Capital

(1)Tangible common equity and related measures are non-GAAP measures that exclude the impact of intangible assets and their related amortization. These measures are useful for evaluating the performance of a business consistently, whether acquired or developed internally. BB&T's management uses these measures to assess the quality of capital and returns relative to balance sheet risk and believes investors may find them useful in their analysis of the Corporation. These capital measures are not necessarily comparable to similar capital measures that may be presented by other companies.BB&T Corporation   62During 2018, BB&T completed $1.2 billion of stock repurchases and paid $1.2 billion in common stock dividends, which resulted in a total payout ratio of 78.7%for the year. BB&T's Board of Directors increased the dividend $0.075 during 2018, which increased the amount of the quarterly dividend to $0.405 per share. As of December 31, 2018, the remaining stock repurchases authorized by the Board of Directors totaled $1.1 billion. BB&T has suspended share repurchases as a result of the pending merger of equals with SunTrust.

|  | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |
| Table 32: Capital Ratios - BB&T Corporation | | | | | | | | |
| December 31,(Dollars in millions, except per share data, shares in thousands) |  | 2018 | | |  | 2017 | | |
| Risk-based: |  |  | | |  |  | | |
| CET1 capital to risk-weighted assets |  | 10.2 | | % |  | 10.2 | | % |
| Tier 1 capital to risk-weighted assets |  | 11.8 | |  |  | 11.9 | |  |
| Total capital to risk-weighted assets |  | 13.8 | |  |  | 13.9 | |  |
| Leverage ratio |  | 9.9 | |  |  | 9.9 | |  |
| Non-GAAP capital measure (1): |  |  | |  |  |  | | |
| Tangible common equity per common share |  | $ | 21.89 |  |  | $ | 21.07 |  |
| Calculation of tangible common equity (1): |  |  | | |  |  | | |
| Total shareholders' equity |  | $ | 30,178 |  |  | $ | 29,695 |  |
| Less: |  |  | | |  |  | | |
| Preferred stock |  | 3,053 | |  |  | 3,053 | |  |
| Noncontrolling interests |  | 56 | |  |  | 47 | |  |
| Intangible assets, net of deferred taxes |  | 10,360 | |  |  | 10,117 | |  |
| Tangible common equity |  | $ | 16,709 |  |  | $ | 16,478 |  |
| Risk-weighted assets |  | $ | 181,260 |  |  | $ | 177,217 |  |
| Common shares outstanding at end of period |  | 763,326 | |  |  | 782,006 | |  |


Capital

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


ACL

BB&T Corporation   64For 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. Basis of Presentation."

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


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 nonperforming 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 nonperforming 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 nonperforming 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 for loans individually evaluated for impairment, BB&T's policy is to review all commercial lending relationships with an outstanding nonperforming balance of $3 million or more. 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 other commercial relationships with collateral-dependent TDRs and nonperforming loans with balances of $1 million or more 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 all other TDRs and commercial nonperforming 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 these loans 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.BB&T Corporation   78

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


Changes in Accounting Principles and Effects of New Accounting Pronouncements

BB&T Corporation   82

|  | | |
| --- | --- | --- |
|  |  |  |
| Standard/Adoption Date | Description | Effects on the Financial Statements |
| Standards Adopted During the Current Year | | |
| Revenue from Contracts with CustomersJan 1, 2018 | Requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. | BB&T adopted this guidance using the modified retrospective approach for in-scope contracts at the date of adoption. The impact was not material. |
| Net Periodic Pension Cost and Net Periodic Postretirement Benefit CostJan 1, 2018 | Requires that the service cost component of net benefit costs of pension and postretirement benefit plans be reported in the same line item as other compensation costs in the Consolidated Statements of Income. The other components of net benefit cost are required to be presented in a separate line item. | The service cost component is included in personnel expense and the other components of net benefit costs are included in other expense in the Consolidated Statements of Income. The prior periods were reclassified to conform to the current presentation. See Note 12. Benefit Plans. |
| Derivatives and HedgingJan 1, 2018 | Expands the risk management activities that qualify for hedge accounting, and simplifies certain hedge documentation and assessment requirements. Eliminates the concept of separately recording hedge ineffectiveness, and expands disclosure requirements. | BB&T early adopted this guidance using the modified retrospective approach. The impact was not material. New required disclosures have been included in Note 17. Derivative Financial Instruments. |
| Standards Not Yet Adopted | | |
| LeasesJan 1, 2019 | Requires lessees to recognize assets and liabilities related to certain operating leases on the balance sheet, requires additional disclosures by lessees, and contains targeted changes to accounting by lessors. | BB&T expects to establish ROU assets of approximately $850 million and lease liabilities of approximately $1.0 billion. The net impact to equity is expected to be a reduction of approximately $40 million, with no material impact to its Consolidated Statements of Income. BB&T will adopt on a prospective basis. |
| Credit LossesJan 1, 2020 | Replaces the incurred loss impairment methodology with an expected credit loss methodology and requires consideration of a broader range of information to determine credit loss estimates. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. Purchased credit deteriorated loans will receive an allowance for expected credit losses. Any credit impairment on AFS debt securities for which the fair value is less than cost will be recorded through an allowance for expected credit losses. The standard also requires expanded disclosures related to credit losses and asset quality. | BB&T expects that the ACL could be materially higher; however, the magnitude of the increase, which is highly dependent on existing and forecasted economic conditions at the time of adoption, has not yet been quantified. Model development and fit-for-purpose testing is substantially complete for most portfolios, and significant progress has been made on testing designed to evaluate the sensitivity of the models to economic forecasts, length of the reasonable and supportable period and reversion to historical loss information. A phased approach to parallel testing is expected, with limited parallel testing in the first and second quarters of 2019, with plans for a more comprehensive parallel testing program in the second half of the year that will include consideration of new or modified internal controls. |


NOTE 2. Securities

Certain securities issued by FNMA and FHLMC exceeded 10% of shareholders' equity at December 31, 2018. The FNMA investments had total amortized cost and fair value of $13.3 billion and $12.8 billion, respectively. The FHLMC investments had total amortized cost and fair value of $9.6 billion and $9.3 billion, respectively.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.


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

Substantially all of the unrealized losses on the securities portfolio were the result of changes in market interest rates compared to the date the securities were acquired rather than the credit quality of the issuers or underlying loans.BB&T Corporation   84


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 rather than reclassifying to nonperforming:


NOTE 3. Loans and ACL

The following tables present activity in the ACL:


NOTE 3. Loans and ACL

BB&T Corporation   86


NOTE 3. Loans and ACL

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


NOTE 3. Loans and ACL

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


NOTE 3. Loans and ACL

The primary reason loan modifications were classified as TDRs is summarized below. Balances represent the recorded investment at the end of the quarter in which the modification was made. Rate modifications consist of TDRs made with below market interest rates, including those that also have modifications of loan structures.


NOTE 3. Loans and ACL

Charge-offs and forgiveness of principal and interest for TDRs were immaterial for all periods presented.The pre-default balance for modifications that had been classified as TDRs during the previous 12 months that experienced a payment default was $76 million, $104 million and $73 million for the years ended December 31, 2018, 2017 and 2016, respectively. Payment default is defined as movement of the TDR to nonperforming status, foreclosure or charge-off, whichever occurs first. Unearned income, discounts and net deferred loan fees and costs were immaterial for all periods presented. Residential mortgage loans in the process of foreclosure were $253 million at December 31, 2018 and $288 million at December 31, 2017.BB&T Corporation   88


NOTE 4. Premises and Equipment

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


NOTE 4. Premises and Equipment

The following table excludes executory costs:


NOTE 5. Goodwill and Other Intangible Assets

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.

|  | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |
| December 31,(Dollars in millions) |  | 2018 | | |  | 2017 | | |  | 2016 | | |
| UPB of residential mortgage loan servicing portfolio |  | $ | 118,605 |  |  | $ | 118,424 |  |  | $ | 121,639 |  |
| UPB of residential mortgage loans serviced for others, primarily agency conforming fixed rate |  | 87,270 | |  |  | 89,124 | |  |  | 90,325 | |  |
| Mortgage loans sold with recourse |  | 419 | |  |  | 490 | |  |  | 578 | |  |
| Maximum recourse exposure from mortgage loans sold with recourse liability |  | 223 | |  |  | 251 | |  |  | 282 | |  |
| Indemnification, recourse and repurchase reserves |  | 24 | |  |  | 37 | |  |  | 40 | |  |
|  |  |  | |  |  |  | |  |  |  | | |
| As of / For the Year Ended December 31, (Dollars in millions) |  | 2018 | | |  | 2017 | | |  | 2016 | | |
| UPB of residential mortgage loans sold from LHFS |  | $ | 10,094 |  |  | $ | 12,423 |  |  | $ | 15,675 |  |
| Pre-tax gains recognized on mortgage loans sold and held for sale |  | 116 | |  |  | 153 | |  |  | 139 | |  |
| Servicing fees recognized from mortgage loans serviced for others |  | 256 | |  |  | 261 | |  |  | 268 | |  |
| Approximate weighted average servicing fee on the outstanding balance of residential mortgage loans serviced for others |  | 0.28 | | % |  | 0.28 | | % |  | 0.28 | | % |
| Weighted average interest rate on mortgage loans serviced for others |  | 4.04 | |  |  | 4.00 | |  |  | 4.03 | |  |


Residential Mortgage Banking Activities

BB&T Corporation   90

|  | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |
| Year Ended December 31,(Dollars in millions) |  | 2018 | | |  | 2017 | | |  | 2016 | | |
| Residential MSRs, carrying value, January 1 |  | $ | 914 |  |  | $ | 915 |  |  | 880 | |  |
| Additions |  | 116 | |  |  | 123 | |  |  | 146 | |  |
| Change in fair value due to changes in valuation inputs or assumptions: |  |  | | |  |  | | |  |  | | |
| Prepayment speeds |  | (12 | | ) |  | (42 | | ) |  | 13 | |  |
| OAS |  | 57 | |  |  | 46 | |  |  | 10 | |  |
| Servicing costs |  | 22 | |  |  | 9 | |  |  | 2 | |  |
| Realization of expected net servicing cash flows, passage of time and other |  | (140 | | ) |  | (137 | | ) |  | (136 | | ) |
| Residential MSRs, carrying value, December 31 |  | $ | 957 |  |  | $ | 914 |  |  | $ | 915 |  |
| Gains (losses) on derivative financial instruments used to mitigate the income statement effect of changes in residential MSR fair value |  | $ | (63 | ) |  | $ | — |  |  | 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 one assumption on the fair value of the MSRs is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another, which may magnify or counteract the effect of the change.


NOTE 8. Long-Term Debt

(1)FHLB advances had a weighted average maturity of 4.0 years at December 31, 2018.The effective rates above reflect the impact of fair value hedges and debt issuance costs. Subordinated notes with a remaining maturity of one year or greater qualify under the risk-based capital guidelines as Tier 2 supplementary capital, subject to certain limitations.During 2017, Branch Bank 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.


Preferred Stock

BB&T Corporation   92Dividends 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.

|  | | | |
| --- | --- | --- | --- |
|  |  |  |  |
| December 31, 2018 |  |  | |
| Shares available for future grants (in thousands) |  | 16,366 |  |
| Vesting period, minimum |  | 1.0 year |  |
| Vesting period, maximum |  | 5.0 years |  |


Equity-Based Compensation Plans

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

|  | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |
| As of / For the Year Ended December 31,(Dollars in millions) |  | 2018 | | |  | 2017 | | |  | 2016 | | |
| Equity-based compensation expense |  | $ | 141 |  |  | $ | 132 |  |  | $ | 115 |  |
| Income tax benefit from equity-based compensation expense |  | 34 | |  |  | 34 | |  |  | 43 | |  |
| Intrinsic value of options exercised, and RSUs and PSUs that vested during the year |  | 260 | |  |  | 261 | |  |  | 159 | |  |
| Grant date fair value of equity-based awards that vested during the year |  | 139 | |  |  | 116 | |  |  | 98 | |  |
| Unrecognized compensation cost related to equity-based awards |  | 135 | |  |  | 132 | |  |  | 109 | |  |
| Weighted-average life over which compensation cost is expected to be recognized |  | 2.4 years | |  |  | 2.4 years | |  |  | 2.3 years | |  |


NOTE 10. AOCI

BB&T Corporation   94


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 on December 22, 2017. Amounts reflected in the above table as Federal tax reform impact for 2018 relate to the revaluation of deferred taxes on positions taken in the 2017 tax return filing, while amounts for 2017 relate to the net tax benefit recognized as a result of the revaluation of deferred taxes and investments in affordable housing projects.

|  | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |
| Year Ended December 31,(Dollars in millions) |  | 2018 | | |  | 2017 | | |  | 2016 | | |
| Federal income taxes at statutory rate |  | $ | 853 |  |  | $ | 1,164 |  |  | $ | 1,225 |  |
| Increase (decrease) in provision for income taxes as a result of: |  |  | | |  |  | | |  |  | | |
| State income taxes, net of federal tax benefit |  | 117 | |  |  | 77 | |  |  | 73 | |  |
| Affordable housing projects proportional amortization |  | 260 | |  |  | 236 | |  |  | 205 | |  |
| Affordable housing projects tax credits and other tax benefits |  | (317 | | ) |  | (319 | | ) |  | (279 | | ) |
| Tax-exempt income |  | (90 | | ) |  | (139 | | ) |  | (151 | | ) |
| Federal tax reform impact |  | (27 | | ) |  | (43 | | ) |  | — | |  |
| Excess tax benefits for equity-based compensation |  | (17 | | ) |  | (52 | | ) |  | — | |  |
| Other, net |  | 24 | |  |  | (13 | | ) |  | (15 | | ) |
| Provision for income taxes |  | $ | 803 |  |  | $ | 911 |  |  | $ | 1,058 |  |
| Effective income tax rate |  | 19.8 | | % |  | 27.4 | | % |  | 30.2 | | % |
| Statutory federal tax rate |  | 21.0 | | % |  | 35.0 | | % |  | 35.0 | | % |


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 amounts of unrecognized tax benefits and accrued tax-related interest penalties were immaterial at December 31, 2018, 2017 and 2016. Further, the amount of net interest and penalties related to unrecognized tax benefits was immaterial for all periods presented.  The Company's federal income tax returns are no longer subject to examination by the IRS for taxable years prior to 2015. With limited exceptions, the Company is no longer subject to examination by state and local taxing authorities for taxable years prior to 2014.


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 2019, the expected rate of return on plan assets is 7.0%.

|  | | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Year Ended December 31,(Dollars in millions) | Location |  | 2018 | | |  | 2017 | | |  | 2016 | | |
| Net periodic pension cost: |  |  |  | | |  |  | | |  |  | | |
| Service cost | Personnel expense |  | $ | 238 |  |  | $ | 200 |  |  | $ | 186 |  |
| Interest cost | Other expense |  | 201 | |  |  | 192 | |  |  | 181 | |  |
| Estimated return on plan assets | Other expense |  | (448 | | ) |  | (372 | | ) |  | (326 | | ) |
| Net amortization and other | Other expense |  | 81 | |  |  | 75 | |  |  | 80 | |  |
| Net periodic benefit cost |  |  | 72 | |  |  | 95 | |  |  | 121 | |  |
| Pre-tax amounts recognized in OCI: |  |  |  | |  |  |  | |  |  |  | |  |
| Prior service credit (cost) |  |  | — | |  |  | 30 | |  |  | — | |  |
| Net actuarial loss (gain) |  |  | 289 | |  |  | 137 | |  |  | 138 | |  |
| Net amortization |  |  | (81 | | ) |  | (75 | | ) |  | (80 | | ) |
| Net amount recognized in OCI |  |  | 208 | |  |  | 92 | |  |  | 58 | |  |
| Total net periodic pension costs (income) recognized in total comprehensive income, pre-tax |  |  | $ | 280 |  |  | $ | 187 |  |  | $ | 179 |  |
| Weighted average assumptions used to determine net periodic pension cost: | |  |  | | |  |  | | |  |  | | |
| Discount rate |  |  | 3.79 | | % |  | 4.43 | | % |  | 4.68 | | % |
| Expected long-term rate of return on plan assets |  |  | 7.00 | | % |  | 7.00 | | % |  | 7.00 | | % |
| Assumed long-term rate of annual compensation increases |  |  | 4.50 | | % |  | 4.50 | | % |  | 4.50 | | % |


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 2019


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 $549 million during the first quarter of 2019. Management may make additional contributions in 2019. 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 Corporation   98


Defined Benefit Retirement Plans

(1)The plan may hold up to 10% of its assets in BB&T common stock.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 plan held alternative investments valued using net asset values totaling $274 million and $105 million at December 31, 2018 and 2017, respectively.


NOTE 13. Commitments and Contingencies

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.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. Refer to "Note 16. Fair Value Disclosures" for additional disclosures related to off-balance sheet financial instruments.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) |  | 2018 | | |  | 2017 | | |
| Investments in affordable housing projects: |  |  | | |  |  | | |
| Carrying amount |  | $ | 2,088 |  |  | $ | 1,948 |  |
| Amount of future funding commitments included in carrying amount |  | 919 | |  |  | 928 | |  |
| Lending exposure |  | 460 | |  |  | 561 | |  |
| Tax credits subject to recapture |  | 523 | |  |  | 471 | |  |
| Private equity investments: |  |  | | |  |  | | |
| Carrying amount |  | 458 | |  |  | 471 | |  |
| Amount of future funding commitments not included in carrying amount |  | 331 | |  |  | 143 | |  |


Pledged Assets

BB&T Corporation   100


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, 2018 and 2017, Branch Bank's capital was above all required levels.


NOTE 15. Parent Company Financial Information

BB&T Corporation   102


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(Dollars in millions) |  | Year Ended December 31, | | | | | | | | | | |
|  | 2018 | | |  | 2017 | | |  | 2016 | | |
| Cash Flows From Operating Activities: |  |  | |  |  |  | | |  |  | | |
| Net income |  | $ | 3,257 |  |  | $ | 2,415 |  |  | $ | 2,442 |  |
| Adjustments to reconcile net income to net cash from operating activities: |  |  | | |  |  | | |  |  | | |
| Equity in earnings of subsidiaries in excess of dividends from subsidiaries |  | (508 | | ) |  | (558 | | ) |  | (1,188 | | ) |
| Other, net |  | (28 | | ) |  | — | |  |  | (14 | | ) |
| Net cash from operating activities |  | 2,721 | |  |  | 1,857 | |  |  | 1,240 | |  |
| Cash Flows From Investing Activities: |  |  | |  |  |  | |  |  |  | | |
| Proceeds from maturities, calls, paydowns and sales of AFS securities |  | 33 | |  |  | 29 | |  |  | 27 | |  |
| Purchases of AFS securities |  | (28 | | ) |  | (29 | | ) |  | (31 | | ) |
| Proceeds from maturities, calls and paydowns of HTM securities |  | — | |  |  | — | |  |  | 2 | |  |
| Investment in subsidiaries |  | — | |  |  | 1,100 | |  |  | (85 | | ) |
| Advances to subsidiaries |  | (4,639 | | ) |  | (6,958 | | ) |  | (7,719 | | ) |
| Proceeds from repayment of advances to subsidiaries |  | 3,665 | |  |  | 4,671 | |  |  | 6,975 | |  |
| Net cash from acquisitions and divestitures |  | — | |  |  | — | |  |  | (254 | | ) |
| Other, net |  | (4 | | ) |  | 1 | |  |  | — | |  |
| Net cash from investing activities |  | (973 | | ) |  | (1,186 | | ) |  | (1,085 | | ) |
| Cash Flows From Financing Activities: |  |  | |  |  |  | |  |  |  | | |
| Net change in short-term borrowings |  | (5 | | ) |  | (39 | | ) |  | (60 | | ) |
| Net change in long-term debt |  | 1,746 | |  |  | 1,319 | |  |  | 465 | |  |
| Repurchase of common stock |  | (1,205 | | ) |  | (1,613 | | ) |  | (520 | | ) |
| Net proceeds from preferred stock issued |  | — | |  |  | — | |  |  | 450 | |  |
| Cash dividends paid on common and preferred stock |  | (1,378 | | ) |  | (1,179 | | ) |  | (1,092 | | ) |
| Other, net |  | (52 | | ) |  | 104 | |  |  | 225 | |  |
| Net cash from financing activities |  | (894 | | ) |  | (1,408 | | ) |  | (532 | | ) |
| Net Change in Cash, Cash Equivalents and Restricted Cash |  | 854 | |  |  | (737 | | ) |  | (377 | | ) |
| Cash, Cash Equivalents and Restricted Cash at Beginning of Period |  | 6,378 | |  |  | 7,115 | |  |  | 7,492 | |  |
| Cash, Cash Equivalents and Restricted Cash at End of Period |  | $ | 7,232 |  |  | $ | 6,378 |  |  | $ | 7,115 |  |


NOTE 16. Fair Value Disclosures

Accounting standards define fair value as the exchange price that would be received on the measurement date to sell an asset or the price paid to transfer a liability in the principal or most advantageous market available to the entity in an orderly transaction between market participants, with a three level valuation input hierarchy. The following discussion focuses on the valuation techniques and significant inputs for Level 2 and Level 3 assets and liabilities.BB&T Corporation   104A third-party pricing service is generally utilized in determining the fair value of the securities portfolio. Management independently evaluates the fair values provided by the pricing service through comparisons to other external pricing sources, review of additional information provided by the pricing service and other third party sources for selected securities and back-testing to compare the price realized on any security sales to the daily pricing information received from the pricing service. Fair value measurements are derived from market-based pricing matrices that were developed using observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads and broker quotes. As described by security type below, additional inputs may be used, or some inputs may not be applicable. In the event that market observable data was not available, which would generally occur due to the lack of an active market for a given security, the valuation of the security would be subjective and may involve substantial judgment by management.U.S. Treasury securities: Treasury securities are valued using quoted prices in active over-the-counter markets.GSE securities and agency MBS: GSE pass-through securities are valued using market-based pricing matrices that reference observable inputs including benchmark TBA security pricing and yield curves that were estimated based on U.S. Treasury yields and certain floating rate indices. The pricing matrices for these securities may also give consideration to pool-specific data supplied directly by the GSE. GSE CMOs are valued using market-based pricing matrices that are based on observable inputs including offers, bids, reported trades, dealer quotes and market research reports, the characteristics of a specific tranche, market convention prepayment speeds and benchmark yield curves as described above.States and political subdivisions: These securities are valued using market-based pricing matrices that reference observable inputs including MSRB reported trades, issuer spreads, material event notices and benchmark yield curves.Non-agency MBS: Pricing matrices for these securities are based on observable inputs including offers, bids, reported trades, dealer quotes and market research reports, the characteristics of a specific tranche, market convention prepayment speeds and benchmark yield curves as described above. Non-agency MBS 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 corporate bonds. These securities are valued based on a review of quoted market prices for assets as well as through the various other inputs discussed previously.LHFS: Certain mortgage loans are originated to be sold to investors, which are carried at fair value. The fair value is primarily based on quoted market prices for securities backed by similar types of loans. The changes in fair value of these assets are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the mortgage LHFS.MSRs: Residential MSRs are valued using an OAS valuation model to project cash flows over multiple interest rate scenarios, which are discounted at risk-adjusted rates. The model considers portfolio characteristics, contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. Fair value estimates and assumptions are compared to industry surveys, recent market activity, actual portfolio experience and, when available, other observable market data. Commercial MSRs are valued using a cash flow valuation model that calculates the present value of estimated future net servicing cash flows. BB&T considers actual and expected loan prepayment rates, discount rates, servicing costs and other economic factors that are determined based on current market conditions. Trading and equity securities: Trading and equity securities primarily consist of exchange traded equity securities, and debt securities issued by the U.S. Treasury, GSEs, or states and political subdivisions. The valuation techniques for debt securities are more fully discussed above.Derivative assets and liabilities: The fair values of derivatives are determined based on quoted market prices and internal pricing models that use market observable data. The fair values of interest rate lock commitments, which are related to mortgage loan commitments and are categorized as Level 3, are based on quoted market prices adjusted for commitments that are not expected to fund and include the value attributable to the net servicing fees.Private equity investments: In many cases there are no observable market values for these investments and therefore management must estimate the fair value based on a comparison of the operating performance of the company to multiples in the marketplace for similar entities. This analysis requires significant judgment, and actual values in a sale could differ materially from those estimated.Securities sold short: Securities sold short represent debt securities sold short that are entered into as a hedging strategy for the purposes of supporting institutional and retail client trading activities.Activity for Level 3 assets and liabilities is summarized below:


NOTE 16. Fair Value Disclosures

The non-agency MBS categorized as Level 3 represent ownership interests in various tranches of Re-REMIC trusts. These securities are valued at a discount, which is unobservable in the market, to the fair value of the underlying securities owned by the trusts. The Re-REMIC tranches do not have an active market and therefore are categorized as Level 3. At December 31, 2018, the fair value of Re-REMIC non-agency MBS represented a discount of 18.6% 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 2028, is uncertain and dependent on various events such as recapitalizations, refinance transactions and ownership changes among others. As of December 31, 2018, restrictions on the ability to sell the investments include, but are not limited to, consent of a majority member or general partner approval for transfer of ownership. These investments are spread over numerous privately-held middle market companies, and thus the sensitivity to a change in fair value for any single investment is limited. The significant unobservable inputs for these investments are EBITDA multiples that ranged from 6x to 14x, with a weighted average of 9x, at December 31, 2018.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

BB&T Corporation   106Excluding government guaranteed, LHFS that were nonperforming or 90 days or more past due and still accruing interest were not material at December 31, 2018.The following table provides information about certain assets measured at fair value on a nonrecurring basis, which are primarily collateral dependent and may be subject to liquidity adjustments. The carrying values represent end of period values, which approximate the fair value measurements that occurred on the various measurement dates throughout the period. The valuation adjustments represent the amounts recorded during the period regardless of whether the asset is still held at period end. These assets are considered to be Level 3 assets (excludes PCI).


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 and revolving credit commitments have an immaterial fair value as BB&T typically has the ability to cancel such commitments.Financial assets and liabilities not recorded at fair value are summarized below:


NOTE 16. Fair Value Disclosures

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


NOTE 16. Fair Value Disclosures

BB&T Corporation   108


Impact of Derivatives on the Consolidated Balance Sheets

The following table presents additional information for fair value hedging relationships:


BB&T Corporation   110


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

The following table summarizes the impact on net interest income related to fair value hedges, which consist of interest rate contracts. Prior period amounts and presentation were not conformed to new hedge accounting guidance that was adopted in 2018.


The following table presents pre-tax gain (loss) recognized in income for derivative instruments not designated as hedges:

|  | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |
| Year Ended December 31,(Dollars in millions) | 2018 | | |  | 2017 | | |  | 2016 | | |
| AFS securities: |  | | |  |  | |  |  |  | | |
| Amounts related to interest settlements | $ | (5 | ) |  |  | | |  |  | | |
| Recognized on derivatives | 12 | |  |  |  | | |  |  | | |
| Recognized on hedged items | (15 | | ) |  |  | | |  |  | | |
| Net income (expense) recognized | (8 | | ) |  | $ | (16 | ) |  | $ | (16 | ) |
| Loans and leases: |  | | |  |  | | |  |  | | |
| Amounts related to interest settlements | (2 | | ) |  |  | | |  |  | | |
| Recognized on derivatives | (1 | | ) |  |  | | |  |  | | |
| Recognized on hedged items | 2 | |  |  |  | | |  |  | | |
| Net income (expense) recognized | (1 | | ) |  | (3 | | ) |  | (2 | | ) |
| Long-term debt: |  | |  |  |  | |  |  |  | |  |
| Amounts related to interest settlements | (30 | | ) |  |  | | |  |  | | |
| Recognized on derivatives | (122 | | ) |  |  | | |  |  | | |
| Recognized on hedged items | 165 | |  |  |  | | |  |  | | |
| Net income (expense) recognized | 13 | |  |  | 148 | |  |  | 226 | |  |
| Net income (expense) recognized, total | $ | 4 |  |  | $ | 129 |  |  | $ | 208 |  |


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

|  | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |  |  |  |  |  |
| Year Ended December 31,(Dollars in millions) | Location | 2018 | | |  | 2017 | | |  | 2016 | | |
| Client-related and other risk management: |  |  | | |  |  | | |  |  | | |
| Interest rate contracts | Other noninterest income | $ | 40 |  |  | $ | 50 |  |  | $ | 52 |  |
| Foreign exchange contracts | Other noninterest income | 21 | |  |  | 1 | |  |  | 11 | |  |
| Mortgage banking: |  |  | |  |  |  | |  |  |  | |  |
| Interest rate contracts | Mortgage banking income | (5 | | ) |  | (12 | | ) |  | 8 | |  |
| MSRs: |  |  | |  |  |  | |  |  |  | |  |
| Interest rate contracts | Mortgage banking income | (65 | | ) |  | — | |  |  | 31 | |  |
| Total |  | $ | (9 | ) |  | $ | 39 |  |  | $ | 102 |  |


Derivatives Credit Risk – Central Clearing Parties

BB&T Corporation   112

|  | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| December 31,(Dollars in millions) | 2018 | | |  | 2017 | | |
| Dealer counterparties: |  | | |  |  | | |
| Cash collateral received from dealer counterparties | $ | 56 |  |  | $ | 21 |  |
| Derivatives in a net gain position secured by collateral received | 55 | |  |  | 22 | |  |
| Unsecured positions in a net gain with dealer counterparties after collateral postings | 2 | |  |  | 2 | |  |
| Cash collateral posted to dealer counterparties | 75 | |  |  | 172 | |  |
| Derivatives in a net loss position secured by collateral received | 76 | |  |  | 171 | |  |
| Additional collateral that would have been posted had BB&T's credit ratings dropped below investment grade | 1 | |  |  | — | |  |
| Central clearing parties: |  | | |  |  | | |
| Cash collateral, including initial margin, posted to central clearing parties | 17 | |  |  | 177 | |  |
| Derivatives in a net loss position | 8 | |  |  | 176 | |  |
| Securities pledged to central clearing parties | 124 | |  |  | 91 | |  |


Other, Treasury & Corporate

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


ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

BB&T Corporation   118

|  | | | | |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
| Exhibit No. |  | Description |  | Location |
| 10.3\* |  | BB&T Corporation 2012 Incentive Plan, as amended |  | [Incorporated herein by reference to Exhibit 10.1 of the Registration Statement on Form S-8, filed May 25, 2017.](http://www.sec.gov/Archives/edgar/data/92230/000009223017000046/ex101-incentiveplan_517.htm) |
| 10.4\* |  | Form of Restricted Stock Unit Agreement (Non-Employee Directors) for the BB&T 2012 Incentive Plan. |  | [Incorporated herein by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q, filed April 27, 2015.](http://www.sec.gov/Archives/edgar/data/92230/000009223015000035/exhibit101.htm) |
| 10.5\* |  | Form of Non-Employee Director Nonqualified Stock Option Agreement for the BB&T Corporation Amended and Restated 2004 Stock Incentive Plan (5-Year Vesting). |  | [Incorporated herein by reference to Exhibit 10.7 of the Annual Report on Form 10-K, filed February 28, 2008.](http://www.sec.gov/Archives/edgar/data/92230/000119312508041900/dex107.htm) |
| 10.6\* |  | Form of Non-Employee Director Nonqualified Stock Option Agreement for the BB&T Corporation Amended and Restated 2004 Stock Incentive Plan (4-Year Vesting). |  | [Incorporated herein by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q, filed May 7, 2010.](http://www.sec.gov/Archives/edgar/data/92230/000119312510112881/dex103.htm) |
| 10.7\* |  | Form of Employee Nonqualified Stock Option Agreement for the BB&T Corporation Amended and Restated 2004 Stock Incentive Plan (5-Year Vesting). |  | [Incorporated herein by reference to Exhibit 10.8 of the Annual Report on Form 10-K, filed February 28, 2008.](http://www.sec.gov/Archives/edgar/data/92230/000119312508041900/dex108.htm) |
| 10.8\* |  | Form of Employee Nonqualified Stock Option Agreement for the BB&T Corporation Amended and Restated 2004 Stock Incentive Plan (4-Year Vesting). |  | [Incorporated herein by reference to Exhibit 10.5 of the Quarterly Report on Form 10-Q, filed May 7, 2010.](http://www.sec.gov/Archives/edgar/data/92230/000119312510112881/dex105.htm) |
| 10.9\* |  | Southern National Deferred Compensation Plan for Key Executives including amendments. |  | [Incorporated herein by reference to Exhibit 10.21 of the Annual Report on Form 10-K, filed February 25, 2011.](http://www.sec.gov/Archives/edgar/data/92230/000119312511047405/dex1021.htm) |
| 10.10\* |  | BB&T Non-Qualified Defined Benefit Plan (January 1, 2012 Restatement). |  | [Incorporated herein by reference to Exhibit 10.11 of the Annual Report on Form 10-K, filed February 25, 2016.](http://www.sec.gov/Archives/edgar/data/92230/000009223016000125/exhibit1011.htm) |
| 10.11\* |  | First Amendment to the BB&T Non-Qualified Defined Benefit Plan (January 1, 2012 Restatement). |  | [Incorporated herein by reference to Exhibit 10.12 of the Annual Report on Form 10-K, filed February 25, 2016.](http://www.sec.gov/Archives/edgar/data/92230/000009223016000125/exhibit1012.htm) |
| 10.12\* |  | Second Amendment to the BB&T Non-Qualified Defined Benefit Plan (January 1, 2012 Restatement). |  | [Incorporated herein by reference to Exhibit 10.13 of the Annual Report on Form 10-K, filed February 25, 2016.](http://www.sec.gov/Archives/edgar/data/92230/000009223016000125/exhibit1013.htm) |
| 10.13\* |  | BB&T Non-Qualified Defined Contribution Plan (January 1, 2012 Restatement). |  | [Incorporated herein by reference to Exhibit 10.14 of the Annual Report on Form 10-K, filed February 25, 2016.](http://www.sec.gov/Archives/edgar/data/92230/000009223016000125/exhibit1014.htm) |
| 10.14\* |  | BB&T Corporation Non-Qualified Deferred Compensation Trust (Amended and Restated Effective January 1, 2012). |  | [Incorporated herein by reference to Exhibit 10.15 of the Annual Report on Form 10-K, filed February 25, 2016.](http://www.sec.gov/Archives/edgar/data/92230/000009223016000125/exhibit1015.htm) |
| 10.15\* |  | Form of Employee Nonqualified Stock Option Agreement for the BB&T Corporation Amended and Restated 2004 Stock Incentive Plan (4-Year Vesting with Clawback Provision). |  | [Incorporated herein by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q, filed May 4, 2012.](http://www.sec.gov/Archives/edgar/data/92230/000119312512212084/d343887dex101.htm) |
| 10.16\* |  | Form of Employee Nonqualified Stock Option Agreement for the BB&T Corporation 2012 Incentive Plan. |  | [Incorporated herein by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q, filed May 2, 2013.](http://www.sec.gov/Archives/edgar/data/92230/000009223013000043/exhibit101.htm) |
| 10.17\* |  | Form of Nonqualified Option Agreement (Senior Executive) for the BB&T Corporation 2012 Incentive Plan. |  | [Incorporated herein by reference to Exhibit 10.4 of the Quarterly Report on Form 10-Q, filed April 30, 2014.](http://www.sec.gov/Archives/edgar/data/92230/000009223014000026/exhibit104.htm) |
| 10.18\* |  | Form of Director Restricted Stock Unit Agreement for the BB&T Corporation 2012 Incentive Plan. |  | [Incorporated herein by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q, filed May 2, 2013.](http://www.sec.gov/Archives/edgar/data/92230/000009223013000043/exhibit102.htm) |


BB&T Corporation   120

|  | | | | |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
| Exhibit No. |  | Description |  | Location |
| 10.35\* |  | 2016 Employment Agreement by and among BB&T Corporation, Branch Banking and Trust Company and Brant J. Standridge. |  | [Incorporated herein by reference to Exhibit 10.2 of the Quarterly Report on Form 10-Q, filed October 24, 2016.](http://www.sec.gov/Archives/edgar/data/92230/000009223016000202/exh102standridgeagreement.htm) |
| 10.36\* |  | 2016 Employment Agreement by and among BB&T Corporation, Branch Banking and Trust Company and Dontá L. Wilson. |  | [Incorporated herein by reference to Exhibit 10.3 of the Quarterly Report on Form 10-Q, filed October 24, 2016.](http://www.sec.gov/Archives/edgar/data/92230/000009223016000202/exh103wilsonagreement.htm) |
| 10.37\* |  | Amended and Restated Employment Agreement by and among BB&T Corporation, Branch Banking and Trust Co. and Kelly S. King dated as of February 7, 2019. |  | [Incorporated herein by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed February 13, 2019.](http://www.sec.gov/Archives/edgar/data/92230/000119312519036824/d704920dex101.htm) |
| 11 |  | Statement re computation of earnings per share. |  | [Filed herewith as Computation of EPS note to the consolidated financial statements.](#s10FFD23AB2D053F7A3C6D1335044C90B) |
| 21† |  | Subsidiaries of the Registrant. |  | [Filed herewith.](ex21-subsidiaries_4q18.htm) |
| 23† |  | Consent of Independent Registered Public Accounting Firm. |  | [Filed herewith.](ex23-consent_4q18.htm) |
| 31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |  | [Filed herewith.](ex311-certification_4q18.htm) |
| 31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |  | [Filed herewith.](ex312-certification_4q18.htm) |
| 32 |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |  | [Filed herewith.](ex32-certification_4q18.htm) |
| 101.INS |  | XBRL Instance Document. |  | Filed herewith. |
| 101.SCH |  | XBRL Taxonomy Extension Schema. |  | Filed herewith. |
| 101.CAL |  | XBRL Taxonomy Extension Calculation Linkbase. |  | Filed herewith. |
| 101.LAB |  | XBRL Taxonomy Extension Label Linkbase. |  | Filed herewith. |
| 101.PRE |  | XBRL Taxonomy Extension Presentation Linkbase. |  | Filed herewith. |
| 101.DEF |  | XBRL Taxonomy Definition Linkbase. |  | Filed herewith. |
| †    Exhibit filed with the SEC and available upon request. | | | | |
| \*    Management compensatory plan or arrangement. | | | | |
| \*\*    Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules and similar attachments have been omitted. The registrant hereby agrees to furnish a copy of any omitted schedule or similar attachment to the SEC upon request. | | | | |


Net Interest Income and NIM

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


Noninterest Income

Noninterest income was a record $4.8 billion for 2017, an increase of $310 million compared to 2016. The increase was broad based across almost all major categories of noninterest income. Income from BB&T’s insurance agency/brokerage operations was the largest source of noninterest income in 2017. Insurance income totaled $1.8 billion for 2017, an increase of $41 million compared to 2016. The increase was largely due to the acquisition of Swett and Crawford on April 1, 2016. In addition, organic commissions and fees were higher, which was offset by lower performance based commissions.Service charges on deposits were $706 million for 2017, an increase of $42 million compared to 2016. The increase was due to changes in client behavior, pricing increases and the acquisition of National Penn on April 1, 2016.Mortgage banking income declined $48 million primarily due to a decline of $39 million in the net mortgage servicing rights valuation.Bankcard fees and merchant discounts increased $34 million due to higher volumes and a reduction in the accrual for rewards.FDIC loss share income improved by $142 million due to the termination of the loss sharing agreements during the third quarter of 2016. Other income totaled $467 million for 2017, an increase of $105 million from 2016, primarily due to a $34 million increase in income from SBIC investments and a $50 million increase driven by income related to assets for certain post-employment benefits. Noninterest income was $4.5 billion for 2016, an increase of $453 million compared to 2015. This increase was across all categories and primarily reflects the impact from acquisitions.Income from BB&T’s insurance agency/brokerage operations was the largest source of noninterest income in 2016. Insurance income totaled $1.7 billion for 2016, an increase of $117 million compared to 2015. The increase was largely the result of the acquisition of Swett and Crawford, which was partially offset by the impact from selling American Coastal in 2015.FDIC loss share income improved by $111 million, primarily due to the termination of the loss sharing agreements during the third quarter of 2016. Other income totaled $362 million for 2016, an increase of $36 million from 2015. This increase is primarily due to the $26 million loss on sale of American Coastal during the second quarter of 2015, $19 million for client derivatives revenues and $10 million of trading gains. These increases were partially offset by lower partnerships and other investment income, which was the result of an opportunistic sale that resulted in a $28 million gain during the third quarter of 2015.


Noninterest Expense

Noninterest expense totaled $7.4 billion for 2017, an increase of $723 million from 2016. The increase includes actions taken in the fourth quarter of 2017 in connection with the passage of tax reform legislation. This included a contribution of $100 million to BB&T's philanthropic fund and $36 million for a one-time bonus paid to associates who do not generally receive incentives or commissions. The increase also includes a $392 million charge in 2017 for the early extinguishment of $2.9 billion of higher cost FHLB advances. Personnel expense is the largest component of noninterest expense and includes salaries and incentives, as well as pension and other employee benefit costs. Personnel expense totaled $4.1 billion, a $157 million increase compared to 2016. Salaries and incentives increased $120 million compared to the prior year, primarily due to higher incentives as a result of improved performance and the one-time bonus previously mentioned. Equity based compensation increased $14 million and benefit costs increased $23 million. The increase in benefit costs was primarily the result of an increase of $43 million for post-employment benefits that is primarily offset in other income. This was partially offset by a decline of $26 million for pension expense. Software expense was higher $18 million compared to 2016, primarily reflecting higher depreciation on recent investments.Outside IT services expense decreased $26 million compared to the prior year, while professional services expense increased $21 million. These fluctuations are due to the volume of project related work in the current year compared to the prior year.Loan-related expense totaled $130 million for 2017, an increase of $35 million compared to the prior year. This increase is largely the result of a release of $31 million in reserves during the fourth quarter of 2016, which was primarily driven by lower anticipated loan repurchase requests.Merger-related and restructuring expense decreased $56 million compared to 2016. This includes a decrease in merger-related charges, partially offset by branch closures and other restructuring initiatives.Other expense increased $183 million primarily due to higher operating charge-offs and charitable contributions. Operating charge-offs increased $108 million due to a net benefit of $73 million recorded in 2016 related to the settlement of matters involving the origination of certain legacy mortgage loans insured by the FHA. Charitable contributions increased $44 million as the company made a $100 million contribution to its philanthropic fund in 2017 as noted above, compared to $50 million made in the third quarter of 2016.Noninterest expense totaled $6.7 billion for 2016, an increase of $455 million from 2015. This increase was primarily driven by higher personnel expense. Personnel expense is the largest component of noninterest expense and includes salaries, wages and incentives, as well as pension and other employee benefit costs. Personnel expense totaled $4.0 billion, a $495 million increase compared to 2015. This increase was driven by a $284 million increase in salaries, which was primarily due to additional headcount from acquisitions. Incentives expense was higher $110 million due to performance against targets and acquisitions. Personnel expense also increased due to a $48 million increase in pension expense that reflects higher amortization, service and interest costs. Additionally, personnel expense reflects a $26 million increase in payroll taxes as a result of higher salaries and incentives.Loss on early extinguishment of debt was down $173 million for 2016, as the prior year included a loss of $172 million, compared to a small gain for 2016.Occupancy and equipment expense totaled $786 million for 2016, compared to $708 million for 2015. The increase reflects the acquisition activity. Software expense was higher $32 million compared to 2015, primarily reflecting higher depreciation on recent investments.Outside IT services expense totaled $186 million for 2016, compared to $135 million in the prior year. This increase was due to higher costs related to projects.Loan-related expense totaled $95 million for 2016, a decrease of $55 million compared to the prior year. This decrease is largely the result of a release of $31 million in reserves during the fourth quarter of 2016, which was primarily driven by lower anticipated loan repurchase requests.Regulatory charges totaled $145 million for 2016, an increase of $44 million compared to the prior year. This increase reflects the impact from acquisitions and the surcharge assessed to large banks, which was implemented in the third quarter of 2016.Other expense decreased $40 million primarily due to a net benefit of $73 million in the third quarter related to the settlement of certain legacy mortgage matters involving the origination of mortgage loans insured by the FHA. In addition, business referral expense decreased $16 million primarily due to the sale of American Coastal in the prior year. Partially offsetting these decreases was a $50 million charitable contribution that was also made in the third quarter.


Merger-Related and Restructuring Charges

(1) Includes asset impairment charges.The 2017 costs primarily reflect branch closures and other restructuring initiatives, while the 2016 costs primarily reflect the acquisitions of National Penn and Swett & Crawford.


Investment Activities

The securities portfolio totaled $47.6 billion at December 31, 2017, compared to $43.6 billion at December 31, 2016. The increase in the overall portfolio was due to new purchases and reinvestments in the HTM portfolio. A change in the mix between AFS and HTM also contributed to the increase in HTM securities. As of December 31, 2017, approximately 5.8% of the securities portfolio was variable rate, compared to 7.5% as of December 31, 2016. The effective duration of the securities portfolio was 4.7 years at December 31, 2017, compared to 4.8 years at the end of 2016. The duration of the securities portfolio excludes equity securities and certain non-agency MBS acquired from the FDIC.Agency MBS represented 83.6% of the total securities portfolio at year-end 2017, compared to 79.1% as of prior year end. Refer to "Note 2. Securities" for additional disclosures related to the evaluation of securities for OTTI.The following table presents the securities portfolio at December 31, 2017, segregated by major category with ranges of maturities and average yields disclosed:


Investment Activities

(1)Yields represent interest computed using the effective interest method on a TE basis using marginal income tax rates and the amortized cost of the securities.(2)For purposes of the maturity table, MBS, which are not due at a single maturity date, have been included in maturity groupings based on the contractual maturity. The expected life of MBS will differ from contractual maturities because borrowers may have the right to call or prepay the underlying mortgage loans.(3)Weighted-average yield excludes the effect of pay-fixed swaps hedging municipal securities.


Lending Activities

Average loans held for investment for the fourth quarter of 2017 were $142.7 billion, down $30 million, or 0.1 percent annualized compared to the third quarter of 2017.Average commercial and industrial loans increased $267 million, while average CRE increased $222 million. Average lease financing increased $119 million due to strong production from our leasing businesses. Average revolving credit increased $91 million, primarily due to seasonal spending.Average residential mortgage loans decreased $365 million as the majority of conforming loans continue to be sold in the secondary market. In addition, average indirect loans decreased $252 million, primarily due to strategic optimization and directing investments toward higher-yielding assets. The following table presents loans with variable interest rates:


Lending Activities

(1)Commercial and industrial loans and direct loans totaling $1.7 billion and $100 million, respectively, have been excluded from the weighted average remaining term because they are callable on demand.  As of December 31, 2017, approximately $126 million of variable rate residential mortgage loans are currently in an interest-only phase. Approximately 95.0% of these balances will begin amortizing within the next three years. Variable rate residential mortgage loans typically reset every 12 months beginning after a 3 to 10 year fixed period, with an annual cap on rate changes ranging from 2.0% to 6.0%.As of December 31, 2017, the direct lending portfolio includes $8.5 billion of variable rate home equity lines, $1.0 billion of variable rate other lines of credit and $255 million of variable rate loans. Approximately $6.5 billion of the variable rate home equity lines is currently in the interest-only phase and approximately 9.4% of these balances will begin amortizing within the next three years. Approximately $911 million of the outstanding balance of variable rate other lines of credit is in the interest-only phase and 17.0% of these balances will begin amortizing within the next three years. Variable rate home equity lines and other lines of credit typically reset on a monthly basis. BB&T monitors the performance of its home equity loans and lines secured by second liens similarly to other consumer loans and utilizes assumptions specific to these loans in determining the necessary ALLL. BB&T also receives notification when the first lien holder, whether BB&T or another financial institution, has initiated foreclosure proceedings against the borrower. When notified that the first lien is in the process of foreclosure, BB&T obtains valuations to determine if any additional charge-offs or reserves are warranted. These valuations are updated at least annually thereafter.BB&T has limited ability to monitor the delinquency status of the first lien, unless the first lien is held or serviced by BB&T. As a result, using migration assumptions that are based on historical experience and adjusted for current trends, BB&T estimates the volume of second lien positions where the first lien is delinquent and adjusts the ALLL to reflect the increased risk of loss on these credits. Finally, BB&T also provides additional reserves to second lien positions when the estimated combined current loan to value ratio for the credit exceeds 100%. As of December 31, 2017, BB&T held or serviced the first lien on 30.4% of its second lien positions.BB&T lends to a diverse customer base that is substantially located within the Company’s primary market area. At the same time, the loan portfolio is geographically dispersed throughout BB&T’s branch network to mitigate concentration risk arising from local and regional economic downturns. Refer to the "Risk Management" section for a discussion of each of the loan portfolios and the credit risk management policies used to manage the portfolios.The following table summarizes the loan portfolio:


Lending Activities

(1) During the first quarter of 2014, $8.3 billion of loans were transferred from direct lending to residential mortgage.Loans and leases HFI were $143.7 billion at December 31, 2017, an increase of $379 million compared to the prior year.Commercial and industrial loans were up $1.4 billion and CRE loans were up $1.5 billion. Residential mortgage loans declined $1.2 billion as the majority of conforming loan production continues to be sold in the secondary market. Indirect loans were down $1.3 billion, primarily due to strategic optimization and directing investments into higher yielding assets. The PCI loan portfolio, which totaled $651 million at December 31, 2017, continued to run off during the year.The majority of loans are with clients in domestic market areas, which are primarily concentrated in the Southeastern United States. International loans were immaterial as of December 31, 2017 and 2016.Scheduled repayments are reported in the maturity category in which the payment is due. Determinations of maturities are based on contract terms. BB&T’s credit policy typically does not permit automatic renewal of loans. At the scheduled maturity date (including balloon payment date), the customer generally must request a new loan to replace the matured loan and execute either a new note or note modification with rate, terms and conditions negotiated at that time.


Asset Quality

(1)Includes charge-offs and losses recorded upon sale of $236 million and $210 million for the year ended December 31, 2017 and 2016, respectively.(2)Includes charge-offs and losses recorded upon sale of $33 million and $30 million for the year ended December 31, 2017 and 2016, respectively.NPAs, which include foreclosed real estate, repossessions and NPLs, totaled $627 million at December 31, 2017 compared to $813 million at December 31, 2016. This decrease consisted of a $166 million decrease in NPLs and a $20 million decrease in foreclosed real estate and other property.The decrease in NPLs is primarily due to a $110 million decline in commercial and industrial NPLs primarily resulting from payoffs, sales and writedowns. In addition, residential mortgage NPLs were down $43 million largely due to sales.NPAs as a percentage of loans and leases plus foreclosed property were 0.44% at December 31, 2017 compared with 0.57% at December 31, 2016.The following tables summarize asset quality information for the past five years:


Asset Quality

(1)During 2016, approximately $191 million of nonaccrual energy-related loans were sold.(2)During 2017 and 2014, approximately $61 million and $121 million, respectively, of nonaccrual residential mortgage loans were sold.(3)During 2017 and 2014, approximately $331 million and $540 million, respectively, of performing residential mortgage TDRs were sold.(4)During 2014, approximately $94 million of performing TDRs were transferred from direct lending to residential mortgage.Asset quality continued to improve in 2017 with declines across almost all loan categories. NPAs declined $186 million driven by commercial and industrial loans and its reduction in the energy-related portfolio. Performing TDRs declined $144 million driven by the sale of $199 million of performing residential mortgage TDRs. Delinquent loans still accruing interest declined $113 million driven by residential mortgage loans, which reflects general improvements in credit quality within that portfolio.


Asset Quality

(1)These asset quality ratios have been adjusted to remove the impact of government guaranteed and PCI assets. Appropriate adjustments to the numerator and denominator have been reflected in the calculation of these ratios.The following table provides a summary of performing TDR activity:


Asset Quality

Payments and payoffs include scheduled principal payments, prepayments and payoffs of amounts outstanding. Transfers to nonperforming TDRs represent loans that no longer meet the requirements necessary to reflect the loan in accruing status.TDRs may be removed due to the passage of time if they: (1) did not include a forgiveness of principal or interest, (2) have performed in accordance with the modified terms (generally a minimum of six months), (3) were reported as a TDR over a year end reporting period, and (4) reflected an interest rate on the modified loan that was no less than a market rate at the date of modification. These loans were previously considered TDRs as a result of structural concessions such as extended interest-only terms or an amortization period that did not otherwise conform to normal underwriting guidelines.In addition, certain loans may be removed from classification as a TDR as a result of a subsequent non-concessionary re-modification. Non-concessionary re-modifications represent TDRs that did not contain concessionary terms at the date of a subsequent renewal/modification and there was a reasonable expectation that the borrower would continue to comply with the terms of the loan subsequent to the date of the re-modification. A re-modification may be considered for such a re-classification if the loan has not had a forgiveness of principal or interest and the modified terms qualify as more than minor such that the re-modified loan is considered a new loan. Alternatively, such loans may be considered for reclassification in years subsequent to the date of the re-modification based on the passage of time as described in the preceding paragraph.In connection with consumer loan TDRs, a NPL will be returned to accruing status when current as to principal and interest and upon a sustained historical repayment performance (generally a minimum of six months).


Asset Quality

(1)Past due performing TDRs are included in past due disclosures.(2)Nonperforming TDRs are included in NPL disclosures.


ACL

(1)During the first quarter of 2014, $8.3 billion of loans were transferred from direct lending to residential mortgage. Charge-offs and recoveries have been reflected in these line items based upon the date the loans were transferred.The ACL consists of the ALLL, which is presented separately on the Consolidated Balance Sheets, and the RUFC, which is included in other liabilities on the Consolidated Balance Sheets. The ACL totaled $1.6 billion at December 31, 2017, an increase of $10 million compared to the prior year.The ALLL amounted to 1.04% of loans and leases held for investment at December 31, 2017 and 2016. The ratio of the ALLL to NPLs held for investment was 2.62x at December 31, 2017 compared to 2.03x at December 31, 2016.Net charge-offs totaled $537 million for 2017, compared to $532 million in 2016. Net charge-offs as a percentage of average loans and leases HFI were 0.38% for 2017, flat compared to 2016. Refer to "Note 3. Loans and ACL" for additional disclosures.The following table presents an allocation of the ALLL at the end of each of the last five years. This allocation of the ALLL is calculated on an approximate basis and is not necessarily indicative of future losses or allocations. The entire amount of the allowance is available to absorb losses occurring in any category of loans and leases. During 2013, the balance in the unallocated ALLL was incorporated into the loan portfolio segments.


ACL

(1) During the first quarter of 2014, $8.3 billion in loans were transferred from direct to residential mortgage.


Deposits

Average deposits for the fourth quarter of 2017 were $158.0 billion, up $545 million compared to the prior quarter.Average noninterest-bearing deposits increased $799 million, primarily due to increases in commercial, public funds and personal balances.Interest checking decreased $254 million, primarily due to decreases in public funds, personal and commercial balances.Money market and savings increased $243 million primarily due to commercial balances partially offset by decreased personal and public funds balances.Average time deposits decreased $50 million as decreases in personal balances and IRAs were partially offset by higher commercial balances.Average foreign office deposits decreased $193 million due to lower overall funding needs.Noninterest-bearing deposits represented 34.4% of total average deposits for the fourth quarter, compared to 34.0% for the prior quarter and 32.1% a year ago. The cost of interest-bearing deposits was 0.40% for the fourth quarter, up five basis points compared to the prior quarter.


Risk Management

The CRO leads the RMO, which designs, organizes and manages BB&T’s risk management framework. The RMO is responsible for ensuring effective risk management oversight, measurement, monitoring, reporting and consistency. The CRO has direct access to the Board of Directors and Executive Management. The CRO is responsible for identifying and communicating in a timely manner to the CEO and the Board of Directors meaningful risks and significant instances when the RMO’s assessment of risk differs from that of a BU, significant instances when a BU is not adhering to the risk governance framework, and BB&T’s risk profile in relation to its risk appetite on at least a quarterly basis. In the event that the CRO and CEO’s assessment of risk were to differ or if the CEO were to not adhere to the risk management framework, the CRO would have the responsibility to report such matters to the Board of Directors.The Executive Management-led enterprise risk committees provide oversight of the first and second lines of defense and communicate risk appetite and values to the RMO. The CRO and the enterprise risk committees approve policies, set risk limits and tolerances and monitor results.The RMC, CRMC, ORMC, CROC and the MRLCC are the enterprise risk committees and provide oversight of the risks as described in the common risk language. There is Executive Management representation in all five committees. The risk management framework is composed of specialized risk functions focused on specific types of risk. The MRLCC, CRMC, CROC and ORMC provide oversight of market, liquidity, capital, credit, compliance, and operational risk while RMC provides a fully integrated view of all material risks across the company. The RMC provides oversight of all risks and its purpose is to review BB&T’s aggregate risk exposure, evaluate risk appetite, and evaluate risks not reviewed by other risk committees.The RMC is responsible for taking a broad view of risk, incorporating information from all risk functions. This combination of broad and specific focus provides the most effective framework for the management of risk. The RMC is chaired by the CRO and its membership includes all members of Executive Management, the General Auditor (ex officio) and senior leaders from Financial Management, the RMO and other areas.The principal types of inherent risk include compliance, credit, liquidity, market, operational, reputation and strategic risks.

|  | | | | |
| --- | --- | --- | --- | --- |
|  |  |  |  |  |
| Risk Committees | Board of Directors | | | Executive Management |
|  |  |  |
| 1st Line of Defense | 2nd Line of Defense | 3rd Line of Defense |
| Business Units | Risk Functions | Audit Services |
|  |  |  |
| Chief Risk Officer | | |


Interest Rate Market Risk (Other than Trading)

The MRLCC has established parameters related to interest sensitivity that prescribe a maximum negative impact on net interest income under different interest rate scenarios. In the event the results of the Simulation model fall outside the established parameters, management will make recommendations to the MRLCC on the most appropriate response given the current economic forecast. The following parameters and interest rate scenarios are considered BB&T’s primary measures of interest rate risk:•Maximum negative impact on net interest income of 2% for the next 12 months assuming a 25 basis point change in interest rates each month for four months followed by a flat interest rate scenario for the remaining eight month period.•Maximum negative impact on net interest income of 4% for the next 12 months assuming a 25 basis point change in interest rates each month for eight months followed by a flat interest rate scenario for the remaining four month period.If a parallel rate change of 200 basis points cannot be modeled due to a low level of rates, a proportional limit applies, and the maximum negative impact on net interest income is adjusted on a proportional basis. Regardless of the proportional limit, the negative risk exposure limit will be the greater of the 4% or the proportional limit.Management has also established a maximum negative impact on net interest income of 4% for an immediate 100 basis points parallel change in rates and 8% for an immediate 200 basis points parallel change in rates. Management currently only models up to a negative 100 basis point decline, and the maximum negative impact on net interest income is adjusted on a proportional basis. Regardless of the proportional limit, the negative risk exposure limit will be the greater of 4% or the proportional limit. These "interest rate shock" limits are designed to create an outer band of acceptable risk based upon a significant and immediate change in rates.Management has temporarily suspended its interest rate exposure limits to declining interest rates. As the Federal Reserve has started to raise rates, competitive pressure on deposit rates has not materialized. As a result, asset repricing in excess of liability repricing is causing the measured exposure to declining rates to increase. Management evaluates its interest rate risk position each month.Management must also consider how the balance sheet and interest rate risk position could be impacted by changes in balance sheet mix. Liquidity in the banking industry has been very strong during the current economic cycle. Much of this liquidity increase has been due to a significant increase in noninterest-bearing demand deposits. Consistent with the industry, Branch Bank has seen a significant increase in this funding source. The behavior of these deposits is one of the most important assumptions used in determining the interest rate risk position of BB&T. A loss of these deposits in the future would reduce the asset sensitivity of BB&T’s balance sheet as the Company increases interest-bearing funds to offset the loss of this advantageous funding source.Beta represents the correlation between overall market interest rates and the rates paid by BB&T on interest-bearing deposits. BB&T applies an average beta of approximately 50% to its non-maturity interest bearing deposit accounts for determining its interest rate sensitivity. Non-maturity interest bearing deposit accounts include interest checking accounts, savings accounts, and money market accounts that do not have a contractual maturity. Due to current market conditions the actual deposit beta on non-maturity interest bearing deposits has been less than 15%; however, BB&T expects the beta to increase as rates continue to rise. BB&T regularly conducts sensitivity on other key variables to determine the impact they could have on the interest rate risk position. This allows BB&T to evaluate the likely impact on its balance sheet management strategies due to a more extreme variation in a key assumption than expected.The following table shows the effect that the loss of demand deposits and an associated increase in managed rate deposits would have on BB&T’s interest-rate sensitivity position. For purposes of this analysis, BB&T modeled the incremental beta for the replacement of the lost demand deposits at 100%.


(1) The base scenario is equal to the annualized hypothetical percentage change in net interest income at December 31, 2017 as presented in the preceding table.If rates increased 200 basis points, BB&T could absorb the loss of $14.8 billion, or 27.5%, of noninterest-bearing demand deposits and replace them with managed rate deposits with a beta of 100% before becoming neutral to interest rate changes.The following table shows the effect that the indicated changes in interest rates would have on EVE. Key assumptions in the preparation of the table include prepayment speeds of mortgage-related and other assets, cash flows and maturities of derivative financial instruments, loan volumes and pricing and deposit sensitivity.


Branch Bank

BB&T and Branch Bank have Contingency Funding Plans designed to ensure that liquidity sources are sufficient to meet their ongoing obligations and commitments, particularly in the event of a liquidity contraction. These plans are designed to examine and quantify the organization’s liquidity under various "stress" scenarios. Additionally, the plans provide a framework for management and other critical personnel to follow in the event of a liquidity contraction or in anticipation of such an event. The plans address authority for activation and decision making, liquidity options and the responsibilities of key departments in the event of a liquidity contraction. The liquidity options available to management could include seeking secured funding, asset sales, and under the most extreme scenarios, curtailing new loan originations.Management believes current sources of liquidity are adequate to meet BB&T’s current requirements and plans for continued growth. See "Note 4. Premises and Equipment," "Note 8. Long-Term Debt" and "Note 13. Commitments and Contingencies" for additional information regarding outstanding balances of sources of liquidity and contractual commitments and obligations.

|  | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  |  |  |  |  |  |  |
| Table 28 | | | | | | | |
| Credit Ratings of BB&T Corporation and Branch Bank | | | | | | | |
| December 31, 2017 | | | | | | | |
|  |  |  |  |  |  |  |  |
|  | S&P |  | Moody's |  | Fitch |  | DBRS |
| BB&T Corporation: |  |  |  |  |  |  |  |
| Commercial Paper | A-2 |  | N/A |  | F1 |  | R-1(low) |
| Issuer | A- |  | A2 |  | A+ |  | A(high) |
| LT/Senior debt | A- |  | A2 |  | A+ |  | A(high) |
| Subordinated debt | BBB+ |  | A2 |  | A |  | A |
| Preferred stock | BBB- |  | Baa1(hyb) |  | BBB- |  | BBB(high) |
|  |  |  |  |  |  |  |  |
| Branch Bank: |  |  |  |  |  |  |  |
| Long term deposits | N/A |  | Aa1 |  | AA- |  | AA(low) |
| LT/Senior unsecured bank notes | A |  | A1 |  | A+ |  | AA(low) |
| Other long term senior obligations | A |  | N/A |  | A+ |  | AA(low) |
| Other short term senior obligations | A-1 |  | N/A |  | F1 |  | R-1(middle) |
| Short term bank notes | A-1 |  | P-1 |  | F1 |  | R-1(middle) |
| Short term deposits | N/A |  | P-1 |  | F1+ |  | R-1(middle) |
| Subordinated bank notes | A- |  | A2 |  | A |  | A(high) |
|  |  |  |  |  |  |  |  |
| Ratings Outlook: |  |  |  |  |  |  |  |
| Credit Trend | Stable |  | Stable |  | Stable |  | Stable |