 

 
 

 
 

 
 

NIM/net interest income
 

 
 
 
3.37
%
 
3.47
%
 
$
1,723

 
$
1,714

 
$
9

 
$
(42
)
 
$
51

Taxable-equivalent adjustment
 

 
 
 
 
 
 

 
$
23

 
$
27

 
 

 
 

 
 

(1)
Yields are stated on a TE basis utilizing the marginal income tax rates. The change in interest not solely due to changes in rate or volume has been allocated on a pro-rata basis based on the absolute dollar amount of each.
(2)
Total securities include AFS and HTM securities.
(3)
Includes cash equivalents, interest-bearing deposits with banks, trading securities, FHLB stock and other earning assets.
(4)
Loan fees, which are not material for any of the periods shown, are included for rate calculation purposes.
(5)
NPLs are included in the average balances.
(6)
Excludes basis adjustments for fair value hedges.
(7)
Total deposit costs were 0.67% and 0.43% for the three months ended September 30, 2019 and 2018, respectively.

BB&T Corporation 39


Table 1-2: TE Net Interest Income and Rate / Volume Analysis (1)
Nine Months Ended September 30,
(Dollars in millions)
Average Balances (6)
 
Annualized Yield/Rate
 
Income/Expense
 
Incr.
(Decr.)
 
Change due to
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
 
Rate
 
Volume
Assets
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total securities, at amortized cost: (2)
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

U.S. Treasury
$
2,731

 
$
3,546

 
2.03
%
 
1.79
%
 
$
41

 
$
47

 
$
(6
)
 
$
6

 
$
(12
)
GSE
2,436

 
2,390

 
2.25

 
2.23

 
41

 
40

 
1

 
—

 
1

Agency MBS
41,202

 
39,894

 
2.57

 
2.44

 
795

 
728

 
67

 
42

 
25

States and political subdivisions
583

 
1,036

 
3.85

 
3.71

 
17

 
29

 
(12
)
 
1

 
(13
)
Non-agency MBS
271

 
356

 
14.34

 
12.06

 
29

 
32

 
(3
)
 
5

 
(8
)
Other
34

 
43

 
3.83

 
3.05

 
1

 
1

 
—

 
—

 
—

Total securities
47,257

 
47,265

 
2.61

 
2.48

 
924

 
877

 
47

 
54

 
(7
)
Other earning assets (3)
2,612

 
2,287

 
3.57

 
3.09

 
70

 
53

 
17

 
9

 
8

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

 
 

 
 

Commercial and industrial
62,576

 
59,363

 
4.28

 
3.89

 
2,006

 
1,729

 
277

 
180

 
97

CRE
20,806

 
21,480

 
4.99

 
4.64

 
777

 
746

 
31

 
55

 
(24
)
Lease financing
2,135

 
1,892

 
3.26

 
3.03

 
52

 
43

 
9

 
3

 
6

Residential mortgage
30,604

 
29,538

 
4.05

 
4.03

 
930

 
893

 
37

 
4

 
33

Direct
11,489

 
11,694

 
5.77

 
5.11

 
495

 
446

 
49

 
57

 
(8
)
Indirect
17,863

 
17,002

 
7.98

 
7.45

 
1,066

 
950

 
116

 
68

 
48

Revolving credit
3,160

 
2,859

 
9.50

 
9.19

 
225

 
197

 
28

 
7

 
21

PCI
433

 
569

 
21.20

 
19.40

 
69

 
82

 
(13
)
 
7

 
(20
)
Total loans and leases HFI
149,066

 
144,397

 
5.04

 
4.71

 
5,620

 
5,086

 
534

 
381

 
153

LHFS
1,742

 
1,332

 
4.17

 
4.01

 
54

 
40

 
14

 
2

 
12

Total loans and leases
150,808

 
145,729

 
5.03

 
4.70

 
5,674

 
5,126

 
548

 
383

 
165

Total earning assets
200,677

 
195,281

 
4.44

 
4.14

 
6,668

 
6,056

 
612

 
446

 
166

Nonearning assets
28,429

 
26,536

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total assets
$
229,106

 
$
221,817

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Liabilities and Shareholders' Equity
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-bearing deposits:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Interest-checking
$
27,665

 
$
26,962

 
0.64

 
0.41

 
132

 
82

 
50

 
48

 
2

Money market and savings
63,885

 
62,256

 
0.98

 
0.56

 
469

 
262

 
207

 
200

 
7

Time deposits
16,256

 
13,720

 
1.57

 
0.84

 
190

 
87

 
103

 
85

 
18

Foreign office deposits - interest-bearing
355

 
577

 
2.36

 
1.60

 
6

 
7

 
(1
)
 
3

 
(4
)
Total interest-bearing deposits (7)
108,161

 
103,515

 
0.99

 
0.57

 
797

 
438

 
359

 
336

 
23

Short-term borrowings
7,443

 
5,609

 
2.44

 
1.72

 
136

 
72

 
64

 
36

 
28

Long-term debt
23,027

 
23,845

 
3.35

 
2.78

 
578

 
497

 
81

 
99

 
(18
)
Total interest-bearing liabilities
138,631

 
132,969

 
1.46

 
1.01

 
1,511

 
1,007

 
504

 
471

 
33

Noninterest-bearing deposits (7)
52,489

 
53,847

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Other liabilities
6,449

 
5,333

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Shareholders' equity
31,537

 
29,668

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Total liabilities and shareholders' equity
$
229,106

 
$
221,817

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Average interest-rate spread
 

 
 
 
2.98
%
 
3.13
%
 
 

 
 

 
 

 
 

 
 

NIM/net interest income
 

 
 
 
3.43
%
 
3.45
%
 
$
5,157

 
$
5,049

 
$
108

 
$
(25
)
 
$
133

Taxable-equivalent adjustment
 

 
 
 
 
 
 

 
$
71

 
$
72

 
 

 
 

 
 

(1)
Yields are stated on a TE basis utilizing the marginal income tax rates. The change in interest not solely due to changes in rate or volume has been allocated on a pro-rata basis based on the absolute dollar amount of each.
(2)
Total securities include AFS and HTM securities.
(3)
Includes cash equivalents, interest-bearing deposits with banks, trading securities, FHLB stock and other earning assets.
(4)
Loan fees, which are not material for any of the periods shown, are included for rate calculation purposes.
(5)
NPLs are included in the average balances.
(6)
Excludes basis adjustments for fair value hedges.
(7)
Total deposit costs were 0.66% and 0.37% for the nine months ended September 30, 2019 and 2018, respectively.

40 BB&T Corporation


Provision for Credit Losses

Third Quarter 2019 compared to Third Quarter 2018
 
The provision for credit losses was $117 million compared to $135 million for the earlier quarter. The decrease in the provision for credit losses was primarily due to the residential mortgage loan sale in the current quarter and a decrease in the reserve for unfunded commitments. The decrease in the reserve for unfunded commitments was due to the resolution of a commercial credit. Net charge-offs for the third quarter of 2019 totaled $153 million compared to $127 million in the earlier period.

Net charge-offs were 0.41% of average loans and leases on an annualized basis for the third quarter of 2019, up six basis points compared to the third quarter of 2018. The increase in net charge-offs was primarily related to indirect and direct loans, as well as revolving credit.

Nine Months of 2019 compared to Nine Months of 2018
 
The provision for credit losses totaled $444 million for the nine months ended September 30, 2019, compared to $420 million for 2018. Net charge-offs for the nine months ended September 30, 2019 were $442 million, compared to $381 million for the nine months ended September 30, 2018.

Net charge-offs were 0.40% of average loans and leases for the nine months ended September 30, 2019, compared to 0.35% of average loans and leases for 2018. The increase in net charge-offs was primarily related to CRE, indirect and revolving credit loans.

Noninterest Income

Noninterest income is a significant contributor to BB&T's financial results. Management focuses on diversifying its sources of revenue to further reduce BB&T's reliance on traditional spread-based interest income, as certain fee-based activities are a relatively stable revenue source during periods of changing interest rates.
Table 2: Noninterest Income
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Insurance income
$
487

 
$
448

 
8.7
 %
 
$
1,563

 
$
1,365

 
14.5
 %
Service charges on deposits
188

 
183

 
2.7

 
540

 
527

 
2.5

Investment banking and brokerage fees and commissions
130

 
116

 
12.1

 
372

 
338

 
10.1

Mortgage banking income
112

 
79

 
41.8

 
288

 
272

 
5.9

Trust and investment advisory revenues
71

 
71

 
—

 
209

 
215

 
(2.8
)
Bankcard fees and merchant discounts
72

 
72

 
—

 
219

 
213

 
2.8

Checkcard fees
57

 
56

 
1.8

 
171

 
165

 
3.6

Operating lease income
36

 
37

 
(2.7
)
 
106

 
110

 
(3.6
)
Income from bank-owned life insurance
29

 
27

 
7.4

 
91

 
88

 
3.4

Securities gains (losses), net
—

 
—

 
—

 
—

 
1

 
NM

Other income
121

 
150

 
(19.3
)
 
298

 
347

 
(14.1
)
Total noninterest income
$
1,303

 
$
1,239

 
5.2

 
$
3,857

 
$
3,641

 
5.9


Third Quarter 2019 compared to Third Quarter 2018
 
Noninterest income for the third quarter of 2019 increased $64 million compared to the earlier quarter. Insurance income increased $39 million due to higher production. Mortgage banking income increased $33 million primarily due to higher production revenues from both residential and commercial mortgage banking businesses. Investment banking and brokerage fees and commissions increased $14 million due to higher managed account fees and higher investment banking transaction revenues. Other income decreased $29 million primarily due to a decrease in income from SBIC private equity investments.

Nine Months of 2019 compared to Nine Months of 2018
 
Noninterest income for the nine months ended September 30, 2019 was $3.9 billion, up $216 million compared to 2018. Insurance income was $1.6 billion, up $198 million compared to 2018 due to higher production levels and the acquisition of Regions Insurance. Investment banking and brokerage fees and commissions were $372 million, up $34 million compared to 2018 due to higher managed account fees and higher investment banking income. Mortgage banking income was $288 million, up $16 million compared to 2018 primarily due to an increase of $34 million for net mortgage servicing rights valuation adjustments, partially offset by lower production-related revenues due to lower sales volumes. Other income was $298 million, down $49 million compared to 2018 due to lower income from SBIC private equity investments and other sundry items.


BB&T Corporation 41


Noninterest Expense

The following table provides a breakdown of BB&T's noninterest expense:
Table 3: Noninterest Expense
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Personnel expense
$
1,161

 
$
1,104

 
5.2
 %
 
$
3,368

 
$
3,217

 
4.7
 %
Occupancy and equipment expense
186

 
189

 
(1.6
)
 
557

 
570

 
(2.3
)
Software expense
77

 
70

 
10.0

 
220

 
202

 
8.9

Outside IT services
28

 
33

 
(15.2
)
 
87

 
97

 
(10.3
)
Regulatory charges
20

 
37

 
(45.9
)
 
57

 
116

 
(50.9
)
Amortization of intangibles
29

 
33

 
(12.1
)
 
93

 
97

 
(4.1
)
Loan-related expense
26

 
28

 
(7.1
)
 
81

 
83

 
(2.4
)
Professional services
47

 
33

 
42.4

 
109

 
95

 
14.7

Merger-related and restructuring charges, net
34

 
18

 
88.9

 
137

 
70

 
95.7

Other expense
232

 
197

 
17.8

 
650

 
601

 
8.2

Total noninterest expense
$
1,840


$
1,742

 
5.6

 
$
5,359

 
$
5,148

 
4.1


Third Quarter 2019 compared to Third Quarter 2018
 
Noninterest expense for the third quarter of 2019 was up $98 million compared to the earlier quarter. Merger-related and restructuring charges increased $16 million, as the current quarter included charges in connection with the announced merger-of-equals with SunTrust, whereas the earlier quarter included charges associated with facilities optimization and the Regions Insurance acquisition. The current quarter also included $52 million of incremental operating expenses related to the merger. Excluding these charges, noninterest expense was up $30 million, or 1.7% compared to the earlier quarter.

Personnel expense increased $57 million compared to the earlier quarter. Excluding an increase of $39 million in incremental operating expenses related to the merger, personnel expense increased $18 million compared to the earlier quarter. The remaining increase in personnel expense was primarily due to an increase in production-based incentive expense. Professional services expense increased $14 million primarily due to incremental operating expenses related to the merger. Regulatory charges decreased $17 million, primarily the result of the deposit insurance fund reaching the targeted level. Other expense increased $35 million due to higher non-service related pension expense, higher operating charge-offs, higher advertising and marketing expenses and other sundry items.

Nine Months of 2019 compared to Nine Months of 2018
 
Noninterest expense totaled $5.4 billion for the nine months ended September 30, 2019, an increase of $211 million, or 4.1%, from the same period in the prior year. Merger-related and restructuring expense was $137 million, an increase of $67 million, primarily due to the announced merger-of-equals with SunTrust. Additionally, the nine months ended September 30, 2019 included $63 million of incremental operating expenses related to the merger. Excluding these charges, noninterest expense was up $81 million or 1.6% compared to the earlier period.
 
Personnel expense was $3.4 billion for the nine months ended September 30, 2019, an increase of $151 million compared to the nine months ended September 30, 2018. Excluding $43 million of incremental operating expenses related to the merger, personnel expense increased $108 million, primarily due to higher production-based incentives, including the impact from the Regions Insurance acquisition and lower capitalized employee costs. The lower capitalized employee costs reflect efficiencies in the loan closing process. Regulatory charges decreased $59 million primarily as a result of the DIF reaching the targeted level. Other expense increased $49 million due to higher non-service related pension expense, higher operating charge-offs, higher advertising and marketing expenses and other sundry items.


42 BB&T Corporation


Merger-Related and Restructuring Charges

The following table presents a summary of merger-related and restructuring charges and the related accruals:
Table 4: Merger-Related and Restructuring Accrual Activity
(Dollars in millions)
Accrual at Jul 1, 2019
 
Expense
 
Utilized
 
Accrual at Sep 30, 2019
 
Accrual at Jan 1, 2019
 
Expense
 
Utilized
 
Accrual at Sep 30, 2019
Severance and personnel-related
$
8

 
$
14

 
$
(10
)
 
$
12

 
$
43

 
$
35

 
$
(66
)
 
$
12

Occupancy and equipment (1)
—

 
1

 
(1
)
 
—

 
—

 
13

 
(13
)
 
—

Professional services
53

 
15

 
(6
)
 
62

 
1

 
75

 
(14
)
 
62

Other adjustments
1

 
4

 
(5
)
 
—

 
—

 
14

 
(14
)
 
—

Total
$
62

 
$
34

 
$
(22
)
 
$
74

 
$
44

 
$
137

 
$
(107
)
 
$
74

(1) Certain lease reserves are no longer required as a result of new lease accounting guidance adopted in the first quarter of 2019. See additional information in Note 1. Basis of Presentation.

Provision for Income Taxes

Third Quarter 2019 compared to Third Quarter 2018
 
The provision for income taxes was $218 million for the third quarter of 2019, compared to $210 million for the earlier quarter. This produced an effective tax rate for the third quarter of 2019 of 20.8%, compared to 20.0% for the earlier quarter.

Nine Months of 2019 compared to Nine Months of 2018
 
The provision for income taxes was $629 million for the nine months ended September 30, 2019, compared to $598 million for 2018. This produced an effective tax rate for the nine months ended September 30, 2019 of 20.0%, compared to 19.6% for 2018.

Segment Results
 
See Note 18. Operating Segments herein and Note 19. Operating Segments in BB&T's Annual Report on Form 10-K for the year ended December 31, 2018, for additional disclosures related to BB&T's reportable business segments. Fluctuations in noninterest income and noninterest expense incurred directly by the segments are more fully discussed in the Noninterest Income and Noninterest Expense sections above.
Table 5: Net Income by Reportable Segment
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Dollars in millions)
2019
 
2018
 
% Change
 
2019
 
2018
 
% Change
Community Banking Retail and Consumer Finance
$
446

 
$
396

 
12.6
 %
 
$
1,269

 
$
1,112

 
14.1
%
Community Banking Commercial
338

 
311

 
8.7

 
985

 
859

 
14.7

Financial Services and Commercial Finance
185

 
149

 
24.2

 
510

 
438

 
16.4

Insurance Holdings
61

 
43

 
41.9

 
260

 
177

 
46.9

Other, Treasury & Corporate
(202
)
 
(60
)
 
NM

 
(513
)
 
(134
)
 
NM

BB&T Corporation
$
828

 
$
839

 
(1.3
)
 
$
2,511

 
$
2,452

 
2.4


Third Quarter 2019 compared to Third Quarter 2018

Community Banking Retail and Consumer Finance

CB-Retail serves retail clients by offering a variety of loan and deposit products, payment services, bankcard products and other financial services by connecting clients to a wide range of financial products and services. CB-Retail includes Dealer Retail Services, which originates loans on an indirect basis to consumers for the purchase of automobiles, boats and recreational vehicles. Additionally, CB-Retail includes specialty finance lending, small equipment leasing and other products for consumers. CB-Retail also includes Residential Mortgage Banking, which originates and purchases mortgage loans to either hold for investment or sell to third parties. BB&T generally retains the servicing rights to loans sold. Mortgage products include fixed and adjustable-rate government guaranteed and conventional loans used for the purpose of constructing, purchasing or refinancing residential properties. Substantially all of the properties are owner-occupied. Residential Mortgage Banking also includes Mortgage Warehouse Lending, which provides short-term lending solutions to finance first-lien residential mortgages held-for-sale by independent mortgage companies.


BB&T Corporation 43


CB-Retail net income was $446 million for the third quarter of 2019, an increase of $50 million compared to the earlier quarter. Segment net interest income increased $56 million primarily due to average loan growth and higher funding spreads on deposits, partially offset by lower credit spreads on loans. Noninterest income increased $25 million primarily due to an increase in mortgage banking income primarily resulting from an increase in saleable lock volume and portfolio sales. The allocated provision for credit losses decreased $6 million primarily due to the impact of the residential mortgage portfolio sale in the current quarter, partially offset by higher net charge-offs and incurred loss estimates in the current quarter. Noninterest expense increased $24 million primarily due to higher allocated corporate expense.

CB-Retail average loans and leases held for investment increased $83 million, or 0.1%, compared to the earlier quarter. The increase was primarily driven by increases in average indirect lending of $1.1 billion, or 6.3%, and average mortgage warehouse lending of $938 million, or 61.3%, partially offset by a decline in average residential mortgage loans of $2.1 billion, or 6.8%, due to the residential mortgage portfolio sale.

CB-Retail average total deposits increased $481 million, or 0.6%, compared to the earlier quarter. The increase was primarily driven by growth in average money market and savings of $1.0 billion, or 2.9%, and average noninterest-bearing deposits of $513 million, or 3.0%, partially offset by a decline in interest checking of $1.2 billion, or 7.8%.

Community Banking Commercial

CB-Commercial serves large, medium and small business clients by offering a variety of loan and deposit products and connecting clients to the combined organization's broad array of financial services. CB-Commercial includes CRE lending, commercial and industrial lending, corporate banking, asset-based lending, dealer inventory financing, tax-exempt financing, cash management and treasury services, and commercial deposit products.

CB-Commercial net income was $338 million for the third quarter of 2019, an increase of $27 million compared to the earlier quarter. Segment net interest income increased $17 million primarily driven by higher funding spreads, partially offset by lower credit spreads on loans and declines in average loans. Noninterest income increased compared to the earlier quarter primarily due to higher referral fees and service charges on deposits in the current quarter. The allocated provision for credit losses decreased primarily due to lower incurred loss estimates, partially offset by higher net charge-offs. Noninterest expense decreased primarily due to lower allocated corporate expenses, partially offset by lower credits for capitalized employee costs.

CB-Commercial average loans and leases held for investment decreased $335 million, or 0.6%, compared to the earlier quarter. Average commercial real estate loans declined $612 million, or 3.1%, partially offset by increases in average commercial and industrial loans of $318 million, or 1.0%. Average total deposits increased $737 million, or 1.2%, compared to the earlier quarter driven by an increase in interest checking of $1.6 billion, or 19.4%, and average money market and savings of $955 million, or 6.0%, partially offset by a decline in noninterest-bearing deposits of $1.8 billion, or 5.3%.

Financial Services and Commercial Finance

FS&CF provides personal trust administration, estate planning, investment counseling, wealth management, asset management, corporate retirement services, capital markets and corporate banking services, specialty finance and corporate trust services to individuals, corporations, institutions, foundations and government entities. In addition, the segment includes BB&T Securities, a full-service brokerage and investment banking firm, which offers clients a variety of investment services, including discount brokerage services, equities, annuities, mutual funds and government bonds. The Corporate Banking Division originates and services large corporate relationships, syndicated lending relationships and client derivatives while the specialty finance products offered by FS&CF include equipment finance, tax-exempt financing for local governments and special-purpose entities, and full-service commercial mortgage banking lending.

FS&CF net income was $185 million for the third quarter of 2019, an increase of $36 million compared to the earlier quarter. Segment net interest income increased $17 million primarily driven by average loan growth and higher funding spreads, partially offset by lower credit spreads on loans. Noninterest income increased $43 million primarily due to client derivatives, an increase in investment banking and brokerage fees and commissions related to an increase in managed account fees; and higher commercial mortgage banking income. Noninterest expense increased $15 million primarily due to higher performance-based incentives in the current quarter.

FS&CF average loans and leases held for investment increased $2.8 billion, or 10.3%, compared to the earlier quarter. The increase was primarily driven by growth in Corporate Banking loans of $2.2 billion, or 14.4%, and Equipment Finance loans and leases of $774 million, or 26.8%, partially offset by a decline in Governmental Finance loans of $311 million, or 6.1%.

FS&CF average total deposits increased $350 million, or 1.2%, compared to the earlier quarter primarily driven by growth in average total deposits for Wealth and Retirement Services of $677 million, or 4.2%, partially offset by declines in average total deposits for Corporate Banking of $465 million, or 5.4%.


44 BB&T Corporation


Insurance Holdings

BB&T's insurance agency / brokerage network is the sixth largest in the world. IH provides property and casualty, employee benefits and life insurance to businesses and individuals. It also provides small business and corporate services, such as workers compensation and professional liability, as well as surety coverage and title insurance. In addition, IH includes commercial and retail insurance premium finance.

IH net income was $61 million for the third quarter of 2019, an increase of $18 million compared to the earlier quarter. Noninterest income increased $39 million primarily due to higher production. Noninterest expense increased $19 million primarily due to commissions on higher production and incremental operating expenses related to the merger.

Other, Treasury & Corporate

Net income in OT&C can vary due to the changing needs of the Corporation, including the size of the investment portfolio, the need for wholesale funding and income received from derivatives used to hedge the balance sheet.

OT&C generated a net loss of $202 million in the third quarter of 2019, compared to a net loss of $60 million in the earlier quarter. Segment net interest income decreased $82 million primarily due to increases in the net credit for funds provided to other operating segments and rates on long-term debt. Noninterest income decreased $49 million primarily due to a decrease in income from SBIC private equity investments and income related to assets for certain post-employment benefits. The allocated provision for credit losses decreased $5 million primarily due to the provision for unfunded commitments. Noninterest expense increased $43 million primarily due to higher merger-related charges and other sundry items. The benefit for income taxes increased $27 million primarily due to a higher pre-tax loss, partially offset by a higher tax benefit from discrete items in the earlier quarter.

Nine Months of 2019 compared to Nine Months of 2018
 
Community Banking Retail and Consumer Finance

CB-Retail net income was $1.3 billion for the nine months ended September 30, 2019, an increase of $157 million, or 14.1%, compared to the same period of the prior year. Segment net interest income increased $176 million primarily due to average loan growth and higher funding spreads, partially offset by lower credit spreads on loans. Noninterest income increased $39 million primarily due to an increase in mortgage banking income, service charges on deposits, and bankcard fees and merchant discounts. The allocated provision for credit losses increased $14 million primarily due to higher net charge-offs, partially offset by declines in average loan balances resulting from the residential mortgage portfolio sale. The allocated provision for income taxes increased $41 million due to higher pre-tax income.

CB-Retail average loans and leases HFI increased $2.5 billion, or 3.9%, compared to the earlier period. Average residential mortgage loans increased $1.1 billion, or 3.6%, average indirect retail loans increased $869 million, or 5.1%, average mortgage warehouse lending increased $424 million, or 31.2%, and average revolving credit increased $302 million, or 10.6%.

CB-Retail average total deposits increased $256 million, or 0.3%, compared to the earlier period. Average money market and savings increased $889 million, or 2.5%, and average noninterest-bearing deposits increased $455 million, or 2.7%, while average interest checking decreased $1.2 billion, or 7.6%.

Community Banking Commercial

CB-Commercial net income was $985 million for the nine months ended September 30, 2019, an increase of $126 million, or 14.7%, compared to the same period of the prior year. Segment net interest income increased $107 million driven primarily by higher funding spreads. Noninterest income increased $14 million primarily due to higher net referral fees. The allocated provision for credit losses decreased $27 million primarily due to a decrease in incurred loss estimates.

CB-Commercial average loans and leases HFI were essentially flat compared with the earlier period. Average commercial real estate loans decreased $648 million or 3.3%, while average commercial and industrial loans increased $622 million, or 1.9%.

CB-Commercial average total deposits increased $139 million, or 0.2%, compared to the earlier period. Average interest checking increased $805 million, or 9.4% and average money market and savings increased $758 million, or 4.9%, while average noninterest-bearing deposits declined $1.5 billion, or 4.4%.

Financial Services and Commercial Finance

FS&CF net income was $510 million for the nine months ended September 30, 2019, an increase of $72 million, or 16.4%, compared to the same period of the prior year. Segment net interest income increased $71 million primarily due to higher average loan growth. Noninterest income increased $52 million primarily due to higher revenue from client derivatives and managed account fees, investment commissions, and investment banking transactions, partially offset by declines in commercial mortgage banking income primarily due to a decline in revenue from net commercial mortgage servicing rights. The allocated provision for

BB&T Corporation 45


credit losses increased $21 million primarily due to reserve rate changes driven by overall credit improvement in the earlier period. Noninterest expense increased $11 million primarily due to higher personnel expense, partially offset by lower allocated corporate expenses.

FS&CF average loans and leases HFI increased $2.4 billion, or 9.0%, compared to the earlier period. Average loans and leases HFI for Corporate Banking and Equipment Finance increased $2.0 billion, or 13.2%, and $531 million, or 18.8%, respectively. FS&CF average total deposits increased $376 million, or 1.3%, compared to the earlier period primarily driven by growth in average total deposits for Wealth and Retirement Services of $469 million, or 2.9%.

Client invested assets totaled $173.1 billion as of September 30, 2019, an increase of $5.3 billion, or 3.2%, compared to the earlier period.

Insurance Holdings

IH net income was $260 million for the nine months ended September 30, 2019, an increase of $83 million, or 46.9%, compared to the same period of the prior year. Noninterest income increased $201 million due to organic growth and the acquisition of Regions Insurance, which contributed $78 million. Noninterest expense increased $97 million primarily due to the acquisition of Regions Insurance and commissions on higher production.

Other, Treasury & Corporate

OT&C generated a net loss of $513 million for the nine months ended September 30, 2019, compared to a net loss of $134 million for the earlier period. Segment net interest income decreased $257 million primarily due to an increase in the net credit for funds provided to other operating segments, an increased net cost for long-term debt and short-term borrowings, and a decline in volume for short-term borrowings, partially offset by increased spreads on securities. Noninterest income decreased $90 million primarily due to lower hedge and client derivative income, income related to assets for certain post-employment benefits and income from SBIC private equity investments. The allocated provision for credit losses increased $11 million primarily due to an increase in the provision for PCI loans as a result of an allowance release in the earlier period. Noninterest expense increased $104 million due to merger-related charges in the current period, as well as higher personnel expense resulting from capitalized employee costs allocated to the segments in the current period and other sundry items, which were partially offset by lower regulatory charges. The benefit for income taxes increased $83 million primarily due to an increase in pre-tax loss, partially offset by a lower tax benefit from discrete items compared to the earlier period.

Analysis of Financial Condition

Investment Activities

The securities portfolio totaled $54.8 billion at September 30, 2019, compared to $45.6 billion at December 31, 2018. The increase in the securities portfolio was primarily due to investing the proceeds from the sale of $4.3 billion in residential mortgage loans and an investment totaling approximately $5 billion in Agency MBS to increase HQLA securities in anticipation of the merger closing.
 
As of September 30, 2019, approximately 5.2% of the securities portfolio was variable rate, compared to 6.5% as of December 31, 2018. The effective duration of the securities portfolio was 4.1 years at September 30, 2019, compared to 4.8 years at December 31, 2018. The duration of the securities portfolio excludes certain non-agency MBS.

U.S. Treasury, GSE and Agency MBS represented 98.2% of the total securities portfolio as of September 30, 2019, compared to 97.3% as of prior year end.

In the fourth quarter of 2019, approximately $7.2 billion in Agency MBS was sold and reinvested in similar assets to improve the portfolio run rate and ensure the appropriate mix of HQLA to meet future LCR requirements in anticipation of the merger closing. The sale is expected to incur a pre-tax loss of approximately $95 million upon final settlement and the reinvested assets will have a payback period of approximately 2.6 years.

Lending Activities

Loans HFI totaled $149.4 billion at September 30, 2019, compared to $149.0 billion at December 31, 2018. Management continuously evaluates the composition of the loan portfolio taking into consideration the current and expected market conditions, interest rate environment and risk profiles to optimize profitability. Based upon this evaluation, management may decide to focus efforts on growing or decreasing exposures in certain portfolios through both organic changes and portfolio acquisitions or sales. In this regard, management made the strategic decision to sell $4.3 billion of residential mortgage loans during the third quarter of 2019. The sale resulted in a pre-tax benefit of $20 million for the quarter, which was composed of a $4 million gain on sale and a $16 million release from the allowance for loan losses.


46 BB&T Corporation


Certain residential mortgage loans have an initial period where the borrower is only required to pay the periodic interest. After the interest-only period, the loan will require the payment of both interest and principal over the remaining term. The outstanding balances of variable rate residential mortgage loans in the interest-only phase were approximately $50 million and $64 million at September 30, 2019 and December 31, 2018, respectively. At September 30, 2019, approximately 100.0% of the interest-only balances will begin amortizing within the next three years compared to 95.9% at December 31, 2018.

The direct retail portfolio includes variable rate home equity lines and other lines of credit whose rate typically reset on a monthly basis. Home equity lines generally require interest-only payments during the first 15 years after origination. After this initial period, the outstanding balance begins amortizing and requires the payment of both interest and principal. The following table presents additional information over variable rate lines of credit:
Table 6: Variable Rate Lines of Credit
 
 
 
 
 
 
 
 
Home Equity Lines
 
Other Lines of Credit
(Dollars in millions)
Sep 30, 2019
 
Dec 31, 2018
 
Sep 30, 2019
 
Dec 31, 2018
Total variable rate lines
$
6,672

 
$
7,201

 
$
1,080

 
$
1,067

Amount in interest-only phase
5,384

 
5,730

 
978

 
949

Percent in interest-only phase that will begin amortizing within 3 years
11.1
%
 
10.3
%
 
13.4
%
 
15.9
%

The following table presents the most recent composition of average loans and leases:
Table 7: Composition of Average Loans and Leases
For the Three Months Ended
(Dollars in millions)
 
Sep 30, 2019
 
Jun 30, 2019
 
Mar 31, 2019
 
Dec 31, 2018
 
Sep 30, 2018
Commercial:
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
63,768

 
$
62,563

 
$
61,370

 
$
60,553

 
$
59,900

CRE
 
20,767

 
20,748

 
20,905

 
21,301

 
21,496

Lease financing
 
2,260

 
2,122

 
2,021

 
1,990

 
1,941

Retail:
 
 
 
 
 
 
 
 
 
 
Residential mortgage
 
28,410

 
32,066

 
31,370

 
31,103

 
30,500

Direct
 
11,468

 
11,506

 
11,493

 
11,600

 
11,613

Indirect
 
18,362

 
17,879

 
17,337

 
17,436

 
17,282

Revolving credit
 
3,218

 
3,151

 
3,110

 
3,070

 
2,947

PCI
 
411

 
432

 
455

 
486

 
518

Total average loans and leases HFI
 
$
148,664

 
$
150,467

 
$
148,061

 
$
147,539

 
$
146,197


Average loans held for investment for the third quarter of 2019 were $148.7 billion, down $1.8 billion or 4.8% annualized compared to the second quarter of 2019. Excluding the sale of $4.3 billion of residential mortgages in the third quarter, average loans held for investment increased 6.5% annualized compared to the second quarter of 2019.

Average commercial and industrial loans increased $1.2 billion driven by strong growth in mortgage warehouse lending, premium finance, corporate banking and equipment finance.

Average residential mortgage loans held for investment decreased $3.7 billion primarily due to the sale of $4.3 billion of residential mortgage loans. Excluding the sale, average residential mortgage loans increased 7.4% annualized compared to the prior quarter.

Average indirect retail loans increased $483 million. The increase was across all categories of indirect lending. Growth was led by power sports, recreational and automobile lending.


BB&T Corporation 47


Asset Quality

The following tables summarize asset quality information for the past five quarters:
Table 8: Asset Quality
(Dollars in millions)
Sep 30, 2019
 
Jun 30, 2019
 
Mar 31, 2019
 
Dec 31, 2018
 
Sep 30, 2018
NPAs:
 
 
 
 
 
 
 
 
 
NPLs:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
172

 
$
193

 
$
196

 
$
200

 
$
238

CRE
29

 
33

 
75

 
65

 
46

Lease financing
2

 
2

 
1

 
3

 
6

Residential mortgage
106

 
104

 
121

 
119

 
120

Direct
56

 
54

 
53

 
53

 
55

Indirect
82

 
75

 
80

 
82

 
72

Total NPLs HFI
447

 
461

 
526

 
522

 
537

Foreclosed real estate
33

 
36

 
33

 
35

 
39

Other foreclosed property
29

 
26

 
25

 
28

 
25

Total nonperforming assets (1)
$
509

 
$
523

 
$
584

 
$
585

 
$
601

Performing TDRs:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
69

 
$
84

 
$
63

 
$
65

 
$
56

CRE
7

 
8

 
9

 
10

 
12

Residential mortgage
570

 
581

 
669

 
656

 
643

Direct
52

 
53

 
54

 
55

 
56

Indirect
328

 
315

 
306

 
305

 
295

Revolving credit
31

 
29

 
29

 
28

 
28

Total performing TDRs (2)(3)
$
1,057

 
$
1,070

 
$
1,130

 
$
1,119

 
$
1,090

Loans 90 days or more past due and still accruing:
 
 
 
 
 
 
 
 
 
Residential mortgage
$
347

 
$
350

 
$
377

 
$
405

 
$
367

Direct
7

 
10

 
7

 
7

 
6

Indirect
9

 
7

 
5

 
6

 
6

Revolving credit
16

 
14

 
14

 
14

 
12

PCI
24

 
26

 
28

 
30

 
40

Total loans 90 days or more past due and still accruing
$
403

 
$
407

 
$
431

 
$
462

 
$
431

Loans 30-89 days past due:
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
34

 
$
32

 
$
36

 
$
34

 
$
35

CRE
1

 
3

 
3

 
5

 
4

Lease financing
1

 
5

 
3

 
1

 
1

Residential mortgage
432

 
480

 
478

 
456

 
510

Direct
54

 
58

 
67

 
61

 
59

Indirect
423

 
393

 
316

 
436

 
418

Revolving credit
31

 
28

 
27

 
28

 
27

PCI
16

 
17

 
18

 
23

 
21

Total loans 30-89 days past due
$
992

 
$
1,016

 
$
948

 
$
1,044

 
$
1,075

Excludes loans held for sale.     
(1)
Sales of nonperforming loans totaled $42 million, $48 million, $30 million, $30 million and $20 million for the quarter ended September 30, 2019, June 30, 2019, March 31, 2019, December 31, 2018 and September 30, 2018, respectively.
(2)
Excludes TDRs that are nonperforming totaling $115 million, $135 million, $178 million, $176 million and $176 million at September 30, 2019, June 30, 2019, March 31, 2019, December 31, 2018 and September 30, 2018, respectively. These amounts are included in total nonperforming assets.
(3)
Sales of performing TDRs, which were primarily residential mortgage loans, totaled $39 million, $120 million, $33 million, $15 million and $34 million for the quarter ended September 30, 2019, June 30, 2019, March 31, 2019, December 31, 2018 and September 30, 2018, respectively.

Nonperforming assets totaled $509 million at September 30, 2019, down $14 million compared to June 30, 2019. Nonperforming loans and leases represented 0.30% of loans and leases held for investment, unchanged compared to June 30, 2019.

Performing TDRs were down $13 million during the third quarter primarily in commercial and industrial loans and residential mortgage loans, which was partially offset by an increase in indirect loans.


48 BB&T Corporation


Loans 90 days or more past due and still accruing totaled $403 million at September 30, 2019, down slightly compared to the prior quarter. The ratio of loans 90 days or more past due and still accruing as a percentage of loans and leases was 0.27% at September 30, 2019, unchanged compared to the prior quarter. Excluding government guaranteed and PCI loans, the ratio of loans 90 days or more past due and still accruing as a percentage of loans and leases was 0.04% at September 30, 2019, also unchanged from the prior quarter.

Loans 30-89 days past due and still accruing totaled $992 million at September 30, 2019, down $24 million compared to the prior quarter, primarily due to a decline in residential mortgage loans, which was partially offset by an expected seasonal increase in indirect automobile lending.

Problem loans include NPLs and loans that are 90 days or more past due and still accruing as disclosed in Table 8. In addition, for the commercial portfolio segment, loans that are rated special mention or substandard performing are closely monitored by management as potential problem loans. Refer to Note 4. Loans and ACL herein for additional disclosures related to these potential problem loans.
Table 9: Asset Quality Ratios
As of / For the Three Months Ended
Sep 30, 2019
 
Jun 30, 2019
 
Mar 31, 2019
 
Dec 31, 2018
 
Sep 30, 2018
Loans 30-89 days past due and still accruing as a percentage of loans and leases HFI
0.66
%
 
0.67
%
 
0.64
%
 
0.70
%
 
0.73
%
Loans 90 days or more past due and still accruing as a percentage of loans and leases HFI
0.27

 
0.27

 
0.29

 
0.31

 
0.29

NPLs as a percentage of loans and leases HFI
0.30

 
0.30

 
0.35

 
0.35

 
0.37

NPAs as a percentage of:
 
 
 
 
 
 
 
 
 
Total assets
0.22

 
0.23

 
0.26

 
0.26

 
0.27

Loans and leases HFI plus foreclosed property
0.34

 
0.34

 
0.39

 
0.39

 
0.41

Net charge-offs as a percentage of average loans and leases HFI
0.41

 
0.38

 
0.40

 
0.38

 
0.35

ALLL as a percentage of loans and leases HFI
1.05

 
1.05

 
1.05

 
1.05

 
1.05

Ratio of ALLL to:
 
 
 
 
 
 
 
 
 
Net charge-offs
2.59x

 
2.80x

 
2.62x

 
2.76x

 
3.05x

NPLs
3.52x

 
3.46x

 
2.97x

 
2.99x

 
2.86x

Loans 90 days or more past due and still accruing as a percentage of loans and leases HFI (1)
0.04
%
 
0.04
%
 
0.04
%
 
0.04
%
 
0.04
%
Applicable ratios are annualized.
(1)
This asset quality ratio has been adjusted to remove the impact of government guaranteed mortgage loans and PCI. Management believes the inclusion of such assets in this asset quality ratio results in distortion of this ratio such that it might not be reflective of asset collectability or might not be comparable to other periods presented or to other portfolios that do not have government guarantees or were not impacted by PCI accounting requirements.

The following table presents activity related to NPAs:
Table 10: Rollforward of NPAs
(Dollars in millions)
 
2019
 
2018
Balance, January 1
 
$
585

 
$
627

New NPAs
 
904

 
881

Advances and principal increases
 
127

 
336

Disposals of foreclosed assets (1)
 
(354
)
 
(337
)
Disposals of NPLs (2)
 
(120
)
 
(65
)
Charge-offs and losses
 
(215
)
 
(180
)
Payments
 
(312
)
 
(542
)
Transfers to performing status
 
(106
)
 
(117
)
Other, net
 
—

 
(2
)
Ending balance, September 30
 
$
509

 
$
601

(1) 
Includes charge-offs and losses recorded upon sale of $165 million and $159 million for the nine months ended September 30, 2019 and 2018, respectively.
(2)
Includes charge-offs and losses recorded upon sale of $20 million and $22 million for the nine months ended September 30, 2019 and 2018, respectively.
 

BB&T Corporation 49


TDRs occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term and a concession has been granted to the borrower. As a result, BB&T will work with the borrower to prevent further difficulties and ultimately improve the likelihood of recovery on the loan. To facilitate this process, a concessionary modification that would not otherwise be considered may be granted, resulting in classification of the loan as a TDR.
 
The following table provides a summary of performing TDR activity: 
Table 11: Rollforward of Performing TDRs
(Dollars in millions)
 
2019
 
2018
Balance, January 1
 
$
1,119

 
$
1,043

Inflows
 
404

 
386

Payments and payoffs
 
(144
)
 
(126
)
Charge-offs
 
(48
)
 
(47
)
Transfers to nonperforming TDRs, net
 
(57
)
 
(52
)
Removal due to the passage of time
 
(17
)
 
(29
)
Non-concessionary re-modifications
 
(8
)
 
(5
)
Transferred to LHFS and/or sold
 
(192
)
 
(80
)
Balance, September 30
 
$
1,057

 
$
1,090


The following table provides further details regarding the payment status of TDRs outstanding at September 30, 2019:
Table 12: Payment Status of TDRs (1)
September 30, 2019
(Dollars in millions)
 
Current
 
Past Due 30-89 Days
 
Past Due 90 Days Or More
 
Total
Performing TDRs:
 
 
 
 
 
 
 
 
 
 

 
 
 
 
Commercial:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
 
$
69

 
100.0
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
69

CRE
 
7

 
100.0

 
—

 
—

 
—

 
—

 
7

Retail:
 


 


 


 


 


 


 


Residential mortgage
 
313

 
54.9

 
105

 
18.4

 
152

 
26.7

 
570

Direct
 
49

 
94.2

 
3

 
5.8

 
—

 
—

 
52

Indirect
 
270

 
82.3

 
58

 
17.7

 
—

 
—

 
328

Revolving credit
 
27

 
87.1

 
3

 
9.7

 
1

 
3.2

 
31

Total performing TDRs
 
735

 
69.5

 
169

 
16.0

 
153

 
14.5

 
1,057

Nonperforming TDRs
 
49

 
42.6

 
10

 
8.7

 
56

 
48.7

 
115

Total TDRs
 
$
784

 
66.9

 
$
179

 
15.3

 
$
209

 
17.8

 
$
1,172

(1)
Past due performing TDRs are included in past due disclosures and nonperforming TDRs are included in NPL disclosures.


50 BB&T Corporation


ACL

Activity related to the ACL is presented in the following tables:
Table 13: Activity in ACL
 
For the Three Months Ended
 
For the Nine Months Ended
(Dollars in millions)
Sep 30, 2019
 
Jun 30, 2019
 
Mar 31, 2019
 
Dec 31, 2018
 
Sep 30, 2018
 
2019
 
2018
Balance, beginning of period
$
1,689

 
$
1,659

 
$
1,651

 
$
1,648

 
$
1,640

 
$
1,651

 
$
1,609

Provision for credit losses (excluding PCI loans)
117

 
172

 
156

 
147

 
141

 
445

 
436

Provision (benefit) for PCI loans
—

 
—

 
(1
)
 
(1
)
 
(6
)
 
(1
)
 
(16
)
Charge-offs:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial
(28
)
 
(22
)
 
(17
)
 
(18
)
 
(28
)
 
(67
)
 
(74
)
CRE
(2
)
 
(18
)
 
(8
)
 
(5
)
 
—

 
(28
)
 
(8
)
Lease financing
(1
)
 
—

 
(1
)
 
(1
)
 
(1
)
 
(2
)
 
(3
)
Residential mortgage
(3
)
 
(5
)
 
(5
)
 
(8
)
 
(4
)
 
(13
)
 
(13
)
Direct
(22
)
 
(22
)
 
(18
)
 
(18
)
 
(17
)
 
(62
)
 
(53
)
Indirect
(106
)
 
(91
)
 
(109
)
 
(108
)
 
(94
)
 
(306
)
 
(283
)
Revolving credit
(27
)
 
(25
)
 
(26
)
 
(22
)
 
(20
)
 
(78
)
 
(62
)
PCI
—

 
—

 
—

 
—

 
(2
)
 
—

 
(2
)
Total charge-offs
(189
)
 
(183
)
 
(184
)
 
(180
)
 
(166
)
 
(556
)
 
(498
)
Recoveries:
 

 
 

 
 

 
 

 
 

 
 

 
 

Commercial and industrial
5

 
8

 
6

 
7

 
13

 
19

 
32

CRE
3

 
3

 
1

 
4

 
1

 
7

 
4

Lease financing
1

 
—

 
—

 
—

 
—

 
1

 
1

Residential mortgage
—

 
—

 
1

 
1

 
—

 
1

 
1

Direct
6

 
7

 
6

 
5

 
6

 
19

 
18

Indirect
15

 
19

 
17

 
15

 
15

 
51

 
47

Revolving credit
6

 
4

 
6

 
5

 
4

 
16

 
14

Total recoveries
36

 
41

 
37

 
37

 
39

 
114

 
117

Net charge-offs
(153
)
 
(142
)
 
(147
)
 
(143
)
 
(127
)
 
(442
)
 
(381
)
Balance, end of period
$
1,653

 
$
1,689

 
$
1,659

 
$
1,651

 
$
1,648

 
$
1,653

 
$
1,648

ALLL (excluding PCI loans)
$
1,565

 
$
1,587

 
$
1,553

 
$
1,549

 
$
1,528

 
 
 
 
ALLL for PCI loans
8

 
8

 
8

 
9

 
10

 
 
 
 
RUFC
80

 
94

 
98

 
93

 
110

 
 
 
 
Total ACL
$
1,653

 
$
1,689

 
$
1,659

 
$
1,651

 
$
1,648

 
 
 
 

The ACL consists of the ALLL, which is presented separately on the Consolidated Balance Sheets, and the RUFC, which is included in other liabilities on the Consolidated Balance Sheets. The ACL totaled $1.7 billion at September 30, 2019, up $2 million compared to December 31, 2018.

Net charge-offs during the third quarter totaled $153 million, up $11 million compared to the prior quarter. As a percentage of average loans and leases, annualized net charge-offs were 0.41%, up three basis points compared to the prior quarter.

The allowance for loan and lease losses, excluding the allowance for PCI loans, was $1.6 billion, down $22 million compared to the prior quarter. The decrease in the allowance for loan and lease losses was primarily due to the sale of residential mortgage loans during the third quarter. As of September 30, 2019, the total allowance for loan and lease losses was 1.05% of loans and leases held for investment, unchanged compared to June 30, 2019.

The allowance for loan and lease losses was 3.52 times nonperforming loans and leases held for investment, compared to 3.46 times at June 30, 2019. At September 30, 2019, the allowance for loan and lease losses was 2.59 times annualized net charge-offs, compared to 2.80 times at June 30, 2019.


BB&T Corporation 51


The following table presents an allocation of the ALLL at the periods shown. This allocation of the ALLL is calculated on an approximate basis and is not necessarily indicative of future losses or allocations. The entire amount of the allowance is available to absorb losses occurring in any category of loans and leases.
Table 14: Allocation of ALLL by Category
 
 
September 30, 2019
 
December 31, 2018
(Dollars in millions)
 
Amount
 
% Loans in each category
 
Amount
 
% Loans in each category
Commercial and industrial
 
$
576

 
42.9
%
 
$
546

 
41.5
%
CRE
 
196

 
14.0

 
190

 
14.1

Lease financing
 
10

 
1.6

 
11

 
1.4

Residential mortgage
 
199

 
18.9

 
232

 
21.1

Direct
 
100

 
7.7

 
97

 
7.8

Indirect
 
362

 
12.4

 
356

 
11.7

Revolving credit
 
122

 
2.2

 
117

 
2.1

PCI
 
8

 
0.3

 
9

 
0.3

Total ALLL
 
1,573

 
100.0
%
 
1,558

 
100.0
%
RUFC
 
80

 
 

 
93

 
 

Total ACL
 
$
1,653

 
 

 
$
1,651

 
 


BB&T monitors the performance of its home equity loans and lines secured by second liens similarly to other consumer loans and utilizes assumptions specific to these loans in determining the necessary ALLL. BB&T also receives notification when the first lien holder, whether BB&T or another financial institution, has initiated foreclosure proceedings against the borrower. When notified that the first lien is in the process of foreclosure, BB&T obtains valuations to determine if any additional charge-offs or reserves are warranted. These valuations are updated at least annually thereafter.
 
BB&T has limited ability to monitor the delinquency status of the first lien, unless the first lien is held or serviced by BB&T. As a result, using migration assumptions that are based on historical experience and adjusted for current trends, BB&T estimates the volume of second lien positions where the first lien is delinquent and adjusts the ALLL to reflect the increased risk of loss on these credits. Finally, BB&T also provides additional reserves for second lien positions when the estimated combined current loan to value ratio for the credit exceeds 100%. As of September 30, 2019, BB&T held or serviced the first lien on 29.4% of its second lien positions.

Funding Activities

Deposits

Deposits totaled $162.3 billion at September 30, 2019, an increase of $1.1 billion from December 31, 2018, primarily due to an increase in foreign office deposits.

The following table presents the most recent composition of average deposits:
Table 15: Composition of Average Deposits
Three Months Ended
(Dollars in millions)
 
Sep 30, 2019
 
Jun 30, 2019
 
Mar 31, 2019
 
Dec 31, 2018
 
Sep 30, 2018
Noninterest-bearing deposits
 
$
52,500

 
$
52,680

 
$
52,283

 
$
53,732

 
$
54,174

Interest checking
 
27,664

 
27,708

 
27,622

 
26,921

 
26,655

Money market and savings
 
64,920

 
63,394

 
63,325

 
62,261

 
62,957

Time deposits
 
16,643

 
15,730

 
16,393

 
14,682

 
13,353

Foreign office deposits - interest-bearing
 
265

 
379

 
422

 
246

 
132

Total average deposits
 
$
161,992

 
$
159,891

 
$
160,045

 
$
157,842

 
$
157,271

 
Average deposits for the third quarter were $162.0 billion, up $2.1 billion compared to the prior quarter. Average money market and savings deposits increased $1.5 billion and average time deposits increased $913 million primarily due to increases in commercial balances.

Noninterest-bearing deposits represented 32.4% of total average deposits for the third quarter, compared to 32.9% for the prior quarter and 34.4% for the same quarter a year ago. The cost of average total deposits was 0.67% for the third quarter, down one basis point compared to the prior quarter. The cost of average interest-bearing deposits was 0.99% for the third quarter, down three basis points compared to the prior quarter.


52 BB&T Corporation


Borrowings

At September 30, 2019, short-term borrowings totaled $10.4 billion, an increase of $5.2 billion compared to December 31, 2018. Short-term borrowings fluctuate based on the Company's funding needs. Average short-term borrowings were $8.3 billion or 3.6% of total funding in the third quarter of 2019 as compared to $6.0 billion or 2.7% in the same period of 2018.

Long-term debt provides funding and, to a lesser extent, regulatory capital, and primarily consists of senior and subordinated notes issued by BB&T and Branch Bank. Long-term debt totaled $25.5 billion at September 30, 2019, an increase of $1.8 billion compared to December 31, 2018. The increase is primarily due to BB&T issuances of $3.5 billion of senior notes and $650 million of subordinated notes, and Branch Bank issuances of $750 million of subordinated notes; partially offset by the maturities of $1.8 billion of senior notes issued by Branch Bank and $1.6 billion of senior notes issued by BB&T. The average cost of long-term debt was 3.35% for the nine months ended September 30, 2019, up 57 basis points compared to the same period in 2018.

FHLB advances represented 6.4% of total outstanding long-term debt at September 30, 2019, compared to 7.4% at December 31, 2018. See Note 9. Long-Term Debt for additional disclosures.

Shareholders' Equity

Total shareholders' equity was $32.3 billion at September 30, 2019, an increase of $2.1 billion from December 31, 2018. BB&T issued $1.7 billion of preferred stock during the quarter and redeemed a similar amount from two higher-cost issuances. In connection with the redemptions, net income available to common shareholders was reduced by $46 million to recognize the difference in the redemption price and the carrying value. Other significant changes include net income of $2.5 billion and an increase in AOCI of $689 million, which was partially offset by a decrease of $1.1 billion for common and preferred dividends. BB&T's book value per common share at September 30, 2019 was $38.07, compared to $35.46 at December 31, 2018.

Risk Management

BB&T has a strong and consistent risk culture, based on established risk values, which promotes predictable and consistent performance within an environment of open communication and effective challenge. The strong culture influences all associates in the organization daily and helps them evaluate whether risks are acceptable or unacceptable while making decisions that balance quality, profitability and growth appropriately. BB&T's effective risk management framework establishes an environment which enables it to achieve superior performance relative to peers, ensures that BB&T is viewed among the safest of banks and assures the operational freedom to act on opportunities.
 
BB&T ensures that there is an appropriate return for the amount of risk taken, and that the expected return is in line with its strategic objectives and business plan. Risk-taking activities are evaluated and prioritized to identify those that present attractive risk-adjusted returns while preserving asset value. BB&T only undertakes risks that are understood and can be managed effectively. By managing risk well, BB&T ensures sufficient capital is available to maintain and grow core business operations in a safe and sound manner.
 
Regardless of financial gain or loss to the Company, associates are held accountable if they do not follow the established risk management policies and procedures. Compensation decisions take into account an associate's adherence to, and successful implementation of, BB&T's risk values. The compensation structure supports the Company's core values and sound risk management practices in an effort to promote judicious risk-taking behavior.
 
BB&T's risk culture encourages transparency and open dialogue between all levels in the performance of organizational functions, such as the development, marketing and implementation of a product or service.

For the merger of equals, BB&T and SunTrust are utilizing a comprehensive change risk management program to ensure appropriate management of the risks related to merging and integrating the two companies. The Board of Directors and Executive Management oversee the change risk management program to ensure key decisions are reviewed and appropriate oversight of integration risks occurs. The risk management organizations of BB&T and SunTrust are engaged in risk oversight of the merger integration planning. The risk oversight process provides comprehensive risk management reporting and assessments of the activities underway by the companies. The change risk teams, risk oversight teams and Executive Management collectively provide a comprehensive framework for the management, control and oversight of the merger to prepare for the integration.

On July 27, 2017, the Chief Executive of the U.K. Financial Conduct Authority announced that it will no longer persuade or compel banks to submit rates for the calculation of the LIBOR rates after 2021. LIBOR in its current form may no longer be available after 2021, which could impact the products listed below. To prepare for the possible transition to an alternative reference rate, management has formed a cross-functional project team to address the LIBOR transition. The project team has performed an assessment to identify the potential risks related to the transition from LIBOR to a new index. The project provides regular reports to the Board of Directors and Risk Management Committee.


BB&T Corporation 53


BB&T has LIBOR-based contracts that extend beyond 2021 included in loans and leases, securities, deposits, short-term borrowings, long-term debt and derivative financial instruments. The project team is reviewing contract fallback language for loans and leases and noted that certain contracts will need updated provisions for the transition and is coordinating with impacted lines of business to update LIBOR fallback language generally consistent with the ARRC recommendation. BB&T is continuing to evaluate the impact on these contracts and other financial instruments, systems implications, hedging strategies, and other related operational and market risks. Market risks associated are dependent on the alternative reference rates available and market conditions at transition. For a further discussion of the various risks associated with the potential cessation of LIBOR and the transition to alternative reference rates, refer to BB&T's Annual Report on Form 10-K for the year ended December, 31, 2018 under the section titled "Item 1A. Risk Factors."

The principal types of inherent risk include compliance, credit, liquidity, market, operational, cyber security, model, reputation and strategic risks. Refer to BB&T's Annual Report on Form 10-K for the year ended December 31, 2018 for disclosures related to each of these risks under the section titled "Risk Management."
 
Market Risk Management
 
The effective management of market risk is essential to achieving BB&T's strategic financial objectives. As a financial institution, BB&T's most significant market risk exposure is interest rate risk in its balance sheet; however, market risk also includes product liquidity risk, price risk and volatility risk in BB&T's BUs. The primary objectives of market risk management are to minimize any adverse effect that changes in market risk factors may have on net interest income, net income and capital and to offset the risk of price changes for certain assets recorded at fair value. At BB&T, market risk management also includes the enterprise-wide IPV function.
 
Interest Rate Market Risk (Other than Trading)
 
BB&T actively manages market risk associated with asset and liability portfolios with a focus on the strategic pricing of asset and liability accounts and management of appropriate maturity mixes of assets and liabilities. The goal of these activities is the development of appropriate maturity and repricing opportunities in BB&T's portfolios of assets and liabilities that will produce reasonably consistent net interest income during periods of changing interest rates. These portfolios are analyzed for proper fixed-rate and variable-rate mixes under various interest rate scenarios.
 
The asset/liability management process is designed to achieve relatively stable NIM and assure liquidity by coordinating the volumes, maturities or repricing opportunities of earning assets, deposits and borrowed funds. Among other things, this process gives consideration to prepayment trends related to securities, loans and leases and certain deposits that have no stated maturity. Prepayment assumptions are developed using a combination of market data and internal historical prepayment experience for residential mortgage-related loans and securities, and internal historical prepayment experience for client deposits with no stated maturity and loans that are not residential mortgage related. These assumptions are subject to monthly review and adjustment, and are modified as deemed necessary to reflect changes in interest rates relative to the reference rate of the underlying assets or liabilities. On a monthly basis, BB&T evaluates the accuracy of its Simulation model, which includes an evaluation of its prepayment assumptions, to ensure that all significant assumptions inherent in the model appropriately reflect changes in the interest rate environment and related trends in prepayment activity. It is the responsibility of the MRLCC to determine and achieve the most appropriate volume and mix of earning assets and interest-bearing liabilities, as well as to ensure an adequate level of liquidity and capital, within the context of corporate performance goals. The MRLCC also sets policy guidelines and establishes long-term strategies with respect to interest rate risk exposure and liquidity. The MRLCC meets regularly to review BB&T's interest rate risk and liquidity positions in relation to present and prospective market and business conditions, and adopts funding and balance sheet management strategies that are intended to ensure that the potential impacts on earnings and liquidity as a result of fluctuations in interest rates are within acceptable tolerance guidelines.
 
BB&T uses derivatives primarily to manage economic risk related to securities, commercial loans, MSRs and mortgage banking operations, long-term debt and other funding sources. BB&T also uses derivatives to facilitate transactions on behalf of its clients. As of September 30, 2019, BB&T had derivative financial instruments outstanding with notional amounts totaling $72.1 billion, with a net fair value of $641 million. See Note 16. Derivative Financial Instruments for additional disclosures.
 
The majority of BB&T's assets and liabilities are monetary in nature and, therefore, differ from most commercial and industrial companies that have significant investments in fixed assets or inventories. Fluctuations in interest rates and actions of the FRB to regulate the availability and cost of credit have a greater effect on a financial institution's profitability than do the effects of higher costs for goods and services. Through its balance sheet management function, which is monitored by the MRLCC, management believes that BB&T is positioned to respond to changing needs for liquidity, changes in interest rates and inflationary trends.
 

54 BB&T Corporation


Management uses the Simulation to measure the sensitivity of projected earnings to changes in interest rates. The Simulation projects net interest income and interest rate risk for a rolling two-year period of time. The Simulation takes into account the current contractual agreements that BB&T has made with its customers on deposits, borrowings, loans, investments and commitments to enter into those transactions. Furthermore, the Simulation considers the impact of expected customer behavior. Management monitors BB&T's interest sensitivity by means of a model that incorporates the current volumes, average rates earned and paid, and scheduled maturities and payments of asset and liability portfolios, together with multiple scenarios that include projected prepayments, repricing opportunities and anticipated volume growth. Using this information, the model projects earnings based on projected portfolio balances under multiple interest rate scenarios. This level of detail is needed to simulate the effect that changes in interest rates and portfolio balances may have on the earnings of BB&T. This method is subject to the accuracy of the assumptions that underlie the process, but management believes that it provides a better illustration of the sensitivity of earnings to changes in interest rates than other analyses such as static or dynamic gap. In addition to the Simulation, BB&T uses EVE analysis to focus on projected changes in asset and liability values given potential changes in interest rates. This measure also allows BB&T to analyze interest rate risk that falls outside the analysis window contained in the Simulation. The EVE model is a discounted cash flow of the portfolio of assets, liabilities, and derivative instruments. The difference in the present value of assets minus the present value of liabilities is defined as the economic value of equity.
 
The asset/liability management process requires a number of key assumptions. Management determines the most likely outlook for the economy and interest rates by analyzing external factors, including published economic projections and data, the effects of likely monetary and fiscal policies, as well as any enacted or prospective regulatory changes. BB&T's current and prospective liquidity position, current balance sheet volumes and projected growth, accessibility of funds for short-term needs and capital maintenance are also considered. This data is combined with various interest rate scenarios to provide management with the information necessary to analyze interest sensitivity and to aid in the development of strategies to reach performance goals.

The following table shows the effect that the indicated changes in interest rates would have on net interest income as projected for the next twelve months assuming a gradual change in interest rates as described below. Key assumptions in the preparation of the table include prepayment speeds of mortgage-related and other assets, cash flows and maturities of derivative financial instruments, loan volumes and pricing, deposit beta, customer preferences and capital plans. The resulting change in net interest income reflects the level of interest rate sensitivity that income has in relation to the investment, loan and deposit portfolios.
Table 16: Interest Sensitivity Simulation Analysis
Interest Rate Scenario
 
Annualized Hypothetical Percentage Change in Net Interest Income
Linear Change in Prime Rate
 
Prime Rate
 
 
Sep 30, 2019
 
Sep 30, 2018
 
Sep 30, 2019
 
Sep 30, 2018
Up 200
 
7.00
%
 
7.25
%
 
(1.49
)%
 
2.06
 %
Up 100
 
6.00

 
6.25

 
(0.56
)
 
1.24

No Change
 
5.00

 
5.25

 
—

 
—

Down 25
 
4.75

 
5.00

 
(0.22
)
 
N/A

Down 100
 
4.00

 
4.25

 
(1.58
)
 
(3.13
)

Rate sensitivity decreased from September 30, 2018, primarily driven by loan, deposit mix changes and the increase in HQLA securities. Rate sensitivity was more neutral at September 30, 2019 as the Consolidated Balance Sheet is in process of being repositioned in anticipation of the merger closing.

Management considers how the balance sheet and interest rate risk position could be impacted by changes in balance sheet mix. Liquidity in the banking industry has been very strong during the current economic cycle. Much of this liquidity increase has been due to a significant increase in noninterest-bearing demand deposits. Consistent with the industry, Branch Bank has seen a significant increase in this funding source. The behavior of these deposits is one of the most important assumptions used in determining the interest rate risk position of BB&T. A loss of these deposits in the future would reduce the asset sensitivity of BB&T's balance sheet as the Company increases interest-bearing funds to offset the loss of this advantageous funding source.

Beta represents the correlation between overall market interest rates and the rates paid by BB&T on interest-bearing deposits. BB&T applies an average deposit beta of approximately 60% to its non-maturity interest-bearing deposit accounts for determining its interest rate sensitivity. Non-maturity interest-bearing deposit accounts include interest checking accounts, savings accounts and money market accounts that do not have a contractual maturity. BB&T regularly conducts sensitivity on other key variables to determine the impact they could have on the interest rate risk position. This allows BB&T to evaluate the likely impact on its balance sheet management strategies due to a more extreme variation in a key assumption than expected.


BB&T Corporation 55


The following table shows the results of BB&T's interest-rate sensitivity position assuming the loss of demand deposits and an associated increase in managed rate deposits under various scenarios. For purposes of this analysis, BB&T modeled the incremental beta for the replacement of the lost demand deposits at 100%.
Table 17: Deposit Mix Sensitivity Analysis
Linear Change in Rates
 
Base Scenario at September 30, 2019 (1)
 
Results Assuming a Decrease in Noninterest-Bearing Demand Deposits
 
 
 
 
$1 Billion
 
$5 Billion
Up 200 bps
 
(1.49
)%
 
(1.70
)%
 
(2.53
)%
Up 100
 
(0.56
)
 
(0.69
)
 
(1.21
)
(1) The base scenario is equal to the annualized hypothetical percentage change in net interest income at September 30, 2019 as presented in the preceding table.

The following table shows the effect that the indicated changes in interest rates would have on EVE. Key assumptions in the preparation of the table include prepayment speeds of mortgage-related and other assets, cash flows and maturities of derivative financial instruments, loan volumes and pricing and deposit sensitivity.
Table 18: EVE Simulation Analysis
Change in Interest Rates
 
EVE/Assets
 
Hypothetical Percentage Change in EVE
 
Sep 30, 2019
 
Sep 30, 2018
 
Sep 30, 2019
 
Sep 30, 2018
Up 100
 
11.1
%
 
12.3
%
 
3.2
 %
 
(2.6
)%
No Change
 
10.7

 
12.6

 
—

 
—

Down 25
 
10.5

 
N/A

 
(2.2
)
 
N/A

Down 100
 
9.3

 
12.3

 
(13.2
)
 
(2.6
)

Market Risk from Trading Activities
 
BB&T also manages market risk from trading activities which consists of acting as a financial intermediary to provide its customers access to derivatives, foreign exchange and securities markets. Trading market risk is managed through the use of statistical and non-statistical risk measures and limits. BB&T utilizes a historical VaR methodology to measure and aggregate risks across its covered trading BUs. This methodology uses two years of historical data to estimate economic outcomes for a one-day time horizon at a 99% confidence level. The average 99% one-day VaR and the maximum daily VaR for the three months ended September 30, 2019 and 2018, respectively, were each less than $1 million. Market risk disclosures under Basel II.5 are available in the Additional Disclosures section of the Investor Relations site on BBT.com.

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

BB&T monitors the ability to meet customer demand for funds under both normal and stressed market conditions. In considering its liquidity position, management evaluates BB&T's funding mix based on client core funding, client rate-sensitive funding and national markets funding. In addition, management also evaluates exposure to rate-sensitive funding sources that mature in one year or less. Management also measures liquidity needs against 30 days of stressed cash outflows for Branch Bank and BB&T. To ensure a strong liquidity position, management maintains a liquid asset buffer of cash on hand and highly liquid unpledged securities. BB&T follows the FRB's enhanced prudential standards for purposes of determining the liquid asset buffer. BB&T's policy is to use the greater of either 5% of total assets or a range of projected net cash outflows over a 30 day period. As of September 30, 2019 and December 31, 2018, BB&T's liquid asset buffer was 18.2% and 14.7%, respectively, of total assets.
 
BB&T is considered to be a "modified LCR" holding company. BB&T would be subject to full LCR requirements if its assets were to increase above $250 billion or if it were to be considered internationally active. As previously mentioned, in October 2019, the federal banking agencies adopted final rules for liquidity requirements that would amend the full LCR such that BHC's with assets between $250 billion and $700 billion, and less than $75 billion in certain other risk related exposures, would be subject to a reduced LCR. See additional disclosures in the "Regulatory Considerations" section.


56 BB&T Corporation


BB&T produces LCR calculations to effectively manage the position of high-quality liquid assets and the balance sheet deposit mix to optimize BB&T's liquidity position. BB&T's preliminary modified average LCR was approximately 139% for the three months ended September 30, 2019, compared to the regulatory minimum for such entities of 100%, which puts BB&T in full compliance with the rule. The LCR can experience volatility due to issues like maturing debt rolling into the 30 day measurement period, or client inflows and outflows. The daily change in BB&T's modified LCR averaged less than 2% for the three months ended September 30, 2019 with a maximum daily change of 17% as the Consolidated Balance Sheet is in process of being repositioned in anticipation of the merger closing.

BB&T routinely evaluates the impact of becoming subject to the full LCR requirement. This includes an evaluation of the changes to the balance sheet and investment strategy that would be necessary to comply with the requirement. Management does not currently expect the required changes to have a material impact on BB&T's financial condition or results of operations.

Parent Company
 
The purpose of the Parent Company is to serve as the primary source of capital for the operating subsidiaries. The Parent Company's assets primarily consist of cash on deposit with Branch Bank, equity investments in subsidiaries, advances to subsidiaries, accounts receivable from subsidiaries, and other miscellaneous assets. The principal obligations of the Parent Company are payments on long-term debt. The main sources of funds for the Parent Company are dividends and management fees from subsidiary, repayments of advances to subsidiaries, and proceeds from the issuance of equity and long-term debt. The primary uses of funds by the Parent Company are for investments in subsidiaries, advances to subsidiaries, dividend payments to common and preferred shareholders, retirement of common stock and payments on long-term debt.
 
The primary source of funds used for Parent Company cash requirements was dividends received from subsidiaries. See Note 15. Parent Company Financial Information of the Annual Report on Form 10-K for the year ended December 31, 2018 for additional information regarding dividends from subsidiaries and debt transactions.

Liquidity at the Parent Company is more susceptible to market disruptions. BB&T prudently manages cash levels at the Parent Company to cover a minimum of one year of projected cash outflows which includes unfunded external commitments, debt service, common and preferred dividends and scheduled debt maturities without the benefit of any new cash infusions. Generally, BB&T maintains a significant buffer above the projected one year of cash outflows. In determining the buffer, BB&T considers cash requirements for common and preferred dividends, unfunded commitments to affiliates, being a source of strength to its banking subsidiary and being able to withstand sustained market disruptions that could limit access to the capital markets. At September 30, 2019 and December 31, 2018, the Parent Company had 32 months and 28 months, respectively, of cash on hand to satisfy projected contractual cash outflows, and 28 months and 19 months, respectively, taking into account common stock dividends.

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

Branch Bank has several major sources of funding to meet its liquidity requirements, including access to capital markets through issuance of senior or subordinated bank notes and institutional CDs, access to the FHLB system, dealer repurchase agreements and repurchase agreements with commercial clients, access to the overnight and term Federal funds markets, use of a Cayman branch facility, access to retail brokered CDs and a borrower in custody program with the FRB for the discount window. At September 30, 2019, Branch Bank has approximately $89.1 billion of secured borrowing capacity, which represents approximately 4.0 times the amount of one year wholesale funding maturities.

Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements
 
Refer to BB&T's Annual Report on Form 10-K for the year ended December 31, 2018 for discussion with respect to BB&T's quantitative and qualitative disclosures about its fixed and determinable contractual obligations. Additional disclosures about BB&T's contractual obligations, commitments and derivative financial instruments are included in Note 14. Commitments and Contingencies, Note 15. Fair Value Disclosures and Note 16. Derivative Financial Instruments.


BB&T Corporation 57


Capital
 
The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. BB&T's principal goals related to the maintenance of capital are to provide adequate capital to support BB&T's risk profile consistent with the Board-approved risk appetite, provide financial flexibility to support future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, achieve optimal credit ratings for BB&T and its subsidiaries and provide a competitive return to shareholders. Risk-based capital ratios, which include CET1 capital, Tier 1 capital and Total capital are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.

BB&T regularly performs stress testing on its capital levels and is required to periodically submit the company's capital plans to the banking regulators. On February 5, 2019, the FRB notified banks with less than $250 billion in assets that they will not need to participate in the 2019 supervisory stress test.
 
Management regularly monitors the capital position of BB&T on both a consolidated and bank-level basis. In this regard, management's overriding policy is to maintain capital at levels that are in excess of internal capital targets, which are above the regulatory "well capitalized" levels. Management has implemented stressed capital ratio minimum targets to evaluate whether capital ratios calculated with planned capital actions are likely to remain above minimums specified by the FRB for the annual CCAR. Breaches of stressed minimum targets prompt a review of the planned capital actions included in BB&T's capital plan. 
Table 19: Capital Requirements Under Basel III
 
Minimum Capital
 
Well-Capitalized
 
Minimum Capital Plus Capital Conservation Buffer
 
BB&T Targets
 
 
 
 
Operating (1)
 
Stressed
CET1 capital to risk-weighted assets
4.5
%
 
6.5
%
 
7.0
%
 
8.5
%
 
6.0
%
Tier 1 capital to risk-weighted assets
6.0

 
8.0

 
8.5

 
10.0

 
7.5

Total capital to risk-weighted assets
8.0

 
10.0

 
10.5

 
12.0

 
9.5

Leverage ratio
4.0

 
5.0

 
N/A
 
8.0

 
5.5

(1)
BB&T's goal is to maintain capital levels above all regulatory minimums.

While nonrecurring events or management decisions may result in the Company temporarily falling below its operating minimum guidelines for one or more of these ratios, it is management's intent to return to these targeted operating minimums within a reasonable period of time through capital planning. Such temporary decreases below the operating minimums shown above are not considered an infringement of BB&T's overall capital policy, provided a return above the minimums is forecasted to occur within a reasonable time period.

BB&T's capital ratios are presented in the following table:
Table 20: Capital Ratios - BB&T Corporation
(Dollars in millions, except per share data, shares in thousands)
 
Sep 30, 2019
 
Dec 31, 2018
Risk-based:
 
(preliminary)
 
 
CET1 capital to risk-weighted assets
 
10.6
%
 
10.2
%
Tier 1 capital to risk-weighted assets
 
12.2

 
11.8

Total capital to risk-weighted assets
 
14.7

 
13.8

Leverage ratio
 
10.3

 
9.9

Non-GAAP capital measure (1):
 
 

 
 
Tangible common equity per common share
 
$
24.66

 
$
21.89

Calculation of tangible common equity (1):
 
 
 
 
Total shareholders' equity
 
$
32,303

 
$
30,178

Less:
 
 
 
 
Preferred stock
 
3,057

 
3,053

Noncontrolling interests
 
69

 
56

Intangible assets, net of deferred taxes
 
10,281

 
10,360

Tangible common equity
 
$
18,896

 
$
16,709

Risk-weighted assets
 
$
187,623

 
$
181,260

Common shares outstanding at end of period
 
766,303

 
763,326

(1)
Tangible common equity and related measures are non-GAAP measures that exclude the impact of intangible assets, net of deferred taxes, and their related amortization. These measures are useful for evaluating the performance of a business consistently, whether acquired or developed internally. BB&T's management uses these measures to assess the quality of capital and returns relative to balance sheet risk and believes investors may find them useful in their analysis of the Corporation. These capital measures are not necessarily comparable to similar capital measures that may be presented by other companies.

58 BB&T Corporation



Capital levels remained strong at September 30, 2019. BB&T declared common dividends of $0.450 per share during the third quarter of 2019, which resulted in dividend and total payout ratios of 46.9%. The Board of Directors approved an increase in the quarterly dividend of 11.1% at their July meeting. As previously communicated, BB&T has suspended its share repurchases under the 2018 Repurchase Plan due to the merger-of-equals.

Critical Accounting Policies
 
The accounting and reporting policies of BB&T are in accordance with GAAP and conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. BB&T's financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Different assumptions in the application of these policies could result in material changes in the consolidated financial position and/or consolidated results of operations and related disclosures. The more critical policies include accounting for the ACL, determining fair value of financial instruments, intangible assets, and costs and benefit obligations associated with pension and postretirement benefit plans. Understanding BB&T's accounting policies is fundamental to understanding the consolidated financial position and consolidated results of operations. The critical accounting policies are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in BB&T's Annual Report on Form 10-K for the year ended December 31, 2018. Significant accounting policies and changes in accounting principles and effects of new accounting pronouncements are discussed in Note 1. Basis of Presentation in Form 10-K for the year ended December 31, 2018. Additional disclosures regarding the effects of new accounting pronouncements are included in the Note 1. Basis of Presentation included herein. There have been no other changes to the significant accounting policies during 2019.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this report, the management of the Company, under the supervision and with the participation of the Company's CEO and CFO, carried out an evaluation of the effectiveness of the Company's disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act. Based on that evaluation, the CEO and CFO concluded that the Company's disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS

Refer to the Legal Proceeding section in Note 14. Commitments and Contingencies, which is incorporated by reference into this item.

ITEM 1A. RISK FACTORS
 
There have been no material changes to the risk factors disclosed in BB&T's Annual Report on Form 10-K for the year ended December 31, 2018. Additional risks and uncertainties not currently known to BB&T or that management has deemed to be immaterial also may materially adversely affect BB&T's business, financial condition, and/or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.


BB&T Corporation 59


ITEM 6. EXHIBITS
Exhibit No.
 
Description
 
Location
3(i)
 
Articles of Incorporation of the Registrant, as amended and restated April 30, 2014.
 
Incorporated herein by reference to Exhibit 3(i) of the Current Report on Form 8-K, filed May 2, 2014.
3(ii)
 
Articles of Amendment of the Registrant, dated as of March 4, 2016
 
Incorporated herein by reference to Exhibit 4.1 of the Current Report on Form 8-K, filed March 9, 2016.
3(iii)
 
Articles of Amendment of the Company with respect to 4.800% Series N Fixed Rate Reset Non-Cumulative Perpetual Preferred Stock filed July 24, 2019.
 
Incorporated herein by reference to Exhibit 4.1 of the Current Report on Form 8-K, filed July 29, 2019.
4.1
 
Deposit Agreement, dated as of July 29, 2019, between the Company and Computershare Inc. and Computershare Trust Company, N.A., jointly as depositary.
 
Incorporated herein by reference to Exhibit 4.2 of the Current Report on Form 8-K, filed July 29, 2019.
4.2
 
Form of Depositary Receipt.
 
Incorporated herein by reference to Exhibit 4.2 of the Current Report on Form 8-K, filed July 29, 2019.
11
 
Statement re computation of earnings per share.
 
Filed herewith as Computation of EPS note to the consolidated financial statements.
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Filed herewith.
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Filed herewith.
32
 
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Filed herewith.
101.INS
 
XBRL Instance Document – the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
 
Filed herewith.
101.SCH
 
XBRL Taxonomy Extension Schema.
 
Filed herewith.
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase.
 
Filed herewith.
101.LAB
 
XBRL Taxonomy Extension Label Linkbase.
 
Filed herewith.
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase.
 
Filed herewith.
101.DEF
 
XBRL Taxonomy Definition Linkbase.
 
Filed herewith.
104
 
Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits101).
 
Filed herewith.


60 BB&T Corporation


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
BB&T CORPORATION
(Registrant)
 
 
 
 
 
Date:
October 25, 2019
 
By:
/s/ Daryl N. Bible
 
 
 
 
Daryl N. Bible
 
 
 
 
Senior Executive Vice President and Chief Financial Officer
 
 
 
 
(Principal Financial Officer)
 
 
 
 
 
Date:
October 25, 2019
 
By:
/s/ Cynthia B. Powell
 
 
 
 
Cynthia B. Powell
 
 
 
 
Executive Vice President and Corporate Controller
 
 
 
 
(Principal Accounting Officer)

BB&T Corporation 61

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