TRUIST FINANCIAL CORP quarterly report, Q3 FY2014

BB&T Corporation Form 10-Q Summary

Filing identity: The supplied filing is for BB&T Corporation, not Truist Financial Corp. The filing covers the quarter and nine months ended September 30, 2014; the financial statements are unaudited. Amounts are in U.S. dollars unless stated otherwise.

Business context and reporting period

BB&T is a financial holding company operating primarily through Branch Banking and Trust Company, alongside insurance and other financial services businesses. During the quarter, it agreed to acquire 41 Texas branches with approximately $2.3 billion in deposits and The Bank of Kentucky, a $1.9 billion bank with 32 branches. Earlier in 2014 it acquired 21 Texas branches from Citigroup.

Key financial metrics

MetricQ3 2014 / September 30, 2014Comparable period or balance
Net income available to common shareholders$520 million$268 million in Q3 2013; $503 million in Q3 2013 excluding its $235 million tax charge
Diluted EPS$0.71$0.37 reported and $0.70 excluding the prior-year tax charge
Net interest income (FTE) and NIM$1.385 billion; 3.38%Down $69 million and 30 basis points year over year
Total revenue (FTE basis)Approximately $2.3 billionDown $38 million year over year
Provision for credit losses$34 million reported; $46 million excluding covered loans$92 million reported in Q3 2013; excluding covered loans, the provision fell $44 million
Noninterest expense$1.556 billionUp $85 million year over year, including a $122 million debt-extinguishment loss
Assets, loans, depositsAssets $187.0 billion; loans and leases $118.7 billion; deposits $130.9 billionAt December 31, 2013: assets $183.0 billion; loans $115.9 billion; deposits $127.5 billion
Debt and shareholders’ equityLong-term debt $22.4 billion; short-term borrowings $3.4 billion; equity $24.3 billionAt December 31, 2013: long-term debt $21.5 billion; short-term borrowings $4.1 billion; equity $22.8 billion
Credit qualityNPLs $784 million and NPAs $883 million, excluding covered assets; NPL ratio 0.67%; ALLL $1.504 billionNPLs $935 million and NPAs $1.053 billion at December 31, 2013; ALLL $1.732 billion
Capital and liquidityTier 1 risk-based capital 12.4%; total risk-based capital 15.1%; Basel III common equity Tier 1 ratio estimated at 10.3%. Liquid asset buffer 14.3% of assets; estimated LCR 132%Capital ratios increased from December 31, 2013; the LCR rule was due to take effect in 2016

For the nine months ended September 30, net income was $1.617 billion, net income available to common shareholders was $1.446 billion, and diluted EPS was $1.99. Net cash from operating activities was $1.504 billion, investing activities used $3.488 billion, and financing activities provided $1.836 billion. Cash and cash equivalents ended the period at $2.017 billion, down $148 million from the beginning of the period.

Material changes versus comparable periods

  • Q3 common earnings rose $252 million year over year, but the comparison is substantially affected by the $235 million tax charge recorded in Q3 2013 and a $50 million tax benefit recognized in Q3 2014. Excluding the respective tax items, diluted EPS was $0.70 and $0.71.
  • Net interest income and NIM declined as lower loan yields and runoff of higher-yielding covered loans outweighed lower funding costs. Management cited lower yields on new loans and the prior sale of a consumer lending subsidiary as additional factors.
  • Quarterly noninterest income increased $31 million, principally from insurance income. For the nine-month period, noninterest income fell $172 million, largely because mortgage banking income declined $198 million.
  • Credit indicators improved: nine-month net charge-offs excluding covered loans were $422 million versus $650 million in 2013, and NPAs declined from year-end. The allowance for credit losses fell to $1.567 billion from $1.821 billion.
  • Loans and deposits grew from year-end. Average deposits in Q3 increased $1.0 billion from Q2, including growth in noninterest-bearing deposits; the Texas branch purchase contributed to deposit growth.

Outlook, commentary, risks and unusual items

  • Management expected Q4 NIM to decline approximately 3–5 basis points, mainly from covered-asset runoff, and net interest income to decline slightly from Q3.
  • Management expected average total loans to be down 1%–2% on an annualized basis in Q4 versus Q3, but up 1%–2% excluding residential mortgage lending. It expected Q4 net charge-offs of 45–50 basis points, modestly lower NPAs, noninterest expense below $1.4 billion, and an effective tax rate similar to Q3’s adjusted 26.5% rate.
  • Management said it anticipated no further allowance releases and therefore expected higher provision expense. Q3’s $550 million residential mortgage loan sale, primarily performing TDRs, generated a $42 million provision benefit. The quarter also included the $122 million loss from extinguishing $1.1 billion of FHLB advances and the $50 million tax benefit.
  • BB&T recorded an $85 million reserve for potential FHA-insured loan exposure; its estimated exposure was $25 million–$105 million, and a HUD-OIG review was ongoing with no claim asserted. It also recorded a $33 million increase to mortgage indemnification reserves.
  • The company’s commercial Colonial loss-sharing coverage with the FDIC expired October 1, 2014. Commercial loans with a $741 million carrying value and certain other assets were no longer covered against losses; specified securities remained subject to gain-sharing provisions through September 2017.
  • BB&T described pending IRS litigation over a financing transaction and said the related exposure was fully reserved. Depending on resolution, changes in unrecognized tax benefits, penalties and interest could produce a benefit of up to approximately $700 million; timing and outcome remain uncertain.
  • Risks cited include economic and credit deterioration, interest-rate changes, regulatory and tax developments, litigation, cybersecurity, merger integration, and potential problems implementing a new ERP general-ledger system. The filing reported no material change to previously disclosed risk factors.

Important facts for investors to verify

  1. Confirm the issuer and filing identity: the source document names BB&T Corporation, not Truist Financial Corp.
  2. Assess underlying earnings after separating the tax adjustments, loan-sale provision benefit, and debt-extinguishment loss from recurring results.
  3. Track NIM, loan yields, covered-asset runoff, loan growth, and whether the stated Q4 outlook was achieved.
  4. Review subsequent developments in the FHA/HUD-OIG matter, mortgage indemnification reserves, and IRS litigation.
  5. Monitor credit quality and allowance adequacy, especially the expected end of allowance releases and the expiration of commercial FDIC loss sharing.
  6. Validate capital and liquidity measures, noting that the Basel III capital ratios and LCR estimate were preliminary or based on management interpretations.