BB&T Corporation (now part of Truist Financial Corporation) — Q1 2011 Form 10-Q
Entity and period: The supplied filing is BB&T Corporation’s unaudited quarterly report for the three months ended March 31, 2011, not a filing under the Truist Financial Corp. name. Unless otherwise noted, amounts are in U.S. dollars.
Business context and financial results
BB&T operated as a regional financial holding company, offering banking, lending, mortgage, insurance, wealth-management and other financial services. Results below compare Q1 2011 with Q1 2010; balance-sheet comparisons are with December 31, 2010.
- Earnings: Net income was $234 million, up 20.6%; net income available to common shareholders was $225 million, versus $188 million. Diluted EPS was $0.32, up from $0.27. Annualized return on average assets was 0.60%, and return on average common equity was 5.48%.
- Revenue and margin: Net interest income was $1.285 billion, down 2.2%; on a fully taxable equivalent basis it was $1.321 billion, down 1.9%. Net interest margin rose to 4.01% from 3.88%. Noninterest income fell 15.4% to $714 million; management said it was relatively flat excluding specified loan-disposition losses and FDIC loss-share effects.
- Costs and credit: Provision for credit losses was $340 million, down from $575 million. Noninterest expense increased 2.3% to $1.372 billion. Net charge-offs were $404 million, or 1.56% of average loans on an annualized basis. Nonperforming assets excluding covered assets were $3.863 billion, down 2.7% from year-end.
- Balance sheet: Total assets were $157.039 billion. Loans and leases, including loans held for sale, were $104.887 billion, down 2.2% from year-end. Total deposits were $106.913 billion; client deposits increased 3.5% to $103.6 billion. The allowance for loan and lease losses was $2.641 billion, 2.58% of loans held for investment.
- Debt, liquidity and capital: Long-term debt was $22.591 billion, up 4.0%, including a $1 billion senior-note issuance. Short-term borrowings were $5.186 billion, down 8.6%. Cash and cash equivalents ended the quarter at $2.2 billion, down $185 million. Reported regulatory ratios were 12.1% Tier 1 capital and 15.8% total risk-based capital; the non-GAAP Tier 1 common ratio was 9.3%.
- Cash flows: Operating activities provided $2.031 billion; investing activities used $2.275 billion; financing activities provided $59 million. Cash and cash equivalents decreased by $185 million. Operating cash flow includes substantial balance-sheet movements, including loans held for sale.
Material changes and unusual items
- Net income improved as lower credit-loss provisioning more than offset lower net interest and noninterest income. The company attributed the decline in net interest income primarily to lower average earning assets following its 2010 balance-sheet deleveraging.
- Noninterest income included $74 million of losses and write-downs tied to commercial loans held for sale under the nonperforming-asset disposition strategy, and a $63 million reduction in FDIC loss-share income. Separately, securities gains of $21 million were offset by $21 million of other-than-temporary impairment charges.
- BB&T transferred approximately $8.3 billion of available-for-sale securities to held-to-maturity, citing intent and ability to hold them to maturity and a desire to mitigate potential Basel III regulatory-capital effects. Available-for-sale securities fell to $17.9 billion from $23.2 billion.
- Credit indicators improved in several areas: nonperforming assets excluding covered assets declined for a fourth consecutive quarter, and 30–89-day past-due loans excluding covered and government-guaranteed loans fell to $1.099 billion from $1.408 billion at year-end. However, nonaccrual loans held for investment increased to $2.427 billion from $2.149 billion; commercial real-estate acquisition, development and construction loans remained a material exposure.
- Management said it intended to retire $3.2 billion of trust-preferred securities by the end of 2013 and planned to issue about $1.75 billion of Tier 1-qualifying instruments. The Federal Reserve had no objection to the capital plan to increase the dividend; the board raised the quarterly dividend to $0.16 per share and declared a special $0.01 dividend.
Outlook, risks and contingencies
- Management expected net interest margin to remain slightly above 4.00% during 2011. It estimated a roughly $700 million annual pretax benefit from a return to a more normalized credit environment, excluding lower provisions or reserve releases; this is an estimate, not a formal earnings forecast.
- Key stated risks include economic weakness and further credit deterioration, interest-rate changes affecting margins and asset values, competition, regulatory and accounting changes (including Dodd-Frank and Basel III), credit-rating changes, securities-market conditions, and integration or cost-savings shortfalls.
- BB&T disclosed an IRS tax dispute asserting about $892 million for 2002–2007. The company had paid the disputed tax, penalties and interest and sued for a refund; management considered reserves adequate but said the outcome was uncertain and resolution was not expected within 12 months.
- Three lawsuits challenged BB&T’s historical ordering of debit-card transactions. No class had been certified; appeals were pending, and the filing said a loss amount or range could not then be determined. Management stated that unfavorable resolution of legal matters could nevertheless be material.
- Other exposures include FDIC loss-share arrangements on acquired Colonial assets, commitments to extend credit, letters of credit and guarantees, affordable-housing investments and loan-sale recourse. The filing also notes that fair-value estimates for certain Level 3 assets depend on significant management judgment.
Important facts for investors to verify
- Confirm the reporting entity and corporate lineage: this is a 2011 BB&T filing, not a Truist-branded 10-Q.
- Review subsequent credit trends, especially commercial real-estate ADC performance, nonaccrual loans, charge-offs and allowance adequacy, distinguishing FDIC-covered assets from uncovered portfolios.
- Assess how much of the earnings improvement came from lower credit provisions and acquired-loan accretion, and whether the margin and normalized-credit benefit expectations were realized.
- Examine the securities reclassification, unrealized losses, FDIC loss-share recoverability and the sensitivity of mortgage-servicing-right valuations to interest rates and prepayments.
- Track the tax refund litigation, debit-transaction class-action appeals, trust-preferred retirement and replacement capital issuance, dividend payments, and regulatory-capital treatment.