Filing identity and reporting period
The supplied filing is BB&T Corporation’s unaudited Form 10-Q for the quarter and six months ended June 30, 2014, filed July 28, 2014. The filing names BB&T Corporation—not Truist Financial Corp—as the registrant; verify the entity and filing match your request.
BB&T operated as a financial holding company through its principal bank subsidiary and other businesses, including insurance, mortgage banking, and specialized lending. In the second quarter it acquired 21 Texas branches from Citigroup, adding $1.2 billion of deposits and $112 million of loans.
Financial performance and condition
| Metric | Q2 2014 | Comparable period / change |
|---|---|---|
| Net interest income (GAAP) | $1.343 billion | $1.415 billion in Q2 2013 |
| Noninterest income | $933 million | $1.046 billion in Q2 2013 |
| Net income / common earnings | $478 million / $425 million | $576 million / $547 million in Q2 2013 |
| Diluted EPS | $0.58 | $0.77 in Q2 2013; $0.70 excluding specified Q2 adjustments |
| FTE net interest margin | 3.43% | 3.70% in Q2 2013 |
| Return on average assets / common equity | 1.04% / 8.03% | 1.27% / 11.39% in Q2 2013 |
For the first six months, net income was $1.056 billion and diluted EPS was $1.27, versus $832 million and $1.06 in 2013. The comparison is affected by a $281 million tax provision adjustment recorded in 2013; 2014 results included $88 million of after-tax Q2 adjustments.
- Balance sheet at June 30: total assets $188.0 billion; loans and leases $119.5 billion gross; deposits $131.6 billion; shareholders’ equity $24.0 billion.
- Funding and debt: short-term borrowings were $4.0 billion and long-term debt $21.9 billion. Long-term debt rose $434 million from year-end after $2.4 billion of senior note issuance, partly offset by repayments and maturities.
- Liquidity: the liquid-asset buffer was 16.2% of assets, above BB&T’s 5% policy minimum. Management estimated a 93% liquidity coverage ratio under its interpretation of proposed rules, versus an 80% regulatory minimum then applicable to its estimate. Parent-company cash covered 35 months of projected contractual cash outflows.
- Capital: Tier 1, total risk-based, and leverage ratios were 12.0%, 14.3%, and 9.5%. The company reported a 10.2% Tier 1 common ratio and preliminary Basel III common equity Tier 1 ratio of 10.0%. The quarterly dividend increased from $0.23 to $0.24 per share.
- Cash flows, six months: operating cash flow was $877 million, investing cash flow was negative $3.542 billion, and financing cash flow was positive $2.948 billion. Cash and cash equivalents ended at $2.448 billion, up $283 million from the start of the period.
Material changes versus comparable periods
- Q2 total revenue on an FTE basis was about $2.3 billion, down $187 million year over year: FTE net interest income fell $74 million and noninterest income fell $113 million. Lower loan yields and runoff of higher-yielding covered loans weighed on interest income; lower mortgage production and margins reduced mortgage banking income.
- Q2 noninterest expense rose $55 million to $1.551 billion, principally reflecting mortgage-related reserves and adjustments. Personnel expense declined $35 million.
- Credit costs improved: Q2 provision for credit losses was $74 million, versus $168 million a year earlier; net charge-offs were $121 million, versus $217 million. Nonperforming assets excluding covered assets declined to $916 million from $1.053 billion at year-end; nonperforming loans were 0.70% of loans excluding covered assets.
- Loans and leases rose to $119.5 billion from $115.9 billion at year-end; deposits rose to $131.6 billion from $127.5 billion. Shareholders’ equity increased $1.2 billion from year-end.
- Residential Mortgage Banking posted a Q2 net loss of $21 million, compared with $97 million net income in Q2 2013, reflecting lower originations and sales, tighter pricing, and FHA-related adjustments.
Outlook, commentary, risks, and unusual items
- Management expected Q3 NIM to decline 5–10 basis points, mainly due to covered-asset runoff, with Q3 net interest income relatively flat versus Q2. It expected second-half average loan growth of 3%–5%, stronger in Q3; minimal credit-reserve release, if any, in Q3 and none thereafter absent substantial credit improvement; and modestly lower NPAs in Q3.
- Management expected Q3 noninterest income to be relatively flat, and targeted an efficiency ratio in the 56% range for Q4. It expected an effective tax rate of about 27% in the second half of 2014.
- FHA exposure: HUD-OIG selected BB&T for an audit survey of FHA loan origination and quality-control compliance. No findings or claims had been asserted. BB&T recorded an $85 million reserve for estimated potential FHA losses and a separate $33 million increase in mortgage indemnification reserves. The estimated potential exposure for the FHA audit matter was $25 million–$105 million; outcome and ultimate loss remained uncertain.
- Tax dispute: a long-running IRS matter related to a financing transaction was fully reserved. Depending on appeals and current examinations, BB&T said a benefit of up to approximately $770 million from changes in unrecognized tax benefits, penalties, and interest was reasonably possible within the next 12 months; timing and outcome were uncertain.
- Other stated risks included interest-rate and margin pressure, credit and economic conditions, regulatory and tax changes, competition, cyber risks, disaster disruption, merger integration, and implementation of a new ERP system. Management said there were no material changes to previously disclosed risk factors and disclosure controls were effective.
Important facts for investors to verify
- Confirm the registrant: the provided document is BB&T Corporation’s 2014 Q2 10-Q, not a filing identifying Truist Financial Corp.
- Review the FHA audit and reserve assumptions, including how the $85 million reserve and $33 million indemnification adjustment may change as the review develops.
- Assess the drivers of falling NIM and mortgage banking income against management’s Q3 outlook and loan-growth expectations.
- Track credit quality, reserve levels, charge-offs, and management’s expectation for little or no further reserve releases.
- Evaluate the status, appeal outcomes, and potential timing of any benefit from the tax dispute, without treating the possible $770 million benefit as assured.
- Check capital and liquidity figures against final regulatory calculations; the filing labels certain capital and Basel III figures preliminary or non-GAAP.