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BB&T 10-Q 2016
Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
_____________________________

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended: September 30, 2016
Commission File Number: 1-10853
_____________________________
BB&T CORPORATION
(Exact name of registrant as specified in its charter)
_____________________________
North Carolina
56-0939887
(State or Other Jurisdiction of Incorporation)
(I.R.S. Employer Identification No.)
200 West Second Street
Winston-Salem, North Carolina
27101
(Address of Principal Executive Offices)
(Zip Code)
(336) 733-2000
(Registrant's Telephone Number, Including Area Code)
______________________________

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  [X]   No  [  ]
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  [X]   No  [  ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
X  
 
Accelerated filer
      
 
 
 
 
 
Non-accelerated filer
 
(Do not check if a smaller reporting company)
Smaller reporting company
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  [  ]   No  [X]

At September 30, 2016, 811,424,301 shares of the Registrant's common stock, $5 par value, were outstanding.
 



BB&T CORPORATION
FORM 10-Q
September 30, 2016
INDEX
 
 
 
 
 
Page No.
PART I
Item 1.
Financial Statements
 
 
 
 
 
 
 
Notes to Consolidated Financial Statements (Unaudited)
 
 
 
 
Note 3. Securities
 
 
Note 5. Goodwill
 
 
Note 7. Deposits
 
 
 
Note 10. AOCI
 
Note 11. Income Taxes
 
Note 12. Benefit Plans
 
 
 
 
 
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 2.
Item 3.
Defaults Upon Senior Securities - (not applicable.)
 
Item 4.
Mine Safety Disclosures - (not applicable.)
 
Item 5.
Other Information - (none to be reported.)
 
Item 6.



Glossary of Defined Terms
The following terms may be used throughout this Report, including the consolidated financial statements and related notes. 
Term
 
Definition
2015 Repurchase Plan
 
Plan for the repurchase of up to 50 million shares of BB&T's common stock
ACL
 
Allowance for credit losses
Acquired from FDIC
 
Assets of Colonial Bank acquired from the Federal Deposit Insurance Corporation during 2009, which were formerly covered under loss sharing agreements
AFS
 
Available-for-sale
Agency MBS
 
Mortgage-backed securities issued by a U.S. government agency or GSE
ALLL
 
Allowance for loan and lease losses
American Coastal
 
American Coastal Insurance Company
AOCI
 
Accumulated other comprehensive income (loss)
Basel III
 
Global regulatory standards on bank capital adequacy and liquidity published by the BCBS
BB&T
 
BB&T Corporation and subsidiaries
BCBS
 
Basel Committee on Banking Supervision
BHC
 
Bank holding company
BHCA
 
Bank Holding Company Act of 1956, as amended
Branch Bank
 
Branch Banking and Trust Company
BU
 
Business Unit
CCAR
 
Comprehensive Capital Analysis and Review
CD
 
Certificate of deposit
CDI
 
Core deposit intangible assets
CFPB
 
Consumer Financial Protection Bureau
CEO
 
Chief Executive Officer
CRO
 
Chief Risk Officer
CMO
 
Collateralized mortgage obligation
Colonial
 
Collectively, certain assets and liabilities of Colonial Bank acquired by BB&T in 2009
Company
 
BB&T Corporation and subsidiaries (interchangeable with "BB&T" above)
CRA
 
Community Reinvestment Act of 1977
CRE
 
Commercial real estate
CRMC
 
Credit Risk Management Committee
CROC
 
Compliance Risk Oversight Committee
DIF
 
Deposit Insurance Fund administered by the FDIC
Dodd-Frank Act
 
Dodd-Frank Wall Street Reform and Consumer Protection Act
EITSC
 
Enterprise IT Steering Committee
EPS
 
Earnings per common share
ERP
 
Enterprise resource planning
EVE
 
Economic value of equity
Exchange Act
 
Securities Exchange Act of 1934, as amended
FASB
 
Financial Accounting Standards Board
FATCA
 
Foreign Account Tax Compliance Act
FDIC
 
Federal Deposit Insurance Corporation
FHA
 
Federal Housing Administration
FHC
 
Financial Holding Company
FHLB
 
Federal Home Loan Bank
FHLMC
 
Federal Home Loan Mortgage Corporation
FINRA
 
Financial Industry Regulatory Authority
FNMA
 
Federal National Mortgage Association
FRB
 
Board of Governors of the Federal Reserve System
FTP
 
Funds transfer pricing
GAAP
 
Accounting principles generally accepted in the United States of America
GNMA
 
Government National Mortgage Association
Grandbridge
 
Grandbridge Real Estate Capital, LLC
GSE
 
U.S. government-sponsored enterprise
HFI
 
Held for investment
HMDA
 
Home Mortgage Disclosure Act
HTM
 
Held-to-maturity

1


Term
 
Definition
HUD-OIG
 
Office of Inspector General, U.S. Department of Housing and Urban Development
IDI
 
Insured depository institution
IMLAFA
 
International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001
IPV
 
Independent price verification
IRC
 
Internal Revenue Code
IRS
 
Internal Revenue Service
ISDA
 
International Swaps and Derivatives Association, Inc.
LCR
 
Liquidity Coverage Ratio
LHFS
 
Loans held for sale
LIBOR
 
London Interbank Offered Rate
MBS
 
Mortgage-backed securities
MRLCC
 
Market Risk, Liquidity and Capital Committee
MSR
 
Mortgage servicing right
MSRB
 
Municipal Securities Rulemaking Board
National Penn
 
National Penn Bancshares, Inc., acquired by BB&T effective April 1, 2016
NIM
 
Net interest margin, computed on a TE basis
NPA
 
Nonperforming asset
NPL
 
Nonperforming loan
NSFR
 
Net stable funding ratio
NYSE
 
NYSE Euronext, Inc.
OAS
 
Option adjusted spread
OCI
 
Other comprehensive income (loss)
OREO
 
Other real estate owned
ORMC
 
Operational Risk Management Committee
OTTI
 
Other-than-temporary impairment
Parent Company
 
BB&T Corporation, the parent company of Branch Bank and other subsidiaries
Patriot Act
 
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
PCI
 
Purchased credit impaired loans as well as assets of Colonial Bank acquired from the FDIC during 2009, which were formerly covered under loss sharing agreements
Peer Group
 
Financial holding companies included in the industry peer group index
RMC
 
Risk Management Committee
RMO
 
Risk Management Organization
RSU
 
Restricted stock unit
RUFC
 
Reserve for unfunded lending commitments
SBIC
 
Small Business Investment Company
SCAP
 
Supervisory Capital Assessment Program
SEC
 
Securities and Exchange Commission
Short-Term Borrowings
 
Federal funds purchased, securities sold under repurchase agreements and other short-term borrowed funds with original maturities of less than one year
Simulation
 
Interest sensitivity simulation analysis
Susquehanna
 
Susquehanna Bancshares, Inc., acquired by BB&T effective August 1, 2015
TBA
 
To be announced
TDR
 
Troubled debt restructuring
TE
 
Taxable-equivalent
U.S.
 
United States of America
U.S. Treasury
 
United States Department of the Treasury
UPB
 
Unpaid principal balance
VA
 
U.S. Department of Veterans Affairs
VaR
 
Value-at-risk
VIE
 
Variable interest entity


2


BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions, except per share data, shares in thousands)
 
September 30,
 
December 31,
 
2016
 
2015
Assets
 
 
 
Cash and due from banks
$
1,850

 
$
2,123

Interest-bearing deposits with banks
930

 
1,435

Federal funds sold and securities purchased under resale agreements or similar arrangements
192

 
153

Restricted cash
654

 
456

AFS securities at fair value
29,449

 
25,297

HTM securities (fair value of $18,083 and $18,519 at September 30, 2016 and December 31, 2015, respectively)
17,750

 
18,530

LHFS at fair value
2,689

 
1,035

Loans and leases
142,423

 
135,951

ALLL
(1,511
)
 
(1,460
)
Loans and leases, net of ALLL
140,912

 
134,491

 
 
 
 
Premises and equipment
2,059

 
2,007

Goodwill
9,627

 
8,548

CDI and other intangible assets
892

 
686

MSRs at fair value
828

 
880

Other assets
14,790

 
14,306

Total assets
$
222,622

 
$
209,947

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Deposits:
 
 
 
Noninterest-bearing deposits
$
51,000

 
$
45,695

Interest-bearing deposits
108,915

 
103,429

Total deposits
159,915

 
149,124

 
 
 
 
Short-term borrowings
4,064

 
3,593

Long-term debt
22,776

 
23,769

Accounts payable and other liabilities
5,776

 
6,121

Total liabilities
192,531

 
182,607

 
 
 
 
Commitments and contingencies (Note 13)

 

Shareholders' equity:
 
 
 
Preferred stock, $5 par, liquidation preference of $25,000 per share
3,053

 
2,603

Common stock, $5 par
4,057

 
3,902

Additional paid-in capital
9,233

 
8,365

Retained earnings
14,459

 
13,464

AOCI, net of deferred income taxes
(750
)
 
(1,028
)
Noncontrolling interests
39

 
34

Total shareholders' equity
30,091

 
27,340

Total liabilities and shareholders' equity
$
222,622

 
$
209,947

 
 
 
 
Common shares outstanding
811,424

 
780,337

Common shares authorized
2,000,000

 
2,000,000

Preferred shares outstanding
126

 
107

Preferred shares authorized
5,000

 
5,000


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

3


BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in millions, except per share data, shares in thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Interest Income
 
 
 
 
 
 
 
 
Interest and fees on loans and leases
 
$
1,524

 
$
1,412

 
$
4,475

 
$
3,898

Interest and dividends on securities
 
262

 
232

 
803

 
704

Interest on other earning assets
 
9

 
6

 
43

 
30

Total interest income
 
1,795

 
1,650

 
5,321

 
4,632

Interest Expense
 
 
 
 
 
 
 
 
Interest on deposits
 
62

 
61

 
190

 
171

Interest on short-term borrowings
 
2

 
1

 
7

 
3

Interest on long-term debt
 
121

 
124

 
368

 
370

Total interest expense
 
185

 
186

 
565

 
544

Net Interest Income
 
1,610

 
1,464

 
4,756

 
4,088

Provision for credit losses
 
148

 
103

 
443

 
299

Net Interest Income After Provision for Credit Losses
 
1,462

 
1,361

 
4,313

 
3,789

Noninterest Income
 
 
 
 
 
 
 
 
Insurance income
 
410

 
354

 
1,294

 
1,216

Service charges on deposits
 
172

 
167

 
492

 
466

Mortgage banking income
 
154

 
111

 
356

 
351

Investment banking and brokerage fees and commissions
 
101

 
105

 
300

 
307

Trust and investment advisory revenues
 
68

 
63

 
197

 
176

Bankcard fees and merchant discounts
 
61

 
57

 
177

 
162

Checkcard fees
 
50

 
45

 
145

 
127

Operating lease income
 
34

 
32

 
103

 
91

Income from bank-owned life insurance
 
35

 
29

 
97

 
86

FDIC loss share income, net
 
(18
)
 
(58
)
 
(142
)
 
(201
)
Other income
 
97

 
85

 
246

 
226

Securities gains (losses), net
 
 
 
 
 
 
 
 
Gross realized gains
 

 
39

 
45

 
41

Gross realized losses
 

 
(40
)
 

 
(40
)
OTTI charges
 

 

 

 
(2
)
Non-credit portion recognized in OCI
 

 
(1
)
 

 
(2
)
Total securities gains (losses), net
 

 
(2
)
 
45

 
(3
)
Total noninterest income
 
1,164

 
988

 
3,310

 
3,004

Noninterest Expense
 
 
 
 
 
 
 
 
Personnel expense
 
1,006

 
882

 
2,960

 
2,576

Occupancy and equipment expense
 
203

 
183

 
588

 
516

Software expense
 
63

 
50

 
167

 
140

Loan-related expense
 
33

 
38

 
101

 
113

Outside IT services
 
51

 
35

 
136

 
94

Professional services
 
27

 
42

 
75

 
101

Amortization of intangibles
 
38

 
29

 
112

 
73

Regulatory charges
 
41

 
25

 
103

 
73

Foreclosed property expense
 
9

 
15

 
28

 
42

Merger-related and restructuring charges, net
 
43

 
77

 
158

 
115

(Gain) loss on early extinguishment of debt
 

 

 
(1
)
 
172

Other expense
 
197

 
218

 
626

 
654

Total noninterest expense
 
1,711

 
1,594

 
5,053

 
4,669

Earnings
 
 
 
 
 
 
 
 
Income before income taxes
 
915

 
755

 
2,570

 
2,124

Provision for income taxes
 
273

 
222

 
771

 
543

Net income
 
642

 
533

 
1,799

 
1,581

Noncontrolling interests
 

 
4

 
9

 
36

Dividends on preferred stock
 
43

 
37

 
123

 
111

Net income available to common shareholders
 
$
599

 
$
492

 
$
1,667

 
$
1,434

Basic EPS
 
$
0.74

 
$
0.64

 
$
2.08

 
$
1.95

Diluted EPS
 
$
0.73

 
$
0.64

 
$
2.05

 
$
1.92

Cash dividends declared per share
 
$
0.30

 
$
0.27

 
$
0.85

 
$
0.78

Basic weighted average shares outstanding
 
812,521

 
764,435

 
802,694

 
737,141

Diluted weighted average shares outstanding
 
823,106

 
774,023

 
812,407

 
746,822


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

4


BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in millions)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
Net Income
 
$
642

 
$
533

 
$
1,799

 
$
1,581

OCI, net of tax:
 
 

 
 

 
 

 
 

Change in unrecognized net pension and postretirement costs
 
2

 
(14
)
 
24

 
4

Change in unrealized net gains (losses) on cash flow hedges
 
21

 
(92
)
 
(143
)
 
(73
)
Change in unrealized net gains (losses) on AFS securities
 
(73
)
 
51

 
224

 
1

Change in FDIC's share of unrealized gains/losses on AFS securities
 
137

 
9

 
169

 
28

Other, net
 

 
(2
)
 
4

 
(5
)
Total OCI
 
87

 
(48
)
 
278

 
(45
)
Total comprehensive income
 
$
729

 
$
485

 
$
2,077

 
$
1,536

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income Tax Effect of Items Included in OCI:
 
 
 
 
 
 
 
 
Change in unrecognized net pension and postretirement costs
 
$

 
$
(8
)
 
$
14

 
$
3

Change in unrealized net gains (losses) on cash flow hedges
 
14

 
(55
)
 
(84
)
 
(44
)
Change in unrealized net gains (losses) on AFS securities
 
(43
)
 
24

 
135

 
(7
)
Change in FDIC's share of unrealized gains/losses on AFS securities
 
80

 
6

 
98

 
20

Other, net
 
1

 
1

 
1

 
1


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


5


BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
Nine Months Ended September 30, 2016 and 2015
(Dollars in millions, shares in thousands)
 
 
Shares of
Common
Stock
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
AOCI
 
Noncontrolling
Interests
 
Total
Shareholders'
Equity
Balance, January 1, 2015
 
720,698

 
$
2,603

 
$
3,603

 
$
6,517

 
$
12,317

 
$
(751
)
 
$
88

 
$
24,377

Add (Deduct):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 

 
1,545

 

 
36

 
1,581

Net change in AOCI
 

 

 

 

 

 
(45
)
 

 
(45
)
Stock transactions:
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
 
Issued in business combinations
 
54,000

 

 
270

 
1,918

 

 

 

 
2,188

Issued in connection with equity awards
 
6,785

 

 
34

 
76

 

 

 

 
110

Shares repurchased
 
(1,333
)
 

 
(6
)
 
(45
)
 

 

 

 
(51
)
Excess tax benefits in connection with equity awards
 

 

 

 
9

 

 

 

 
9

Purchase of additional ownership interest in AmRisc, LP
 

 

 

 
(219
)
 

 

 
(3
)
 
(222
)
Cash dividends declared on common stock
 

 

 

 

 
(579
)
 

 

 
(579
)
Cash dividends declared on preferred stock
 

 

 

 

 
(111
)
 

 

 
(111
)
Equity-based compensation expense
 

 

 

 
88

 

 

 

 
88

Other, net
 

 

 

 

 

 

 
(81
)
 
(81
)
Balance, September 30, 2015
 
780,150

 
$
2,603

 
$
3,901

 
$
8,344

 
$
13,172

 
$
(796
)
 
$
40

 
$
27,264

 
 
Balance, January 1, 2016
 
780,337

 
$
2,603

 
$
3,902

 
$
8,365

 
$
13,464

 
$
(1,028
)
 
$
34

 
$
27,340

Add (Deduct):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 

 
1,790

 

 
9

 
1,799

Net change in AOCI
 

 

 

 

 

 
278

 

 
278

Stock transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issued in business combinations
 
31,666

 

 
158

 
905

 

 

 

 
1,063

Issued in connection with equity awards
 
4,735

 

 
23

 
34

 

 

 

 
57

Issued in connection with preferred stock offerings
 

 
450

 

 

 

 

 

 
450

Shares repurchased
 
(5,314
)
 

 
(26
)
 
(167
)
 

 

 

 
(193
)
Cash dividends declared on common stock
 

 

 

 

 
(682
)
 

 

 
(682
)
Cash dividends declared on preferred stock
 

 

 

 

 
(123
)
 

 

 
(123
)
Equity-based compensation expense
 

 

 

 
96

 

 

 

 
96

Other, net
 

 

 

 

 
10

 

 
(4
)
 
6

Balance, September 30, 2016
 
811,424

 
$
3,053

 
$
4,057

 
$
9,233

 
$
14,459

 
$
(750
)
 
$
39

 
$
30,091

 
 
 

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

6


BB&T CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
 
 
Nine Months Ended
 
 
September 30,
 
 
2016
 
2015
Cash Flows From Operating Activities:
 
 
 
 
Net income
 
$
1,799

 
$
1,581

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

 
 
Provision for credit losses
 
443

 
299

Adjustment to income tax provision
 
(13
)
 
(107
)
Depreciation
 
298

 
265

(Gain) loss on early extinguishment of debt
 
(1
)
 
172

Amortization of intangibles
 
112

 
73

Equity-based compensation expense
 
96

 
88

(Gain) loss on securities, net
 
(45
)
 
3

Net change in operating assets and liabilities:
 
 

 
 
LHFS
 
(1,617
)
 
5

Trading securities
 
188

 
(331
)
Other assets
 
(628
)
 
(294
)
Accounts payable and other liabilities
 
(118
)
 
(42
)
Cash paid to terminate FDIC loss share agreements
 
(230
)
 

Other, net
 
16

 
190

Net cash from operating activities
 
300

 
1,902

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 
Proceeds from sales of AFS securities
 
4,538

 
6,252

Proceeds from maturities, calls and paydowns of AFS securities
 
4,039

 
4,069

Purchases of AFS securities
 
(9,867
)
 
(10,306
)
Proceeds from maturities, calls and paydowns of HTM securities
 
5,963

 
2,637

Purchases of HTM securities
 
(5,122
)
 
(2,116
)
Originations and purchases of loans and leases, net of principal collected
 
(1,567
)
 
(2,278
)
Net cash received (paid) for acquisitions and divestitures
 
(789
)
 
1,307

Other, net
 
319

 
(27
)
Net cash from investing activities
 
(2,486
)
 
(462
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 
Net change in deposits
 
4,183

 
1,200

Net change in short-term borrowings
 
(923
)
 
(1,994
)
Proceeds from issuance of long-term debt
 
3,028

 
2,266

Repayment of long-term debt
 
(4,573
)
 
(1,458
)
Net cash from common stock transactions
 
(136
)
 
59

Net proceeds from preferred stock issued
 
450

 

Cash dividends paid on common stock
 
(682
)
 
(579
)
Cash dividends paid on preferred stock
 
(123
)
 
(111
)
Other, net
 
223

 
(368
)
Net cash from financing activities
 
1,447

 
(985
)
Net Change in Cash and Cash Equivalents
 
(739
)
 
455

Cash and Cash Equivalents at Beginning of Period
 
3,711

 
2,325

Cash and Cash Equivalents at End of Period
 
$
2,972

 
$
2,780

 
 
 
 
 
Supplemental Disclosure of Cash Flow Information:
 
 
 
 
Cash paid during the period for:
 
 
 
 
Interest
 
$
569

 
$
518

Income taxes
 
706

 
578

Noncash investing activities:
 
 

 
 
Transfers of loans to foreclosed assets
 
356

 
389

Purchase of additional interest in AmRisc, LP
 

 
216

Stock issued in business combinations
 
1,063

 
2,188

Transfer of HTM securities to AFS
 

 
517


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

7


NOTE 1. Basis of Presentation
 
See the Glossary of Defined Terms at the beginning of this Report for terms used throughout the consolidated financial statements and related notes of this Form 10-Q.
 
General
 
These consolidated financial statements and notes are presented in accordance with the instructions for Form 10-Q and, therefore, do not include all information and notes necessary for a complete presentation of financial position, results of operations and cash flow activity required in accordance with GAAP. In the opinion of management, all normal recurring adjustments necessary for a fair statement of the consolidated financial position and consolidated results of operations have been made. The year-end consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. The information contained in the financial statements and notes included in the Annual Report on Form 10-K for the year ended December 31, 2015 should be referred to in connection with these unaudited interim consolidated financial statements.
 
Reclassifications
 
Certain amounts reported in prior periods' consolidated financial statements have been reclassified to conform to the current presentation. Such reclassifications had no effect on previously reported cash flows, shareholders' equity or net income.
 
Use of Estimates in the Preparation of Financial Statements
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change include the determination of the ACL, determination of fair value for financial instruments, valuation of goodwill, intangible assets and other purchase accounting related adjustments, benefit plan obligations and expenses, and tax assets, liabilities and expense.
 
Changes in Accounting Principles and Effects of New Accounting Pronouncements

During August 2016, the FASB issued new guidance related to the Statement of Cash Flows. The new guidance clarifies the classification within the statement of cash flows for certain transactions, including debt extinguishment costs, zero-coupon debt, contingent consideration related to business combinations, insurance proceeds, equity method distributions and beneficial interests in securitizations. The guidance also clarifies that cash flows with aspects of multiple classes of cash flows or that cannot be separated by source or use should be classified based on the activity that is likely to be the predominant source or use of cash flows for the item. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.

During June 2016, the FASB issued new guidance related to Credit Losses. The new guidance replaces the incurred loss impairment methodology in current GAAP 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 account for expected credit losses at the acquisition date that represents a component of the purchase price allocation. Credit losses relating to AFS debt securities will be recorded through an allowance for expected credit losses, with such allowance limited to the amount by which fair value is below amortized cost. An allowance will be established for estimated credit losses on HTM securities. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Upon adoption, the Company expects that the ACL will be higher, however the Company is still in the process of determining the magnitude of the increase. The Company is also in the process of quantifying the impact on the Consolidated Statements of Income and the Consolidated Statements of Shareholders' Equity. The Company does not expect the new guidance to have a material impact on net cash flows.


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During March 2016, the FASB issued new guidance related to Stock Compensation. The new guidance eliminates the concept of additional paid-in capital pools for stock-based awards and requires that the related excess tax benefits and tax deficiencies be classified as an operating activity in the statement of cash flows. The new guidance also allows entities to make a one-time policy election to account for forfeitures when they occur, instead of accruing compensation cost based on the number of awards expected to vest. Additionally, the new guidance changes the requirement for an award to qualify for equity classification by permitting tax withholding up to the maximum statutory tax rate instead of the minimum statutory tax rate. Cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity in the Statement of Cash Flows. This guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The Company expects to elect to account for forfeitures of stock-based awards when they occur, and the adoption of this guidance is not expected to be material to the consolidated financial statements.

During March 2016, the FASB issued new guidance related to    Investments. The new guidance eliminates the requirement to retroactively adjust the financial statements when a change in ownership or influence causes an existing investment to qualify for the equity method of accounting. The new guidance requires the investor to add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. This guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.

During March 2016, the FASB issued new guidance related to Derivatives and Hedging. The new guidance clarifies the requirements for assessing whether contingent call or put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts, which is used to determine whether the embedded derivative should be separated from the host contract and accounted for separately as a derivative. An entity performing the assessment will be required to assess the embedded call or put options solely in accordance with the pre-existing four-step decision sequence. This guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.

During March 2016, the FASB issued new guidance related to Liabilities. The new guidance requires companies to recognize breakage on prepaid stored-value products in accordance with the recently issued guidance on Revenue from Contracts with Customers. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.

During March 2016, the FASB issued new guidance related to Derivatives and Hedging. The new guidance clarifies that derivative instrument novations do not require dedesignation of the related hedging relationship provided that all other hedge accounting criteria continue to be met. BB&T adopted this guidance upon issuance. The adoption of this guidance was not material to the consolidated financial statements.

During February 2016, the FASB issued new guidance related to Leases. The new guidance requires lessees to recognize assets and liabilities related to certain operating leases on the balance sheet. The new guidance also requires additional disclosures by lessees and contains targeted changes to accounting by lessors. This guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Upon adoption, the Company expects to report higher assets and liabilities as a result of including additional leases on the Consolidated Balance Sheet. The Company does not expect the new guidance to have a material impact on the Consolidated Statements of Income or the Consolidated Statements of Shareholders' Equity.

During January 2016, the FASB issued new guidance related to Financial Instruments. The new guidance requires the majority of equity investments to be measured at fair value with changes in fair value recognized in net income, excluding equity investments that are consolidated or accounted for under the equity method of accounting. The new guidance allows equity investments without readily determinable fair values to be measured at cost minus impairment, with a qualitative assessment required to identify impairment. For financial instruments recorded at amortized cost, the new guidance requires public companies to use exit prices to measure the fair value for disclosure purposes, eliminates the disclosure requirements related to measurement assumptions and requires separate presentation of financial assets and liabilities based on form and measurement category. In addition, for liabilities measured at fair value under the fair value option, the changes in fair value due to changes in instrument-specific credit risk should be recognized in OCI. This guidance is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The adoption of this guidance is not expected to be material to the consolidated financial statements.


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During May 2014, the FASB issued new guidance related to Revenue from Contracts with Customers. This guidance supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Accounting Standards Codification. The guidance requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. During August 2015, the FASB provided a one-year deferral of the effective date; therefore, the guidance is effective for interim and annual reporting periods beginning after December 15, 2017. The FASB has also issued clarification guidance as it relates to principal versus agent considerations for revenue recognition purposes and clarification guidance on other various considerations related to the new revenue recognition guidance. Additionally, during April 2016, the FASB issued further clarification guidance related to identifying performance obligations and licensing. The Company is currently evaluating this guidance to determine the impact on its consolidated financial statements.

Effective January 1, 2016, BB&T adopted new guidance related to Fair Value Measurement. The new guidance eliminates the requirement to classify in the fair value hierarchy any investments for which fair value is measured at net asset value per share using the practical expedient. The adoption of this guidance was not material to the consolidated financial statements.

Effective January 1, 2016, BB&T adopted new guidance related to Internal-Use Software. Under the new guidance, if a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The adoption of this guidance was not material to the consolidated financial statements.

Effective January 1, 2016, BB&T adopted new guidance related to Debt Issuance Costs. The new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The adoption of this guidance was not material to the consolidated financial statements, therefore, it was adopted on a prospective basis.

Effective January 1, 2016, BB&T adopted new guidance related to Consolidation. The new guidance provides an additional requirement for a limited partnership or similar entity to qualify as a voting interest entity, amending the criteria for consolidating such an entity and eliminating the deferral provided under previous guidance for investment companies. In addition, the new guidance amends the criteria for evaluating fees paid to a decision maker or service provider as a variable interest and amends the criteria for evaluating the effect of fee arrangements and related parties on a VIE primary beneficiary determination. The adoption of this guidance was not material to the consolidated financial statements.
  
NOTE 2. Acquisitions and Divestitures
 
On April 1, 2016, BB&T acquired all of the outstanding stock of National Penn, a Pennsylvania incorporated BHC. National Penn conducted its business operations primarily through its bank subsidiary, National Penn Bank, which was merged into Branch Bank. National Penn operated other subsidiaries in Pennsylvania, New Jersey and Maryland to provide a wide range of retail and commercial banking and financial products and services. National Penn also operated a trust and investment company, an asset management company and a property and casualty insurance brokerage company. National Penn had 126 financial centers as of the acquisition date. BB&T acquired National Penn in order to increase BB&T’s market share in these areas.

The acquisition of National Penn constituted a business combination. Accordingly, the assets acquired and liabilities assumed are presented at their fair values in the table below. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. These fair value estimates are considered preliminary and are subject to change for up to one year after the closing date of the acquisition as additional information becomes available. Immaterial amounts of the intangible assets recognized are deductible for income tax purposes.


10


 
 
National Penn
 
 
UPB
 
Fair Value
 
 
(Dollars in millions)
Assets acquired:
 
 
 
 
Cash, due from banks and federal funds sold
 
 

 
$
216

Securities
 
 

 
2,496

Loans and leases:
 
 
Commercial and industrial
 
$
2,817

 
2,596

CRE-income producing properties
 
1,450

 
1,202

CRE-construction and development
 
165

 
127

Direct retail lending
 
801

 
767

Revolving credit
 
7

 
7

Residential mortgage
 
1,217

 
1,003

Sales finance
 
166

 
162

PCI
 
181

 
124

Total loans and leases-HFI
 
$
6,804

 
5,988

Goodwill
 
 

 
797

CDI