TRUIST FINANCIAL CORP quarterly report, Q2 FY2013

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BB&T Corporation Form 10-Q Summary

Entity note: The request identifies Truist Financial Corp., but the supplied filing is for BB&T Corporation. The filing covers the quarter and six months ended June 30, 2013; it was signed August 8, 2013. Unless noted, dollar amounts are USD millions.

Business context and reporting period

BB&T was a North Carolina financial holding company operating principally through Branch Banking and Trust Company and nonbank subsidiaries. The report is unaudited and compares Q2 and first-half 2013 with the corresponding 2012 periods. Balance-sheet comparisons are with December 31, 2012.

Financial results and position

  • Q2 earnings: Net income was $576 million and net income available to common shareholders was $547 million, versus $538 million and $510 million, respectively, in Q2 2012. Diluted EPS was $0.77 versus $0.72. Annualized return on average assets was 1.27% and return on average common equity was 11.39%.
  • First-half earnings: Net income was $832 million and income available to common shareholders was $757 million, versus $983 million and $941 million a year earlier. Diluted EPS was $1.06 versus $1.33; excluding a $281 million tax charge, adjusted diluted EPS was $1.46 (a non-GAAP measure).
  • Revenue and expenses: Q2 net interest income was $1,415 million and noninterest income was $1,046 million; noninterest expense was $1,496 million. For the first half, these were $2,837 million, $2,047 million and $2,910 million, respectively. Q2 noninterest income growth was led by insurance and securities gains; expense growth reflected personnel and restructuring costs.
  • Margins: Q2 net interest margin was 3.70%, down 25 basis points year over year. First-half NIM was 3.73%, down 21 basis points. Lower new-loan yields and runoff of higher-yielding covered assets weighed on margin, partly offset by lower funding costs.
  • Credit: Q2 provision for credit losses was $168 million versus $273 million in Q2 2012; first-half provision was $440 million versus $561 million. Q2 net charge-offs were $217 million, or 0.74% of average loans and leases; first-half net charge-offs were $506 million, or 0.87%. The allowance for loan and lease losses was $1,901 million and total allowance for credit losses was $1,982 million at June 30.
  • Asset quality: Nonperforming assets excluding covered assets were $1,276 million, down from $1,536 million at year-end 2012. Nonperforming loans and leases were $1,149 million. The reported NPA-to-loans-and-foreclosed-property ratio excluding covered assets was 1.10%; management said NPAs had declined for 13 consecutive quarters.
  • Balance sheet and liquidity: Total assets were $182.7 billion; loans and leases were $115.8 billion gross and deposits were $131.1 billion. Cash and cash equivalents were $2.4 billion at June 30, versus $3.0 billion at year-end. Six-month operating cash flow was $2.308 billion, investing cash flow was negative $1.791 billion and financing cash flow was negative $1.177 billion.
  • Debt and capital: Short-term borrowings were $3.2 billion and long-term debt $19.4 billion. Total shareholders’ equity was $22.0 billion. Regulatory Tier 1, total risk-based and leverage capital ratios were 11.1%, 13.9% and 8.8%, respectively; Tier 1 common ratio was 9.3%. Management’s preliminary Basel III common equity Tier 1 estimate was 8.9%.

Material changes versus comparable periods

  • Q2 common income increased 7.3% year over year, despite lower net interest income, as noninterest income rose and credit costs fell.
  • First-half common income declined $184 million year over year, chiefly because of the $281 million tax provision adjustment relating to disputed tax positions. Excluding that item, management reported adjusted first-half common income of $1,038 million.
  • Credit quality improved: nonperforming assets excluding covered assets fell $260 million from year-end, and Q2 net charge-offs were lower than in Q2 2012. The allowance-to-loans ratio also declined from year-end.
  • Deposits decreased $2.0 billion from year-end, as interest-bearing deposits declined more than noninterest-bearing deposits grew. Long-term debt increased $248 million; equity rose $773 million, including $487 million net proceeds from a preferred stock issuance.
  • Other comprehensive loss increased by $225 million in the first half, primarily reflecting a $415 million decline in unrealized AFS securities gains, partly offset by a $162 million improvement in unrealized cash-flow-hedge losses.

Outlook, risks, contingencies and unusual items

  • Management expected Q3 2013 NIM to decline 5–10 basis points, citing lower rates on new earning assets, covered-loan runoff and tighter retail credit spreads, partly offset by lower deposit costs and favorable funding and asset mix.
  • Management expected Q3 average loan growth of 2%–4% annualized, subject to stable economic conditions; net charge-offs to trend modestly lower; and NPAs to improve modestly. It expected deposit costs below 0.30% by year-end and said elevated systems and process expenses should decline in coming quarters.
  • Tax contingency: BB&T had paid and was litigating an approximately $892 million IRS deficiency involving tax years 2002–2007. After an adverse Tax Court opinion in a similar case, BB&T recorded a $281 million expense in Q1 2013. No decision had been rendered in BB&T’s case; possible changes in uncertain-tax-position valuation over the next 12 months ranged from a $496 million benefit to a $328 million expense.
  • Capital and regulation: The Federal Reserve objected to certain elements of BB&T’s capital plan in March; the company resubmitted its CCAR plan in June, with regulatory review pending. New Basel III rules were expected to apply beginning January 1, 2015. Management noted existing subordinated debt might not qualify as Tier 2 capital under the new rules.
  • Liquidity: Management reported a 10.5% liquid-asset buffer as a share of total assets, against a 5% policy minimum, and approximately $55 billion of secured borrowing capacity. Parent-company cash covered 32 months of projected contractual cash outflows. Management considered liquidity adequate.
  • Other items and risks: Q2 merger-related and restructuring charges were $27 million, mainly related to Community Banking optimization. The filing identifies interest-rate, credit, market, operational, regulatory, cyber-security, economic and integration risks. Management stated legal reserves were adequate but acknowledged an unfavorable resolution of proceedings could be material. No material change to previously disclosed risk factors was reported.

Most important facts for investors to verify

  • Confirm the issuer: the supplied 10-Q is BB&T Corporation, not Truist Financial Corp.
  • Review the pending IRS litigation and potential tax-position range; understand the distinction between reported first-half results and management’s non-GAAP adjusted results.
  • Assess whether NIM pressure, covered-asset runoff and lower loan yields offset continuing loan growth and lower deposit costs.
  • Track credit quality and reserve adequacy, including the effect of excluding FDIC-covered and government-guaranteed loans from certain asset-quality ratios.
  • Verify capital treatment under Basel III, the outcome of the resubmitted CCAR plan and whether subordinated debt qualifies for Tier 2 capital.
  • Review securities valuation and interest-rate exposure: the securities portfolio’s effective duration rose to 5.0 years from 2.8 years at year-end, while AFS unrealized gains declined.
  • Monitor mortgage servicing-rights valuation sensitivity, mortgage repurchase/recourse exposures, legal contingencies and execution of restructuring and expense-reduction plans.