Contractual Obligations, Commitments, Contingent Liabilities, Off-Balance Sheet Arrangements and Related Party Transactions

(1)Based on estimated payment dates.(2)Includes accrued interest, future contractual interest obligations and the impact of hedges in a loss position. Other derivatives are excluded. Variable rate payments are based upon the rate in effect at December 31, 2017.(3)Represents obligations to purchase goods or services that are enforceable and legally binding. Many of the purchase obligations have terms that are not fixed and determinable and are included in the table above based upon the estimated timing and amount of payment. In addition, certain of the purchase agreements contain clauses that would allow BB&T to cancel the agreement with specified notice; however, that impact is not included in the table above.(4)Although technically unfunded plans, Rabbi Trusts and insurance policies on the lives of certain of the covered employees are available to finance future benefit plan payments.BB&T’s commitments include investments in affordable housing projects throughout its market area and private equity funds. Refer to "Note 1. Summary of Significant Accounting Policies" and "Note 13. Commitments and Contingencies" 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, 2017 do 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 17. Derivative Financial Instruments."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 uncollateralized deposit shortfall would have to be absorbed on a pro-rata basis (based upon the public deposits held by each bank within the respective state) by the remaining financial institutions holding public funds in that state. BB&T monitors deposits levels relative to the total public deposits held by all depository institutions within these states. 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 certain risks. 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 13. Commitments and Contingencies" and "Note 16. Fair Value Disclosures."


(1)Excludes the FHA-insured mortgage loan reserve of $85 million established during 2014 and settled in 2016.


Capital

(1) BB&T's goal is to maintain capital levels above the 2019 requirements.Payments of cash dividends 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). 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.Management intends to maintain capital at Branch Bank at levels that will result in classification as "well-capitalized" for regulatory purposes. Secondarily, it is management’s intent to maintain Branch Bank’s capital 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 Bank increase above these guidelines, excess capital may be transferred to the Parent Company in the form of special dividend payments, subject to regulatory and other operating considerations.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.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. The FRB did not object to the Company’s 2017 capital plan, and the 2018 capital plan is expected to be submitted during April 2018. Management’s capital deployment plan in order of preference is to focus on 1) organic growth, 2) dividends and 3) acquisitions and/or share repurchases depending on opportunities in the marketplace and our interest and ability to proceed with acquisitions.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. Branch Bank's capital ratios are presented in the following table:


Capital

BB&T's capital ratios are presented in the following table:


Capital

(1)Tangible 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.During 2017, BB&T completed $1.6 billion of stock repurchases and paid $1.0 billion in common stock dividends, which resulted in a total payout ratio of 117.9% for the year. Effective December 31, 2017, BB&T adopted new accounting guidance related to tax reform legislation passed in 2017, and reclassified deferred income taxes from AOCI and increased retained earnings $247 million, which also increased regulatory capital and the related ratios.During July 2017, BB&T's Board of Directors approved a $0.03 increase in the quarterly dividend, which increased the amount of the quarterly dividend to $0.33 per share. As of December 31, 2017, the remaining stock repurchases authorized by the Board of Directors totaled $640 million. During the first quarter of 2018, the Company repurchased approximately 5.9 million shares of common stock totaling $320 million.


Capital

(1)Loans and leases are net of unearned income and include LHFS.


ACL

For collectively evaluated loans, the ALLL is determined by multiplying the loan exposure estimated at the time of default 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."

|  | | |
| --- | --- | --- |
|  |  |  |
| 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 |


Reclassifications

Certain other amounts reported in prior periods’ consolidated financial statements have been reclassified to conform to the current presentation.


NPAs

(1)Loans may be returned to accrual status when they become current as to both principal and interest and concern no longer exists as to the collectability of principal and interest, generally indicated by 180 days of sustained performance.(2)Or when it is probable that principal or interest is not fully collectible, whichever occurs first.(3)Depends on product type, loss mitigation status and status of the government guaranty.When commercial loans are placed on nonaccrual status, a charge-off is recorded, as applicable, to decrease the carrying value of such loans to the estimated recoverable amount. Retail loans are subject to mandatory charge-off at a specified delinquency date consistent with regulatory guidelines. As such, retail loans are subject to collateral valuation and charge-off, as applicable, when they are moved to nonaccrual status.Certain past due loans may remain on accrual status if management determines that it does not have concern over the collectability of principal and interest. Generally, when loans are placed on nonaccrual status, accrued interest receivable is reversed against interest income in the current period and amortization of deferred loan fees and expenses is suspended. Payments received for interest and lending fees thereafter are applied as a reduction to the remaining principal balance as long as concern exists as to the ultimate collection of the principal.Assets acquired as a result of foreclosure are subsequently carried at the lower of cost or net realizable value. Net realizable value equals fair value less estimated selling costs. Any excess of cost over net realizable value at the time of foreclosure is charged to the ALLL. NPAs are subject to periodic revaluations of the collateral underlying impaired loans and foreclosed real estate. The periodic revaluations are generally based on the appraised value of the property and may include additional liquidity adjustments based upon the expected retention period. BB&T’s policies require that valuations be updated at least annually and that upon foreclosure, the valuation must not be more than six months old, otherwise an update is required.


Commercial

For commercial clients with total credit exposure of $2 million or less, BB&T has developed an automated loan review system to identify and proactively manage accounts with a higher risk of loss. The "score" produced by this automated system is updated quarterly.To establish a reserve, BB&T's policy is to review all commercial lending relationships with an outstanding nonaccrual balance of $3 million or more. While this review is largely focused on the borrower’s ability to repay the loan, BB&T also considers the capacity and willingness of a loan’s guarantors to support the debt service on the loan as a secondary source of repayment. When a guarantor exhibits the documented capacity and willingness to support the loan, BB&T may consider extending the loan maturity and/or temporarily deferring principal payments if the ultimate collection of both principal and interest is not in question. In these cases, BB&T may deem the loan to not be impaired due to the documented capacity and willingness of the guarantor to repay the loan. Loans are considered impaired when the borrower (or guarantor in certain circumstances) does not have the cash flow capacity or willingness to service the debt according to contractual terms, or it does not appear reasonable to assume that the borrower will continue to pay according to the contractual agreement. BB&T establishes a specific reserve for each loan that has been deemed impaired based on the criteria outlined above. The amount of the reserve is based on the present value of expected cash flows discounted at the loan’s effective interest rate and/or the value of collateral, net of costs to sell. In addition, BB&T reviews collateral-dependent commercial loan balances between $1 million and $3 million to establish a specific reserve based on the underlying collateral value, net of costs to sell.BB&T also has a review process related to TDRs and other commercial impaired loans. In connection with this process, BB&T establishes reserves related to these loans that are calculated using an expected cash flow approach. These discounted cash flow analyses incorporate adjustments to future cash flows that reflect management’s best estimate of the default risk related to TDRs based on a combination of historical experience and management judgment.BB&T also maintains reserves for collective impairment that reflect an estimate of losses related to non-impaired commercial loans as of the balance sheet date. Embedded loss estimates for BB&T’s commercial loan portfolio are based on estimated migration rates, which are based on historical experience, and current risk mix as indicated by the risk grading or scoring process described above. Embedded loss estimates may be adjusted to reflect current economic conditions and current portfolio trends including credit quality, concentrations, aging of the portfolio, and significant policy and underwriting changes.

|  | | |
| --- | --- | --- |
|  |  |  |
| Risk Rating |  | Description |
| Pass |  | Loans not considered to be problem credits |
| Special Mention |  | Loans that have a potential weakness deserving management’s close attention |
| Substandard |  | Loans for which a well-defined weakness has been identified that may put full collection of contractual cash flows at risk |


NOTE 2. Securities

Certain investments in marketable debt securities and MBS issued by FNMA and FHLMC exceeded 10% of shareholders’ equity at December 31, 2017. The FNMA investments had total amortized cost and fair value of $14.7 billion and $14.4 billion, respectively. The FHLMC investments had total amortized cost and fair value of $10.2 billion and $10.0 billion, respectively.The change in credit losses on securities with OTTI where a portion of the unrealized loss was recognized in OCI was immaterial for all periods presented.The amortized cost and estimated fair value of the securities portfolio by contractual maturity are shown in the following table. The expected life of MBS may differ from contractual maturities because borrowers have the right to prepay the underlying mortgage loans with or without prepayment penalties.


NOTE 2. Securities

The following tables present the fair values and gross unrealized losses of investments based on the length of time that individual securities have been in a continuous unrealized loss position:


NOTE 2. Securities

Periodic reviews are conducted to identify and evaluate each investment with an unrealized loss for OTTI. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. Unrealized losses that are determined to be temporary in nature are recorded, net of tax, in AOCI for AFS securities. The unrealized losses on U.S. Treasury securities, GSE securities and agency MBS were the result of increases in market interest rates compared to the date the securities were acquired rather than the credit quality of the issuers.Cash flow modeling is used to evaluate non-agency MBS in an unrealized loss position for potential credit impairment. These models give consideration to long-term macroeconomic factors applied to current security default rates, prepayment rates and recovery rates and security-level performance. At December 31, 2017, there were no non-agency MBS with other than temporary credit impairment.At December 31, 2017, the majority of the unrealized loss on municipal securities was the result of fair value hedge basis adjustments that are a component of amortized cost. Municipal securities in an unrealized loss position are evaluated for credit impairment through a qualitative analysis of issuer performance and the primary source of repayment. At December 31, 2017, the evaluation of municipal securities did not indicate any municipal securities with other than temporary credit impairment.


NOTE 3. Loans and ACL

The following table presents the carrying amount of loans by risk rating. PCI loans are excluded because their related ALLL is determined by loan pool performance and revolving credit loans are excluded as the loans are charged-off and not reclassified to nonperforming.


NOTE 3. Loans and ACL

The following tables present a summary of activity in the ACL:


NOTE 3. Loans and ACL

The following table provides a summary of loans that are collectively evaluated for impairment:


NOTE 3. Loans and ACL

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


NOTE 3. Loans and ACL

The following table provides a summary of TDRs, all of which are considered impaired:


NOTE 3. Loans and ACL

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


NOTE 3. Loans and ACL

The pre-default balance for modifications that experienced a payment default that had been classified as TDRs during the previous 12 months was $104 million, $73 million and $81 million for the twelve months ended December 31, 2017, 2016 and 2015, respectively. Payment default is defined as movement of the TDR to nonaccrual status, foreclosure or charge-off, whichever occurs first.The following table presents additional information about BB&T’s loans and leases:


NOTE 4. Premises and Equipment

The following table excludes assets related to the lease financing business:


NOTE 5. Goodwill and Other Intangible Assets

During 2016, the purchase price allocation for Susquehanna was finalized. During 2017, the purchase price allocations for National Penn and Swett & Crawford were finalized. The related effects of these finalizations are included in other adjustments in the above table. The following table, which excludes fully amortized intangibles, presents information for identifiable intangible assets:


The estimated amortization expense for the next five years is presented as follows:


Residential Mortgage Banking Activities

During 2016, BB&T paid $83 million to settle certain FHA loan origination and quality control matters pursuant to an agreement with the Department of Justice. In addition, the Company separately received recoveries of $71 million, resulting in a net benefit of $73 million, which was included in other expense on the Consolidated Statements of Income. During 2016, BB&T released $31 million of mortgage repurchase reserves, which was primarily driven by lower anticipated loan repurchase requests. These adjustments were included in loan-related expense on the Consolidated Statements of Income. Payments made to date for recourse exposure on residential mortgage loans sold with recourse liability have been immaterial.The following table presents a roll forward of the carrying value of residential MSRs recorded at fair value:

|  | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  | As Of / For The Year Ended December 31, | | | | | | | | | | |
| (Dollars in millions) |  | 2017 | | |  | 2016 | | |  | 2015 | | |
| UPB of residential mortgage and home equity loan servicing portfolio |  | $ | 118,424 |  |  | $ | 121,639 |  |  | $ | 122,169 |  |
| UPB of residential mortgage loans serviced for others, primarily agency conforming fixed rate |  | 89,124 | |  |  | 90,325 | |  |  | 91,132 | |  |
| Mortgage loans sold with recourse |  | 490 | |  |  | 578 | |  |  | 702 | |  |
| Maximum recourse exposure from mortgage loans sold with recourse liability |  | 251 | |  |  | 282 | |  |  | 326 | |  |
| Indemnification, recourse and repurchase reserves |  | 37 | |  |  | 40 | |  |  | 79 | |  |
| UPB of residential mortgage loans sold |  | 12,423 | |  |  | 15,675 | |  |  | 14,764 | |  |
| Pre-tax gains recognized on mortgage loans sold and held for sale |  | 153 | |  |  | 139 | |  |  | 148 | |  |
| Servicing fees recognized from mortgage loans serviced for others |  | 261 | |  |  | 268 | |  |  | 273 | |  |
| Approximate weighted average servicing fee on the outstanding balance of residential mortgage loans serviced for others |  | 0.28 | | % |  | 0.28 | | % |  | 0.29 | | % |
| Weighted average interest rate on mortgage loans serviced for others |  | 4.00 | |  |  | 4.03 | |  |  | 4.12 | |  |


Residential Mortgage Banking Activities

The sensitivity of the fair value of the residential MSRs to changes in key assumptions is included in the accompanying table:

|  | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  | Year Ended December 31, | | | | | | | | | | |
| (Dollars in millions) |  | 2017 | | |  | 2016 | | |  | 2015 | | |
| Carrying value, beginning of year |  | $ | 915 |  |  | $ | 880 |  |  | $ | 844 |  |
| Additions |  | 123 | |  |  | 146 | |  |  | 156 | |  |
| Change in fair value due to changes in valuation inputs or assumptions: |  |  | | |  |  | | |  |  | | |
| Prepayment speeds |  | (42 | | ) |  | 13 | |  |  | 91 | |  |
| Weighted average OAS |  | 46 | |  |  | 10 | |  |  | (52 | | ) |
| Servicing costs |  | 9 | |  |  | 2 | |  |  | (25 | | ) |
| Realization of expected net servicing cash flows, passage of time and other |  | (137 | | ) |  | (136 | | ) |  | (134 | | ) |
| Carrying value, end of year |  | $ | 914 |  |  | $ | 915 |  |  | $ | 880 |  |
|  |  |  | | |  |  | | |  |  | | |
| Gains (losses) on derivative financial instruments used to mitigate the income statement effect of changes in fair value |  | $ | — |  |  | $ | 32 |  |  | $ | 32 |  |


Residential Mortgage Banking Activities

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


NOTE 8. Long-Term Debt

(1)FHLB advances had a weighted average maturity of 3.8 years at December 31, 2017.The effective rates above reflect the impact of hedges and issuance costs. Subordinated notes with a remaining maturity of one year or greater qualify under the risk-based capital guidelines as Tier 2 supplementary capital, subject to certain limitations.During 2017, BB&T terminated FHLB advances totaling $2.9 billion of par value, which resulted in a pre-tax loss on early extinguishment of debt totaling $392 million. During 2015, BB&T terminated FHLB advances totaling $931 million, which resulted in a pre-tax loss on early extinguishment of debt totaling $172 million.The following table presents future debt maturities:


Preferred Stock

Dividends on the preferred stock, if declared, accrue and are payable quarterly, in arrears. For each issuance, BB&T issued depositary shares, each of which represents a fractional ownership interest in a share of the Company’s preferred stock. The preferred stock has no stated maturity and redemption is solely at the option of the Company in whole, but not in part, upon the occurrence of a regulatory capital treatment event, as defined. In addition, the preferred stock may be redeemed in whole or in part, on any dividend payment date after five years from the date of issuance. Under current rules, any redemption of the preferred stock is subject to prior approval of the FRB. The preferred stock is not subject to any sinking fund or other obligations of the Company.


Equity-Based Compensation Plans

The fair value of RSUs and PSUs is based on the common stock price on the grant date less the present value of expected dividends that will be foregone during the vesting period. Substantially all awards are granted in February of each year. Grants to non-executive employees primarily consist of RSUs.A summary of selected data related to equity-based compensation costs follows:

|  | | | | |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
|  |  | December 31, 2017 | | |
| Shares available for future grants (in thousands) |  | 19,408 |  |  |
| Vesting period, minimum |  | 1.0 |  | years |
| Vesting period, maximum |  | 5.0 |  |  |
| Option term |  | 10.0 |  |  |


Equity-Based Compensation Plans

The following table presents the activity during 2017 related to awards of RSUs, PSUs and restricted shares:

|  | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  | As of / For the Year Ended December 31, | | | | | | | | | | |
| (Dollars in millions) |  | 2017 | | |  | 2016 | | |  | 2015 | | |
| Equity-based compensation expense |  | $ | 132 |  |  | $ | 115 |  |  | $ | 106 |  |
| Income tax benefit from equity-based compensation expense |  | 34 | |  |  | 43 | |  |  | 40 | |  |
| Intrinsic value of options exercised, and RSUs and PSUs that vested during the year |  | 261 | |  |  | 159 | |  |  | 170 | |  |
| Grant date fair value of equity-based awards that vested during the year |  | 116 | |  |  | 98 | |  |  | 115 | |  |
| Unrecognized compensation cost related to equity-based awards |  | 132 | |  |  | 109 | |  |  | 103 | |  |
| Weighted-average life over which compensation cost is expected to be recognized (years) |  | 2.4 | |  |  | 2.3 | |  |  | 2.2 | |  |


NOTE 10. AOCI

(1)Amounts related to unrecognized net pension and postretirement costs are included in personnel expense, amounts related to unrealized net gains (losses) on cash flow hedges are included in net interest income, amounts related to unrealized net gains (losses) on AFS securities are included in net interest income or securities gains/losses when realized, amounts related to FDIC's share of unrealized gains (losses) on AFS securities are included in FDIC loss share income, net and amounts related to other, net are primarily included in net interest income in the Consolidated Statements of Income.


NOTE 11. Income Taxes

The reasons for the difference between the provision for income taxes and the amount computed by applying the statutory Federal income tax rate to income before income taxes were as follows:


NOTE 11. Income Taxes

The Tax Cuts and Jobs Act was signed into law December 22, 2017. The net tax benefit recognized as a result of the revaluation of deferred taxes and investment in affordable housing projects is presented as Federal tax reform impact in the above table. The tax effects of temporary differences that gave rise to deferred tax assets and liabilities are reflected in the table below:

|  | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  | Year Ended December 31, | | | | | | | | | | |
| (Dollars in millions) |  | 2017 | | |  | 2016 | | |  | 2015 | | |
| Federal income taxes at statutory rate of 35% |  | $ | 1,164 |  |  | $ | 1,225 |  |  | $ | 1,021 |  |
| Increase (decrease) in provision for income taxes as a result of: |  |  | | |  |  | |  |  |  | | |
| State income taxes, net of federal tax benefit |  | 77 | |  |  | 73 | |  |  | 72 | |  |
| Affordable housing projects proportional amortization |  | 236 | |  |  | 205 | |  |  | 181 | |  |
| Affordable housing projects tax credits and other tax benefits |  | (319 | | ) |  | (279 | | ) |  | (249 | | ) |
| Tax exempt income |  | (139 | | ) |  | (151 | | ) |  | (129 | | ) |
| Federal tax reform impact |  | (43 | | ) |  | — | |  |  | — | |  |
| Excess tax benefits for equity-based compensation |  | (52 | | ) |  | — | |  |  | — | |  |
| Adjustments for uncertain tax positions |  | — | |  |  | (6 | | ) |  | (107 | | ) |
| Other, net |  | (13 | | ) |  | (9 | | ) |  | 5 | |  |
| Provision for income taxes |  | $ | 911 |  |  | $ | 1,058 |  |  | $ | 794 |  |
| Effective income tax rate |  | 27.4 | | % |  | 30.2 | | % |  | 27.2 | | % |


NOTE 11. Income Taxes

On a periodic basis, BB&T evaluates its income tax positions based on tax laws and regulations and financial reporting considerations, and records adjustments as appropriate. This evaluation takes into consideration the status of current taxing authorities’ examinations of BB&T’s tax returns, recent positions taken by the taxing authorities on similar transactions and the overall tax environment in relation to tax-advantaged transactions. The following table presents changes in unrecognized tax benefits:


NOTE 11. Income Taxes

During 2015, the U.S. Court of Appeals for the Federal Circuit overturned a portion of an earlier ruling pertaining to the disallowance of foreign tax credits and other deductions claimed by a subsidiary in connection with a financing transaction, which resulted in the recognition of a $107 million income tax benefit. During 2016, the U.S. Supreme Court declined to hear the case, which preserved the earlier ruling and effectively concluded this matter.The Company had immaterial amounts accrued for tax-related interest and penalties at December 31, 2017 and 2016. The amount of net interest and penalties related to unrecognized tax benefits recognized in the Consolidated Statements of Income was immaterial for all periods presented. The IRS has completed its Federal income tax examinations of BB&T through 2013. Various years remain subject to examination by state taxing authorities.

|  | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  | As of/ For the Year Ended December 31, | | | | | | | | | | |
| (Dollars in millions) |  | 2017 | | |  | 2016 | | |  | 2015 | | |
| Beginning balance of unrecognized tax benefits |  | $ | 1 |  |  | $ | 426 |  |  | $ | 503 |  |
| Additions based on tax positions related to current year |  | — | |  |  | — | |  |  | — | |  |
| Additions (reductions) for tax positions of prior years |  | — | |  |  | (5 | | ) |  | (76 | | ) |
| Settlements |  | — | |  |  | (420 | | ) |  | (1 | | ) |
| Lapse of statute of limitations |  | — | |  |  | — | |  |  | (1 | | ) |
| Unrecognized deferred tax benefits from acquisitions |  | — | |  |  | — | |  |  | 1 | |  |
| Ending balance of unrecognized tax benefits |  | $ | 1 |  |  | $ | 1 |  |  | $ | 426 |  |
|  |  |  | | |  |  | | |  |  | | |
| Unrecognized tax benefits that would have impacted effective rate if recognized |  |  | |  |  |  | |  |  |  | | |
| Federal |  | $ | — |  |  | $ | — |  |  | $ | 422 |  |
| State |  | 1 | |  |  | 1 | |  |  | 3 | |  |


Defined Benefit Retirement Plans

The weighted average expected long-term rate of return on plan assets represents the average rate of return expected to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid. In developing the expected rate of return, BB&T considers long-term compound annualized returns of historical market data for each asset category, as well as historical actual returns on the plan assets. Using this reference information, the Company develops forward-looking return expectations for each asset category and a weighted average expected long-term rate of return for the plan based on target asset allocations contained in BB&T's Investment Policy Statement. For 2018, the expected rate of return on plan assets is 7.0%.Financial data relative to qualified and nonqualified defined benefit pension plans is summarized in the following tables for the years indicated. On the Consolidated Balance Sheets, the qualified pension plan prepaid asset is recorded as a component of other assets and the nonqualified pension plans accrued liability is recorded as a component of other liabilities. The data is calculated using an actuarial measurement date of December 31.


Defined Benefit Retirement Plans

The following actuarial assumptions were used to determine benefit obligations:


Defined Benefit Retirement Plans

Activity in the projected benefit obligation is presented in the following table:


Defined Benefit Retirement Plans

Effective December 31, 2017, the qualified defined benefit plan was amended and a portion of the accrued benefits of participants in the nonqualified plan were shifted to the qualified plan. Affected associates continue to participate in the nonqualified plan for benefits earned in 2017 and later. In conjunction with this shift, a minimum benefit was established under the qualified plan. Activity in plan assets is presented in the following table:


Defined Benefit Retirement Plans

The following are the pre-tax amounts recognized in AOCI:


Defined Benefit Retirement Plans

The following table presents the amount expected to be amortized from AOCI into net periodic pension cost during 2018:


Defined Benefit Retirement Plans

BB&T makes contributions to the qualified pension plan in amounts between the minimum required for funding and the maximum amount deductible for federal income tax purposes. BB&T made discretionary contributions of $144 million during the first quarter of 2018. Management may make additional contributions in 2018. For the nonqualified plans, the employer contributions are based on benefit payments.The following table reflects the estimated benefit payments for the periods presented:


Defined Benefit Retirement Plans

BB&T's primary total return objective is to achieve returns that, over the long term, will fund retirement liabilities and provide for the desired plan benefits in a manner that satisfies the fiduciary requirements of the Employee Retirement Income Security Act of 1974. The plan assets have a long-term time horizon that runs concurrent with the average life expectancy of the participants. As such, the Plan can assume a time horizon that extends well beyond a full market cycle, and can assume an above-average level of risk, as measured by the standard deviation of annual return. It is expected, however, that both professional investment management and sufficient portfolio diversification will smooth volatility and help to generate a reasonable consistency of return. The investments are broadly diversified among economic sector, industry, quality and size in order to reduce risk and to produce incremental return. Within approved guidelines and restrictions, investment managers have wide discretion over the timing and selection of individual investments.BB&T periodically reviews its asset allocation and investment policy and makes changes to its target asset allocation. BB&T has established guidelines within each asset category to ensure the appropriate balance of risk and reward. For the year ended December 31, 2017, the target asset allocations for the plan assets included a range of 30% to 50% for U.S. equity securities, 11% to 18% for international equity securities, 35% to 53% for fixed income securities, and 0% to 14% for alternative investments, which include real estate, hedge funds and private equities. The plan may hold up to 10% of its assets in BB&T common stock.The fair values of certain pension plan assets by asset category are reflected in the following table:


Defined Benefit Retirement Plans

International equity securities include a common/commingled fund that consists of assets from several accounts, pooled together, to reduce management and administration costs. Investments measured at fair value using the net asset value per share or equivalent as a practical expedient are not required to be classified in the fair value hierarchy. The pension plan held alternative investments valued using net asset values totaling $105 million and $199 million at December 31, 2017 and 2016, respectively.


NOTE 13. Commitments and Contingencies

Letters of credit and financial guarantees written are unconditional commitments issued by BB&T to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support borrowing arrangements, including commercial paper issuance, bond financing and similar transactions, the majority of which are to tax exempt entities. The credit risk involved in the issuance of these guarantees is essentially the same as that involved in extending loans to clients and as such, the instruments are collateralized when necessary.BB&T invests in certain affordable housing projects throughout its market area as a means of supporting local communities. BB&T receives tax credits related to these investments. BB&T typically acts as a limited partner in these investments and does not exert control over the operating or financial policies of the partnerships. BB&T typically provides financing during the construction and development of the properties; however, permanent financing is generally obtained from independent third parties upon completion of a project. Tax credits are subject to recapture by taxing authorities based on compliance features required to be met at the project level. BB&T’s maximum potential exposure to losses relative to investments in VIEs is generally limited to the sum of the outstanding balance, future funding commitments and any related loans to the entity. Loans to these entities are underwritten in substantially the same manner as are other loans and are generally secured.BB&T has investments in and future funding commitments to private equity and certain other equity method investments. The majority of these investments are private equity funds that are consolidated into BB&T's financial statements. The risk exposure relating to such commitments is generally limited to the amount of investments and future funding commitments made.BB&T has sold certain mortgage-related loans that contain recourse provisions. These provisions generally require BB&T to reimburse the investor for a share of any loss that is incurred after the disposal of the property. BB&T also issues standard representations and warranties related to mortgage loan sales to GSEs. Refer to "Note 6. Loan Servicing" for additional disclosures related to these exposures.In the ordinary course of business, BB&T indemnifies its officers and directors to the fullest extent permitted by law against liabilities arising from pending litigation. BB&T also issues standard representations and warranties in underwriting agreements, merger and acquisition agreements, loan sales, brokerage activities and other similar arrangements. Counterparties in many of these indemnification arrangements 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 position or results of operations of BB&T.

|  | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
|  |  | December 31, | | | | | | |
| (Dollars in millions) |  | 2017 | | |  | 2016 | | |
| Letters of credit |  | $ | 2,466 |  |  | $ | 2,786 |  |
| Carrying amount of the liability for letters of credit |  | 21 | |  |  | 27 | |  |
| Investments in affordable housing projects: |  |  | | |  |  | | |
| Carrying amount |  | 1,948 | |  |  | 1,719 | |  |
| Amount of future funding commitments included in carrying amount |  | 928 | |  |  | 738 | |  |
| Lending exposure |  | 561 | |  |  | 495 | |  |
| Tax credits subject to recapture |  | 471 | |  |  | 413 | |  |
| Private equity investments |  | 471 | |  |  | 417 | |  |
| Future funding commitments to private equity investments |  | 143 | |  |  | 199 | |  |


NOTE 14. Regulatory Requirements and Other Restrictions

As an approved seller/servicer, Branch Bank is required to maintain minimum levels of capital, as specified by various agencies, including the U.S. Department of Housing and Urban Development, GNMA, FHLMC and FNMA. At December 31, 2017 and 2016, Branch Bank’s capital was above all required levels.


NOTE 15. Parent Company Financial Statements

The transfer of funds in the form of dividends, loans or advances from bank subsidiaries to the Parent Company is restricted. Federal law requires loans to the Parent Company or its affiliates to be secured and at market terms and generally limits loans to the Parent Company or an individual affiliate to 10% of Branch Bank’s unimpaired capital and surplus. In the aggregate, loans to the Parent Company and all affiliates cannot exceed 20% of the bank’s unimpaired capital and surplus.Dividend payments to the Parent Company by Branch Bank are subject to regulatory review and statutory limitations and, in some instances, regulatory approval. In general, dividends from Branch Bank to the Parent Company are limited by rules which compare dividends to net income for regulatory-defined periods. Furthermore, dividends are restricted by regulatory minimum capital constraints.

|  | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |
| Parent Company - Statements of Cash Flows |  | Year Ended December 31, | | | | | | | | | | |
| (Dollars in millions) |  | 2017 | | |  | 2016 | | |  | 2015 | | |
| Cash Flows From Operating Activities: |  |  | |  |  |  | | |  |  | | |
| Net income |  | $ | 2,415 |  |  | $ | 2,442 |  |  | $ | 2,123 |  |
| Adjustments to reconcile net income to net cash from operating activities: |  |  | | |  |  | | |  |  | | |
| Equity in earnings of subsidiaries in excess of dividends from subsidiaries |  | (558 | | ) |  | (1,188 | | ) |  | (273 | | ) |
| Other, net |  | — | |  |  | (14 | | ) |  | 35 | |  |
| Net cash from operating activities |  | 1,857 | |  |  | 1,240 | |  |  | 1,885 | |  |
| Cash Flows From Investing Activities: |  |  | |  |  |  | |  |  |  | | |
| Proceeds from maturities, calls and paydowns of AFS securities |  | 29 | |  |  | 27 | |  |  | 49 | |  |
| Purchases of AFS securities |  | (29 | | ) |  | (31 | | ) |  | (21 | | ) |
| Proceeds from maturities, calls and paydowns of HTM securities |  | — | |  |  | 2 | |  |  | 27 | |  |
| Investment in subsidiaries |  | 1,100 | |  |  | (85 | | ) |  | 17 | |  |
| Advances to subsidiaries |  | (6,958 | | ) |  | (7,719 | | ) |  | (7,461 | | ) |
| Proceeds from repayment of advances to subsidiaries |  | 4,671 | |  |  | 6,975 | |  |  | 6,831 | |  |
| Net cash from acquisitions and divestitures |  | — | |  |  | (254 | | ) |  | (595 | | ) |
| Other, net |  | 1 | |  |  | — | |  |  | — | |  |
| Net cash from investing activities |  | (1,186 | | ) |  | (1,085 | | ) |  | (1,153 | | ) |
| Cash Flows From Financing Activities: |  |  | |  |  |  | |  |  |  | | |
| Net change in short-term borrowings |  | (39 | | ) |  | (60 | | ) |  | 30 | |  |
| Net change in long-term debt |  | 1,319 | |  |  | 465 | |  |  | (92 | | ) |
| Repurchase of common stock |  | (1,613 | | ) |  | (520 | | ) |  | — | |  |
| Net cash from common stock transactions in connection with equity awards |  | 108 | |  |  | 218 | |  |  | 68 | |  |
| Net proceeds from preferred stock issued |  | — | |  |  | 450 | |  |  | — | |  |
| Cash dividends paid on common and preferred stock |  | (1,179 | | ) |  | (1,092 | | ) |  | (937 | | ) |
| Other, net |  | (4 | | ) |  | 7 | |  |  | — | |  |
| Net cash from financing activities |  | (1,408 | | ) |  | (532 | | ) |  | (931 | | ) |
| Net Change in Cash and Cash Equivalents |  | (737 | | ) |  | (377 | | ) |  | (199 | | ) |
| Cash and Cash Equivalents at Beginning of Period |  | 7,115 | |  |  | 7,492 | |  |  | 7,691 | |  |
| Cash and Cash Equivalents at End of Period |  | $ | 6,378 |  |  | $ | 7,115 |  |  | $ | 7,492 |  |


NOTE 16. Fair Value Disclosures

The following discussion focuses on the valuation techniques and significant inputs for Level 2 and Level 3 assets and liabilities.A third-party pricing service is generally utilized in determining the fair value of the securities portfolio. Management independently evaluates the fair values provided by the pricing service through comparisons to other external pricing sources, review of additional information provided by the pricing service and other third party sources for selected securities and back-testing to compare the price realized on any security sales to the daily pricing information received from the pricing service. Fair value measurements are derived from market-based pricing matrices that were developed using observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads and broker quotes. As described by security type below, additional inputs may be used, or some inputs may not be applicable. In the event that market observable data was not available, which would generally occur due to the lack of an active market for a given security, the valuation of the security would be subjective and may involve substantial judgment by management.Trading securities: Trading securities include various types of debt and equity securities, primarily consisting of debt securities issued by the U.S. Treasury, GSEs, or states and political subdivisions. The valuation techniques used for these investments are more fully discussed below.U.S. Treasury securities: Treasury securities are valued using quoted prices in active over the counter markets.GSE securities and agency MBS: GSE pass-through securities are valued using market-based pricing matrices that reference observable inputs including benchmark TBA security pricing and yield curves that were estimated based on U.S. Treasury yields and certain floating rate indices. The pricing matrices for these securities may also give consideration to pool-specific data supplied directly by the GSE. GSE CMOs are valued using market-based pricing matrices that are based on observable inputs including offers, bids, reported trades, dealer quotes and market research reports, the characteristics of a specific tranche, market convention prepayment speeds and benchmark yield curves as described above.States and political subdivisions: These securities are valued using market-based pricing matrices that reference observable inputs including MSRB reported trades, issuer spreads, material event notices and benchmark yield curves.Non-agency MBS: Pricing matrices for these securities are based on observable inputs including offers, bids, reported trades, dealer quotes and market research reports, the characteristics of a specific tranche, market convention prepayment speeds and benchmark yield curves as described above. Non-agency MBS also include investments in Re-REMIC trusts that primarily hold non-agency MBS, which are valued based on broker pricing models that use baseline securities yields and tranche-level yield adjustments to discount cash flows modeled using market convention prepayment speed and default assumptions.Other securities: These securities consist primarily of mutual funds and corporate bonds. These securities are valued based on a review of quoted market prices for assets as well as through the various other inputs discussed previously.LHFS: Certain mortgage loans are originated to be sold to investors, which are carried at fair value. The fair value is primarily based on quoted market prices for securities backed by similar types of loans. The changes in fair value of these assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage LHFS.MSRs: Residential MSRs are valued using an OAS valuation model to project cash flows over multiple interest rate scenarios, which are then discounted at risk-adjusted rates. The model considers portfolio characteristics, contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. Fair value estimates and assumptions are compared to industry surveys, recent market activity, actual portfolio experience and, when available, other observable market data. Commercial MSRs are valued using a cash flow valuation model that calculates the present value of estimated future net servicing cash flows. BB&T considers actual and expected loan prepayment rates, discount rates, servicing costs and other economic factors that are determined based on current market conditions. Derivative assets and liabilities: The fair values of derivatives are determined based on quoted market prices and internal pricing models that use market observable data. The fair values of interest rate lock commitments, which are related to mortgage loan commitments and are categorized as Level 3, are based on quoted market prices adjusted for commitments that are not expected to fund and include the value attributable to the net servicing fees.Private equity investments: Private equity investments are measured at fair value based on the investment’s net asset value. In many cases there are no observable market values for these investments and therefore management must estimate the fair value based on a comparison of the operating performance of the company to multiples in the marketplace for similar entities. This analysis requires significant judgment, and actual values in a sale could differ materially from those estimated.Securities sold short: Securities sold short represent debt securities sold short that are entered into as a hedging strategy for the purposes of supporting institutional and retail client trading activities.The following table summarizes activity for Level 3 assets and liabilities:


NOTE 16. Fair Value Disclosures

(1)Amounts related to non-agency MBS are included in interest income, amounts related to MSRs and net derivatives are primarily included in mortgage banking income and amounts related to private equity investments are included in other income in the Consolidated Statements of Income.BB&T’s policy is to recognize transfers between levels as of the end of a reporting period. Transfers in and out of Level 3 are shown in the preceding tables. There were no transfers between Level 1 and Level 2 during 2017, 2016 or 2015.The non-agency MBS categorized as Level 3 represent ownership interest in various tranches of Re-REMIC trusts. These securities are valued at a discount, which is unobservable in the market, to the fair value of the underlying securities owned by the trusts. The Re-REMIC tranches do not have an active market and therefore are categorized as Level 3. At December 31, 2017, the fair value of the Re-REMIC non-agency MBS represented a discount of 21.1% to the fair value of the underlying securities owned by the Re-REMIC trusts.The majority of private equity investments are in SBIC qualified funds, which primarily focus on equity and subordinated debt investments in privately-held middle market companies. The majority of these VIE investments are not redeemable and distributions are received as the underlying assets of the funds liquidate. The timing of distributions, which are expected to occur on various dates on an approximately ratable basis through 2026, is uncertain and dependent on various events such as recapitalizations, refinance transactions and ownership changes, among others. As of December 31, 2017, restrictions on the ability to sell the investments include, but are not limited to, consent of a majority member or general partner approval for transfer of ownership. BB&T’s investments are spread over numerous privately-held middle market companies, and thus the sensitivity to a change in fair value for any single investment is limited. The significant unobservable inputs for these investments are EBITDA multiples that ranged from 5x to 14x, with a weighted average of 9x, at December 31, 2017.The following table details the fair value and UPB of LHFS that were elected to be carried at fair value:


NOTE 16. Fair Value Disclosures

Excluding government guaranteed, LHFS that were in nonaccrual status or 90 days or more past due and still accruing interest were not material at December 31, 2017.The following table provides information about certain financial assets measured at fair value on a nonrecurring basis, which are primarily collateral dependent and may be subject to liquidity adjustments. The carrying values represent end of period values, which approximate the fair value measurements that occurred on the various measurement dates throughout the period. The valuation adjustments represent the amounts recorded during the period regardless of whether the asset is still held at period end. These assets are considered to be Level 3 assets (excludes PCI).


NOTE 16. Fair Value Disclosures

For financial instruments not recorded at fair value, estimates of fair value are based on relevant market data and information about the instrument. Values obtained relate to one trading unit without regard to any premium or discount that may result from concentrations of ownership, possible tax ramifications, estimated transaction costs that may result from bulk sales or the relationship between various instruments.An active market does not exist for certain financial instruments. Fair value estimates for these instruments are based on current economic conditions, currency and interest rate risk characteristics, loss experience and other factors. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision. Therefore, the fair value estimates in many instances cannot be substantiated by comparison to independent markets and, in many cases, may not be realizable in a current sale of the instrument. In addition, changes in assumptions could significantly affect these fair value estimates. The following assumptions were used to estimate the fair value of these financial instruments.Cash and cash equivalents and restricted cash: For these short-term instruments, the carrying amounts are a reasonable estimate of fair values.HTM securities: The fair values of HTM securities are based on a market approach using observable inputs such as benchmark yields and securities, TBA prices, reported trades, issuer spreads, current bids and offers, monthly payment information and collateral performance.Loans receivable: The fair values for loans are estimated using discounted cash flow analyses, applying interest rates currently being offered for loans with similar terms and credit quality, which are deemed to be indicative of orderly transactions in the current market. For commercial loans and leases, discount rates may be adjusted to address additional credit risk on lower risk grade instruments. For residential mortgage and other consumer loans, internal prepayment risk models are used to adjust contractual cash flows. Loans are aggregated into pools of similar terms and credit quality and discounted using a LIBOR based rate. The carrying amounts of accrued interest approximate fair values.Deposit liabilities: The fair values for demand deposits are equal to the amount payable on demand. Fair values for CDs are estimated using a discounted cash flow calculation that applies current interest rates to aggregate expected maturities. BB&T has developed long-term relationships with its deposit customers, commonly referred to as CDIs, that have not been considered in the determination of the deposit liabilities’ fair value.Short-term borrowings: The carrying amounts of short-term borrowings, excluding securities sold short, approximate their fair values.Long-term debt: The fair values of long-term debt instruments are estimated based on quoted market prices for the instrument if available, or for similar instruments if not available, or by using discounted cash flow analyses, based on current incremental borrowing rates for similar types of instruments.Contractual commitments: The fair values of commitments are estimated using the fees charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. The fair values of guarantees and letters of credit are estimated based on the counterparties’ creditworthiness and average default rates for loan products with similar risks. These respective fair value measurements are categorized within Level 3 of the fair value hierarchy. Retail lending commitments are assigned no fair value as BB&T typically has the ability to cancel such commitments by providing notice to the borrower.Financial assets and liabilities not recorded at fair value are summarized below:


NOTE 16. Fair Value Disclosures

The following is a summary of selected information pertaining to off-balance sheet financial instruments:


NOTE 17. Derivative Financial Instruments

The fair values of derivatives in a gain or loss position are presented on a gross basis in other assets or other liabilities, respectively, in the Consolidated Balance Sheets. Cash collateral posted for derivatives in a loss position is reported as restricted cash. Derivatives with dealer counterparties at both the bank and the parent company are governed by the terms of ISDA Master netting agreements and Credit Support Annexes. The ISDA Master agreements allow counterparties to offset trades in a gain against trades in a loss to determine net exposure and allows for the right of setoff in the event of either a default or an additional termination event. Credit Support Annexes govern the terms of daily collateral posting practices. Collateral practices mitigate the potential loss impact to affected parties by requiring liquid collateral to be posted on a scheduled basis to secure the aggregate net unsecured exposure. In addition to collateral, the right of setoff allows counterparties to offset net derivative values with a defaulting party against certain other contractual receivables from or obligations due to the defaulting party in determining the net termination amount. No portion of the change in fair value of derivatives designated as hedges has been excluded from effectiveness testing. The ineffective portion was immaterial for all periods presented. The following table presents the effect of hedging derivative instruments on the consolidated statements of income:


The following table provides a summary of derivative strategies and the related accounting treatment:


The following table presents information about BB&T's cash flow and fair value hedges:

|  | | | | | | |
| --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |
|  |  | Cash Flow Hedges |  | Fair Value Hedges |  | Derivatives Not Designated as Hedges |
| Risk exposure |  | Variability in cash flows of interest payments on floating rate business loans, overnight funding and various LIBOR funding instruments. |  | Losses in value on fixed rate long-term debt, CDs, FHLB advances, loans and state and political subdivision securities due to changes in interest rates. |  | Risk associated with an asset or liability, including mortgage banking operations and MSRs, or for client needs. Includes exposure to changes in market rates and conditions subsequent to the interest rate lock and funding date for mortgage loans originated for sale. |
| Risk management objective |  | Hedge the variability in the interest payments and receipts on future cash flows for forecasted transactions related to the first unhedged payments and receipts of variable interest. |  | Convert the fixed rate paid or received to a floating rate, primarily through the use of swaps. |  | For interest rate lock commitment derivatives and LHFS, use mortgage-based derivatives such as forward commitments and options to mitigate market risk. For MSRs, mitigate the income statement effect of changes in the fair value of the MSRs. |
| Treatment for portion that is highly effective |  | Recognized in AOCI until the related cash flows from the hedged item are recognized in earnings. |  | Recognized in current period income along with the corresponding changes in the fair value of the designated hedged item attributable to the risk being hedged. |  | Entire change in fair value recognized in current period income. |
| Treatment for portion that is ineffective |  | Recognized in current period income. |  | Recognized in current period income. |  | Not applicable |
| Treatment if hedge ceases to be highly effective or is terminated |  | Hedge is dedesignated. Effective changes in value that are recorded in AOCI before dedesignation are amortized to yield over the period the forecasted hedged transactions impact earnings. |  | If hedged item remains outstanding, cash flows from terminations are reported in the same category as the cash flows from the hedged item and effective changes in value are reflected as part of the carrying value of the financial instrument and amortized to earnings over its estimated remaining life. |  | Not applicable |
| Treatment if transaction is no longer probable of occurring during forecast period or within a short period thereafter |  | Hedge accounting is ceased and any gain or loss in AOCI is reported in earnings immediately. |  | Not applicable |  | Not applicable |


Other, Treasury & Corporate

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


ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

*Management compensatory plan or arrangement.†Exhibit filed with the SEC and available upon request.

|  | | | | |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
| Exhibit No. |  | Description |  | Location |
| 101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase. |  | Filed herewith. |
| 101.DEF |  | XBRL Taxonomy Definition Linkbase. |  | Filed herewith. |
| 101.INS |  | XBRL Instance Document. |  | Filed herewith. |
| 101.LAB |  | XBRL Taxonomy Extension Label Linkbase. |  | Filed herewith. |
| 101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase. |  | Filed herewith. |
| 101.SCH |  | XBRL Taxonomy Extension Schema. |  | Filed herewith. |


Net Interest Income and NIM

(1)Yields are stated on a TE basis utilizing federal tax rate. The change in interest not solely due to changes in rate or volume has been allocated based on the pro-rata absolute dollar amount of each. Interest income includes certain fees, deferred costs and dividends.(2)Total securities include AFS and HTM securities. (3)Includes cash equivalents, interest-bearing deposits with banks, FHLB stock and other earning assets. (4)Fees, which are not material for any of the periods shown, are included for rate calculation purposes. NPLs are included in the average balances. (5)Excludes basis adjustments for fair value hedges.(6)Total deposit costs were 0.22%, 0.64% and 0.41% for the years ended December 31, 2020, 2019 and 2018, respectively.


Noninterest Income

Noninterest income for the year ended December 31, 2020 increased $3.6 billion compared to the earlier period. The current period includes $402 million of net securities gains primarily from the sale of non-agency MBS in the second quarter of 2020 and agency MBS in the third quarter of 2020. The prior period includes $116 million of net securities losses from the sale of agency MBS. Excluding the net securities gains and losses, noninterest income increased $3.1 billion, with nearly all categories of noninterest income being impacted by the Merger. In addition to the impacts from the Merger, insurance income increased $121 million due to strong production and acquisitions. Service charges on deposits were up despite reduced overdraft incident rates and increased refunds and waivers to support clients impacted by the COVID-19 pandemic. Residential mortgage banking income was up due to strong production and refinance activity driven by the lower rate environment, partially offset by lower valuations of the mortgage servicing rights and increased amortization driven by higher prepayments speeds. Investment banking and trading income was up, but was negatively impacted by credit valuation adjustments on the derivatives portfolio primarily related to the decline in interest rates and widening of credit spreads. 46   Truist Financial Corporation


Noninterest Expense

Noninterest expense for the year ended December 31, 2020 was up $7.0 billion compared to the earlier period. Merger-related and restructuring charges and other incremental operating expenses related to the Merger increased $500 million and $370 million, respectively. In addition, the current period was impacted by $235 million of losses on the early extinguishment of long-term debt and a $50 million charitable contribution to the Truist Charitable Fund. Excluding the items mentioned above and the impact of an increase of $521 million of amortization expense for intangibles, noninterest expense increased $5.3 billion, primarily reflecting the impact of the Merger. In addition to the impacts of the Merger, operating costs were elevated due to COVID-19, which resulted in approximately $250 million of expenses compared to the earlier period. This was primarily related to additional on-site pay and bonuses for certain teammates, net occupancy costs for enhanced cleaning and teammate support expenses. Additionally, personnel expenses increased as a result of the completion of a post-Merger reevaluation of job grades that resulted in additional salaries, incentives and equity-based compensation expenses.


Merger-Related and Restructuring Charges

(1)The Company recognized $825 million and $298 million for the year ended December 31, 2020 and 2019, respectively, related to the Merger. At December 31, 2020 and 2019, the Company had an accrual of $50 million and $76 million related to the Merger, respectively. The remaining expense and accrual relate to other restructuring activities.


Investment Activities

The securities portfolio totaled $120.8 billion at December 31, 2020, compared to $74.7 billion at December 31, 2019. The increase was due primarily to a $47.0 billion increase in Agency MBS. The increase in the Agency MBS portfolio includes the redeployment of excess liquidity. During 2020, the Company sold non-Agency MBS, and sold and reinvested residential Agency MBS. These sales were the primary drivers for the gains of $402 million for the year ended December 31, 2020.As of December 31, 2020, approximately 1.9% of the securities portfolio was variable rate, compared to 3.6% as of December 31, 2019. The effective duration of the securities portfolio was 4.0 years at December 31, 2020, compared to 4.7 years at December 31, 2019.U.S. Treasury, GSE and Agency MBS represented 99.6% of the total securities portfolio as of December 31, 2020, compared to 98.7% as of the prior year end.50   Truist Financial CorporationThe following table presents the securities portfolio at December 31, 2020, segregated by major category of security holdings with ranges of maturities and average yields disclosed:


Investment Activities

(1)Yields represent interest computed under the effective interest method on a TE basis using the federal income tax rate 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.


PCI

Loans and leases HFI were $299.7 billion at December 31, 2020, down $108 million compared to 2019.Commercial loans increased $7.3 billion during 2020. The growth in the commercial portfolio was primarily in commercial and industrial loans and reflects PPP loan originations, which was partially offset by lower utilization of commercial lines. Truist served as the fourth largest PPP lender in 2020. The carrying value of PPP loans was $11.0 billion as of December 31, 2020. Additionally, within the commercial and industrial portfolio, Truist experienced growth in loans from mortgage warehouse lending due to the decline in rates and increased refinance activity. Growth in commercial portfolios was partially offset by a decline in dealer floor plan lending and the transfer of $1.0 billion of certain loans and leases to held for sale related to the decision to exit a small ticket loan and lease portfolio.Consumer loans decreased $3.2 billion during 2020 primarily due to refinance activity resulting in a decline in residential mortgages and residential home equity and direct loans. This was partially offset by an increase in indirect auto due to expanded client offerings and an improving credit environment.Credit card loans decreased $780 million during 2020 due to lower business and consumer spending as a result of COVID-19.LHFS decreased $2.3 billion during 2020 primarily due to the sale of loans that had been placed in LHFS after the close of the Merger and the branch divestiture in connection with the Merger, partially offset by the transfer of $1.0 billion to LHFS due to the decision to exit a small ticket loan and lease portfolio.The following table presents a summary of the commercial loan portfolio, segregated by contractual maturities and interest rate terms. Determinations of maturities are based on contractual terms. Truist's credit policy typically does not permit automatic renewal of loans. At the scheduled maturity date (including balloon payment date), the client 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.


PCI

Certain residential mortgage loans have an initial period where the borrower is only required to pay the periodic interest. After the interest-only period, the loan will require the payment of both interest and principal over the remaining term. The outstanding balances of variable rate residential mortgage loans in the interest-only phase were approximately $358 million and $392 million at December 31, 2020 and December 31, 2019, respectively. The following table presents the composition of average loans and leases for each of the last five quarters:


PCI

Average loans and leases held for investment for the fourth quarter of 2020 were $302.9 billion, down $7.6 billion compared to the third quarter of 2020.Average commercial loans decreased $5.4 billion, primarily in commercial and industrial loans due to paydowns on commercial lines. This was partially offset by growth in mortgage warehouse lending, dealer floor plan lending and governmental finance loans. The carrying value of PPP loans was down $1.4 billion compared to September 30, 2020, which resulted in a decline of $304 million in average PPP loans compared to the average for the third quarter of 2020. In addition, average commercial loans were impacted by the transfer of $1.0 billion of certain loans and leases to held for sale, which resulted in a decline in the average balance of $323 million compared to the third quarter of 2020.Average consumer loans decreased $2.2 billion primarily due to seasonally lower loan production and refinance activity resulting in a decline in residential mortgages and residential home equity and direct loans. This was partially offset by an increase in indirect auto loans.54   Truist Financial Corporation


COVID-19 Lending Activities

(1)Excludes approximately 46,000 of active accommodations related to government guaranteed loans totaling approximately $2.3 billion.(2)Calculated based on accommodation count; includes loans that are less than 30 days past due. The following table provides a summary of the Company’s exposure related to loans that have exited accommodations:

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | | |  | | |  | | |  | | |  | | |  | | |  | | |  | | |  | | |  | | |
|  | | |
| Table 19: Client Accommodations (1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|  | | | Active Accommodations | | | | | | | | |  | | | Exited Accommodations | | | | | | | | |  | | |  | | |
| December 31, 2020(Dollars in millions) | | | Total Count | | |  | | | Outstanding Balance | | |  | | | Outstanding Balance | | |  | | | % Paid-off or Current (2) | | |  | | | Types of Accommodations | | |
| Commercial | | | 835 | |  |  | | | $ | 274 |  |  | | | $ | 21,239 |  |  | | | 97.2 | | % |  | | | Clients may elect to defer loan or lease payments for up to 90 days without late fees being incurred but with finance charges continuing to accrue. | | |
| Consumer | | | 123,191 | |  |  | | | 3,729 | |  |  | | | 8,062 | |  |  | | | 90.8 | |  |  | | | Clients may elect to defer loan payments for time periods that generally range from 30 to 90 days without late fees being incurred but with finance charges generally continuing to accrue. The Company’s residential mortgage forbearance program generally provides up to 180 days of relief, provided that additional relief may be provided in certain circumstances. | | |
| Credit card | | | 5,996 | |  |  | | | 31 | |  |  | | | 187 | |  |  | | | 88.5 | |  |  | | | Clients may elect to defer payments for up to 90 days without late fees being incurred but with finance charges accruing. In addition, Truist provided credit card clients with 5% cash back on qualifying card purchases for certain important basic needs. | | |
| Total | | | 130,022 | |  |  | | | $ | 4,034 |  |  | | | $ | 29,488 |  |  | | |  | | |  | | |  | | |


COVID-19 Lending Activities

The following table provides a summary of exposure to industries that management believes are most vulnerable in the current economic environment. These selected industry exposures represent 9.0% of loans held for investment at December 31, 2020. Truist is actively managing these portfolios and will continue to make underwriting or risk acceptance adjustments as appropriate. These exposures decreased $0.8 billion or 2.6% during the fourth quarter. In addition, management is closely monitoring its leveraged lending and small secured real estate portfolios which comprised 3.1% and 1.5% of loans held for investment at December 31, 2020, respectfully.


Asset Quality

(1)The past due status of loans that received a deferral under the CARES Act is generally frozen during the deferral period.56   Truist Financial CorporationNonperforming assets totaled $1.4 billion at December 31, 2020, up $703 million compared to December 31, 2019 primarily from the adoption of CECL, which resulted in the discontinuation of the pool-level accounting for PCI loans and replaced that with a loan-level evaluation for nonaccrual status. As of December 31, 2019, there was approximately $500 million of PCI loans that would have been classified as nonperforming had the Company evaluated accrual status on a loan level basis. The remaining increase in nonperforming loans held for investment is primarily in commercial and industrial loans and an increase in nonperforming mortgage loans due to loans exiting certain accommodation programs related to the CARES Act. Nonperforming loans and leases represented 0.44% of total loans and leases, up 26 basis points compared to December 31, 2019. Performing TDRs were up $381 million compared to the prior year primarily in residential mortgage, lease financing and indirect auto loans. This increase primarily reflects the application of acquisition accounting related to the Merger, which resulted in the removal of the TDR designation on all loans that were restructured by SunTrust prior to the Merger date.Loans 90 days or more past due and still accruing totaled $2.0 billion at December 31, 2020, relatively flat compared to the prior year. In connection with the discontinuation of pool level accounting for PCI loans, loans 90 days or more past due and still accruing decreased as loan-level evaluations resulted in certain loans being placed in nonaccrual status. This decrease was partially offset by an increase in government guaranteed student loans. Additionally, residential mortgage loans 90 days or more past due increased primarily due to the repurchase of delinquent government guaranteed loans. The ratio of loans 90 days or more past due and still accruing as a percentage of loans and leases was 0.67% at December 31, 2020, an increase of 1 basis point from the prior year. Excluding government guaranteed and PCI loans, the ratio of loans 90 days or more past due and still accruing as a percentage of loans and leases was 0.04% at December 31, 2020, up 1 basis point from December 31, 2019.Loans 30-89 days past due and still accruing totaled $2.2 billion at December 31, 2020, relatively flat compared to the prior year. Loans 30-89 days past due reflects a decrease in PCI loans, offset by a corresponding increase in the portfolios where these loans were transferred in connection with the implementation of CECL. The ratio of loans 30-89 days or more past due and still accruing as a percentage of loans and leases was 0.74% at December 31, 2020, flat compared to the prior year.Problem loans include NPLs and loans that are 90 days or more past due and still accruing as disclosed in Table 22. In addition, for the commercial portfolio segment, loans that are rated special mention or substandard performing are closely monitored by management as potential problem loans. Refer to "Note 5. Loans and ACL" for additional disclosures related to these potential problem loans.


Asset Quality

Applicable ratios are annualized.(1)Includes LHFS.(2)This asset quality ratio has been adjusted to remove the impact of government guaranteed mortgage, student and PPP loans, and PCI, as applicable. Management believes the inclusion of such assets in this asset quality ratio results in distortion of this ratio such that it might not be reflective of asset collectability or might not be comparable to other periods presented or to other portfolios that do not have government guarantees or were not impacted by PCI accounting requirements.The following table presents activity related to NPAs:


Asset Quality

(1)For 2020, includes approximately $500 million of loans previously classified as PCI that would have otherwise been nonperforming as of December 31, 2019.(2)Includes charge-offs and losses recorded upon sale of $139 million and $228 million for the year ended December 31, 2020 and 2019, respectively.(3)Includes charge-offs and losses recorded upon sale of $132 million and $39 million for the year ended December 31, 2020 and 2019, respectively.TDRs occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near term and a concession has been granted to the borrower. As a result, Truist works with borrowers to prevent further difficulties and to improve the likelihood of recovery on a 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. In accordance with the CARES Act, Truist implemented loan modification programs in response to the COVID-19 pandemic in order to provide borrowers with flexibility with respect to repayment terms. Payment relief assistance provided by Truist includes forbearance, deferrals, extension and re-aging programs, along with certain other modification strategies. The Company adopted certain provisions of the CARES Act and other regulatory guidance that provide relief from the requirement to apply TDR accounting to (1) certain modifications of federally backed mortgages upon request from the borrower, and (2) certain modifications of other non-federally backed mortgages for borrowers impacted by the COVID-19 pandemic that were less than 30 days past due at December 31, 2019. Refer to "Note 1. Basis of Presentation" for Truist’s policy related to TDRs and COVID-19 loan modifications. TDRs identified by SunTrust prior to the Merger date are not included in Truist's TDR disclosure because all such loans were recorded at fair value and a new accounting basis was established as of the Merger date. Subsequent modifications are evaluated for potential treatment as TDRs in accordance with Truist's accounting policies.The following table provides a summary of performing TDR activity:


Asset Quality

(1)Includes scheduled principal payments, prepayments and payoffs of amounts outstanding. (2)Represent loans that no longer meet the requirements necessary to reflect the loan in accruing status.TDR classification may be removed due to the passage of time if the loan: (i) did not include a forgiveness of principal or interest, (ii) has performed in accordance with the modified terms (generally a minimum of six months), (iii) was reported as a TDR over a year-end reporting period, and (iv) reflected an interest rate on the modified loan that was no less than a market rate at the date of modification. TDR classification may also be removed for an accruing loan upon the occurrence of a subsequent non-concessionary modification granted at market terms and within current underwriting guidelines. In connection with consumer TDRs, a NPL will be returned to accruing status when (i) the borrower has resumed paying the full amount of the scheduled contractual interest and principal payments, (ii) management concludes that all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment, and (iii) there is a sustained period of repayment performance, generally a minimum of six months.58   Truist Financial CorporationThe following table provides further details regarding the payment status of TDRs outstanding at December 31, 2020:


Asset Quality

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


ACL

The ACL totaled $6.2 billion at December 31, 2020, compared to $1.9 billion at December 31, 2019. The increase in the allowance for credit losses was primarily due to the adoption of CECL. Upon adoption, the Company recorded a $3.1 billion increase in the allowance for credit losses, including $2.8 billion that was charged to retained earnings before tax, and $378 million related to the gross up for PCD loans. The remaining increase in the allowance for credit losses primarily reflects deteriorated economic conditions. As of December 31, 2020, the allowance for loan and lease losses was 1.95% of loans and leases held for investment. The allowance for credit losses includes $5.8 billion for loans and leases and $364 million for the reserve for unfunded commitments. At December 31, 2020, the allowance for loan and lease losses was 4.39 times nonperforming loans and leases held for investment, compared to 3.41 times at December 31, 2019. At December 31, 2020, the allowance for loan and lease losses was 5.21 times annualized net charge-offs, compared to 2.44 times at December 31, 2019.60   Truist Financial CorporationNet charge-offs during 2020 totaled $1.1 billion, up $485 million compared to the prior year. The increase in net charge-offs primarily reflects the Merger. As a percentage of average loans and leases, annualized net charge-offs were 0.36%, down four basis points compared to the prior year. Current year net charge-offs include $97 million of charge-offs related to the implementation of CECL, which required a gross-up of loan carrying values in connection with the establishment of an allowance on PCD loans. Management performed a comprehensive review of PCD assets during the year and concluded in certain situations that a charge-off was required. Excluding these additional charge-offs, net charge-offs would have been an annualized 0.33% of average loans and leases for 2020, down seven basis points compared to the prior year.The following table presents an allocation of the ALLL. The entire amount of the allowance is available to absorb losses occurring in any category of loans and leases.


ACL

Truist monitors the performance of its home equity loans and lines secured by second liens similarly to other consumer loans and utilizes assumptions specific to these loans in determining the necessary ALLL. Truist also receives notification when the first lien holder, whether Truist or another financial institution, has initiated foreclosure proceedings against the borrower. When notified that the first lien is in the process of foreclosure, Truist obtains valuations to determine if any additional charge-offs or reserves are warranted. These valuations are updated at least annually thereafter.Truist has limited ability to monitor the delinquency status of the first lien, unless the first lien is held or serviced by Truist. As a result, using migration assumptions that are based on historical experience and adjusted for current trends, Truist estimates the volume of second lien positions where the first lien is delinquent and adjusts the ALLL to reflect the increased risk of loss on these credits. Finally, Truist also provides additional reserves for second lien positions when the estimated combined current loan to value ratio for the credit exceeds 100%. As of December 31, 2020, Truist held or serviced the first lien on 30.6% of its second lien positions.


Deposits

Deposits totaled $381.1 billion at December 31, 2020, an increase of $46.4 billion from December 31, 2019. The growth in deposits reflects solid growth in all non-time deposit categories resulting from pandemic-related client behavior and government stimulus programs. Time deposits decreased primarily due to maturities of wholesale negotiable certificates of deposit and higher-cost personal and business accounts.62   Truist Financial CorporationThe following table presents average deposits for each of the last five quarters:


Deposits

Average deposits for the fourth quarter of 2020 were $375.3 billion, an increase of $3.1 billion compared to the prior quarter. Average noninterest-bearing and interest checking deposit growth was strong for the fourth quarter of 2020 driven by anticipated seasonal inflows in addition to continued growth resulting from pandemic-related client behavior. Average time deposits decreased primarily due to maturity of wholesale negotiable certificates of deposit and higher-cost personal and business accounts.Average noninterest-bearing deposits represented 33.9% of total deposits for the fourth quarter of 2020, compared to 33.3% for the prior quarter. The cost of average total deposits was 0.07% for the fourth quarter, down three basis points compared to the prior quarter. The cost of average interest-bearing deposits was 0.11% for the fourth quarter, down four basis points compared to the prior quarter.The following table summarizes the maturities of time deposits above $100,000:


Borrowings

At December 31, 2020, short-term borrowings totaled $6.1 billion, a decrease of $12.1 billion compared to December 31, 2019, due primarily to a decrease of $10.8 billion in short-term FHLB advances. These borrowing sources were replaced with deposit funding.Average short-term borrowings were $10.1 billion, or 2.4% of total funding for 2020, as compared to $8.5 billion, or 4.1% for the prior year. The increase in the average amount was due to the Merger. Average short-term borrowings decreased as a percentage of funding sources due to strong deposit growth.Long-term debt provides funding and, to a lesser extent, regulatory capital, and primarily consists of senior and subordinated notes issued by Truist and Truist Bank. Long-term debt totaled $39.6 billion at December 31, 2020, a decrease of $1.7 billion compared to December 31, 2019. During 2020, the Company issued $4.8 billion of senior notes with interest rates from 1.125% to 1.95% maturing in 2023 to 2030, $500 million in floating rate senior notes maturing in 2023 and $1.3 billion of subordinated notes with an interest rate of 2.25% maturing in 2030. These issuances were partially offset by the redemption of $4.6 billion of senior notes during 2020 and a decrease of $3.3 billion in long-term FHLB advances. FHLB advances represented 2.2% of total outstanding long-term debt at December 31, 2020, compared to 10.0% at December 31, 2019. The average cost of long-term debt was 1.75% for the year ended December 31, 2020, down 147 basis points compared to the same period in 2019. Truist entered into $20 billion of FHLB advances during 2020 to build liquidity and ensure the Company was able to meet the funding needs of its clients. As market conditions stabilized and deposits increased, these advances were repaid and the Company recognized a loss of $235 million on the early extinguishment of debt. The repayment of these advances improved net interest income, the net interest margin and the leverage ratios.


Interest Rate Market Risk

(1)The Down 25 and 50 rates are floored at one basis point and may not reflect Down 25 and 50 basis points for all rate indices.Truist has established parameters related to interest rate sensitivity measures that prescribe a maximum impact on net interest income under different interest rate scenarios that would result in an escalation to the Board. The following parameters and interest rate scenarios are considered Truist's primary measures of interest rate risk:•Maximum impact on net interest income of 7.5% for the next 12 months assuming a 25 basis point change in interest rates each quarter for four quarters; and a•Maximum impact on net interest income of 10% for an immediate 100 basis point parallel change in rates.This interest rate shock analysis is designed to create an outer bound of acceptable interest rate risk.Management considers how the 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 resulted in growth in noninterest-bearing demand deposits. Consistent with the industry, Truist has seen a significant increase in this funding source. The behavior of these deposits is one of the most important assumptions used in determining the interest rate risk position of Truist. A decrease in the amount of these deposits in the future would reduce the asset sensitivity of Truist’s balance sheet because the Company would increase interest-bearing funds to offset the loss of this advantageous funding source.The following table shows the results of Truist's interest-rate sensitivity position assuming the loss of demand deposits and an associated increase in managed rate deposits under various scenarios. For purposes of this analysis, Truist modeled the incremental beta of managed rate deposits for the replacement of the demand deposits at 100%.


Interest Rate Market Risk

(1)The base scenario is equal to the annualized hypothetical percentage change in net interest income at December 31, 2020 as presented in the preceding table.Truist also uses an EVE analysis to focus on longer-term projected changes in asset and liability values given potential changes in interest rates. This measure allows Truist to analyze interest rate risk that falls outside the net interest income simulation period. 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 EVE.The following table shows the effect that the indicated changes in interest rates would have on EVE:


Interest Rate Market Risk

Truist uses financial instruments including derivatives to manage interest rate risk related to securities, commercial loans, MSRs and mortgage banking operations, long-term debt and other funding sources. During October 2020, Truist initiated a new investment securities fair value hedging program, using fixed interest rate swaps to hedge prepayable securities. Truist also uses derivatives to facilitate transactions on behalf of its clients and as part of associated hedging activities. As of December 31, 2020, Truist had derivative financial instruments outstanding with notional amounts totaling $322.9 billion, with an associated net fair value of $3.3 billion. See "Note 19. Derivative Financial Instruments" for additional disclosures.LIBOR in its current form was anticipated to no longer be available after 2021. For most tenors of U.S. dollar LIBOR, subject to the results of a consultation period ending January 2021, the administrator of LIBOR is considering extending publication until June 30, 2023. Tenors used infrequently by Truist, including one week and two month U.S. dollar LIBOR, are still anticipated to cease publication at December 31, 2021, based on this new guidance. Truist has U.S. dollar LIBOR-based contracts that extend beyond June 30, 2023. To prepare for the transition to an alternative reference rate, management has formed a cross-functional project team to address the LIBOR transition. The project team has performed an assessment to identify the potential risks related to the transition from LIBOR to a new index. The project team provides updates to Executive Leadership and the Board.Contract fallback language for existing loans and leases is under review and certain contracts will need updated provisions for the transition. Current fallback language used for new, renewed, and modified contracts is generally consistent with ARRC recommendations. Updates to current fallback language will be evaluated according to new regulatory guidance for the extension of timelines for the transition and expectations for production of U.S. dollar LIBOR contracts during 2021. Truist continues to manage the impact of these contracts and other financial instruments, systems implications, hedging strategies, and related operational and market risks on established project plans for business and operational readiness for the transition. Market risks associated with this change are dependent on the alternative reference rates available and market conditions at transition. For a further discussion of the various risks associated with the potential cessation of LIBOR and the transition to alternative reference rates, refer to the section titled "Item1A. Risk Factors." In 2020, Truist began offering SOFR-based lending solutions to wholesale and consumer clients, and entered into SOFR-based derivative contracts. Truist expects SOFR to become a more commonly-used pricing benchmark across the industry. Truist continues to evaluate SOFR for additional product offerings and other alternative reference rates as replacements for LIBOR.


Stressed VaR-based measures

The increase from the prior year in stressed VaR-based measures was due to the integration of heritage SunTrust trading business after the Merger and the market volatility due to the COVID-19 pandemic.


Truist Bank

Truist has a contingency funding plan designed to ensure that liquidity sources are sufficient to meet ongoing obligations and commitments, particularly in the event of a liquidity contraction. This plan is designed to examine and quantify the organization's liquidity under various "stress" scenarios. Additionally, the plan provides 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 plan addresses authority for activation and decision making, liquidity options, and the responsibilities of key departments in the event of a liquidity contraction. Management believes current sources of liquidity are adequate to meet Truist's current requirements and plans for continued growth. See "Note 9. Other Assets and Liabilities," "Note 11. Borrowings" and "Note 16. Commitments and Contingencies" for additional information regarding outstanding balances of sources of liquidity and contractual commitments and obligations.