BB&T Corporation — Q2 2012 Form 10-Q
Period and entity: Quarter and six months ended June 30, 2012. The filing identifies the registrant as BB&T Corporation, a financial holding company; the supplied company label, Truist Financial Corp., does not match the registrant named in the filing. Unless stated otherwise, dollar amounts are in millions.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net interest income | $1,462 | $1,354 | $2,898 | $2,639 |
| Provision for credit losses | $273 | $328 | $561 | $668 |
| Noninterest income | $966 | $787 | $1,837 | $1,501 |
| Noninterest expense | $1,426 | $1,395 | $2,811 | $2,767 |
| Net income | $538 | $327 | $983 | $561 |
| Net income available to common shareholders | $510 | $307 | $941 | $532 |
| Diluted EPS | $0.72 | $0.44 | $1.33 | $0.76 |
- Q2 revenue, as described by management, was approximately $2.5 billion, up $289 million year over year. The income statement reports $1.462 billion of net interest income and $966 million of noninterest income.
- Q2 taxable-equivalent net interest margin was 3.95%, down 20 basis points year over year; the six-month margin was 3.94%, down 14 basis points. Lower funding costs and growth in earning assets supported net interest income, while lower loan yields, runoff of covered assets, and a larger securities portfolio pressured margin.
- Q2 annualized return on average assets was 1.22%, versus 0.83%; return on average common equity was 11.21%, versus 7.25%.
- For the first six months, operating cash flow was $2.635 billion, investing cash flow was negative $5.099 billion, and financing cash flow was $1.987 billion. Cash and cash equivalents ended the period at $3.867 billion, down $477 million from the beginning of the year.
Balance sheet, credit, and capital
- At June 30, total assets were $178.529 billion, compared with $174.579 billion at year-end 2011. Loans and leases held for investment were $111.075 billion, up from $107.469 billion; deposits were $126.059 billion, up from $124.939 billion.
- Long-term debt was $22.561 billion, compared with $21.803 billion at year-end. Shareholders’ equity was $18.926 billion, up from $17.480 billion, including $559 million of net proceeds from a preferred-stock issuance.
- Credit quality improved: nonperforming assets excluding covered assets were $1.897 billion, down from $2.450 billion at year-end; nonaccrual loans were $1.647 billion. Q2 net charge-offs were $337 million, or 1.21% of average loans and leases. The allowance for loan and lease losses was $2.126 billion, 1.91% of loans held for investment.
- Regulatory capital ratios at June 30 were 10.2% Tier 1, 13.5% total risk-based capital, and 7.3% leverage. Tier 1 common equity was 9.7%. Management said capital remained above well-capitalized regulatory standards; the quarter-end regulatory figures were preliminary. The Tier 1 and total risk-based ratios declined from 12.8% and 16.2% at March 31, largely due to the planned redemption of trust-preferred securities.
- Management reported a liquid-asset buffer equal to 14.1% of total assets and 21 months of parent-company cash coverage for projected contractual outflows.
Changes, outlook, and notable items
- Year-over-year earnings growth reflected higher revenue and lower credit costs. Insurance income and mortgage banking income increased; checkcard fees declined $34 million in Q2, primarily following the Durbin amendment. Foreclosed-property expense fell $73 million in Q2.
- Q2 insurance income included approximately $77 million from the April 2 acquisition of Crump Insurance. Management expects organic insurance growth but anticipates normal seasonal decline in Q3. The acquisition also contributed about $50 million of Q2 personnel expense.
- Mortgage banking income rose to $182 million from $83 million, primarily on higher mortgage production gains and sales volume. Management expected Q3 mortgage banking income to be similar to Q2. Changes in servicing-cost assumptions reduced mortgage servicing rights value by $22 million during the first half; Q2 MSR valuation losses were more than offset by gains on related derivatives.
- Management outlook: net interest margin of 3.90%–3.95% in the second half of 2012; interest-bearing deposit costs around 30 basis points over the next several quarters; Q3 loan growth of 5%–7% annualized and deposit growth similar to Q2, both excluding BankAtlantic; and Q3 nonperforming assets down 5%–10% if the economy does not deteriorate significantly. Management projected Q3 net charge-offs of 1.15%–1.20%, excluding covered assets, with a lower trend thereafter.
- Unusual items included a $29 million Q2 benefit from accelerated amortization of deferred hedge gains and issuance costs following the trust-preferred redemption announcement, and a $12 million Q2 tax benefit from terminating the last leveraged leases. The six-month period also included a $42 million first-quarter write-down related to affordable-housing investments.
- After quarter-end, BB&T completed the redemption of the remaining $3.1 billion of trust-preferred debt in July, issued $1.2 billion of Series E preferred stock on July 31, and completed its BankAtlantic acquisition on July 31. BankAtlantic’s June 30 unaudited balance sheet showed about $1.8 billion of loans acquired and $3.5 billion of deposits assumed; the purchase price was preliminary and subject to adjustment.
Risks and contingencies
- Management identified exposure to economic and credit deterioration, interest-rate and funding changes, market disruption, competition, regulatory and accounting changes, credit-rating reductions, and merger integration and execution risks.
- BB&T is pursuing a refund of approximately $892 million paid in 2010 in a tax dispute concerning 2002–2007 foreign tax credits and deductions. A trial was scheduled for March 2013. Management considered its reserve adequate but said it could change materially within the next twelve months.
- Three cases challenge the bank’s historical ordering of debit transactions and seek class-action treatment; no class had been certified and no damages were specified. The filing states that no specific loss or range could then be determined.
- Other exposures include $44.170 billion of commitments to extend, originate, or purchase credit and $5.784 billion of letters of credit and financial guarantees. The company also disclosed mortgage and commercial-loan recourse obligations and FDIC loss-sharing arrangements.
Important facts for investors to verify
- Confirm the issuer and security being analyzed: the filing is for BB&T Corporation, notwithstanding the Truist metadata label.
- Track whether margin and earnings growth persist as lower loan yields, deposit pricing, and the runoff of covered assets affect results.
- Assess credit trends and allowance adequacy, including management’s projected charge-offs and nonperforming-asset improvement.
- Review the effect of trust-preferred redemptions, preferred issuance, and proposed Basel III rules on capital ratios and funding costs.
- Monitor the BankAtlantic purchase accounting and integration, the Crump acquisition contribution, and the outcome of the tax and debit-ordering litigation.