Significant accomplishments in 2013
The Company's more significant accomplishments during 2013 were:
· Record income before taxes of
· Continued improvement in credit quality:
o NPAs, excluding covered assets, declined
their lowest level since 2007.
o Net charge-offs as a percentage of average loans and leases were 0.67%,
compared to 1.14% and 1.57% for 2012 and 2011, respectively.
o ALLL was 219% of net charge-offs at
December 31, 2012and 2011, respectively.
· Growth in noninterest income was driven by record revenues in the insurance,
investment banking and brokerage, bankcard fees and merchant discounts, and
trust and investment advisory LOBs.
· Continued improvement in deposit mix and average cost:
o Average noninterest-bearing deposits increased 17.3% during 2013 and
represented 26.4% of total average deposits for 2013 compared to 22.7% in 2012.
o The average cost of interest-bearing deposits for 2013 was 0.32%, a decline of
11 basis points compared to the prior year. The average cost was 0.28% for the
fourth quarter of 2013.
· Strong growth in all regulatory capital ratios throughout 2013:
o Tier 1 risk-based capital increased to 11.8% at year-end 2013, compared to
10.5% at year-end 2012.
o Total capital was 14.3% at year-end 2013, compared to 13.4% at year-end 2012.
o Leverage capital was 9.3% at year-end 2013, compared to 8.2% at year-end 2012.
Challenges BB&T's business has become more dynamic and complex in recent years. Consequently, management has annually evaluated and, as necessary, adjusted the Company's business strategy in the context of the current operating environment. During this process, management considers the current financial condition and performance of the Company and its expectations for future economic activity from both a national and local market perspective. The achievement of BB&T's key strategic objectives and established long-term financial goals is subject to many uncertainties and challenges. In the opinion of management, the challenges that are most relevant and likely to have a near term impact on performance
are presented below:
· Global economic uncertainty - including the impact of U.S. fiscal debt, budget
and tax negotiations
· Intense competition within the financial services industry given the challenge
in growing assets during a period of sustained low interest rates
· Cost and risk associated with the regulatory reform and initiatives and IT
projects 34 Table of Contents
Overview of Significant Events and Financial Results
BB&T generated strong operating results for 2013, despite the challenges associated with the continued low interest rate environment, increased costs associated with certain regulatory initiatives and intense competition for loans to qualified borrowers. From a NIM perspective, the negative impact associated with lower yields on new loans and securities was partially mitigated by a 15.9% decrease in funding costs, primarily driven by a decline in the cost of interest-bearing deposits to 0.32% compared to 0.43% in the prior year. The provision for credit losses declined 44.0% compared to the prior year, reflecting continued improvement in credit quality. Noninterest income increased compared to the prior year, based on record insurance income, investment banking and brokerage fees and commissions, bankcard fees and merchant discounts and trust and investment advisory revenues, while noninterest expense was essentially flat compared to the prior year, despite significant costs associated with systems, process-related enhancements and regulatory costs. Consolidated net income available to common shareholders for 2013 totaled
$1.6 billion, a decrease of $354 million, or 18.5%, compared to $1.9 billionearned during 2012. On a diluted per common share basis, earnings for 2013 were $2.19, compared to $2.70for 2012. BB&T's results of operations for 2013 produced a return on average assets of 0.95% and a return on average common shareholders' equity of 8.06% compared to prior year ratios of 1.14% and 10.35%, respectively. During 2013, BB&T recognized $516 millionin adjustments to the provision for income taxes. On September 20, 2013, the U.S. Court of Federal Claimsdenied BB&T's refund claim related to the IRS'sdisallowance of tax deductions and foreign tax credits taken in connection with a financing transaction entered into by BB&T in 2002. BB&T has appealed this ruling. Excluding the impact of these adjustments, diluted EPS was $2.91and the adjusted results of operations for 2013 produced an annualized return on average assets of 1.24% and an annualized return on average common shareholders' equity of 10.55%. See non-GAAP information on page 83. BB&T's revenues for 2013 were $9.7 billionon a FTE basis, a decrease of 1.3% compared to 2012. Net interest income on a FTE basis was $244 millionlower than the prior year, which reflects a $414 milliondecrease in interest income that was partially offset by a decrease in funding costs totaling $170 million. Noninterest income increased 3.1% compared to 2012, which reflects solid growth in insurance income, trust and investment advisory revenues and bankcard fees and merchant discounts totaling 11.6%, 8.7% and 8.5%, respectively. These increases were partially offset by a 32.7% decrease in mortgage banking income. Credit costs declined significantly during 2013 as NPAs, excluding covered assets, declined $483 million, or 31.4%, compared to 2012. This decline included a $445 milliondecrease in NPLs and a $38 milliondecrease in foreclosed real estate and other property. Net charge-offs for 2013, excluding covered, were $773 million, a decrease of $487 million, or 38.7%, compared to the prior year. BB&T's provision for credit losses, excluding covered, totaled $587 millionin 2013, compared to $1.0 billionin the prior year. The ratio of the ALLL to net charge-offs excluding covered was 2.09x for 2013, compared to 1.50x in 2012. Foreclosed property expenses declined $211 million, or 79.3%, during 2013, reflecting fewer losses and write-downs related to foreclosed property. BB&T's total assets at December 31, 2013were $183.0 billion, a decrease of $1.5 billioncompared to December 31, 2012. This decline includes a $1.2 billiondecrease in total loans and leases, a $900 milliondecrease in cash and cash equivalents and a $1.0 billiondecrease in other assets. These decreases were partially offset by a $1.5 billionincrease in the securities portfolio. The decrease in the total loan and lease portfolio was primarily driven by a $2.5 billiondecrease in LHFS and a $1.3 billiondecrease in the covered loan portfolio, partially offset by a $2.6 billionincrease in loans and leases held for investment. The increase in the total securities portfolio is primarily the result of increased securities purchases during the fourth quarter of 2013, which occurred in response to a decrease in loan originations. The decrease in other assets primarily relates to the previously described income tax adjustments. Total deposits at December 31, 2013were $127.5 billion, a decrease of $5.6 billion, or 4.2%, from December 31, 2012. The decrease in deposits reflects a decrease in certificates and other time deposits and interest checking totaling $6.7 billionand $2.2 billion, respectively. These decreases were partially offset by an increase in noninterest-bearing deposits totaling $2.5 billion. These changes resulted in a substantial improvement to deposit mix, with noninterest-bearing accounts representing 27.4% of total deposits at December 31, 2013, compared to 24.4% at December 31, 2012. The cost of interest-bearing deposits for 2013 declined 11 basis points compared to the prior year. Total shareholders' equity increased $1.6 billion, or 7.5%, compared to December 31, 2012. This increase was primarily driven by net income in excess of dividends totaling $915 millionand proceeds from the issuance of Tier 1 qualifying Series G Non-Cumulative Preferred Stock totaling $487 million. BB&T's Tier 1 risk-based capital and total risk-based capital ratios at December 31, 2013increased to 11.8% and 14.3%, respectively, compared to 10.5% and 13.4% at December 31, 2012, respectively. BB&T's risk-based capital ratios remain well above regulatory standards for well-capitalized banks. 35 Table of Contents Reclassifications
In certain circumstances, reclassifications have been made to prior period information to conform to the 2013 presentation. Such reclassifications had no effect on previously reported shareholders' equity or net income.
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. The financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Different assumptions in the application of these policies could result in material changes in the consolidated financial position and/or consolidated results of operations and related disclosures. The more critical accounting and reporting policies include those related to the ACL, determining fair value of financial instruments, intangible assets and other purchase accounting related adjustments associated with mergers and acquisitions, costs and benefit obligations associated with BB&T's pension and postretirement benefit plans and income taxes. Understanding BB&T's accounting policies is fundamental to understanding the consolidated financial position and consolidated results of operations. Accordingly, BB&T's significant accounting policies and changes in accounting principles and effects of new accounting pronouncements are discussed in detail in Note 1 "Summary of Significant Accounting Policies" in the "Notes to Consolidated Financial Statements."
The following is a summary of BB&T's critical accounting policies that are highly dependent on estimates, assumptions and judgments. These critical accounting policies are reviewed with the Audit Committee of BB&T's Board of Directors on a periodic basis.
ACL It is the policy of BB&T to maintain an ALLL and a RUFC that represent management's best estimate of probable credit losses inherent in the portfolio at the balance sheet date. Estimates for loan and lease losses are determined by analyzing historical loan and lease losses, historical loan and lease migration to charge-off experience, current trends in delinquencies and charge-offs, expected cash flows on purchased loans, current assessment of problem loans and leases, the results of regulatory examinations and changes in the size, composition and risk assessment of the loan and lease portfolio. As part of this process, BB&T develops a series of loss estimate factors, which are modeled projections of the frequency, timing and severity of losses. These loss estimate factors are based on historical loss experience, economic and political environmental considerations and any other data that management believes will provide evidence about the expected collectability of outstanding loan and lease amounts. The following table summarizes the loss estimate factors used to determine the ALLL. Loss Estimate Factor Description Loss Frequency Indicates the likelihood of a borrower defaulting on a loan Loss Severity Indicates the amount of estimated loss at the time of default
For collectively evaluated loans, the ALLL is determined by multiplying the loan exposure by the loss frequency and loss severity factors. For individually evaluated loans, the ALLL is determined through review of data specific to the borrower. For TDRs, default expectations and estimated slower prepayment speeds that are specific to each of the restructured loan populations are incorporated in the determination of the ALLL. Also included in management's estimates for loan and lease losses are considerations with respect to the impact of current economic events, the outcomes of which are uncertain. These events may include, but are not limited to, fluctuations in overall interest rates, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting specific geographical areas and industries in which BB&T conducts business. The methodology used to determine an estimate for the RUFC is inherently similar to the methodology used in calculating the ALLL adjusted for factors specific to binding commitments, including the probability of funding and exposure at the time of funding. A detailed discussion of the methodology used in determining the ALLL and the RUFC is included in Note 1 "Summary of Significant Accounting Policies" in the "Notes to Consolidated Financial Statements."
Fair Value of Financial Instruments
The vast majority of assets and liabilities carried at fair value are based on either quoted market prices or market prices for similar instruments. See Note 17 "Fair Value Disclosures" in the "Notes to Consolidated Financial Statements" herein for additional disclosures regarding the fair value of financial instruments. 36 Table of Contents Securities BB&T generally utilizes a third-party pricing service in determining the fair value of its AFS and trading securities. 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. Management performs various procedures to evaluate the accuracy of the fair values provided by the third-party service provider. These procedures, which are performed independent of the responsible LOB, include comparison of pricing information received from the third party pricing service to other third party pricing sources, review of additional information provided by the third party pricing service and other third party sources for selected securities and back-testing to compare the price realized on any security sales to the daily pricing information received from the third party pricing service. The IPV committee, which provides oversight to BB&T's enterprise-wide IPV function, is responsible for oversight of the comparison of pricing information received from the third party pricing service to other third party pricing sources, approving tolerance limits determined by IPV for price comparison exceptions, reviewing significant changes to pricing and valuation policies and reviewing and approving the pricing decisions made on any illiquid and hard-to-price securities. When market observable data is not available, which generally occurs due to the lack of liquidity for certain securities, the valuation of the security is subjective and may involve substantial judgment by management. As of
December 31, 2013, BB&T had approximately $861 millionof AFS securities valued using unobservable inputs, the majority of which were non-agency MBS securities that are covered by a loss sharing agreement with
FDIC. BB&T periodically reviews AFS securities with an unrealized loss. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. The purpose of the review is to consider the length of time and the extent to which the market value of a security has been below its amortized cost. The primary factors BB&T considers in determining whether an impairment is other-than-temporary are long-term expectations and recent experience regarding principal and interest payments and BB&T's intent to sell and whether it is more likely than not that the Company would be required to sell those securities before the anticipated recovery of the amortized cost
BB&T has a significant mortgage loan servicing portfolio and related MSRs. BB&T has two classes of MSRs for which it separately manages the economic risk: residential and commercial. Residential MSRs are primarily carried at fair value with changes in fair value recorded as a component of mortgage banking income. BB&T uses various derivative instruments to mitigate the income statement effect of changes in fair value due to changes in valuation inputs and assumptions of its residential MSRs. MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs do occur, the precise terms and conditions typically are not readily available. Accordingly, BB&T estimates the fair value of residential MSRs using an OAS valuation model to project MSR cash flows over multiple interest rate scenarios, which are then discounted at risk-adjusted rates. The OAS model considers portfolio characteristics, contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. BB&T reassesses and periodically adjusts the underlying inputs and assumptions in the OAS model to reflect market conditions and assumptions that a market participant would consider in valuing the MSR asset. Fair value estimates and assumptions are compared to industry surveys, recent market activity, actual portfolio experience and, when available, observable market data. Due to the nature of the valuation inputs, MSRs are classified within Level 3 of the valuation hierarchy. The value of MSRs is significantly affected by mortgage interest rates available in the marketplace, which influence mortgage loan prepayment speeds. In general, during periods of declining interest rates, the value of MSRs declines due to increasing prepayments attributable to increased mortgage-refinance activity. Conversely, during periods of rising interest rates, the value of MSRs generally increases due to reduced refinance activity. Commercial MSRs are carried at the lower of cost or market and amortized over the estimated period that servicing income is expected to be received based on projections of the amount and timing of estimated future cash flows. The amount and timing of servicing asset amortization is based on actual results and updated projections. Refer to Note 6 "Loan Servicing" in the "Notes to Consolidated Financial Statements" for quantitative disclosures reflecting the effect that changes in management's assumptions would have on the fair value of MSRs. 37 Table of Contents LHFS BB&T originates certain mortgage loans for sale to investors that are carried at fair value. The fair value is primarily based on quoted market prices for securities backed by similar types of loans. Changes in the fair value are recorded as a component of mortgage banking income, while the related origination costs are recognized in noninterest expense when incurred. 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 loan held for sale. BB&T uses various derivative instruments to mitigate the economic effect of changes in fair value of the underlying loans.
Derivative Assets and Liabilities
BB&T uses derivatives to manage various financial risks. The fair values of derivative financial instruments are determined based on quoted market prices and internal pricing models that are primarily sensitive to market observable data. BB&T mitigates the credit risk by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. In addition, certain counterparties are required to provide collateral to BB&T when their unsecured loss positions exceed certain negotiated limits. The fair value of interest rate lock commitments, which are related to mortgage loan commitments, is based on quoted market prices adjusted for commitments that BB&T does not expect to fund and includes the value attributable to the net servicing fee.
Private Equity and Similar Investments
BB&T has private equity and similar investments that are carried at fair value. Changes in the fair value of these investments are recorded in other noninterest income each period. In many cases there are no observable market values for these investments and 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. As of
December 31, 2013, BB&T had $291 millionof these investments, which represented less than 1% of total assets. Intangible Assets BB&T's mergers and acquisitions are accounted for using the acquisition method of accounting, which requires that acquired assets and liabilities are recorded at their fair values. This often involves estimates based on third party valuations or internal valuations based on discounted cash flow analyses or other valuation techniques, all of which are inherently subjective. The amortization of identified intangible assets is based upon the estimated economic benefits to be received, which is also subjective. Acquisitions typically result in goodwill, which is subject to ongoing periodic impairment tests based on the fair values of the reporting units to which the acquired goodwill relates. Refer to Note 1 "Summary of Significant Accounting Policies" in the "Notes to Consolidated Financial Statements" for a description of the impairment testing process. Management considers the sensitivity of the significant assumptions in its impairment analysis including consideration of a 10% change in estimated future cash flows or the discount rate for each reporting unit.
Pension and Postretirement Benefit Obligations
BB&T offers various pension plans and postretirement benefit plans to employees. Calculation of the obligations and related expenses under these plans requires the use of actuarial valuation methods and assumptions. Actuarial assumptions used in the determination of future values of plan assets and liabilities are subject to management judgment and may differ significantly if different assumptions are used. The discount rate assumption used to measure the postretirement benefit obligations is set by reference to a high-quality (AA-rated or higher) corporate bond yield curve and the individual characteristics of the plans such as projected cash flow patterns and payment durations. Management evaluated the sensitivity changes that the expected return on plan assets and the discount rate would have on pension expense for 2014. A decrease of 25 basis points in the discount rate would result in additional pension expense of approximately
$17 millionfor 2014, while a decrease of 100 basis points in the expected return on plan assets would result in an increase of approximately $37 millionin pension expense for 2014. Refer to Note 13 "Benefit Plans" in the "Notes to Consolidated Financial Statements" for disclosures related to BB&T's benefit plans. 38 Table of Contents Income Taxes
The calculation of BB&T's income tax provision is complex and requires the use of estimates and judgments. As part of the Company's analysis and implementation of business strategies, consideration is given to the tax laws and regulations that apply to the specific facts and circumstances for any tax position under evaluation. For tax positions that are uncertain in nature, management determines whether the tax position is more likely than not to be sustained upon examination. For tax positions that meet this threshold, management then estimates the amount of the tax benefit to recognize in the financial statements. Management closely monitors tax developments in order to evaluate the effect they may have on the Company's overall tax position and the estimates and judgments used in determining the income tax provision and records adjustments as necessary.
Analysis of Results of Operations
Table 7 Profitability Measures Years Ended December 31, 2013 Adjusted 2013 (1) 2012 2011 EPS: Basic
$ 2.22 $ 2.96 $ 2.74 $ 1.85Diluted 2.19 2.91 2.70 1.83 Rate of return on: Average assets 0.95 % 1.24 % 1.14 % 0.82 % Average common shareholders' equity 8.06 10.55 10.35 7.49 NIM (FTE) 3.68 N/A 3.91 4.06
(1) Calculated excluding the impact of the adjustments for uncertain income tax positions of
2013. For additional information, see Non-GAAP Information on page 83. Net Interest Income and NIM Net interest income is BB&T's primary source of revenue. Net interest income is influenced by a number of factors, including the volume, mix and maturity of interest-earning assets and interest-bearing liabilities and the interest rates earned and paid thereon. The difference between rates earned on interest-earning assets and the cost of funds (with a FTE adjustment made to tax-exempt items to provide comparability with taxable items) is measured by the NIM. 2013 compared to 2012 For 2013, net interest income on an FTE-adjusted basis totaled
$5.8 billion, a decrease of $244 millionor 4.1%, compared to the prior year. The decrease in net interest income reflects lower yields on new loans and securities and runoff in the covered loan portfolio, partially offset by lower funding costs, which declined $170 millioncompared to 2012. The improvement in funding costs reflects an 11 basis point reduction in the average cost of interest-bearing deposits and a lower average long-term debt balance. The FTE-adjusted NIM is the primary measure used in evaluating the gross profit margin from the portfolios of earning assets. The FTE-adjusted NIM was 3.68% in 2013 compared with 3.91% in 2012. The decline in the NIM primarily reflects lower yields on new loans and securities and covered loan runoff, partially offset by the lower funding costs described above. The average annualized FTE yield for total loans and leases was 4.85% for 2013, compared to 5.35% for the prior year. The decrease was primarily due to lower yields on new loan originations and the runoff of higher yielding covered loans. The FTE yield on the total securities portfolio was 2.51% for the year ended December 31, 2013, compared to 2.64% for the prior year. This decrease reflects runoff in the covered security portfolio and security duration adjustments. Management expects NIM to decline approximately five basis points in the first quarter of 2014 as a result of an increase in the relative size of the securities portfolio and lower earning asset yields, partially offset by lower funding costs.
The average rate paid on interest-bearing deposits dropped to 0.32% during 2013, from 0.43% in 2012. This improvement included a 16 basis point reduction in the cost of certificates and other time deposits and a five basis point reduction in the cost of money market and savings accounts. 39 Table of Contents
The rates paid on average short-term borrowings declined from 0.26% in 2012 to 0.16% during 2013. At
December 31, 2013, the targeted Federal funds rate was a range of zero percent to 0.25%. The average rate on long-term debt during 2013 was 3.03%, an increase of one basis point compared to the prior year. This increase reflects the redemption of all higher cost junior subordinated debt to unconsolidated trusts and the related benefit associated with accelerated amortization of derivatives that were unwound in a gain position during 2012, partially offset by lower effective rates on new debt issued during 2013. 2012 compared to 2011 For 2012, net interest income on an FTE-adjusted basis totaled $6.0 billion, compared with $5.7 billionin 2011, an increase of 6.2%. The increase in net interest income was driven by lower funding costs, which declined $319 millioncompared to 2011. The improvement in funding costs reflects a 25 basis point reduction in the average cost of interest-bearing deposits for 2012 compared to the prior year and the 2012 redemption of all junior subordinated debt to unconsolidated trusts. Net interest income also benefited from the growth in average earning assets, which more than offset the negative impact of lower yields on new loans. FTE-adjusted NIM was 3.91% in 2012 compared with 4.06% in 2011. The decline in the NIM primarily reflects the runoff of higher yielding covered loans and lower yields on new loans, partially offset by the lower funding costs described above. The average annualized FTE yield for 2012 for the total loan portfolio was 5.35% compared to 5.87% for the prior year. The decrease was primarily due to the runoff of higher yielding covered loans and a higher volume of new loans originated at lower rates. The FTE yield on the total securities portfolio was 2.64% for the year ended December 31, 2012, compared to 2.67% for the prior year. The decrease reflects a higher volume of lower yielding RMBS securities issued by GSEs.
The average rate paid on interest-bearing deposits dropped to 0.43% during 2012 from 0.68% in 2011. This improvement was a result of lower rates on interest-bearing deposits, including a 56 basis point reduction in the cost of certificates and other time deposits and a 13 basis point reduction in the cost of money market and savings accounts. The rates paid on average short-term borrowings declined from 0.27% in 2011 to 0.26% during 2012. At
December 31, 2012, the targeted Federal funds rate was a range of zero percent to 0.25%. The average rate on long-term debt during 2012 was 3.02%, a decrease of 38 basis points compared to the prior year. This reduction was primarily due to the redemption of all higher cost junior subordinated debt to unconsolidated trusts during 2012 and the related benefit associated with accelerated amortization of derivatives that were unwound in a gain position.
Covered Assets and FDIC Loss Share Receivable/Payable
In connection with the Colonial acquisition,
Branch Bankentered into loss sharing agreements with the FDICthat outline the terms and conditions under which the FDICwill reimburse Branch Bankfor a portion of the losses incurred on certain loans, OREO, certain investment securities and other assets (collectively, "covered assets"). The FDIC'sobligation to reimburse Branch Bankfor losses with respect to covered assets began with the first dollar of loss incurred. The loss sharing agreement applicable to single family residential mortgage loans expires in 2019. The loss sharing agreement applicable to commercial loans and other covered assets expires in the third quarter of 2014; however, Branch Bankmust reimburse the FDICfor gains and recoveries, net of related expenses, through the third quarter of 2017. The commercial loss sharing agreement calls for Branch Bankto sell all remaining loans, foreclosed property and any related deficiency agreements/rights during the eighth year of the agreement. The following table presents the carrying amount of assets covered by each loss share agreement: Table 8 Covered Assets by Loss Share Agreement December 31, 2013 Commercial Single Family Total (dollars in millions) Loans and leases $ 1,263$ 772 $ 2,035AFS securities 1,393 - 1,393 Other assets 124 39 163 Total covered assets $ 2,780$ 811 $ 3,59140 Table of Contents The terms of the loss sharing agreement with respect to certain non-agency MBS provide that Branch Bankwill be reimbursed by the FDICfor 95% of any and all losses incurred through the third quarter of 2014. For other covered assets, the FDICwill reimburse Branch Bankfor (1) 80% of net losses incurred up to $5 billionand (2) 95% of net losses in excess of $5 billion. BB&T does not expect cumulative net losses to exceed $5 billionon the respective covered assets. Gains and recoveries on covered assets, net of related expenses, will offset losses, or be paid to the FDIC, at the applicable loss share percentage at the time of recovery. Following the conclusion of the 10 year loss share period in 2019, should actual aggregate losses, excluding securities, be less than an amount determined in accordance with these agreements, BB&T will pay the FDICa portion of the difference. As of December 31, 2013, BB&T projects that in 2019 Branch Bankwould owe the FDICapproximately $147 millionunder the aggregate loss calculation. As described below, this liability is expensed over time and BB&T has recognized total expense of approximately $104 millionthrough December 31, 2013. The fair value of the net reimbursement the Company expected to receive from the FDICunder these agreements was recorded as the FDICloss share receivable at the date of acquisition. The fair value of the FDICloss share receivable/payable was estimated using a discounted cash flow methodology. Acquired loans were aggregated into separate pools based upon common risk characteristics. Each pool is considered a unit of account and the cash flows expected to be collected, credit losses and other relevant information are developed for each pool. A summary of the accounting treatment related to changes in credit losses on each loan pool and the related FDICloss share
· If the estimated credit loss on a loan pool is increased:
o The reduction in the net present value of the loan pool is recognized
immediately as provision expense and an increase to the ALLL.
· If the estimated credit loss on a loan pool is reduced:
o If the loan pool has an allowance, the allowance is first reduced to
80% of this reduction decreases the
o If the loan pool does not have an allowance (or it is first reduced to
there remains additional expected cash flows), the excess of expected cash
flows is recognized as a yield adjustment over the remaining expected life of
o The decrease in expected reimbursement from the
prospectively using a level yield methodology over the remaining life of the
loss share agreements.
o The increase in the amount expected to be paid to the
aggregate loss calculation is recognized prospectively in proportion to
expected loan income over the remaining life of the loss share agreements.
The accounting treatment for covered securities is summarized below:
· Prior to the recognition of OTTI on a covered security:
o The purchase discount established at acquisition is accreted into income over
the expected life of the underlying securities using a level yield methodology.
o Changes to the expected life of the securities are recognized with a cumulative
adjustment to the accretion recognized.
· Subsequent to recognition of OTTI, which is determined using the same
methodology that is applied to non-covered securities, an increase in expected
cash flows is recognized as a yield adjustment over the remaining expected life
of the security based on an evaluation of the nature of the increase.
· The income statement effect of the above items is offset by the applicable loss
share percentage in
a liability of
$190 millionas of December 31, 2013. 41 Table of Contents
· Covered securities are classified as AFS and carried at fair market value. The
changes in unrealized gains/losses are offset by the applicable loss share
percentage in AOCI, which resulted in a liability of
$375 millionas of December 31, 2013.
· BB&T would only owe these amounts to the
securities prior to the third quarter of 2017. BB&T has no current intent to
dispose of the covered securities.
The following table provides the carrying amount and estimated fair value of the components of the
Table 9 FDIC Loss Share Receivable (Payable) December 31, 2013 2012 Carrying Carrying Amount Fair Value Amount Fair Value (Dollars in millions) Covered loans $ 843
$ 464 $ 1,106 $ 751Covered securities
(565) (521) (553) (502)
Aggregate loss calculation
(104) (131) (74) (100) Total $ 174
$ (188) $ 479 $ 149The decrease in the carrying amount attributable to covered loans was due to the receipt of cash from the FDICand negative accretion due to the credit loss improvement, partially reduced by the offset to the provision for covered loans and the FDIC'sshare of losses on foreclosed property. The change in the carrying amount attributable to covered securities was due to the offsets to the accretion of the discount and the amount of changes in unrealized gains of covered securities. The change in the carrying amount attributable to the aggregate loss calculation is primarily due to accretion of the expected payment, which is included in "Accretion due to credit loss improvement" below. The fair values were based upon a discounted cash flow methodology that was consistent with the acquisition date methodology. The fair value attributable to covered loans and the aggregate loss calculation changes over time due to the receipt of cash from the FDIC, updated credit loss assumptions and the passage of time. The fair value attributable to covered securities was based upon the timing and amount that would be payable to the FDICshould they settle at the current fair value at the conclusion of the loss share agreement. The following table provides information related to the income statement impact of covered loans and securities and the FDICloss sharing receivable/payable. The table excludes all amounts related to other assets acquired and liabilities assumed in the acquisition. Table 10 Revenue, Net of Provision, Impact from Covered Assets Years Ended December 31, 2013 2012 2011 (Dollars in millions)
Interest income-covered loans
$ 451 $ 765 $ 1,053Interest income-covered securities 137 172 168 Total interest income 588 937 1,221 Provision for covered loans (5) (13) (71) OTTI for covered securities - (4) - FDIC loss share income, net (293) (318) (289) Adjusted net revenue $ 290 $ 602 $ 861 FDICloss share income, net: Offset to provision for covered loans $ 4 $ 11 $ 57Accretion due to credit loss improvement (255) (271) (297) Offset to OTTI for covered securities - 3 - Accretion for securities (42) (61) (49) Total $ (293) $ (318) $ (289)42 Table of Contents 2013 compared to 2012 Interest income for 2013 on covered loans and securities acquired in the Colonial acquisition decreased $349 millioncompared to 2012, primarily due to lower average covered loan balances. The yield on covered loans for 2013 was 16.93% compared to 18.91% in 2012. At December 31, 2013, the accretable yield balance on covered loans was $538 million. Accretable yield represents the excess of expected future cash flows above the current net carrying amount of loans and will be recognized in income over the remaining life of the covered loans.
During 2013, BB&T increased the accretable yield balance on covered loans by
The provision for covered loans was
FDICloss share income, net, was $25 millionbetter than 2012, primarily due to securities duration adjustments that increased the expected lives of securities in 2013, compared to duration adjustments that shortened the lives in 2012.
2012 compared to 2011 Interest income for 2012 on covered loans and securities acquired in the Colonial acquisition decreased
$284 millioncompared to 2011, primarily due to lower average covered loan balances. The yield on covered loans for 2012 was 18.91% compared to 19.15% in 2011. At December 31, 2012, the accretable yield balance on covered loans was $881 million. Accretable yield represents the excess of expected future cash flows above the current net carrying amount of loans and will be recognized in income over the remaining life of the covered loans.
During 2012, BB&T reduced the accretable yield balance on covered loans by
$72 millionprimarily due to changes in the expected lives of the underlying loans. During 2011, BB&T reclassified $379 millionfrom the nonaccretable balance to accretable yield on covered loans. This reclassification was primarily the result of increased cash flow estimates resulting from improved loss expectations.
The provision for covered loans was
FTE Net Interest Income and Rate / Volume Analysis
The following table sets forth the major components of net interest income and the related yields and rates for 2013, 2012 and 2011, as well as the variances between the periods caused by changes in interest rates versus changes in volumes. Changes attributable to the mix of assets and liabilities have been allocated proportionally between the changes due to rate and the changes due to volume. 43 Table of Contents Table 11 FTE Net Interest Income and Rate / Volume Analysis (1) Years Ended December 31, 2013, 2012 and 2011 2013 vs. 2012 2012 vs. 2011 Average Balances Yield/Rate Income/Expense Increase Change due to Increase Change due to 2013 2012 2011 2013 2012 2011 2013 2012 2011 (Decrease) Rate Volume (Decrease) Rate Volume (Dollars in millions) Assets Total securities, at amortized cost: (2) U.S. Treasuries
$ 502 $ 272 $ 1120.42 % 0.22 % 0.25 % $ 2 $ 1$ - $ 1 $ - $ 1$ 1 $ - $ 1GSEs 5,016 1,329 176 2.04 1.92 2.33 103 25 4 78 2 76 21 (1) 22 MBS issued by GSE 27,598 30,848 25,305 2.00 2.02 1.86 552 624 472 (72) (6) (66) 152 43 109 States and political subdivisions 1,836 1,851 1,895 5.80 5.83 5.72 107 108 109 (1) (1) - (1) 2 (3) Non-agency MBS 283 346 528 5.69 5.76 6.72 16 20 35 (4) - (4) (15) (5) (10) Other 470 505 658 1.45 1.65 1.55 7 8 10 (1) - (1) (2) 1 (3) Covered 1,067 1,183 1,249 12.82 14.53 13.46 137 172 168 (35) (19) (16) 4 13 (9) Total securities 36,772 36,334 29,923 2.51 2.64 2.67 924 958 798 (34) (24) (10) 160 53 107 Other earning assets (3) 2,412 3,359 3,207 1.39 0.91 0.62 34 31 20 3 13 (10) 11 10 1 Loans and leases, net of unearned income: (4)(5)
Commercial and industrial 38,206 36,966 34,153 3.63 3.96 4.23 1,386 1,464 1,446 (78) (126) 48 18 (96) 114 CRE-other 11,418 10,779 11,139 3.69 3.81 3.81 421 411 425 10 (13) 23 (14) - (14) CRE-residential ADC 1,087 1,665 2,769 4.34 3.76 3.51 47 63 97 (16) 9 (25) (34) 7 (41) Direct retail lending 15,952 15,270 13,850 4.64 4.87 5.22 741 744 722 (3) (35) 32 22 (50) 72 Sales finance 8,658 7,680 7,202 3.18 3.97 4.88 275 305 352 (30) (66) 36 (47) (69) 22 Revolving credit 2,303 2,217 2,106 8.56 8.41 8.77 197 186 185 11 3 8 1 (8) 9 Residential mortgage 23,598 22,623 18,782 4.22 4.37 4.80 996 989 902 7 (35) 42 87 (86) 173 Other lending subsidiaries 10,468 9,525 8,280 10.20 11.04 11.51 1,068 1,051 953 17 (83) 100 98 (40) 138 Total loans and leases held for investment (excluding covered loans) 111,690 106,725 98,281 4.59 4.88 5.17 5,131 5,213 5,082 (82) (346) 264 131 (342) 473 Covered loans 2,667 4,045 5,498 16.93 18.91 19.15 451 765 1,053 (314) (74) (240) (288)
Total loans and leases held for investment 114,357 110,770 103,779 4.88 5.40 5.91 5,582 5,978 6,135 (396) (420) 24 (157) (355) 198 LHFS 3,170 2,963 2,183 3.59 3.42 3.75 114 101 82 13 5 8 19 (8) 27 Total loans and leases 117,527
113,733 105,962 4.85 5.35 5.87 5,696
6,079 6,217 (383) (415) 32 (138)
Total earning assets 156,711
153,426 139,092 4.25 4.61 5.06 6,654
7,068 7,035 (414) (426) 12 33
Nonearning assets 24,551
Liabilities and Shareholders' Equity Interest-bearing deposits: Interest-checking
$ 19,305 $ 19,904 $ 18,6140.08 0.12 0.16 15 25 30 (10) (9) (1) (5) (7) 2 Money market and savings 48,640 46,927 41,287 0.13 0.18 0.31 64 85 129 (21) (24) 3 (44)
Certificates and other time deposits 26,006 31,647 28,825 0.85 1.01 1.57 221 319 453 (98) (46) (52) (134)
Foreign office deposits - interest-bearing 672 214 647 0.08 0.11 (0.37) 1 - (2) 1 - 1 2 1 1 Total interest-bearing deposits 94,623 98,692 89,373 0.32 0.43 0.68 301 429 610 (128) (79) (49) (181)
(241) 60 Federal funds purchased, securities sold under repurchase agreements and
short-term borrowed funds 4,459 3,408 5,189 0.16 0.26 0.27 7 9 14 (2) (4) 2 (5) (1) (4) Long-term debt 19,301 20,651 22,257 3.03 3.02 3.40 584 624 757 (40) 2 (42) (133) (81) (52) Total interest-bearing liabilities 118,383 122,751 116,819 0.75 0.86 1.18 892 1,062 1,381 (170) (81) (89) (319) (323) 4 Noninterest-bearing deposits 33,932 28,925 22,945 Other liabilities 7,057 7,481 5,935 Shareholders' equity 21,890 19,477 17,267 Total liabilities and shareholders' equity
$ 181,262 $ 178,634 $ 162,966
Average interest rate spread
3.50 % 3.75 % 3.88 % NIM/ net interest income 3.68 % 3.91 % 4.06 %
$ 5,762 $ 6,006 $ 5,654 $ (244) $ (345) $ 101 $ 352 $ 23 $ 329Taxable-equivalent adjustment $ 146 $ 149 $ 147
(1) Yields are stated on a taxable equivalent basis assuming tax rates in effect for the periods presented. (2) Total securities include AFS and HTM securities. (3) Includes Federal funds sold, securities purchased under resale agreements or similar arrangements, interest-bearing deposits with banks, trading securities, FHLB stock and other earning assets. (4) Loan fees, which are not material for any of the periods shown, have been included for rate calculation purposes. (5) Nonaccrual loans have been included in the average balances. 44 Table of Contents Provision for Credit Losses 2013 compared to 2012
The provision for credit losses recorded by BB&T in 2013 was
$592 million, a decrease of $465 million, or 44.0%, compared to the prior year. The 2013 provision for credit losses included $5 millionrelated to covered loans, compared to $13 millionin 2012. The decrease in the provision for credit losses reflected continued improvement in credit trends and outlook, as net charge-offs in 2013 decreased 38.8% compared to the prior year. Improving credit conditions also resulted in an increase in the ratio of the ALLL to net charge-offs, which increased to 2.19x for 2013, compared to 1.56x for 2012. Net charge-offs were 0.67% of average loans and leases (and 0.67% excluding covered loans) for 2013, compared to 1.14% of average loans and leases (or 1.15% excluding covered loans) during 2012. Net charge-offs decreased in nearly all loan portfolios, including decreases in the CRE-residential ADC, CRE-other and direct retail lending portfolios of 83.2%, 70.8% and 41.5%, respectively. 2012 compared to 2011
The provision for credit losses recorded by BB&T in 2012 was
$1.1 billion, a decrease of $133 million, or 11.2%, compared to 2011. Included in the 2012 provision for credit losses was $13 millionrelated to covered loans, compared to $71 millionin 2011. The decrease in the provision for credit losses during 2012 compared to 2011 was primarily due to improving credit trends and outlook, as net charge-offs in 2012 decreased 22.0% compared to 2011. Improving credit conditions also resulted in an increase in the ratio of the ALLL to net charge-offs, which increased to 1.56x for 2012 compared to 1.36x for 2011. Net charge-offs were 1.14% of average loans and leases (or 1.15% excluding covered loans) for 2012 compared to 1.57% of average loans and leases (or 1.59% excluding covered loans) during 2011. Net charge-offs for 2011 included $87 millionrelated to the transfer and sale of residential mortgage loans in the second quarter. Excluding the charge-off related to this transfer, net charge-offs were 1.50% of average loans and leases for 2011. The largest decreases in the provision for credit losses for 2012 were in the residential mortgage and CRE-residential ADC portfolios. Noninterest Income Noninterest income is a significant contributor to BB&T's financial results. Management continues to focus 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.
The following table provides a breakdown of noninterest income:
Table 12 Noninterest Income % Change Years Ended December 31, 2013 2012 2013 2012 2011 vs. 2012 vs. 2011 (Dollars in millions) Insurance income
$ 1,517 $ 1,359 $ 1,04411.6 % 30.2 % Service charges on deposits 584 566 563 3.2 0.5 Mortgage banking income 565 840 436 (32.7) 92.7
Investment banking and brokerage fees and
commissions 383 365 333 4.9 9.6 Bankcard fees and merchant discounts 256 236 204 8.5 15.7 Trust and investment advisory revenues 200 184 173 8.7 6.4 Checkcard fees 199 185 271 7.6 (31.7) Income from bank-owned life insurance 113 116 122 (2.6) (4.9) FDIC loss share income, net (293)
(318) (289) (7.9) 10.0
Securities gains (losses), net 51 (12) 62 NM (119.4) Other income 362 299 194 21.1 54.1 Total noninterest income
$ 3,937 $ 3,820 $ 3,1133.1 22.7 45 Table of Contents 2013 compared to 2012 Noninterest income was $3.9 billionfor 2013, up 3.1% compared to 2012. This increase was driven by record income generated by BB&T's insurance, investment banking and brokerage, bankcard fees and merchant discounts, and trust and investment advisory LOBs, along with strong growth in checkcard fees and steady growth in service charges on deposits. This growth in noninterest income was negatively impacted by a decrease in mortgage banking income. Income from BB&T's insurance agency/brokerage operations was the largest source of noninterest income in 2013. Insurance income was up 11.6% compared to 2012, with approximately one-half of the growth attributable to the acquisition of Crump Insuranceon April 2, 2012, and the remainder primarily the result of an improving market for insurance premiums and a $13 millionexperience-based refund of reinsurance premiums that was received in the second quarter of 2013. Investment banking and brokerage fees and commissions increased $18 million, or 4.9%, compared to 2012. This increase was largely driven by higher investment commission income and increased investment banking activities. Bankcard fees and merchant discounts increased $20 million, or 8.5%, in 2013, based on higher retail and commercial bankcard transaction volumes and an increase in merchant discount income. Trust and investment advisory revenues increased $16 million, primarily the result of higher investment advisory revenues during the current year. Checkcard fees were $14 millionhigher than the prior year, an increase of 7.6%, reflecting increased transaction volume, a portion of which is attributable to the acquisition of BankAtlantic in the prior year. Service charges totaled $584 million, an increase of $18 million, or 3.2%, compared to 2012, reflecting growth in cash management products, an increase in other deposit fees and the impact of the BankAtlantic acquisition. Mortgage banking income totaled $565 millionin 2013, a decrease of $275 million, or 32.7%, compared to the prior year. The decrease in mortgage banking income includes a $247 milliondecrease in residential mortgage production revenues and a $61 milliondecrease in net MSR and related hedge valuation adjustments compared to the prior year. These decreases were partially offset by a $12 millionincrease in residential mortgage servicing revenues, which primarily reflects growth in the servicing portfolio, and a $28 milliondecrease in the amortization of MSRs that was primarily driven by slower prepayment speeds. The decrease in residential mortgage production revenues primarily resulted from lower gain on sale margins, which reflects increased competition and a higher proportion of loans originated through the correspondent network. The weighted average gain on sale margin for 2013 was 1.15%, a 49.2% decline compared to the prior year. Correspondent loan originations represented 65.1% of mortgage loan originations in 2013, compared to 60.5% of mortgage loan originations in 2012. FDICloss share income, net reflects accretion of the FDICloss share receivable due to credit loss improvement (including expense associated with the aggregate loss calculation) and accretion related to covered securities, partially reduced by the offset to the provision for covered loans. Covered loans have experienced better performance than originally anticipated, which has resulted in the recognition of additional interest income on a level yield basis over the expected life of the corresponding loans. A significant portion of this increase in interest income is offset by a reduction in noninterest income recorded in FDICloss share income. For 2013, noninterest income was reduced by $255 millionrelated to improvement in loan performance compared to a reduction of $271 millionin 2012. These decreases in income were partially offset by increases of $4 millionand $11 million, respectively, which reflected 80% of the provision for credit losses recorded on covered loans for 2013 and 2012. BB&T recognized $51 millionin net securities gains during 2013, compared to $12 millionof net securities losses in 2012. Other income increased $63 millionin 2013 compared to 2012, primarily due to a $31 milliongain on the sale of a consumer lending subsidiary in 2013, a $22 millionincrease in income from operating leases and a $21 millionincrease in income from assets related to certain post-employment benefits, which is offset in personnel expense. These increases were partially offset by a $10 milliondecrease in client derivative related activities. 2012 compared to 2011 Noninterest income was $3.8 billionfor 2012, up 22.7% compared to 2011. This increase was driven by growth in BB&T's insurance, mortgage banking and investment banking and brokerage LOBs. In addition, bankcard fees and merchant discounts and other income increased compared to the prior year. These increases were partially offset by lower checkcard fees, a decrease in income related to the FDICloss share receivable and a reduction in net securities income. Insurance income was up 30.2% compared to 2011, primarily due to the acquisition of Crump Insuranceon April 2, 2012, which added approximately $234 millionin revenues during 2012. The remainder of the increase in insurance income is attributable to the impact of other acquisitions that closed during the fourth quarter of 2011 and firming market conditions. 46 Table of Contents Mortgage banking income totaled $840 millionin 2012 compared to $436 millionin 2011. The increase in mortgage banking income was primarily due to an increase in residential mortgage production revenues totaling $378 million, which was driven by higher gains on residential mortgage production and sales. Included in mortgage banking income for 2012 is a negative valuation adjustment of $32 millionrelated to changes in assumptions for residential MSRs that are carried at fair value. Approximately $22 millionof the decline in the valuation of the residential MSRs was due to a revision in the servicing cost assumption based on an expectation of higher costs that continue to impact the industry. The remainder of the net decrease is primarily due to the impact of an increase in OAS assumption changes partially offset by prepayment speed changes, which are reflective of the current MSR market. This decrease was more than offset by gains of $128 millionfrom derivative financial instruments used to manage
the economic risk. Service charges on deposit accounts totaled
$566 millionin 2012, essentially flat compared to the prior year, reflecting the impact of pricing changes for routine services related to retail and commercial transaction deposit products, such as monthly maintenance fees and commercial transaction deposit products, implemented in 2012 and 2011 that were designed to offset a reduction in service charges that occurred in 2011 and 2010 as a result of a change in overdraft policies. Investment banking and brokerage fees and commissions increased $32 million, or 9.6%, compared to 2011. This increase was largely driven by a higher level of investment banking activities and higher brokerage fees and commissions. Checkcard fees decreased $86 million, or 31.7%, due to the Durbin Amendment to the Dodd-Frank Act, which was implemented on October 1, 2011and limited the rate banks could assess for debit card transactions. Bankcard fees and merchant discounts increased $32 millionin 2012, primarily the result of higher volumes for both retail and commercial bankcard activities. For 2012, noninterest income was reduced by $271 millionrelated to FDICloss share income, compared to a reduction of $297 millionin 2011. These decreases in income were partially offset by increases of $11 millionand $57 million, respectively, which reflected 80% of the provision for credit losses recorded on covered loans for 2012 and 2011. BB&T recognized $12 millionin net securities losses during 2012, compared to $62 millionof net securities gains in 2011. The net securities losses during 2012 included $9 millionof OTTI charges and $3 millionof net losses realized from securities sales. The net securities gains during 2011 included $174 millionof net gains realized from securities sales and $112 millionof OTTI charges. The OTTI charges recognized during 2011 were due to weaker actual and forecasted collateral performance for non-agency RMBS. Refer to the "Analysis of Financial Condition - Investment Activities" section for a detailed discussion of strategies executed during the years presented. Other income increased $105 millionin 2012 compared to 2011, primarily due to $149 millionof losses and write-downs recorded in 2011 related to the sale of commercial NPLs. This increase was partially offset by $42 millionof increased write-downs on affordable housing investments in 2012 due to revised estimates and processes used to value these investments. Noninterest Expense
The following table provides a breakdown of BB&T's noninterest expense:
Table 13 Noninterest Expense % Change Years Ended December 31, 2013 2012 2013 2012 2011 vs. 2012 vs. 2011 (Dollars in millions) Personnel expense
$ 3,293 $ 3,125 $ 2,7275.4 % 14.6 % Occupancy and equipment expense 692 650 616 6.5 5.5 Loan-related expense 255 283 227 (9.9) 24.7 Professional services 189 156 174 21.2 (10.3) Software expense 158 138 118 14.5 16.9 Regulatory charges 143 159 212 (10.1) (25.0) Amortization of intangibles 106
110 99 (3.6) 11.1
Foreclosed property expense 55
266 802 (79.3) (66.8)
Merger-related and restructuring charges, net 46
68 16 (32.4) NM
Other expense 900 873 811 3.1 7.6 Total noninterest expense
$ 5,837 $ 5,828 $ 5,8020.2 0.4 47 Table of Contents 2013 compared to 2012 Personnel expense is the largest component of noninterest expense and includes salaries, wages and incentives, as well as pension and other employee benefit costs. Personnel expense totaled $3.3 billion, an increase of $168 million, or 5.4%, compared to 2012. The increase in personnel expense includes an increase of $128 millionin salaries and wages, which reflects increases related to the acquisitions of Crump Insuranceand BankAtlantic during 2012 and the impact of normal salary increases and job class changes. Other personnel expenses increased approximately $40 million, which included an increase of $22 millionin post-employment benefits expense that is offset in other income. The remainder of the increase in other personnel expenses was driven by smaller increases in employment taxes and other fringe benefits.
Occupancy and equipment expense increased
Professional services expense totaled
$189 million, an increase of $33 millioncompared to the prior year. This increase was largely driven by costs associated with systems and project-related expenses, partially offset by a decrease in legal fees. Other expense increased $27 million, or 3.1%, compared to 2012, primarily the result of higher project-related expenses, increased depreciation expense related to assets used in the equipment finance leasing business and lower of cost or fair value adjustments on certain owned real estate. These increases were partially offset by a decrease in advertising and marketing expenses, lower insurance-related expenses and the loss on the sale of a leveraged lease that was recorded in the prior year. Software expense increased $20 millioncompared to the prior year, which primarily reflects higher maintenance and depreciation expense.
Foreclosed property expense includes the gain or loss on sale of foreclosed property, valuation adjustments resulting from updated appraisals and the ongoing expense of maintaining foreclosed properties. Foreclosed property expense decreased
$211 million, or 79.3% in 2013, due to fewer losses and write-downs and lower maintenance costs on foreclosed property. Loan-related expense totaled $255 million, a decrease of $28 million, or 9.9% compared to the prior year. This decrease was primarily the result of improvements in mortgage repurchase expense and lower costs associated with certain mortgage loan indemnifications. Merger-related and restructuring charges were $22 millionlower than the prior year, which reflects the impact of merger-related charges associated with the Crump Insuranceand BankAtlantic acquisitions in the prior year, partially offset by restructuring charges associated with optimization activities in Community Banking that were initiated during the second quarter of 2013. Regulatory charges decreased $16 millionin 2013 due to improved credit quality, which led to lower deposit insurance premiums. Management currently expects that total noninterest expense should trend lower throughout 2014, largely driven by lower personnel expense, professional services and regulatory charges. This decrease in noninterest expense, along with an anticipated increase in noninterest income, is expected to lead to continued improvement in the efficiency ratio throughout 2014, down to the mid-fifties by the fourth quarter. 2012 compared to 2011 Total personnel expense increased 14.6% during 2012, primarily the result of the Crump Insuranceand BankAtlantic acquisitions during 2012. Other factors contributing to this increase include normal salary increases, higher production-related incentives and commissions and other performance incentives and higher pension expense related to certain changes in actuarial assumptions. Additional disclosures relating to BB&T's benefit plans can be found in Note 13 "Benefit Plans" in the "Notes to Consolidated Financial Statements."
Occupancy and equipment expense increased
Loan-related expense totaled
Foreclosed property expense decreased
$536 million, or 66.8% in 2012, primarily reflecting the impact of a more aggressive approach to reducing the inventory of foreclosed property that was undertaken in the fourth quarter of 2011. 48 Table of Contents
Regulatory charges decreased
Merger-related and restructuring charges increased
Other expense increased
$62 millioncompared to 2011, primarily the result of higher advertising expenses, an increase in depreciation expense related to assets under operating leases to customers driven by growth in BB&T's equipment financing business, higher operating charge-offs in 2012 and increased referral fee expense. The remaining noninterest expenses increased a net $13 million, or 3.3%, compared to 2011. Provision for Income Taxes BB&T's provision for income taxes totaled $1.4 billion, $764 millionand $296 millionfor 2013, 2012 and 2011, respectively. BB&T's effective tax rates for the years ended 2013, 2012 and 2011 were 44.7%, 27.4% and 18.2%, respectively. The increase in the effective tax rate for 2013 compared to 2012 was primarily due to the adjustments totaling $516 millionrelated to the previously described uncertain tax positions. Excluding the impact of these adjustments, the effective tax rate for 2013 was 28.1%. The increase in the effective tax rate for 2012 compared to 2011 reflects a higher level of pre-tax earnings relative to permanent income tax differences. BB&T has extended credit to and invested in the obligations of states and municipalities and their agencies and has made other investments and loans that produce tax-exempt income. The income generated from these investments, together with certain other transactions that have favorable tax treatment, have reduced BB&T's overall effective tax rate from the statutory rate in all periods presented. Management currently expects the effective tax rate in the first quarter of 2014 to be similar to the effective tax rate in the fourth quarter of 2013, which was 29.2%.
Refer to Note 12 "Income Taxes" in the "Notes to Consolidated Financial Statements" for a reconciliation of the effective tax rate to the statutory tax rate and a discussion of uncertain tax positions and other tax matters.
Segment Results BB&T's operations are divided into six reportable business segments. See Note 20 "Operating Segments" in the "Notes to Consolidated Financial Statements" herein for additional disclosures related to BB&T's operating segments, the internal accounting and reporting practices used to manage these segments and financial disclosures for these segments.
Fluctuations in noninterest income and noninterest expense incurred directly by the segments are more fully discussed in the "Noninterest Income" and "Noninterest Expense" sections above.
2013 compared to 2012 Community Banking Community Banking had a network of 1,825 banking offices at the end of 2013, a decrease of seven offices compared to
December 31, 2012. The decrease in offices was driven by the closure of low volume branches, partially offset by de novo branch openings. Community Banking net income was $982 millionin 2013, an increase of $260 million, or 36.0%, compared to 2012. Segment net interest income totaled $3.2 billionin 2013, a decrease of $163 million, or 4.8%, compared to 2012. The decrease in segment net interest income was primarily attributable to lower funding spreads earned on deposits, partially offset by improvements in deposit mix as a result of growth in noninterest-bearing, money market and savings deposits, and a decrease in certificates of deposits.
The allocated provision for loan and lease losses decreased
Noninterest income of
$1.2 billionincreased $66 million, or 5.8%, primarily due to higher checkcard fees, bankcard fees, merchant discounts, and service charges on deposits. 49 Table of Contents
Noninterest expense of
Residential Mortgage Banking
Mortgage originations totaled
$31.6 billionin 2013, a decrease of $1.5 billion, or 4.5%, compared to $33.1 billionin 2012. BB&T's residential mortgage servicing portfolio, which includes both retained loans and loans serviced for third parties, totaled $112.8 billionat the end of 2013, an increase of 11.3%, compared to $101.4 billionat December 31, 2012. Residential Mortgage Banking net income was $284 millionin 2013, a decrease of $83 million, or 22.6%, compared to 2012. Segment net interest income increased $44 million, or 11.7%, to $421 million. The increase in segment net interest income was driven by growth in loans held for investment, which was partially attributable to the decision to begin retaining certain originated mortgage loans, and higher credit spreads to funding costs for both LHFS and loans held for investment. The allocated provision for loan and lease losses decreased $61 million, primarily reflecting an improvement in mix due to the runoff of lower quality loans. Net charge-offs of $78 millionwere recorded in 2013, compared to $133 millionin 2012, as nonaccrual and aged loans (excluding guaranteed loans) decreased during the period. Noninterest income decreased $270 million, primarily driven by lower gain on sale margins, which reflects increased competition and a higher proportion of loans originated through the correspondent network, and a decrease in net MSR valuation adjustments.
Noninterest expense decreased
Dealer Financial Services
Dealer Financial Services net income was
Segment net interest income increased
The allocated provision for loan and lease losses increased
Specialized Lending net income was
Segment net interest income decreased
$10 million, or 1.8%, compared to 2012. During the fourth quarter, BB&T sold a consumer lending subsidiary that focused its business on the subprime consumer market. The sale of this subsidiary included loans totaling approximately $500 million. In connection with this sale transaction, loans totaling approximately $230 millionwere transferred to Residential Mortgage Banking. Excluding this sales transaction, Specialized Lending grew average balances by $925 million, or 6.7%, over 2012. This increase was primarily driven by 32.3% growth in average small ticket consumer finance loan balances, 7.6% growth in the average commercial insurance premium financing portfolio, and a 7.0% increase in the average commercial finance portfolio. The allocated provision for loan and lease losses decreased $50 million, which primarily reflects the removal of reserves in connection with the sale of $500 millionof consumer lending loans and the transfer of $230 millionof consumer lending loans to Residential Mortgage Banking. Due to the overall higher credit risk profiles of Specialized Lending's clients, loss rates are expected to be higher than conventional bank lending. Loss rates are also affected by shifts in the portfolio mix of the underlying subsidiaries. Insurance Services
Insurance Services net income was
50 Table of Contents
Noninterest income was
$1.5 billion, an increase of $170 million, or 12.5%, compared to 2012. The increase reflects the acquisition of Crump Insuranceon April 2, 2012, firming market conditions for insurance premiums, organic growth in wholesale and retail property and casualty insurance operations, wholesale life insurance growth, and an experience-based refund of reinsurance premiums totaling $13 millionthat was received in the second quarter of 2013. Wholesale property and casualty insurance income increased $59 million, or 15.5%, while retail property and casualty insurance income increased $36 million, or 8.1%, compared to 2012. Wholesale life insurance income increased $43 million, or 34.5%, compared to 2012, primarily attributable to the Crump Insuranceacquisition.
Higher noninterest income growth was offset by a
Financial Services net income was
Segment net interest income for Financial Services decreased
$2 million, to $447 millionin 2013. The decrease in segment net interest income during 2013 was primarily attributable to a lower NIM, partially offset by strong organic loan growth and an improved deposit mix. Corporate Banking's average loan balances increased by $1.5 billion, or 24.9%, in 2013, while BB&T Wealth's average loan balances grew $250 million, or 21.6%, over the same time period. The allocated provision for loan and lease losses increased $6 millionto $19 millionin 2013, primarily attributable to a $10 millionreserve release in 2012 resulting from improved credit trends in the commercial and industrial loan portfolio. Noninterest income for Financial Services increased $24 million, or 3.3%, to $743 millionin 2013. The increase in noninterest income was primarily due to higher investment banking and brokerage fees and commissions and trust and investment advisory revenues. Client invested assets totaled $111.2 billionas of December 31, 2013, an increase of $15.0 billion, or 15.6%, compared to 2012. Noninterest expense incurred by Financial Services decreased $26 million, or 4.0%, to $617 millionin 2013, primarily due to lower occupancy and equipment expense and an operating charge-off in the prior year, partially offset by an increase in personnel expense. Other, Treasury & Corporate
Net income in Other, Treasury & Corporate can vary due to changing needs of the Company, including the size of the investment portfolio, the need for wholesale funding, income received from derivatives used to hedge the balance sheet and, in certain cases, income associated with acquisition activities. Other, Treasury & Corporate generated a net loss of
$487 millionin 2013, compared to net income of $50 millionin the prior year. The net loss was primarily the result of $516 millionin adjustments for uncertain income tax positions as previously described. Segment net interest income decreased $139 millionprimarily attributable to runoff in the covered loan portfolio. The $128 millionincrease in noninterest income primarily reflects the gain on the sale of a consumer lending subsidiary totaling $31 million, higher income from assets related to certain post-employment benefits, higher securities gains in the investment portfolio, and higher FDICloss share income. The $88 millionincrease in noninterest expense was primarily attributable to personnel expense related to certain post-employment benefits mentioned above, and higher professional services, data processing software, and IT professional services expense related to corporate project initiatives. 2012 compared to 2011 Community Banking Community Banking had a network of 1,832 banking offices at the end of 2012, an increase of 53 offices compared to December 31, 2011. The increase in offices was driven by the BankAtlantic acquisition and de novo branch openings, partially offset by the closing of low volume branches. Community Banking results include BankAtlantic since the systems conversion in October 2012. Community Banking net income was $722 millionin 2012, up $225 million, or
45.3%, compared to 2011. 51 Table of Contents
Segment net interest income totaled
The allocated provision for loan and lease losses increased by
Noninterest income increased
$105 million, or 10.2%, to $1.1 billionin 2012, primarily due to higher bankcard and merchant fees, as well as losses on commercial LHFS in the prior year. The increase in noninterest income was partially offset by lower debit interchange and overdraft fees. Noninterest income allocated from other segments, which is reported as intersegment net referral fees ("referral fees"), increased by $57 million, or 47.1% in 2012, driven by higher referrals for residential mortgage lending as originations grew. Noninterest expense declined $529 million, or 22.5%, to $1.8 billionfor 2012. This decline was primarily due to lower foreclosed property expense and regulatory charges, partially offset by higher net occupancy expense and personnel expense. Allocated corporate expense increased $125 million, or 13.9%, to $1.0 billionin 2012, primarily due to increases in loan administration, operations and marketing expense. Residential Mortgage Banking BB&T's mortgage originations totaled $33.1 billionin 2012, up $9.4 billion, or 39.9%, compared to 2011. BB&T's residential mortgage servicing portfolio, which includes both retained loans and loans serviced for third parties, totaled $101.3 billionat the end of 2012, an increase of 10.5%, compared to $91.6 billionat December 31, 2011. Residential Mortgage Banking net income was $367 millionin 2012, compared to a net loss of $15 millionin 2011. Segment net interest income increased $87 million, or 30.0%, to $377 millionin 2012. The increase in segment net interest income was primarily due to growth in LHFS, growth in loans held for investment and higher spreads to funding costs on loans held for investment. These increases in segment net interest income were partially offset by lower spreads to funding costs on LHFS. The allocated provision for loan and lease losses was $95 millionfor 2012, down $225 million, or 70.3%, compared to $320 millionin 2011. The decrease in provision expense reflects improved credit quality in the loan portfolio, as well as the sale of NPLs in the second quarter of 2011, which resulted in higher charge-offs. Net charge-offs of $133 millionwere recorded in 2012 compared
$264 millionin 2011. Noninterest income increased from $351 millionin 2011 to $754 millionin 2012. This increase was primarily due to higher mortgage loan production and sales and higher margins than in the prior year. Noninterest expense increased $92 million, or 31.0%, to $389 millionin 2012, reflecting higher loan-related and personnel expenses. The increase in loan-related expense was driven by an increase in the loan repurchase reserve. The increase in personnel expense was driven by a higher number of employees and incentives related to the increased production. Dealer Financial Services
Dealer Financial Services net income was
Segment net interest income increased
$66 million, or 11.3%, to $648 millionin 2012. The increase in segment net interest income was primarily due to loan growth and an improved NIM in Regional Acceptance Corporation'spoint-of-sale loan portfolio.
The allocated provision for loan and lease losses increased
$39 million, or 31.2%, in 2012, primarily due to increases in Regional Acceptance Corporation'sALLL related to nonprime auto loans as delinquent accounts and NPAs move from historical lows to more normalized levels. Specialized Lending
Specialized Lending net income was
52 Table of Contents Net interest income increased
$97 million, or 20.9%, to $562 millionin 2012. This increase was primarily due to strong loan growth by Sheffield Financial as the result of dealer volume growth and expanded dealer relationships. Additionally, Mortgage Warehouse Lending benefited from increased market penetration, higher commitment levels and higher line usage, while Lendmark and Equipment Finance realized higher NIM. Average loans for Specialized Lending grew by $2.0 billion, or 15.6%, to $14.8 billionin 2012. The allocated provision for loan and lease losses increased $63 million, or 87.5%, in 2012. The increase in provision expense was primarily due to higher charge-offs in the consumer lending subsidiary and adjustments to loss factors resulting from an acceleration of certain consumer loan charge-offs in the third quarter of 2012. Due to the overall higher credit risk profiles of Specialized Lending's clients, loss rates are expected to be higher than conventional bank lending. Loss rates are also affected by shifts in the portfolio mix of the underlying subsidiaries. Noninterest income increased $18 million, or 8.5%, to $229 millionin 2012. The increase in noninterest income was driven by higher operating lease income and gains on sale of finance lease equipment by Equipment Finance, as well as higher commercial finance and commercial mortgage banking fees.
Noninterest expense increased
Insurance Services net income was
Noninterest income increased
$324 million, or 31.1%, to $1.4 billion. The increase in noninterest income was primarily driven by higher life insurance, property and casualty insurance and employee benefits commissions. The life insurance and property and casualty operations of Crump Insurance, which was acquired on April 2, 2012, contributed $234 millionof insurance income. Property and casualty insurance commission growth was partially attributable to improvement in premium pricing compared to the prior year. Employee benefits commission growth was primarily due to the fourth quarter 2011 acquisitions of Precept, a full-service employee benefits consulting and administrative solutions firm with offices in Irvineand San Ramon, Californiaand Liberty Benefit Insurance Services, a full-service employee benefits broker located
San Jose, California.
Noninterest expense increased
$230 million, or 29.3%, in 2012. The increase in noninterest expenses was primarily due to the Crump Insuranceacquisition and related personnel expense, occupancy expense and amortization of intangibles. Financial Services
Financial Services net income was
Segment net interest income increased
$91 million, or 25.4%, to $449 millionin 2012. The increase in segment net interest income during 2012 was primarily attributable to strong organic loan and deposit growth by Corporate Banking and BB&T Wealth, partially offset by a lower NIM for both businesses. The allocated provision for loan and lease losses increased $14 millionto $13 millionin 2012 as the result of changes in the composition of the commercial and industrial loan portfolio, combined with overall growth in the portfolio. Noninterest income increased $36 million, or 5.3%, to $719 millionin 2012. The increase in noninterest income was primarily due to higher investment banking and brokerage fees and commissions, trust and investment advisory revenues
and commercial loan fees. Noninterest expense increased
$68 million, or 11.8%, to $643 millionin 2012, primarily due to higher personnel expense and intercompany expense. The increase in noninterest expense in 2012 was driven by continued efforts to expand the national lending teams in Corporate Banking and by the associated increases in incentive expenses tied to the strong income growth in the LOBs. 53 Table of Contents Other, Treasury & Corporate
Net income in Other, Treasury & Corporate can vary due to changing needs of the Company, including the size of the investment portfolio, the need for wholesale funding, income received from derivatives used to hedge the balance sheet and, in certain cases, income associated with acquisition activities. Other, Treasury & Corporate's 2012 results reflect the income from BankAtlantic from the acquisition date to the systems conversion date in
October 2012. Other, Treasury & Corporate generated net income of $50 millionin 2012 compared to net income of $40 millionin the prior year. The increase in segment net interest income was primarily due to a decrease in FTP funding credits on deposits allocated to the Community Banking segment. The decrease in the allocated provision for loan losses was primarily the result of a decline in the provision for covered loans. The decrease in noninterest income was primarily due to higher securities gains in the prior year, increased write-downs on affordable housing investments and lower FDICloss share income. The decrease in allocated corporate expenses was primarily due to changes in intersegment service center allocations.
Analysis of Financial Condition
A review of the Company's major balance sheet categories is presented below.
Investment Activities BB&T's investment activities are governed internally by a written, board-approved policy. The investment policy is carried out by the MRLCC, which meets regularly to review the economic environment and establish investment strategies. The MRLCC also has much broader responsibilities, which are discussed in the "Market Risk Management" section in "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein. Investment strategies are reviewed by the MRLCC based on the interest rate environment, balance sheet mix, actual and anticipated loan demand, funding opportunities and the overall interest rate sensitivity of the Company. In general, the investment portfolio is managed in a manner appropriate to the attainment of the following goals: (i) to provide a sufficient margin of liquid assets to meet unanticipated deposit and loan fluctuations and overall funds management objectives; (ii) to provide eligible securities to secure public funds, trust deposits as prescribed by law and other borrowings; and (iii) to earn the maximum return on funds invested that is commensurate with meeting
the requirements of (i) and (ii).
Branch Bankinvests in securities as allowable under bank regulations. These securities may include obligations of the U.S. Treasury, U.S. government agencies, GSEs (including MBS), bank eligible obligations of any state or political subdivision, non-agency MBS, structured notes, bank eligible corporate obligations (including corporate debentures), commercial paper, negotiable CDs, bankers acceptances, mutual funds and limited types of equity securities. Branch Bankalso may deal in securities subject to the provisions of the Gramm-Leach-Bliley Act. BB&T's full-service brokerage and investment banking subsidiary engages in the underwriting, trading and sales of equity and debt securities subject to the risk management policies of the Company.
The following table provides information regarding the composition of BB&T's AFS and HTM securities portfolio for the years presented:
54 Table of Contents Table 14 Composition of Securities Portfolio December 31, 2013 2012 2011 (Dollars in millions) AFS securities (at fair value): U.S. Treasury
$ 595 $ 281 $ 229GSE - 9 77 MBS issued by GSE 17,929 20,930 18,132 States and political subdivisions 1,851 2,011 1,923 Non-agency MBS 291 312 368 Other 45 3 7 Covered 1,393 1,591 1,577 Total AFS securities 22,104 25,137 22,313 HTM securities (at amortized cost): U.S. Treasury 392 - - GSE 5,603 3,808 500 MBS issued by GSE 11,636 9,273 13,028 States and political subdivisions 33 34 35 Other 437 479 531 Total HTM securities 18,101 13,594 14,094 Total securities $ 40,205 $ 38,731 $ 36,407
The total securities portfolio increased
December 31, 2013, approximately 14.7% of the securities portfolio was variable rate. The effective duration of the securities portfolio was 5.5 years at December 31, 2013, compared to 2.8 years at the end of 2012. The duration of the securities portfolio excludes equity securities, auction rate securities, and certain covered non-agency MBS. MBS issued by GSEs were 73.5% of the total securities portfolio at year-end 2013. As of December 31, 2013, the AFS securities portfolio also includes $1.4 billionof securities that were acquired from the FDICas part of the Colonial acquisition. These securities are covered by FDICloss sharing agreements and include $1.1 billionof non-agency MBS and $314 millionof municipal securities.
During 2013, management sold
Refer to Note 2 "Securities" in the "Notes to Consolidated Financial Statements" herein for additional disclosures related to the evaluation of securities for OTTI. The following table presents the securities portfolio at
December 31, 2013, segregated by major category with ranges of maturities and average yields disclosed: 55 Table of Contents Table 15 Securities December 31, 2013 AFS HTM Effective Effective Amortized Fair Value Yield (1) Cost Yield (1) (Dollars in millions) U.S. Treasury: Within one year $ 1440.17 % $ - - % One to five years 451 0.26 - - Five to ten years - - 392 2.05 Total 595 0.24 392 2.05 GSE: Five to ten years - - 5,384 2.10 After ten years - - 219 1.28 Total - - 5,603 2.06 MBS issued by GSE: (2) One to five years 34 3.97 - - Five to ten years 4 1.58 - - After ten years 17,891 2.02 11,636 2.09 Total 17,929 2.02 11,636 2.09 Obligations of states and political subdivisions: (3) One to five years 34 6.68 - - Five to ten years 255 6.43 1 1.61 After ten years 1,562 6.67 32 5.11 Total 1,851 6.64 33 5.02 Non-agency MBS: (2) After ten years 291 5.94 - - Total 291 5.94 - - Other: Within one year 45 0.02 - - Five to ten years - - 149 1.37 After ten years - - 288 1.39 Total 45 0.02 437 1.38 Covered: One to five years 54 3.59 - - Five to ten years 260 3.86 - - After ten years 1,079 16.76 - - Total 1,393 13.85 - - Total securities $ 22,1043.15 $ 18,1012.07
(1) Yields represent interest computed at the end of the period using the effective interest method on an FTE
basis applying the statutory federal income tax rate of 35% and the amortized cost of the securities. (2) For purposes of the maturity table, MBS, which are not due at a single maturity date, have been included in
maturity groupings based on the contractual maturity. The expected life of MBS will differ from contractual
maturities because borrowers may have the right to call or prepay the underlying mortgage loans with or
without call or prepayment penalties. (3) Weighted-average yield excludes the effect of pay-fixed swaps hedging municipal securities.
56 Table of Contents Lending Activities The primary goal of the BB&T lending function is to help clients achieve their financial goals by providing quality loan products that are fair to the client and profitable to the Company. Management believes that this purpose can best be accomplished by building strong, profitable client relationships over time, with BB&T becoming an important contributor to the prosperity and well-being of its clients. In addition to the importance placed on client knowledge and continuous involvement with clients, BB&T's lending process incorporates the standards of a consistent company-wide credit culture and an in-depth local market knowledge. Furthermore, the Company employs strict underwriting criteria governing the degree of assumed risk and the diversity of the loan portfolio in terms of type, industry and geographical concentration. In this context, BB&T strives to meet the credit needs of businesses and consumers in its markets while pursuing a balanced strategy of loan profitability, loan growth and loan quality. Table 16 Quarterly Average Balances of Loans and Leases For the Three Months Ended 12/31/13 9/30/13 6/30/13 3/31/13 12/31/12 (Dollars in millions) Commercial:
Commercial and industrial
CRE - other 11,494 11,344
11,411 11,422 11,032
CRE - residential ADC 970 1,022 1,121 1,238 1,398 Direct retail lending 15,998 16,112 15,936 15,757 15,767 Sales finance 9,262 8,992 8,520 7,838 7,724 Revolving credit 2,357 2,308 2,268 2,279 2,280 Residential mortgage 23,979 23,403 23,391 23,618 23,820
Other lending subsidiaries 10,448 11,018
10,407 9,988 10,051
Total average loans and leases
investment (excluding covered
loans) 112,609 112,645
111,413 110,056 110,094
Covered 2,186 2,502
2,858 3,133 3,477
Total average loans and leases
held for investment 114,795 115,147 114,271 113,189 113,571 LHFS 2,206 3,118 3,581 3,792 3,532
Total average loans and leases
Average loans held for investment for the fourth quarter of 2013 declined
$352 million, or an annualized 1.2%, compared to the third quarter. Loan growth for the fourth quarter was negatively impacted by the sale of a consumer lending subsidiary with loans totaling approximately $500 millionearly in the fourth quarter. In connection with this transaction, approximately $230 millionof loans that were previously reported within the other lending subsidiaries portfolio were transferred to the residential mortgage loan portfolio. Excluding the impact of the loan sale described above, average loans held for investment were up 0.3% annualized compared to the prior quarter. Average residential mortgage loans increased $576 million, or 9.8% annualized, compared to the prior quarter. Excluding the estimated impact of the loan transfer described above, average residential mortgage loans increased approximately 6.0% annualized, which primarily reflects the decision in the fourth quarter to retain 10 to 15 year mortgage loan production in the held for investment portfolio. The average sales finance portfolio increased $270 million, or 11.9% annualized, based on continued strength in the prime automobile lending market as dealer floor plan financing has been a strategic focus. Average CRE - other loan balances were $150 millionhigher than the prior quarter, which reflects growth in lending related to multi-family residential construction, office, retail and industrial clients. Average other lending subsidiaries loans decreased $570 millioncompared to the prior quarter. Excluding the estimated impact of the subsidiary sale and related loan transfer described above, average other lending subsidiaries loans increased by approximately 3.5% on an annualized basis. This increase was primarily driven by growth in the equipment finance and small ticket consumer finance portfolios, which totaled $70 millionand $84 million, respectively. Average commercial and industrial loans decreased $345 millioncompared to the prior quarter due to lower mortgage warehouse lending average balances. Loan growth continued to be negatively impacted by expected declines in the covered and CRE - residential ADC loan portfolios, which decreased $316 millionand $52 million, respectively. 57 Table of Contents Primarily as a result of lower mortgage activity, management currently expects average total loans to increase in the range of 1% to 2% annualized during
the first quarter of 2014. Table 17 Variable Rate Loans (Excluding Covered and LHFS) Wtd. Avg. Wtd. Avg.
Outstanding Contractual Remaining
December 31, 2013 Balance Rate Term (Dollars in millions) Commercial:
Commercial and industrial
$ 28,7222.58 % 2.8 yrs CRE - other 9,054 3.40 3.5 CRE - residential ADC 881 4.56 1.0 Other lending subsidiaries 531 4.15 2.1 Retail: Direct retail lending (1) 5,892 3.58 8.3 Revolving credit 2,029 9.18 NM Residential mortgage 6,758 3.55 25.5 Sales finance 917 1.99 0.8 Other lending subsidiaries - N/A N/A
(1) The weighted average remaining term for direct retail lending represents the remaining contractual draw
period. Margin loans totaling
$108 millionhave been excluded
from the calculation of the weighted average
remaining term because they do not have a contractual end date and are callable on demand NM - not meaningful. As of
December 31, 2013, approximately 24% of the outstanding balance of variable rate residential mortgage loans is currently in an interest-only phase. Approximately 69% of these balances will begin amortizing within the next three years. Variable rate residential mortgage loans typically reset every 12 months beginning after a 3 to 10 year fixed period, with an annual cap on rate changes ranging from 2% to 6%.
December 31, 2013, the direct retail lending portfolio includes $5.2 billionof home equity lines. Approximately 66% of the outstanding balance of variable rate home equity lines is currently in the interest-only phase. Less than 7% of these balances will begin scheduled amortization within the next three years. Variable rate home equity lines typically reset on a monthly basis. Variable rate home equity loans were immaterial as of December 31, 2013. BB&T monitors the performance of its home equity loans and lines secured by second liens similar 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 appropriately adjusts the ALLL to reflect the increased risk of loss on these credits. Finally, BB&T also provides additional reserves to second lien positions when the estimated combined current loan to value ratio for the credit exceeds 100%. As of December 31, 2013, BB&T held or serviced the first lien on 37.7% of its second lien positions. Scheduled repayments are reported in the maturity category in which the payment is due. Determinations of maturities are based upon contract terms. BB&T's credit policy typically does not permit automatic renewal of loans. At the scheduled maturity date (including balloon payment date), the customer generally must request a new loan to replace the matured loan and execute either a new note or note modification with rate, terms and conditions negotiated at that time.
BB&T lends to a diverse customer base that is substantially located within the Company's primary market area. At the same time, the loan portfolio is geographically dispersed throughout BB&T's branch network to mitigate concentration risk arising from local and regional economic downturns. Refer to the "Risk Management" section herein for a discussion of each of the loan portfolios and the credit risk management policies used to manage the portfolios. 58 Table of Contents The following table presents BB&T's total loan portfolio based upon BB&T's LOBs: Table 18 Composition of Loan and Lease Portfolio Based on LOB December 31, 2013 2012 2011 2010 2009 (Dollars in millions) Commercial
$ 51,118 $ 51,017 $ 49,165 $ 48,886 $ 49,820Direct retail lending 15,869 15,817 14,506 13,807 14,406 Sales finance 9,382 7,736 7,401 7,050 6,290 Revolving credit 2,403 2,330 2,212 2,127 2,016 Residential mortgage 24,648 24,272 20,581 17,550 15,435
Other lending subsidiaries 10,462 10,137
8,737 7,953 7,670
Total loans and leases held for
(excluding covered loans) 113,882 111,309 102,602 97,373 95,637
Covered 2,035 3,294
4,867 6,194 8,019
Total loans and leases held for
investment 115,917 114,603
107,469 103,567 103,656
LHFS 1,222 3,761
3,736 3,697 2,551
Total loans and leases
$ 117,139 $ 118,364 $ 111,205 $ 107,264 $ 106,207
Total loans and leases were
$117.1 billionat year-end 2013, a decrease of $1.2 billion, or 1.0%, compared to the balance at year-end 2012. This decrease was largely attributable to a $2.5 billiondecline in LHFS compared to year-end 2012. This decline reflects a lower level of loan origination activity in the latter part of 2013 and management's decision in the fourth quarter of 2013 to retain certain 10 to 15 year residential mortgage loan production in the held for investment portfolio. Total loans and leases held for investment, excluding covered loans, increased $2.6 billionin 2013, based on broad-based growth in the portfolio. The covered loan portfolio, which totaled $2.0 billionat year-end 2013, continued to runoff during the year, resulting in a decline of $1.3 billioncompared to the prior year-end. The following tables summarize the loan portfolio based on regulatory classifications, which focuses on the underlying loan collateral, and differs from internal classifications presented herein that focus on the primary purpose of the loan. Covered loans are included in their respective categories. Table 19 Composition of Loan and Lease Portfolio December 31, 2013 2012 2011 2010 2009
(Dollars in millions)
Commercial, financial and agricultural
$ 25,260 $ 23,863 $ 21,452 $ 20,490 $ 19,076Lease receivables 1,126 1,114 1,067 1,158 1,092 Real estate-construction and land development 4,630 5,900 7,714 10,969 15,353 Real estate-mortgage 65,485 65,760 60,821 57,418 55,671 Consumer 19,416 17,966 16,415 13,532 12,464 Total loans and leases held for investment 115,917 114,603 107,469 103,567 103,656 LHFS 1,222 3,761 3,736 3,697 2,551 Total loans and leases $ 117,139 $ 118,364 $ 111,205 $ 107,264 $ 106,20759 Table of Contents Table 20 Selected Loan Maturities and Interest Sensitivity December 31, 2013 Commercial, Real Estate: Financial Construction and and Land Agricultural Development Total (Dollars in millions) Fixed Rate: 1 year or less (1) $ 2,628 $ 183 $ 2,8111-5 years 3,075 515 3,590 After 5 years 4,167 1,014 5,181 Total 9,870 1,712 11,582 Variable Rate: 1 year or less (1) 4,087 979 5,066 1-5 years 8,734 1,431 10,165 After 5 years 2,569 508 3,077 Total 15,390 2,918 18,308 Total loans and leases (2) $ 25,260 $ 4,630 $ 29,890
(1) Includes loans due on demand.
(Dollars in (2) The above table excludes:
millions) (i) consumer
$ 19,416(ii) real estate mortgage 65,485 (iii) LHFS 1,222 (iv) lease receivables 1,126 Total $ 87,249Asset Quality The following discussion excludes assets covered by FDICloss sharing agreements that provide for reimbursement to BB&T for the majority of losses incurred on those assets. Covered loans, which are considered performing due to the application of the expected cash flows method, were $2.0 billionat December 31, 2013and $3.3 billionin the prior year. Covered foreclosed real estate totaled $121 millionand $254 millionat December 31, 2013and 2012, respectively. NPAs, which include foreclosed real estate, repossessions and nonaccrual loans, totaled $1.1 billionat December 31, 2013compared to $1.5 billionat December 31, 2012. The decline in NPAs of $483 millionwas driven by decreases of $445 millionin NPLs and $38 millionin foreclosed property. The decline in NPLs included a $359 millionreduction in the commercial loan portfolio and smaller declines in other lending subsidiaries, residential mortgage and direct retail lending totaling $35 million, $26 millionand $23 million, respectively. The inventory of foreclosed real estate as of December 31, 2013includes land and lots totaling $10 millionthat have been held for approximately five months on average. The remaining foreclosed real estate of $61 million, which is primarily single family residential and CRE, had an average holding period of four months. NPAs as a percentage of loans and leases plus foreclosed property were 0.91% at December 31, 2013compared with 1.33% at December 31, 2012.
Management expects NPAs to decline at a modest pace during the first quarter of 2014, assuming no significant economic deterioration during the quarter.
60 Table of Contents
The following table presents the changes in NPAs during 2013 and 2012:
Table 21 Rollforward of NPAs Years Ended
December 31, 20132012 (Dollars in millions) Balance at beginning of year $
New NPAs 1,583 2,449 Advances and principal increases 177 161 Disposals of foreclosed assets (533) (737) Disposals of NPLs (1) (348) (754) Charge-offs and losses (511) (1,002) Payments (636) (669) Transfers to performing status (212) (392) Other, net (3) 30 Balance at end of year $
(1) Includes charge-offs and losses recorded upon sale of
December 31, 2013and 2012, respectively.
The following tables summarize asset quality information for the past five years. As more fully described below, this information has been adjusted to exclude past due loans that are subject to
· In accordance with regulatory reporting standards, covered loans that are
contractually past due are reported as past due and still accruing based on the
number of days past due. However, given the significant amount of acquired
loans that are past due but still accruing due to the application of the
expected cash flows method, BB&T has concluded that it is appropriate to adjust
Table 22 to exclude covered loans in summarizing total loans 90 days or more
past due and still accruing and total loans 30-89 days past due and still
· BB&T has also concluded that the inclusion of covered loans in certain asset
quality ratios summarized in Table 23 including "Loans 30-89 days past due and
still accruing as a percentage of total loans and leases," "Loans 90 days or
more past due and still accruing as a percentage of total loans and leases,"
"Nonperforming loans and leases as a percentage of total loans and leases" and
certain other asset quality ratios that reflect NPAs in the numerator or
denominator (or both) results in significant distortion to these ratios. In
addition, because loan level charge-offs related to the acquired loans are not
recognized in the financial statements until the cumulative amounts exceed the
original loss projections on a pool basis, the net charge-off ratio for the
acquired loans is not consistent with the net charge-off ratio for other loan
portfolios. The inclusion of these loans in the asset quality ratios described
above could result in a lack of comparability across quarters or years, and
could negatively impact comparability with other portfolios that were not
impacted by acquisition accounting. BB&T believes that the presentation of
asset quality measures excluding covered loans and related amounts from both
the numerator and denominator provides better perspective into underlying
trends related to the quality of its loan portfolio. Accordingly, the asset
quality measures in Table 23 present asset quality information both on a
consolidated basis as well as excluding the covered assets and related amounts.
· In addition, BB&T has excluded mortgage loans that are guaranteed by the
government, primarily FHA/VA loans, from the asset quality metrics and ratios
reflected on Tables 22 and 23, as these loans are recoverable through various
government guarantees. In addition, BB&T has recorded on the balance sheet
certain amounts related to delinquent GNMA loans serviced for others that BB&T
has the option, but not the obligation, to repurchase and has effectively
regained control. These amounts are also excluded from asset quality metrics as
reimbursement of insured amounts is proceeding in accordance with investor
guidelines. The amount of government guaranteed mortgage loans and GNMA loans
serviced for others that have been excluded are noted in the footnotes to Table 22. 61 Table of Contents Table 22 Asset Quality (Excluding Covered Assets) December 31, 2013 2012 2011 2010 2009
(Dollars in millions)
Nonaccrual loans and leases:
$ 527 $ 886 $ 1,352 $ 1,426 $ 1,651Direct retail lending 109 132 142 191 197 Sales finance loans 5 7 7 6 7 Residential mortgage loans (1) 243 269 308 466 707 Other lending subsidiaries 51 86 63 60 96
Total nonaccrual loans and leases held for investment 935 1,380 1,872 2,149 2,658
Nonaccrual LHFS - - - 521 5 Total nonaccrual loans and leases 935 1,380 1,872 2,670 2,663 Foreclosed real estate (2) 71 107 536 1,259 1,451 Other foreclosed property 47 49 42 42 58 Total NPAs (1)(2)
Loans 90 days or more past due and still accruing:
Commercial $ -
$ 1 $ 2 $ 20 $ 7Direct retail lending 33 38 56 79 87 Sales finance loans 5 10 18 27 30 Revolving credit loans 10 16 17 20 25 Residential mortgage loans (3)(4) 69 92 104 143 150 Other lending subsidiaries 5 10 5 6 12
Total loans 90 days or more past due and still
Loans 30-89 days past due:
$ 45 $ 56 $ 121 $ 315 $ 377Direct retail lending 132 145 162 190 222 Sales finance loans 56 56 75 95 126 Revolving credit loans 23 23 22 28 32 Residential mortgage loans (6)(7) 463 498 479 532 600 Other lending subsidiaries 221 290 273 248 306 Total loans 30 - 89 days past due (6)(7)(8) $ 940$
(1) Excludes nonaccrual mortgage loans that are government guaranteed totaling
related to FHA/VA guaranteed loans during 2010. The change in policy resulted
in a decrease in nonaccrual mortgage loans and an increase in mortgage loans
90 days past due and still accruing of approximately
(2) Excludes covered foreclosed real estate totaling
2010 and 2009, respectively.
(3) Excludes mortgage loans guaranteed by GNMA that BB&T does not have the
obligation to repurchase that are 90 days or more past due totaling
(4) Excludes mortgage loans past due 90 days or more that are government
Includes past due mortgage LHFS.
(5) Excludes covered loans past due 90 days or more totaling
2012, 2011, 2010 and 2009, respectively.
(6) Excludes mortgage loans guaranteed by GNMA that BB&T does not have the
obligation to repurchase that are past due 30-89 days totaling
2011, 2010 and 2009, respectively.
(7) Excludes mortgage loans past due 30-89 days that are government guaranteed
due mortgage LHFS.
(8) Excludes covered loans past due 30-89 days totaling
2012, 2011, 2010 and 2009, respectively. 62 Table of Contents Loans 90 days or more past due and still accruing interest excluding government guaranteed loans and covered loans, totaled
$122 millionat December 31, 2013, compared with $167 millionat year-end 2012, a decline of 26.9%. Loans 30-89 days past due, excluding government guaranteed loans and covered loans, totaled $940 millionat December 31, 2013, which was a decline of $128 million, or 12.0%, compared to year-end 2012. Excluding government guaranteed loans and covered loans, BB&T's past due asset quality metrics are essentially at normalized levels. Table 23 Asset Quality Ratios As Of
/ For The Years Ended
2012 2011 2010 2009
Asset Quality Ratios (including amounts related to
covered loans and covered foreclosed property): Loans 30 - 89 days past due and still accruing as a percentage of total loans and leases (1)(2) 0.88 % 1.02 % 1.22 % 1.65 % 1.93 % Loans 90 days or more past due and still accruing as a percentage of total loans and leases (1)(2) 0.36 0.52 0.84 1.34 1.60 Nonperforming loans and leases as a percentage of total loans and leases 0.80 1.17 1.68 2.49 2.51 NPAs as a percentage of: Total assets 0.64 0.97 1.62 2.73 2.61 Loans and leases plus foreclosed property 1.00 1.51 2.52 3.94 4.02 Net charge-offs as a percentage of average loans and leases (3) 0.67 1.14 1.57 2.41 1.74 ALLL as a percentage of loans and leases held for investment 1.49 1.76 2.10 2.62 2.51 Ratio of ALLL to: Net charge-offs (3) 2.19 x 1.56 x 1.36 x 1.07 x 1.47 x Nonperforming loans and leases held for investment 1.85 1.46 1.21 1.26 0.98
Asset Quality Ratios (excluding amounts related to
covered loans and covered foreclosed property): (4)
Loans 30 - 89 days past due and still accruing as a
percentage of total loans and leases (1)(2) 0.82 %
0.93 % 1.06 % 1.39 % 1.69 %
Loans 90 days or more past due and still accruing as a
percentage of total loans and leases (1)(2) 0.11
0.15 0.19 0.29 0.32
Nonperforming loans and leases as a percentage of total
loans and leases 0.81
1.20 1.76 2.64 2.71
NPAs as a percentage of:
Total assets 0.58
0.85 1.44 2.64 2.65
Loans and leases plus foreclosed property 0.91
1.33 2.29 3.88 4.18
Net charge-offs as a percentage of average loans
and leases (3) 0.67
1.15 1.59 2.59 1.79
ALLL as a percentage of loans and leases
held for investment 1.42
1.70 2.05 2.63 2.72
Ratio of ALLL to:
Net charge-offs (3) 2.09 x 1.50 x 1.32 x 1.01 x 1.47 x Nonperforming loans and leases held for investment 1.73 1.37 1.13 1.19 0.98
(1) Excludes mortgage loans guaranteed by GNMA. Refer to the footnotes of
preceding table for related amounts.
(2) Excludes mortgage loans guaranteed by the government. Refer to the footnotes
of preceding table for related amounts.
(3) Net charge-offs for 2011 and 2010 include
respectively, related to BB&T's NPA disposition strategy. In connection with
this strategy, approximately
were transferred from loans held for investment to LHFS in 2011 and 2010,
respectively. The disposition of all such loans was complete as of December
(4) These asset quality ratios have been adjusted to remove the impact of covered
loans and covered foreclosed property. Appropriate adjustments to the
numerator and denominator have been reflected in the calculation of these
ratios. 63 Table of Contents BB&T's potential problem loans include loans on nonaccrual status or past due as disclosed in Table 22. In addition, for its commercial portfolio segment, loans that are rated special mention or substandard performing are closely monitored by management as potential problem loans. Refer to Note 3 "Loans and ACL" in the "Notes to Consolidated Financial Statements" herein for additional disclosures related to these potential problem loans. TDRs generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term. As a result, BB&T will work with the borrower to prevent further difficulties, and ultimately to improve the likelihood of recovery on the loan. To facilitate this process, a concessionary modification that would not otherwise be considered may be granted resulting in classification of the loan as a TDR. Refer to Note 1 "Summary of Significant Accounting Policies" in the "Notes to Consolidated Financial Statements" for additional policy information regarding TDRs. BB&T's performing TDRs, excluding government guaranteed mortgage loans, totaled
$1.3 billionat December 31, 2013, essentially flat compared to the prior year. During 2012, a national bank regulatory agency issued guidance that requires certain loans, which have been discharged in bankruptcy and not reaffirmed by the borrower, to be accounted for as TDRs and possibly as nonperforming, regardless of their actual payment history and expected performance. In connection with the issuance of this guidance, BB&T classified $226 millionand $44 millionof performing and nonperforming loans, respectively, as TDRs during the fourth quarter of 2012. All loans subsequently discharged in bankruptcy have been evaluated and classified as performing or nonperforming TDRs based on an evaluation of historical and expected payment performance.
The following table provides a summary of performing TDR activity:
Table 24 Rollforward of Performing TDRs
(Dollars in millions)
Balance at beginning of year
$ 1,327 $ 1,109Inflows 489 417 Change in regulatory guidance - 226 Payments and payoffs (208) (187) Charge-offs (41) (36) Transfers to nonperforming TDRs, net (65) (50) Removal due to the passage of time (108) (109) Non-concessionary re-modifications (41) (43) Removed in connection with the sale of a consumer lending subsidiary (24) - Balance at end of year $ 1,329 $ 1,327Payments and payoffs represent cash received from borrowers in connection with scheduled principal payments, prepayments and payoffs of amounts outstanding. Transfers to nonperforming TDRs represent loans that no longer meet the requirements necessary to reflect the loan in accruing status and as a result are subsequently classified as a nonperforming TDR. TDRs may be removed due to the passage of time if they: (1) did not include a forgiveness of principal or interest, (2) have performed in accordance with the modified terms (generally a minimum of six months), (3) were reported as a TDR over a year end reporting period, and (4) reflected an interest rate on the modified loan that was no less than a market rate at the date of modification. These loans were previously considered TDRs as a result of structural concessions such as extended interest-only terms or an amortization period that did not otherwise conform to normal underwriting guidelines. In addition, certain transactions may be removed from classification as a TDR as a result of a subsequent non-concessionary re-modification. Non-concessionary re-modifications represent TDRs that did not contain concessionary terms at the date of a subsequent renewal/modification and there was a reasonable expectation that the borrower would continue to comply with the terms of the loan subsequent to the date of the re-modification. A re-modification may be considered for such a re-classification if the loan has not had a forgiveness of principal or interest and the modified terms qualify as more than minor such that the re-modified loan is considered a new loan. Alternatively, such loans may be considered for reclassification in years subsequent to the date of the re-modification based on the passage of time as described in the preceding
paragraph. 64 Table of Contents In connection with consumer loan TDRs, a NPL will be returned to accruing status when current as to principal and interest and upon a sustained historical repayment performance (generally a minimum of six months). The following table provides further details regarding the payment status of TDRs: Table 25 TDRs December 31, 2013 Past Due Past Due Current Status 30-89 Days (1) 90 Days Or More (1) Total
(Dollars in millions)
Commercial loans: Commercial and industrial
$ 77100.0 % $ - - % $ - - % $ 77CRE - other 70 100.0 - - - - 70 CRE - residential ADC 19 100.0 - - - - 19 Direct retail lending 173 92.5 12 6.4 2 1.1 187 Sales finance 16 94.1 1 5.9 - - 17 Revolving credit 40 83.3 5 10.4 3 6.3 48 Residential mortgage (2) 659 83.9 109 13.9 17 2.2 785 Other lending subsidiaries 109 86.5 17 13.5 - - 126 Total performing TDRs (2) 1,163 87.5 144 10.8 22 1.7 1,329 Nonperforming TDRs (3) 76 39.4 16 8.3 101 52.3 193 Total TDRs (2) $ 1,23981.4 $ 16010.5 $ 1238.1 $ 1,522
(1) Past due performing TDRs are included in past due disclosures.
(2) Excludes residential mortgage TDRs that are government guaranteed totaling
(3) Nonperforming TDRs are included in nonaccrual loan disclosures.
65 Table of Contents ACL Information related to BB&T's ACL for the last five years is presented in the following table: Table 26 Analysis of ACL December 31, 2013 2012 2011 2010 2009 (Dollars in millions) Beginning balance
$ 2,048 $ 2,285 $ 2,755 $ 2,672 $ 1,607Provision for credit losses (excluding covered loans) 587 1,044 1,119 2,494 2,811 Provision for covered loans 5 13 71 144 - Charge-offs: Commercial (1) (380) (732) (898) (1,508) (720) Direct retail lending (148) (224) (276) (338) (349) Sales finance (23) (26) (32) (48) (72) Revolving credit (85) (81) (95) (118) (127) Residential mortgage (2) (81) (136) (269) (394) (280) Other lending subsidiaries (255) (225) (190) (252) (314) Covered loans (19) (34) (66) - - Total charge-offs (1)(2) (991) (1,458) (1,826) (2,658) (1,862) Recoveries: Commercial 98 71 71 37 21 Direct retail lending 38 36 37 33 19 Sales finance 9 10 9 9 9 Revolving credit 17 18 19 16 12 Residential mortgage 3 3 5 4 5 Other lending subsidiaries 34 26 25 31 23 Total recoveries 199 164 166 130 89 Net charge-offs (1)(2) (792) (1,294) (1,660) (2,528) (1,773) Other changes, net (27) - - (27) 27 Ending balance $ 1,821 $ 2,048 $ 2,285 $ 2,755 $ 2,672ALLL (excluding covered loans) $ 1,618 $ 1,890 $ 2,107 $ 2,564 $ 2,600Allowance for covered loans 114 128 149 144 - RUFC 89 30 29 47 72 Total ACL $ 1,821 $ 2,048 $ 2,285 $ 2,755 $ 2,672
(1) Includes charge-offs of
(2) Includes charge-offs of
connection with BB&T's NPL disposition strategy. The ACL, which totaled
$1.8 billionand $2.0 billionat December 31, 2013and 2012, respectively, 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 ALLL amounted to 1.49% of loans and leases held for investment at December 31, 2013(or 1.42% excluding covered loans), compared to 1.76% (or 1.70% excluding covered loans) at December 31, 2012. The decline in the ALLL reflects continued improvement in credit quality as indicated by improving loss frequency and severity factors in most loan portfolios. The ratio of the ALLL to NPLs held for investment, excluding covered loans, was 1.73x at December 31, 2013compared to 1.37x at December
31, 2012. 66 Table of Contents BB&T's net charge-offs totaled
$792 millionfor 2013, compared to $1.3 billionin 2012. Included in net charge-offs for 2013 and 2012 was $19 millionand $34 million, respectively, of charge-offs related to covered loans. BB&T's net charge-offs as a percentage of average loans and leases was 0.67% (and 0.67% excluding covered loans) for 2013, compared to 1.14% (or 1.15% excluding covered loans), in 2012. Net charge-offs decreased in most lending portfolios, including a 37.2% decrease in commercial and industrial, a 70.8% decrease in CRE - other and a 41.5% reduction in direct retail lending net charge-offs. Net charge-offs for the other lending subsidiaries portfolio increased 11.1%, primarily reflecting growth in the loan portfolio. Management expects that net charge-offs will remain slightly below the normalized range for net charge-offs (which ranges from 50 to 70 basis points).
Refer to Note 3 "Loans and ACL" in the "Notes to Consolidated Financial Statements" for additional disclosures.
The following table presents an estimated allocation of the ALLL at the end of each of the last five years. 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. During 2013, the balance in the unallocated ALLL was allocated to the loan portfolio segments. Table 27 Allocation of ALLL by Category December 31, 2013 2012 2011 2010 2009 % Loans % Loans % Loans % Loans % Loans in each in each in each in each in each Amount category Amount category Amount category Amount category Amount category (Dollars in millions) Balances at end of period applicable to: Commercial
$ 67944.1 % $ 774
Direct retail lending 209 13.7 300
13.8 232 13.5 246 13.3 297 13.8 Sales finance 45 8.1 29 6.8 38 6.9 47 6.8 77 6.1 Revolving credit 115 2.1 102 2.0 112 2.1 109 2.1 127 1.9
Residential mortgage 331 21.3 328 21.2 365 19.2 298 17.0 131
Other lending subsidiaries 239 9.0 277 8.8 197 8.1 198 7.7 264 7.4 Covered 114 1.7 128 2.9 149 4.5 144 6.0 - 7.7 Unallocated - - 80 - 110 - 130 - 130 - Total ALLL 1,732 100.0 % 2,018 100.0 % 2,256 100.0 % 2,708 100.0 % 2,600 100.0 % RUFC 89 30 29 47 72 Total ACL
$ 1,821 $ 2,048 $ 2,285 $ 2,755 $ 2,672Funding Activities Deposits are the primary source of funds for lending and investing activities. Scheduled payments, as well as prepayments, and maturities from portfolios of loans and investment securities also provide a stable source of funds. FHLB advances, other secured borrowings, Federal funds purchased and other short-term borrowed funds, as well as longer-term debt issued through the capital markets, all provide supplemental liquidity sources. BB&T's funding activities are monitored and governed through BB&T's overall asset/liability management process, which is further discussed in the "Market Risk Management" section in "Management's Discussion and Analysis of Financial Condition and Results of Operations" herein. Following is a brief description of the various sources
of funds used by BB&T. Deposits Deposits are attracted principally from clients within BB&T's branch network through the offering of a broad selection of deposit instruments to individuals and businesses, including noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money market deposit accounts, CDs and individual retirement accounts. Deposit account terms vary with respect to the minimum balance required, the time period the funds must remain on deposit and service charge schedules. Interest rates paid on specific deposit types are determined based on (i) the interest rates offered by competitors, (ii) the anticipated amount and timing of funding needs, (iii) the availability and cost of alternative sources of funding, and (iv) anticipated future economic conditions and interest rates. Deposits are attractive sources of funding because of their stability and relative cost. Deposits are regarded as an important part of the overall client relationship and provide opportunities to cross-sell other BB&T services. 67 Table of Contents
Total deposits were
$127.5 billionat December 31, 2013, a decrease of $5.6 billion, or 4.2%, compared to year-end 2012. Noninterest-bearing deposits totaled $35.0 billionat December 31, 2013, an increase of $2.5 billion, or 7.8%, from December 31, 2012. The increase in noninterest-bearing deposits was broad based in nature, with increases in deposits from personal, business and public funds clients. Interest checking and money market and savings accounts decreased $1.5 billion, or 2.1%, compared to the prior year while certificates and other time deposits declined $6.7 billion, or 21.1%, during that same time period. For the year ended December 31, 2013, total deposits averaged $128.6 billion, an increase of $938 million, or 0.7%, compared to 2012. Management currently expects continued growth in client deposit balances during 2014. The following table presents the composition of average deposits for the last five quarters: Table 28 Composition of Average Deposits For the Three Months Ended 12/31/13 9/30/13 6/30/13 3/31/13 12/31/12 (Dollars in millions)
$ 35,347 $ 34,244$
Interest checking 18,969 18,826
19,276 20,169 19,837
Money market and savings 49,298 48,676
48,140 48,431 47,965
Certificates and other time deposits 21,580 25,562 28,034 28,934 31,724
Foreign office deposits -
interest-bearing 712 640 947 385 387 Total average deposits
$ 125,906 $ 127,948 $ 129,983 $ 130,437 $ 131,762
Average deposits for the fourth quarter of 2013 decreased
$2.0 billion, or 6.3% on an annualized basis, compared to the third quarter. Deposit mix continued to improve during the quarter as average noninterest-bearing deposits grew $1.1 billion, while average certificates and other time deposits decreased $4.0 billion. Average noninterest-bearing deposits represented 28.1% of total average deposits for the fourth quarter compared to 26.8% for the prior quarter. Growth in average noninterest-bearing deposits was broad-based, with increases in deposits related to commercial, public funds and personal accounts totaling $500 million, $347 millionand $171 million, respectively. Average interest-checking and money market and savings accounts increased $765 millioncompared to the prior quarter, reflecting growth in personal, public funds and commercial accounts totaling $312 million, $254 millionand $199 million, respectively. The decrease in average certificates and other time deposits was primarily driven by a $3.0 billiondecline in non-client certificates of deposit. Average foreign office deposits increased $72 millioncompared to
the prior quarter.
The cost of interest-bearing deposits was 0.28% for the fourth quarter, a decrease of three basis points compared to the prior quarter.
The following table provides information regarding the scheduled maturities of time deposits that are
Table 29 Scheduled Maturities of Time Deposits
$100,000and Greater December 31, 2013 (Dollars in millions) Three months or less $ 8,034 Over three through six months 1,415 Over six through twelve months 1,473 Over twelve months 3,251 Total $ 14,173 68 Table of Contents Short-term Borrowings BB&T also uses various types of short-term borrowings in meeting funding needs. While deposits remain the primary source for funding loan originations, management uses short-term borrowings as a supplementary funding source for loan growth and other balance sheet management purposes. Short-term borrowings were 2.5% of total funding on average in 2013 as compared to 1.9% in 2012. See Note 7 "Short-Term Borrowings" in the "Notes to Consolidated Financial Statements" herein for further disclosure. The types of short-term borrowings that have been, or may be, used by the Company include Federal funds purchased, securities sold under repurchase agreements, master notes, commercial paper and short-term bank notes. All securities sold under repurchase agreements are reflected as collateralized borrowings on the balance sheet. Short-term borrowings at the end of 2013 were $4.1 billion, an increase of $1.3 billion, or 44.5%, compared to year-end 2012. Average short-term borrowings totaled $4.5 billionduring 2013 compared to $3.4 billionlast year, an increase of 30.8%. The increase in the average balance during 2013 primarily reflects the managed reduction in non-client certificates of deposit.
The following table summarizes certain information for the past three years with respect to short-term borrowings:
Table 30 Short-Term Borrowings As Of / For The Years Ended December 31, 2013 2012 2011 (Dollars in millions)
Securities Sold Under Agreements to Repurchase: Maximum outstanding at any month-end during the year
$ 1,537 $ 813 $ 1,176Balance outstanding at end of year 463 514 619 Average outstanding during the year 662 651 956 Average interest rate during the year 0.25 % 0.30 % 0.73 % Average interest rate at end of year 0.28 0.33 0.31 Federal Funds Purchased and Short-Term Borrowed Funds: Maximum outstanding at any month-end during the year $ 4,722 $ 3,627 $ 9,350Balance outstanding at end of year 3,675 2,350 2,947 Average outstanding during the year 3,797 2,757 4,233 Average interest rate during the year 0.13 % 0.20 % 0.10 % Average interest rate at end of year 0.09 0.19 0.17 Long-term Debt Long-term debt provides funding and, to a lesser extent, regulatory capital. During 2013, long-term debt represented 10.6% of average total funding compared to 11.6% during 2012. At December 31, 2013, long-term debt totaled $21.5 billion, an increase of $2.4 billioncompared to year-end 2012. The increase in long-term debt is primarily due to Branch Banksenior note issuances to obtain liquidity at attractive rates. The average cost of long-term debt was 3.03% in 2013, compared to 3.02% in 2012. See Note 9 "Long-Term Debt" in the "Notes to Consolidated Financial Statements" herein for further disclosure. Exclusive of hedge basis adjustments, FHLB advances represented 37.7% of total outstanding long-term debt at December 31, 2013; senior notes of BB&T represented 30.5% of the year-end balance; subordinated notes of BB&T represented 10.1% of the year-end balance; senior notes of Branch Bankrepresented 14.7% of the year-end balance; and subordinated notes of Branch Bankrepresented 4.6% of the year-end balance. FHLB advances are cost-effective long-term funding sources that provide flexibility to structure the debt in a manner that aids in the management of interest rate risk and liquidity.
69 Table of Contents Shareholders' Equity
Shareholders' equity totaled
The increase in shareholders' equity during 2013 includes
$487 millionin net proceeds from the issuance of Tier 1 qualifying non-cumulative perpetual preferred stock. See Note 9 "Shareholders' Equity" in the "Notes to Consolidated Financial Statements" herein for additional information. In addition, shareholders' equity increased $915 milliondue to net income in excess of dividends declared, and $233 millionas a result of the issuance of additional shares and other transactions in connection with equity-based compensation plans, the 401(k) plan and the dividend reinvestment plan. The net loss in AOCI increased $34 million, primarily due to a $640 millionafter-tax net decrease in the value of the AFS securities portfolio, partially offset by improvements of $411 millionrelated to pensions and other post-retirement benefit plans and $175 millionrelated to changes in unrealized net gains on cash flow hedges. Tangible book value per common share at December 31, 2013was $18.08compared to $16.53at December 31, 2012. As of December 31, 2013, measures of tangible capital were not required by the regulators and, therefore, were considered non-GAAP measures. Refer to the section titled "Capital" herein for a discussion of how BB&T calculates and uses these measures in the evaluation of the Company. Risk Management BB&T has defined and established an enterprise-wide risk culture that places an emphasis on effective risk management through a strong tone at the top by the Board of Directors and Executive Management, accountability at all levels of the organization, an effective challenge environment and incentives to encourage strong risk management behavior. The risk culture promotes judicious risk-taking and discourages rampant revenue generation without consideration of corresponding risks. It is part of BB&T's mission statement that risk is managed to optimize the long-term return to shareholders, while providing a safe and sound investment. Risk management begins with the LOBs, and as such, BB&T has established clear expectations for the LOBs in regards to the identification, monitoring, reporting and response to current and emerging risks. Centrally, risk oversight is managed at the corporate level through oversight, policies and reporting. The Board of Directors and Executive Management established BB&T's risk culture and promoted appropriate risk-taking behaviors. It is the responsibility of senior leadership to clearly communicate the organizational values that support the desired risk culture, recognize and reward behavior that reflects the defined risk culture and monitor and assess the current risk culture of BB&T. Regardless of financial gain or loss, employees are held accountable if they do not follow the established risk management policies and procedures. BB&T's risk culture encourages transparency and open dialogue between all levels in the performance of bank functions, such as the development, marketing and implementation of a product or service. An effective challenge environment is reflected in BB&T's decision-making processes. The Chief Risk Officer leads the RMO, which designs, organizes and manages BB&T's risk framework. The RMO is responsible for ensuring effective risk management oversight, measurement, monitoring, reporting and consistency. The RMO has direct access to the Board of Directors and Executive Management to communicate any risk issues (identified or emerging) as well as the performance of the risk management activities throughout the Company. The principal types of inherent risk include regulatory, credit, liquidity, market, operational, reputation and strategic risks. Compliance risk Compliance risk is the risk to earnings, capital, or reputation arising from violations of, or noncompliance with, current and changing laws, regulations, supervisory guidance or regulatory expectations. Credit risk Credit risk is the risk to earnings or capital arising from the default, inability or unwillingness of a borrower, obligor, or counterparty to meet the terms of any financial obligation with BB&T or otherwise perform as agreed. Credit risk exists in all activities where success depends on the performance of a borrower, obligor, or counterparty. Credit risk arises when BB&T funds are extended, committed, invested, or otherwise exposed through actual or implied contractual agreements, whether on or off the balance sheet. Credit risk also occurs when the credit quality of an issuer whose securities or other instruments the bank holds deteriorates. 70 Table of Contents
BB&T has established the following general practices to manage credit risk:
· limiting the amount of credit that individual lenders may extend to a borrower;
· establishing a process for credit approval accountability;
· careful initial underwriting and analysis of borrower, transaction, market and
· ongoing servicing and monitoring of individual loans and lending relationships;
· continuous monitoring of the portfolio, market dynamics and the economy; and
· periodically reevaluating the bank's strategy and overall exposure as economic,
market and other relevant conditions change.
The following discussion presents the principal types of lending conducted by BB&T and describes the underwriting procedures and overall risk management
of BB&T's lending function. Underwriting Approach Recognizing that the loan portfolio is a primary source of profitability and risk, proper loan underwriting is critical to BB&T's long-term financial success. BB&T's underwriting approach is designed to define acceptable combinations of specific risk-mitigating features that ensure credit relationships conform to BB&T's risk philosophy. Provided below is a summary of the most significant underwriting criteria used to evaluate new loans and loan renewals:
· Cash flow and debt service coverage-cash flow adequacy is a necessary condition
of creditworthiness, meaning that loans must either be clearly supported by a
borrower's cash flow or, if not, must be justified by secondary repayment
· Secondary sources of repayment-alternative repayment funds are a significant
risk-mitigating factor as long as they are liquid, can be easily accessed and
provide adequate resources to supplement the primary cash flow source.
· Value of any underlying collateral-loans are generally secured by the asset
being financed. Because an analysis of the primary and secondary sources of
repayment is the most important factor, collateral, unless it is liquid, does
not justify loans that cannot be serviced by the borrower's normal cash flows.
· Overall creditworthiness of the customer, taking into account the customer's
relationships, both past and current, with BB&T and other lenders-BB&T's
success depends on building lasting and mutually beneficial relationships with
clients, which involves assessing their financial position and background.
· Level of equity invested in the transaction-in general, borrowers are required
to contribute or invest a portion of their own funds prior to any loan advances.
Commercial Loan and Lease Portfolio
The commercial loan and lease portfolio represents the largest category of the Company's total loan portfolio. BB&T's commercial lending program is generally targeted to serve small-to-middle market businesses with sales of
$250 millionor less. In addition, BB&T's Corporate Banking Groupprovides lending solutions to large corporate clients. Traditionally, lending to small and mid-sized businesses has been among BB&T's strongest market segments. Commercial and small business loans are primarily originated through BB&T's Community Bank. In accordance with the Company's lending policy, each loan undergoes a detailed underwriting process, which incorporates BB&T's underwriting approach, procedures and evaluations described above. Commercial loans are typically priced with an interest rate tied to market indices, such as the prime rate or LIBOR. Commercial loans are individually monitored and reviewed for any possible deterioration in the ability of the client to repay the loan. Approximately 90% of BB&T's commercial loans are secured by real estate, business equipment, inventories and other types of collateral. 71 Table of Contents Direct Retail Loan Portfolio The direct retail loan portfolio primarily consists of a wide variety of loan products offered through BB&T's branch network. Various types of secured and unsecured loans are marketed to qualifying existing clients and to other creditworthy candidates in BB&T's market area. The vast majority of direct retail loans are secured by first or second liens on residential real estate and include both closed-end home equity loans and revolving home equity lines of credit. Direct retail loans are subject to the same rigorous lending policies and procedures as described above for commercial loans and are underwritten with note amounts and credit limits that ensure consistency with the Company's risk philosophy.
During January of 2014, approximately
The sales finance category primarily includes secured indirect installment loans to consumers for the purchase of new and used automobiles, boats and recreational vehicles. Such loans are originated through approved franchised and independent dealers throughout the BB&T market area. These loans are relatively homogenous and no single loan is individually significant in terms of its size and potential risk of loss. Sales finance loans are subject to the same rigorous lending policies and procedures as described above for commercial loans and are underwritten with note amounts and credit limits that ensure consistency with the Company's risk philosophy. In addition to its normal underwriting due diligence, BB&T uses application systems and "scoring systems" to help underwrite and manage the credit risk in its sales finance portfolio. Also included in the sales finance category are commercial lines, serviced by the
Dealer Finance Department, to finance dealer wholesale inventory ("Floor Plan Lines") for resale to consumers. Floor Plan Linesare underwritten by commercial loan officers in compliance with the same rigorous lending policies described above for commercial loans. In addition, Floor Plan Linesare subject to intensive monitoring and oversight to ensure quality and to mitigate risk, including from fraud.
Revolving Credit Loan Portfolio
The revolving credit portfolio comprises the outstanding balances on credit cards and BB&T's checking account overdraft protection product,
Residential Mortgage Loan Portfolio
Branch Bankoffers various types of fixed- and adjustable-rate loans for the purpose of constructing, purchasing or refinancing residential properties. BB&T primarily originates conforming mortgage loans and higher quality jumbo and construction-to-permanent loans for owner-occupied properties. Conforming loans are loans that are underwritten in accordance with the underwriting standards set forth by FNMA and FHLMC. They are generally collateralized by one-to-four-family residential real estate, typically have loan-to-collateral value ratios of 80% or less, and are made to borrowers in good credit standing. Risks associated with the mortgage lending function include interest rate risk, which is mitigated through the sale of a substantial portion of conforming fixed-rate loans in the secondary mortgage market and an effective MSR hedging process. Borrower risk is lessened through rigorous underwriting procedures and mortgage insurance. The right to service the loans and receive servicing income is generally retained when conforming loans are sold. Management believes that the retention of mortgage servicing is a relationship driver in retail banking and a part of management's strategy to establish profitable long-term customer relationships and offer high quality client service. BB&T also purchases residential mortgage loans from correspondent originators. The loans purchased from third-party originators are subject to the same underwriting and risk-management criteria as loans originated internally.
Other Lending Subsidiaries Portfolio
BB&T's other lending subsidiaries portfolio consists of loans originated through six LOBs that provide specialty finance alternatives to consumers and businesses including: dealer-based financing of equipment for small businesses and consumers, commercial equipment leasing and finance, insurance premium finance, indirect nonprime automobile finance, and full-service commercial mortgage banking. BB&T offers these services to bank clients as well as nonbank clients within and outside BB&T's primary geographic market area. 72 Table of Contents BB&T's other lending subsidiaries adhere to the same overall underwriting approach as the commercial and consumer lending portfolio and also utilize automated credit scoring to assist with underwriting credit risk. The majority of these loans are relatively homogenous and no single loan is individually significant in terms of its size and potential risk of loss. The majority of the loans are secured by real estate, automobiles, equipment or unearned insurance premiums. As of
December 31, 2013, included in the other lending subsidiaries portfolio are loans to nonprime borrowers of approximately $2.8 billion, or 2.4% of the total BB&T loan and lease portfolio. Covered Loan Portfolio
$2.0 billionof loans covered by loss sharing agreements with the FDIC, which are primarily CRE and residential mortgage loans. Refer to Note 3 "Loans and ACL" in the "Notes to Consolidated Financial Statements" in this report for additional disclosures related to BB&T's covered loans. Liquidity risk
Liquidity risk is the risk to ongoing operations arising from the inability to accommodate liability maturities or deposit withdrawals, fund asset growth, or meet contractual obligations when they come due. For additional information concerning BB&T's management of liquidity risk, see the "Liquidity" section of "Management's Discussion and Analysis" herein. Market risk
Market risk is the risk to earnings or capital arising from changes in the market value of portfolios, securities, or other financial instruments due to changes in the level, volatility, or correlations among financial market rates or prices, including interest rates, foreign exchange rates, equity prices, or other relevant rates or prices. For additional information concerning BB&T's management of market risk, see the "Market Risk Management" section of "Management's Discussion and Analysis" herein. Operational risk
Operational risk is the risk to earnings or capital arising from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, which is the risk of loss arising from defective transactions, litigation or claims made, or the failure to adequately protect company-owned assets. Reputation risk Reputation risk is the risk to earnings, capital, enterprise value, the BB&T brand, and public confidence arising from negative publicity or public opinion, whether real or perceived, regarding BB&T's business practices, products and services, transactions, or other activities undertaken by BB&T, its representatives, or its partners. Reputation risk may impact BB&T's clients, employees, communities or shareholders, and is often a residual risk that arises when other risks are not managed properly. Strategic risk Strategic risk is the risk to earnings, capital, enterprise value, and to the achievement of BB&T's Vision, Mission, Purpose, and business objectives that arises from BB&T's business strategy, adverse business decisions, improper or ineffective implementation of decisions, or lack of responsiveness to changes in business environment. Strategic risk is a function of the compatibility of BB&T's strategic goals, the business strategies developed to achieve those goals, the resources deployed against these goals, and the quality of implementation. 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 LOBs. 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. 73 Table of Contents
Interest Rate Market Risk (Other than Trading)
BB&T actively manages market risk associated with asset and liability portfolios with a focus on the strategic pricing of asset and liability accounts and management of appropriate maturity mixes of assets and liabilities. The goal of these activities is the development of appropriate maturity and repricing opportunities in BB&T's portfolios of assets and liabilities that will produce reasonably consistent net interest income during periods of changing interest rates. These portfolios are analyzed for proper fixed-rate and variable-rate mixes under various interest rate scenarios. The asset/liability management process is designed to achieve relatively stable NIM and assure liquidity by coordinating the volumes, maturities or repricing opportunities of earning assets, deposits and borrowed funds. Among other things, this process gives consideration to prepayment trends related to securities, loans and leases and certain deposits that have no stated maturity. Prepayment assumptions are developed using a combination of market data and internal historical prepayment experience for residential mortgage-related loans and securities, and internal historical prepayment experience for client deposits with no stated maturity and loans that are not residential mortgage related. These assumptions are subject to monthly back-testing, and are adjusted as deemed necessary to reflect changes in interest rates relative to the reference rate of the underlying assets or liabilities. On a monthly basis, BB&T evaluates the accuracy of its Simulation model, which includes an evaluation of its prepayment assumptions, to ensure that all significant assumptions inherent in the model appropriately reflect changes in the interest rate environment and related trends in prepayment activity. It is the responsibility of the MRLCC to determine and achieve the most appropriate volume and mix of earning assets and interest-bearing liabilities, as well as to ensure an adequate level of liquidity and capital, within the context of corporate performance goals. The MRLCC also sets policy guidelines and establishes long-term strategies with respect to interest rate risk exposure and liquidity. The MRLCC meets regularly to review BB&T's interest rate risk and liquidity positions in relation to present and prospective market and business conditions, and adopts funding and balance sheet management strategies that are intended to ensure that the potential impacts on earnings and liquidity as a result of fluctuations in interest rates are within acceptable tolerance guidelines. BB&T uses derivatives primarily to manage economic risk related to securities, commercial loans, MSRs and mortgage banking operations, long-term debt and other funding sources. BB&T also uses derivatives to facilitate transactions on behalf of its clients. As of
December 31, 2013, BB&T had derivative financial instruments outstanding with notional amounts totaling $59.3 billion, with a net fair value of a loss of $106 million. See Note 18 "Derivative Financial Instruments" in the "Notes to Consolidated Financial Statements" herein for additional disclosures. The majority of BB&T's assets and liabilities are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Fluctuations in interest rates and actions of the FRB to regulate the availability and cost of credit have a greater effect on a financial institution's profitability than do the effects of higher costs for goods and services. Through its balance sheet management function, which is monitored by the MRLCC, management believes that BB&T is positioned to respond to changing needs for liquidity, changes in interest rates and inflationary trends. Management uses the Simulation to measure the sensitivity of projected earnings to changes in interest rates. The Simulation model projects net interest income and interest rate risk for a rolling two-year period of time. The Simulation takes into account the current contractual agreements that BB&T has made with its customers on deposits, borrowings, loans, investments and commitments to enter into those transactions. Furthermore, the Simulation considers the impact of expected customer behavior. Management monitors BB&T's interest sensitivity by means of a model that incorporates the current volumes, average rates earned and paid, and scheduled maturities and payments of asset and liability portfolios, together with multiple scenarios that include projected prepayments, repricing opportunities and anticipated volume growth. Using this information, the model projects earnings based on projected portfolio balances under multiple interest rate scenarios. This level of detail is needed to simulate the effect that changes in interest rates and portfolio balances may have on the earnings of BB&T. This method is subject to the accuracy of the assumptions that underlie the process, but management believes that it provides a better illustration of the sensitivity of earnings to changes in interest rates than other analyses such as static or dynamic gap. In addition to the Simulation, BB&T uses EVE analysis to focus on projected changes in capital given potential changes in interest rates. This measure also allows BB&T to analyze interest rate risk that falls outside the analysis window contained in the Simulation model. 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. 74 Table of Contents The asset/liability management process requires a number of key assumptions. Management determines the most likely outlook for the economy and interest rates by analyzing external factors, including published economic projections and data, the effects of likely monetary and fiscal policies, as well as any enacted or prospective regulatory changes. BB&T's current and prospective liquidity position, current balance sheet volumes and projected growth, accessibility of funds for short-term needs and capital maintenance are also considered. This data is combined with various interest rate scenarios to provide management with the information necessary to analyze interest sensitivity and to aid in the development of strategies to reach performance goals. The following table shows the effect that the indicated changes in interest rates would have on net interest income as projected for the next twelve months assuming a gradual change in interest rates as described below. Key assumptions in the preparation of the table include prepayment speeds of mortgage-related and other assets, cash flows and maturities of derivative financial instruments, loan volumes and pricing, deposit sensitivity, customer preferences and capital plans. The resulting change in net interest income reflects the level of sensitivity that interest sensitive income has in relation to changing interest rates. Table 31 Interest Sensitivity Simulation Analysis Interest Rate Scenario Annualized Hypothetical Percentage Linear Prime Rate Change in Net Interest Income Change in December 31, December 31, Prime Rate 2013 2012 2013 2012 Up 200 bps 5.25 % 5.25 % 2.27 % 3.16 % Up 100 4.25 4.25 1.35 2.04 No Change 3.25 3.25 - - Down 25 3.00 3.00 0.39 (0.13) The MRLCC has established parameters related to interest sensitivity that prescribe a maximum negative impact on net interest income under different interest rate scenarios. In the event the results of the Simulation model fall outside the established parameters, management will make recommendations to the MRLCC on the most appropriate response given the current economic forecast. The following parameters and interest rate scenarios are considered BB&T's primary measures of interest rate risk:
· Maximum negative impact on net interest income of 2% for the next 12 months
assuming a linear change in interest rates totaling 100 basis points over four
months followed by a flat interest rate scenario for the remaining eight month
· Maximum negative impact on net interest income of 4% for the next 12 months
assuming a linear change of 200 basis points over eight months followed by a
flat interest rate scenario for the remaining four month period. If a rate change of 200 basis points cannot be modeled due to a low level of rates, a proportional limit applies. Management currently only models a negative 25 basis point decline because larger declines would have resulted in a Federal funds rate of less than zero. In a situation such as this, the maximum negative impact on net interest income is adjusted on a proportional basis. Regardless of the proportional limit, the negative risk exposure limit will be the greater of 1% or the proportional limit. Management has also established a maximum negative impact on net interest income of 4% for an immediate 100 basis points change in rates and 8% for an immediate 200 basis points change in rates. These "interest rate shock" limits are designed to create an outer band of acceptable risk based upon a significant and immediate change in rates. Management must also consider how the balance sheet and interest rate risk position could be impacted by changes in balance sheet mix. Liquidity in the banking industry has been very strong during the current economic cycle. Much of this liquidity increase has been due to a significant increase in noninterest-bearing demand deposits. Consistent with the industry,
Branch Bankhas 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. 75 Table of Contents Beta represents the correlation between overall market interest rates and the rates paid by BB&T on interest-bearing deposits. BB&T applies an average beta of approximately 80% to its managed rate deposits for determining its interest rate sensitivity. Managed rate deposits are high beta, premium money market and interest checking accounts, which attract significant client funds when needed to support balance sheet growth. BB&T regularly conducts sensitivity on other key variables to determine the impact they could have on the interest rate risk position. This allows BB&T to evaluate the likely impact on its balance sheet management strategies due to a more extreme variation in a key assumption than expected. The following table shows the effect that the loss of demand deposits and an associated increase in managed rate deposits would have on BB&T's interest-rate sensitivity position. For purposes of this analysis, BB&T modeled the incremental beta for the replacement of the lost demand deposits at 100%. Table 32 Deposit Mix Sensitivity Analysis Results Assuming a Decrease in Increase in Base Scenario Noninterest
Bearing Demand Deposits
at December 31, Rates 2013 (1)
$1 Billion $5 BillionUp 200 bps 2.27 % 2.01 % 0.98 % Up 100 1.35 1.19 0.56
(1) The base scenario is equal to the annualized hypothetical percentage change in net interest income at
December 31, 2013as presented in the preceding table. If rates increased 200 basis points, BB&T could absorb the loss of $8.8 billion, or 25.3%, of noninterest bearing demand deposits and replace them with managed rate deposits with a beta of 100% before becoming neutral to interest rate changes. The following table shows the effect that the indicated changes in interest rates would have on EVE. Key assumptions in the preparation of the table include prepayment speeds of mortgage-related and other assets, cash flows and maturities of derivative financial instruments, loan volumes and pricing and deposit sensitivity. The resulting change in the EVE reflects the level of sensitivity that EVE has in relation to changing interest rates. Table 33 EVE Simulation Analysis Hypothetical Percentage EVE/Assets Change in EVE Change in December 31, December 31, Rates 2013 2012 2013 2012 Up 200 bps 10.3 % 7.5 % (4.5) % 16.6 % Up 100 10.6 7.2 (1.4) 11.9 No Change 10.8 6.4 - - Down 25 10.8 6.2 (0.4) (4.1)
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 LOBs. 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 year ended
December 31, 2013were less than $1 million. For the year ended December 31, 2012, the average 99% one-day VaR was less than $1 millionand the maximum daily VaR was approximately $3 million. Market risk disclosures under Basel II.5 are available in the Additional Disclosures section of the Investor Relations site on www.bbt.com/about. 76 Table of Contents Liquidity Liquidity represents the continuing ability to meet funding needs, including deposit withdrawals, timely repayment of borrowings and other liabilities, and funding of loan commitments. In addition to the level of liquid assets, such as cash, cash equivalents and AFS securities, many other factors affect the ability to meet liquidity needs, including access to a variety of funding sources, maintaining borrowing capacity in national money markets, growing core deposits, the repayment of loans and the ability to securitize or package loans for sale. BB&T monitors key liquidity metrics at both the Parent Company and Branch Bank. Parent Company The purpose of the Parent Company is to serve as the primary capital financing vehicle for the operating subsidiaries. The assets of the Parent Company consist primarily of cash on deposit with Branch Bank, equity investments in subsidiaries, advances to subsidiaries, accounts receivable from subsidiaries, and other miscellaneous assets. The principal obligations of the Parent Company are principal and interest payments on long-term debt. The main sources of funds for the Parent Company are dividends and management fees from subsidiaries, repayments of advances to subsidiaries, and proceeds from the issuance of equity and long-term debt. The primary uses of funds by the Parent Company are for investments in subsidiaries, advances to subsidiaries, dividend payments to common and preferred shareholders, retirement of common stock and interest and principal payments due on long-term debt. The primary source of funds used for Parent Company cash requirements was dividends received from subsidiaries, which totaled $1.3 billionduring 2013. In addition, the Parent Company issued $1.0 billionof senior notes and repaid $500 millionof maturing long-term debt. Funds raised through master note agreements with commercial clients are placed in a note receivable at Branch Bankprimarily for its use in meeting short-term funding needs and, to a lesser extent, to support the short-term temporary cash needs of the Parent Company. At December 31, 2013and 2012, master note balances totaled $24 millionand $37 million, respectively.
Liquidity at the Parent Company is more susceptible to market disruptions. BB&T prudently manages cash levels at the Parent Company to cover a minimum of one year of projected contractual cash outflows which includes unfunded external commitments, debt service, preferred dividends and scheduled debt maturities without the benefit of any new cash infusions. Generally, BB&T maintains a significant buffer above the projected one year of contractual cash outflows. In determining the buffer, BB&T considers cash for common dividends, unfunded commitments to affiliates, being a source of strength to its banking subsidiaries, and being able to withstand sustained market disruptions which may limit access to the capital markets. As of
December 31, 2013and December 31, 2012, the Parent Company had 27 months and 35 months, respectively, of cash on hand to satisfy projected contractual cash outflows as described above. Branch Bank
BB&T carefully manages liquidity risk at
Branch Bank. Branch Bank'sprimary source of funding is customer deposits. Continued access to customer deposits is highly dependent on the confidence the public has in the stability of the bank and its ability to return funds to the client when requested. BB&T maintains a strong focus on its reputation in the market to ensure continued access to client deposits. BB&T integrates its risk appetite into its overall risk management framework to ensure the bank does not exceed its risk tolerance through its lending and other risk taking functions and thus risk becoming undercapitalized. BB&T believes that sufficient capital is paramount to maintaining the confidence of its depositors and other funds providers. BB&T has extensive capital management processes in place to ensure it maintains sufficient capital to absorb losses and maintain a highly capitalized position that will instill confidence in the bank and allow continued access to deposits and other funding sources. Branch Bankmonitors many liquidity metrics at the bank including funding concentrations, diversification, maturity distribution, contingent funding needs and ability to meet liquidity requirements under times of stress. Branch Bankhas several major sources of funding to meet its liquidity requirements, including access to capital markets through issuance of senior or subordinated bank notes and institutional CDs, access to the FHLB system, dealer repurchase agreements and repurchase agreements with commercial clients, access to the overnight and term Federal funds markets, use of a Cayman branch facility, access to retail brokered CDs and a borrower in custody program with the FRB for the discount window. As of December 31, 2013, BB&T has approximately $57.3 billionof secured borrowing capacity, which represents approximately 357% of one year wholesale funding maturities. 77 Table of Contents
BB&T also monitors the ability to meet customer demand for funds under both normal and stressed market conditions. In considering its liquidity position, management evaluates BB&T's funding mix based on client core funding, client rate-sensitive funding and non-client rate-sensitive funding. In addition, management also evaluates exposure to rate-sensitive funding sources that mature in one year or less. Management also measures liquidity needs against 30 days of stressed cash outflows for
Branch Bank. To ensure a strong liquidity position, management maintains a liquid asset buffer of cash on hand and highly liquid unpledged securities. The Company has established a policy that the liquid asset buffer would be a minimum of 5% of total assets, but intends to maintain the ratio well in excess of this level. As of December 31, 2013and December 31, 2012, BB&T's liquid asset buffer was 14.6% and 11.1%, respectively, of total assets. The ability to raise funding at competitive prices is affected by the rating agencies' views of the Parent Company's and Branch Bank'scredit quality, liquidity, capital and earnings. Management meets with the rating agencies on a regular basis to discuss current outlooks. The ratings for BB&T and Branch Bankby the four major rating agencies are detailed in the table below: Table 34 Credit Ratings of BB&T Corporation and Branch Bank December 31, 2013 S&P Moody's Fitch DBRS BB&T Corporation: Commercial Paper A-2 P-1 F1 R-1(low) Issuer A- A2 A+ A(high) LT/Senior debt A- A2 A+ A(high) Subordinated debt BBB+ A3 A A Branch Bank:
Bank financial strength N/A B- a+ N/A Long term deposits N/A A1 AA- AA(low) LT/Senior unsecured bank notes A A1 A+ AA(low) Other long term senior obligations A A1 A+ AA(low) Other short term senior obligations A-1 P-1 F1 R-1(middle) Short term bank notes A-1 P-1 F1 R-1(middle) Short term deposits N/A P-1 F1+ R-1(middle) Subordinated bank notes A- A2 A A(high) Ratings Outlook: Credit Trend Negative Negative Stable Stable
BB&T and Branch Bankhave Contingency Funding Plans designed to ensure that liquidity sources are sufficient to meet their ongoing obligations and commitments, particularly in the event of a liquidity contraction. These plans are designed to examine and quantify the organization's liquidity under various "stress" scenarios. Additionally, the plans provide a framework for management and other critical personnel to follow in the event of a liquidity contraction or in anticipation of such an event. The plans address authority for activation and decision making, liquidity options and the responsibilities of key departments in the event of a liquidity contraction. The liquidity options available to management could include seeking secured funding, asset sales, and under the most extreme scenarios, curtailing new loan originations. Management believes current sources of liquidity are adequate to meet BB&T's current requirements and plans for continued growth. See Note 4 "Premises and Equipment," Note 9 "Long-Term Debt" and Note 14 "Commitments and Contingencies" in the "Notes to Consolidated Financial Statements" for additional information regarding outstanding balances of sources of liquidity and contractual commitments and obligations.
Contractual Obligations, Commitments, Contingent Liabilities, Off-Balance Sheet Arrangements, And Related Party Transactions
The following table presents, as of
December 31, 2013, BB&T's contractual obligations by payment date. The payment amounts represent those amounts contractually due to the recipient. The table excludes liabilities recorded where management cannot reasonably estimate the timing of any payments that may be required in connection with these liabilities. Further discussion of the nature of each obligation is included in Note 14 "Commitments and Contingencies" in the "Notes to Consolidated Financial Statements." 78 Table of Contents Table 35 Contractual Obligations and Other Commitments December 31, 2013 Less than 1 to 3 3 to 5 After 5 Total One Year Years Years Years (Dollars in millions) Long-term debt $ 21,210 $ 2,143 $ 7,293 $ 4,629 $ 7,145Operating leases 1,508 214 383 297 614
Commitments to fund affordable housing investments 464
291 153 13 7 Private equity commitments (1) 245 45 139 56 5 Time deposits 24,983 16,775 6,810 1,398 - Contractual interest payments (2) 4,014 836 1,331 798 1,049 Total contractual cash obligations
(1) Maturities are based on estimated payment dates.
(2) Includes accrued interest, future contractual interest obligations and the impact of hedges used to manage interest rate risk.
Variable rate payments are based upon the rate in effect at
BB&T's significant commitments include investments in affordable housing and historic building rehabilitation projects throughout its market area and private equity funds. Refer to Note 1 "Summary of Significant Accounting Policies" and to Note 14 "Commitments and Contingencies" in the "Notes to Consolidated Financial Statements" for further discussion of these commitments. In addition, BB&T enters into derivative contracts to manage various financial risks. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or referenced interest rate. Derivative contracts are carried at fair value on the Consolidated Balance Sheets with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. Derivative contracts are written in amounts referred to as notional amounts, which only provide the basis for calculating payments between counterparties and are not a measure of financial risk. Therefore, the derivative liabilities recorded on the balance sheet as of
December 31, 2013do not represent the amounts that may ultimately be paid under these contracts. Further discussion of derivative instruments is included in Note 1 "Summary of Significant Accounting Policies" and Note 18 "Derivative Financial Instruments" in the "Notes to Consolidated Financial Statements." In the ordinary course of business, BB&T indemnifies its officers and directors to the fullest extent permitted by law against liabilities arising from litigation. BB&T also issues standard representation and warranties in underwriting agreements, merger and acquisition agreements, loan sales, brokerage activities and other similar arrangements. Counterparties in many of these indemnifications provide similar indemnifications to BB&T. Although these agreements often do not specify limitations, BB&T does not believe that any payments related to these guarantees would materially change the financial condition or results of operations of BB&T. BB&T holds public funds in certain states that do not require 100% collateralization on public fund bank deposits. In these states, should the failure of another public fund depository institution result in a loss for the public entity, the resulting shortfall would have to be absorbed on a pro-rata basis by the remaining financial institutions holding public funds in that state. As a member of the FHLB, BB&T is required to maintain a minimum investment in capital stock. The board of directors of the FHLB can increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Agency. Because the extent of any obligation to increase BB&T's investment in the FHLB depends entirely upon the occurrence of a future event, potential future payments to the FHLB are not determinable. In the normal course of business, BB&T is also a party to financial instruments to meet the financing needs of clients and to mitigate exposure to interest rate risk. Such financial instruments include commitments to extend credit and certain contractual agreements, including standby letters of credit and financial guarantee arrangements. Further discussion of BB&T's commitments is included in Note 14 "Commitments and Contingencies" and Note 17 "Fair Value Disclosures" in the "Notes to Consolidated Financial Statements." 79 Table of Contents Related Party Transactions
The Company may extend credit to its officers and directors in the ordinary course of business. These loans are made under substantially the same terms as comparable third-party lending arrangements and are in compliance with applicable banking regulations.
Capital The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. BB&T's principal goals related to the maintenance of capital are to provide adequate capital to support BB&T's risk profile consistent with the Board-approved risk appetite, provide financial flexibility to support future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, achieve optimal credit ratings for BB&T and its subsidiaries and provide a competitive return to shareholders. Management regularly monitors the capital position of BB&T on both a consolidated and bank level basis. In this regard, management's overriding policy is to maintain capital at levels that are in excess of the operating capital guidelines, which are above the regulatory "well capitalized" levels. Management has implemented stressed capital ratio minimum guidelines to evaluate whether capital ratios calculated with planned capital actions are likely to remain above minimums specified by the FRB for the annual CCAR. Breaches of stressed minimum guidelines prompt a review of the planned capital actions included in BB&T's capital plan. Table 36 BB&T's Internal Capital Guidelines Prior to Basel III Operating Stressed Tier 1 Capital Ratio 10.0 % 7.5 % Total Capital Ratio 12.0 9.5 Tier 1 Leverage Capital Ratio 7.0 5.0 Tangible Capital Ratio 6.0 4.0 Tier 1 Common Equity Ratio 8.5 6.0
Payments of cash dividends to BB&T's shareholders and repurchases of common shares are the methods used to manage any excess capital generated. In addition, management closely monitors the Parent Company's double leverage ratio (investments in subsidiaries as a percentage of shareholders' equity) with the intention of maintaining the ratio below 125%. The active management of the subsidiaries' equity capital, as described above, is the process used to manage this important driver of Parent Company liquidity and is a key element in the management of BB&T's capital position. The capital of BB&T's subsidiaries is regularly monitored to determine if the levels that management believes are the most beneficial and efficient for their operations are maintained. Management intends to maintain capital at
Branch Bankat levels that will result in classification as "well-capitalized" for regulatory purposes. Secondarily, it is management's intent to maintain Branch Bank'scapital at levels that result in regulatory risk-based capital ratios that are generally comparable with peers of similar size, complexity and risk profile. If the capital levels of Branch Bankincrease above these guidelines, excess capital may be transferred to the Parent Company, subject to regulatory and other operating considerations, in the form of special dividend payments. While nonrecurring events or management decisions may result in the Company temporarily falling below its operating minimum guidelines for one or more of these ratios, it is management's intent through capital planning to return to these targeted operating minimums within a reasonable period of time. Such temporary decreases below the operating minimums shown above are not considered an infringement of BB&T's overall capital policy provided a return above the minimums is forecast to occur within a reasonable time period. On March 14, 2013, the FRB informed BB&T that it objected to certain qualitative elements of its capital plan. BB&T resubmitted its plan on June 11, 2013. On August 23, 2013, BB&T announced that the FRB did not object to the Company's revised plan.
Risk-based capital ratios, which include Tier 1 Capital, Total Capital and Tier 1 Common Equity, are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.
BB&T's Tier 1 common equity ratio was 9.9% at
December 31, 2013compared to 9.0% at December 31, 2012. The increase in regulatory capital was primarily due to strong capital generation during 2013. 80 Table of Contents
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. Management's capital deployment plan in order of preference is to focus on organic growth, dividends, strategic opportunities and share repurchases.
Table 37 Capital Ratios
December 31, 20132012 (Dollars in millions)
Risk-based: Tier 1 (1) 11.8 % 10.5 % Total (1) 14.3 13.4 Leverage capital 9.3 8.2
Non-GAAP capital measures (2)
Tangible common equity as a percentage of tangible assets 7.3 % 6.5 % Tier 1 common equity as a percentage of risk-weighted assets (1) 9.9 9.0 Tangible common equity (book value) per common share (3)
$ 18.08 $ 16.53
Calculations of tangible common equity, Tier 1 common equity and tangible
Total shareholders' equity
Preferred stock 2,603 2,116 Noncontrolling interests 50 65 Intangible assets 7,383 7,477 Tangible common equity
Regulatory adjustments 698 692 Tier 1 common equity (Basel I)
$ 13,471 $ 12,257Total assets $ 183,010 $ 184,499Less: Intangible assets 7,383 7,477 Tangible assets (3)
Total risk-weighted assets (1)
Common shares outstanding at end of period (in thousands)
(1) Tier 1 capital, total capital and Tier 1 common equity ratios as of December
31, 2012 were previously reported on BB&T's
11.0%, 13.9% and 9.3%, respectively. Risk-weighted assets as of
2012 was previously reported on BB&T's
(2) Tangible common equity, Tier 1 common equity and related ratios are non-GAAP
measures. Management uses these measures to assess the quality of capital and
believes that investors may find them useful in their analysis of the
Company. These capital measures are not necessarily comparable to similar
capital measures that may be presented by other companies.
(3) During 2013, the calculation of tangible book value per common share was
revised to be based on tangible common equity whereas this calculation was
previously based upon Tier 1 common equity. In addition, the calculation of
tangible assets was revised to no longer include deferred taxes on intangible
assets. Previously presented information has been revised to conform to the
current presentation. BB&T's estimated common equity Tier 1 ratio under Basel III, on a fully phased-in basis, was approximately 9.6% at
December 31, 2013based on management's interpretation of the final rules adopted by the FRB on July 2, 2013, which established a new comprehensive capital framework for U.S. banking organizations. The minimum required common equity Tier 1 ratio, including the capital conservation buffer, will gradually increase from 4.5% on January 1, 2015to 7.0% on January 1, 2019. The following table presents the calculation of the Tier 1 common equity ratio under the U.S. Basel III guidelines: 81 Table of Contents Table 38 Basel III Capital Ratios (1) December 31, 2013(Dollars in millions)
Tier 1 common equity under Basel I definition
$ 13,471Net impact of differences between Basel I and Basel III definitions 98 Tier 1 common equity under Basel III definition $ 13,569Risk-weighted assets under Basel III definition $ 141,962Common equity Tier 1 ratio under Basel III 9.6 %
(1) Regulatory capital information is preliminary. The Basel III amounts and related common
equity Tier 1 ratio reflects management's interpretation of the regulatory requirements
on a fully phased-in basis and is subject to change. Table 39
Quarterly Financial Summary-Unaudited
2013 2012 Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter (Dollars in millions, except per share data)
Consolidated Summary of Operations:
$ 1,566 $ 1,639 $ 1,643 $ 1,659 $ 1,726 $ 1,720 $ 1,728 $ 1,743Interest expense 204 222 228 237 250 237 266 307 Provision for credit losses 60 92 168 272 252 244 273 288 Securities gains (losses), net 5 - 23 23 - (1) (2) (9) Other noninterest income 980 905 1,023 978 1,020 964 968 880 Noninterest expense 1,456 1,471 1,496 1,414 1,488 1,529 1,426 1,385 Provision for income taxes (1) 243 450 221 481 207 177 191 189 Net income (1) 588 309 576 256 549 496 538 445 Noncontrolling interest 14 4 16 16 13 2 20 14 Preferred stock dividends 37 37 13 30 30 25 8 - Net income available to common shareholders (1) $ 537 $ 268 $ 547 $ 210 $ 506 $ 469 $ 510 $ 431Basic EPS (1) $ 0.76 $ 0.38 $ 0.78 $ 0.30 $ 0.72 $ 0.67 $ 0.73 $ 0.62Diluted EPS (1) $ 0.75 $ 0.37 $ 0.77 $ 0.29 $ 0.71 $ 0.66 $ 0.72 $ 0.61Selected Average Balances: Assets $ 179,534
Securities, at amortized cost 37,022
36,547 36,719 36,801 36,383 35,260
Loans and leases (2) 117,001
118,265 117,852 116,981 117,103 115,609 111,760 110,403
Total earning assets 156,045
156,985 157,197 156,620 156,863 153,918 152,385 150,494
127,948 129,983 130,437 131,762 128,695 125,348 124,606
Short-term borrowings 3,865
4,637 5,118 4,217 3,340 3,478
Long-term debt 20,756
19,447 18,287 18,690 18,689 19,682
Total interest-bearing liabilities 115,180
117,788 119,802 120,826 121,942 121,865 123,611 123,605
Shareholders' equity 22,305
22,139 21,789 21,315 21,188 20,125
(1) Results for the first and third quarters of 2013 include tax adjustments of
Fourth Quarter Results Consolidated net income available to common shareholders for the fourth quarter of 2013 totaling
$537 millionwas up 6.1% compared to $506 millionearned during the same period in 2012. On a diluted per common share basis, earnings for the fourth quarter of 2013 were $0.75, up 5.6% compared to $0.71for the same period in 2012. BB&T's results of operations for the fourth quarter of 2013 produced an annualized return on average assets of 1.30% and an annualized return on average common shareholders' equity of 10.85% compared to prior year ratios of 1.19% and 10.51%, respectively. 82 Table of Contents Total FTE revenues were $2.4 billionfor the fourth quarter of 2013, down $151 millioncompared to the fourth quarter of 2012. The decrease in total revenues included a $116 milliondecline in FTE net interest income, primarily driven by lower yields on new loans and the sale of a consumer lending subsidiary during October 2013. NIM was 3.56%, down 28 basis points compared to the fourth quarter of 2012, which reflects covered loan run-off and lower yields on new loans and securities partially offset by lower funding costs. Noninterest income decreased $35 million, primarily attributable to a $131 milliondecline in mortgage banking income, partially offset by a $31 milliongain on the sale of a consumer lending subsidiary, a $22 millionimprovement in FDICloss share income and other smaller increases. Noninterest expense was $1.5 billionfor the fourth quarter of 2013, a decrease of $32 million, or 2.2%, compared to the fourth quarter of 2012. The decrease in noninterest expense was primarily due to a $37 milliondecline in foreclosed property expense. The provision for credit losses, excluding covered loans, for the fourth quarter of 2013 totaled $71 million, a decline of $185 millionfrom the fourth quarter of 2012, as a result of continued improvement in credit quality. Net charge-offs, excluding covered loans, for the fourth quarter of 2013 were $154 millionlower than the fourth quarter of 2012 reflecting improved credit quality. NPAs declined $483 million, or 31.4% compared to the fourth quarter of 2012. The provision for income taxes was $243 millionfor the fourth quarter of 2013 compared to $207 millionfor the fourth quarter of 2012. The effective tax rate for the fourth quarter of 2013 was 29.2% compared to 27.4% for the prior year's fourth quarter. The increase in the effective tax rate was primarily due to higher levels of pre-tax earnings relative to permanent tax differences in
2013 compared to 2012. Non-GAAP Information Certain amounts have been presented that exclude the effect of the
$516 millionof adjustments for uncertain income tax positions that were recognized during 2013. BB&T believes these adjusted measures are meaningful as excluding the adjustments increases the comparability of certain period-to-period results. The following table reconciles these adjusted measures to their corresponding GAAP amount: Table 40 Non-GAAP Reconciliations Excluding Tax Year Ended December 31, 2013 As Reported Tax
millions, except per share data)
Net income available to common shareholders
$ 1,562$ 516 $ 2,078Weighted average number of diluted common shares (thousands) 714,363 714,363 Diluted EPS $ 2.19 $ 2.91Net income $ 1,729$ 516 $ 2,245Average assets 181,262 296 181,558 Return on average assets 0.95 % 1.24 % Net income available to common shareholders $ 1,562$ 516 $ 2,078Average common shareholders' equity 19,397 296 19,693 Return on average common shareholders' equity 8.06 % 10.55 % Income before income taxes $ 3,124 $ 3,124Provision for income taxes 1,395 $ (516) 879 Effective tax rate 44.7 % 28.1 % 83
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