BB&T Corporation — Second Quarter 2011 Form 10-Q
Issuer and period: The filing is for BB&T Corporation, not a filing under the name Truist Financial Corp. It covers the quarter and six months ended June 30, 2011; financial statements are unaudited. Dollar amounts are in millions unless noted.
Business context and financial results
BB&T was a regional financial holding company with banking, mortgage, insurance, consumer finance, wealth and other financial businesses. Its operations were concentrated across the southeastern and mid-Atlantic United States.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $1,354 | $1,360 | $2,639 | $2,674 |
| Provision for credit losses | $328 | $650 | $668 | $1,225 |
| Noninterest income | $787 | $1,039 | $1,501 | $1,883 |
| Noninterest expense | $1,395 | $1,500 | $2,767 | $2,841 |
| Net income | $327 | $224 | $561 | $418 |
| Net income available to common shareholders | $307 | $210 | $532 | $398 |
| Diluted earnings per share | $0.44 | $0.30 | $0.76 | $0.57 |
Q2 return on average assets was 0.83% and return on average common equity was 7.25%, versus 0.56% and 5.01%, respectively, a year earlier. Net interest margin was 4.15% in Q2 (4.12% a year earlier) and 4.08% for the first half (4.00% a year earlier). The effective tax rate was 21.8% for Q2 and 20.4% for the first half.
Balance sheet, funding, capital and cash flow
- At June 30, total assets were $159.3 billion, loans and leases were $105.4 billion, and total deposits were $108.1 billion. Total shareholders’ equity was $17.0 billion.
- Compared with December 31, 2010, assets rose 1.4%, deposits rose 0.8%, and equity rose 3.3%. Total loans and leases fell 1.8%, primarily as loans held for sale declined $1.7 billion. Client deposits increased 3.5% to $103.6 billion; noninterest-bearing deposits were 20.8% of deposits, up from 19.2% at year-end.
- Long-term debt was $23.4 billion, up 7.6%; short-term borrowed funds were $4.8 billion, down 14.6%. The company issued $2.0 billion of senior notes during the first half. Its Tier 1, total risk-based and Tier 1 common capital ratios were 12.3%, 16.0% and 9.6%, respectively; management said capital remained above regulatory well-capitalized standards.
- For the first half, operating cash flow was $3.9 billion, investing cash flow was negative $4.9 billion, and financing cash flow was $1.5 billion. Cash and cash equivalents increased $401 million to $2.8 billion. These cash flow figures should be considered in the context of a bank’s lending, securities and deposit activities.
Changes versus comparable periods
- Q2 net income rose 46.0% year over year; first-half net income rose 34.2%. The principal earnings support was a lower credit-loss provision, reflecting improving credit trends.
- Q2 noninterest income declined 24.3%, largely because net securities gains were $221 million lower than in Q2 2010 and the current quarter included $27 million of commercial-loan sale losses and write-downs. Excluding these items, management said noninterest income was relatively flat.
- Q2 noninterest expense fell 7.0%, primarily due to lower foreclosed-property costs and merger-related charges. Personnel expense increased, including incentive and benefit costs.
- Reported nonperforming assets, excluding covered assets, fell to $3.4 billion from $4.0 billion at year-end 2010. Q2 net charge-offs were $444 million, or 1.71% of average loans on an annualized basis, versus $642 million, or 2.48%, in Q2 2010.
- Available-for-sale securities declined $3.8 billion from year-end; a first-quarter transfer of approximately $8.3 billion of securities to held-to-maturity accounted for a major part of the change. Management said the transfer was intended to mitigate potential regulatory-capital effects under proposed Basel III standards.
Outlook, management commentary and key risks
- Management expected positive operating leverage through the second half of 2011. It projected the net interest margin at 4.05%–4.10% for the remainder of 2011, average loans held for investment growth of 2%–4% annualized in each of Q3 and Q4 versus the preceding quarter, and sequential nonperforming-asset declines of 5%–10% in each quarter, assuming relative economic stability.
- Management anticipated net charge-offs of 1.40%–1.50% of average loans, excluding covered loans, in Q3 and Q4. These are management expectations, not guarantees.
- Credit and real-estate risks persisted. The residential acquisition, development and construction portfolio had $2.7 billion outstanding, with nonaccrual loans equal to 17.11% of that category. Management cited economic conditions, borrower performance and collateral values as relevant to credit-loss estimates.
- The Colonial Bank acquisition included FDIC loss-sharing arrangements. Covered assets, related reimbursement estimates and acquired-loan cash-flow assumptions affect reported income and asset-quality comparability. A $15 million provision for covered loans was recorded in Q2; FDIC loss-share income was negative $81 million.
- BB&T recognized $39 million of other-than-temporary credit impairment in securities for the first half. Management revised mortgage-servicing cost assumptions in Q2, reducing residential mortgage servicing rights value by $10 million. Servicing-rights valuation depends on assumptions including prepayments, discount rates and servicing costs.
- The company identified interest-rate, economic, regulatory, competitive and market risks, including possible effects from the U.S. government credit downgrade and European sovereign-debt concerns. Management estimated annualized noninterest revenue at risk from interchange regulation at about $395 million beginning in 2012, and said it had identified or implemented offsets for approximately half.
- Contingencies include an IRS dispute for approximately $892 million of taxes, penalties and interest for 2002–2007. BB&T paid the disputed amount and sued for a refund; management considered reserves adequate, but the outcome uncertain. Three debit-transaction ordering class-action cases remained in preliminary proceedings; no class had been certified and a loss range was not determinable.
Important facts for investors to verify
- Whether improving credit quality and lower provisions continue, and how charge-offs and nonperforming assets compare with management’s stated outlook.
- The sustainability of net interest margin and loan growth amid low rates, funding-mix changes and continued reliance on acquired-loan accretion.
- The earnings and capital effects of the $8.3 billion securities reclassification, securities valuation exposures, and proposed Basel III requirements.
- FDIC loss-share receivable assumptions and covered-loan cash-flow estimates, including their effect on reported income and comparisons with other banks.
- Resolution and potential financial impact of the IRS refund litigation, debit-ordering cases, mortgage representations and warranties, and other disclosed commitments.