BB&T Corporation Form 10-Q Summary — First Quarter 2012
Entity note: The supplied filing is for BB&T Corporation, not Truist Financial Corp. It reports the unaudited quarter ended March 31, 2012, with comparisons to the quarter ended March 31, 2011, and balance-sheet comparisons to December 31, 2011.
Business context and reporting period
BB&T was a North Carolina financial holding company operating banking, lending, mortgage, insurance, brokerage, wealth-management and related businesses across a multistate footprint. Its six reportable segments included Community Banking, Residential Mortgage Banking, Dealer Financial Services, Specialized Lending, Insurance Services and Financial Services.
Financial performance and position
- Earnings: Net income available to common shareholders was $431 million, up 91.6% from $225 million. Diluted EPS was $0.61, versus $0.32. Return on average assets was 1.03% and return on average common equity was 9.75%.
- Revenue and margins: Tax-equivalent total revenue was approximately $2.3 billion, up $309 million year over year. GAAP net interest income was $1.436 billion; noninterest income was $871 million. The tax-equivalent net interest margin was 3.93%, down 8 basis points year over year.
- Revenue drivers: Mortgage banking income rose $121 million to $216 million, reflecting higher mortgage loan sales and margins and a gain in mortgage servicing rights valuation. Insurance income increased $21 million to $271 million. Checkcard fees fell $29 million, primarily following implementation of the Durbin amendment.
- Credit costs and asset quality: Provision for credit losses was $288 million, down from $340 million. Net charge-offs were $352 million, or 1.28% of average loans and leases, compared with $404 million, or 1.56%, a year earlier. Nonperforming assets excluding covered assets declined 7.9% from year-end to $2.256 billion. The allowance for loan and lease losses was $2.181 billion, or 2.02% of loans held for investment.
- Expenses and taxes: Noninterest expense was $1.385 billion, slightly above $1.372 billion. Income tax expense was $189 million; the effective tax rate was 29.8%, compared with 18.5%.
- Cash flow: Operating activities provided $1.873 billion; investing activities used $2.255 billion; financing activities provided $90 million. Cash and cash equivalents decreased $292 million to $4.052 billion.
- Balance sheet and funding: Total assets were $174.752 billion. Loans and leases held for investment were $108.161 billion before allowance; deposits were $124.157 billion. Long-term debt was $22.768 billion, up $965 million from year-end. Shareholders’ equity was $17.882 billion.
- Capital and dividends: Tier 1, total risk-based and leverage capital ratios were 12.7%, 16.2% and 9.1%, respectively. The Tier 1 common ratio was 10.0%. The board increased the quarterly dividend 25% to $0.20 per share.
Material changes versus comparable periods
- Higher net interest income and noninterest income, together with lower credit costs, drove the increase in earnings. Net interest income benefited from growth in earning assets and lower funding costs, although margin declined amid covered-loan runoff and lower yields on new loans.
- Average loans held for investment grew 4.7% year over year; average deposits grew 18.0%. Average noninterest-bearing deposits increased to 21.0% of average deposits from 19.9%.
- Nonperforming assets excluding covered assets fell from $3.863 billion at March 31, 2011 to $2.256 billion at March 31, 2012; management reported eight consecutive quarterly declines.
- Noninterest expense remained nearly level overall, as higher personnel and other costs were largely offset by lower foreclosed-property and regulatory expenses.
Outlook, commentary, risks and unusual items
- Management outlook: BB&T expected second-quarter 2012 net interest margin of 3.80%–3.90%, net charge-offs near 1.25%, average loans held for investment growth of 5%–7% annualized excluding BankAtlantic, and a mid-20% effective tax rate for the rest of 2012. Management expected nonperforming assets to decline 5%–10% in the second quarter, assuming no significant economic downturn.
- Costs and acquisitions: Merger-related and restructuring charges were expected to be approximately $40–$50 million in the second quarter, principally related to Crump and BankAtlantic. BB&T completed the Crump insurance businesses acquisition on April 2, 2012 for $570 million in cash; the filing said it was expected to add about $300 million in annual Insurance Services revenue. The BankAtlantic acquisition remained pending, subject to regulatory approval, with closing expected in the second quarter.
- Tax dispute: BB&T was seeking a refund of approximately $892 million paid in 2010 in connection with an IRS dispute over foreign tax credits and deductions. Trial was scheduled for March 2013. Management considered its reserve adequate but noted it could change materially within twelve months.
- Other risks and contingencies: The filing discusses ordinary-course litigation, including three proposed class actions concerning the ordering of debit transactions; no class had been certified and a potential loss could not be estimated. It also reports $42.827 billion in commitments to extend, originate or purchase credit, $5.939 billion in letters of credit and financial guarantees, and exposures related to mortgage-loan recourse, affordable-housing investments and FDIC loss-sharing assets.
- Market and regulatory risks: Management identified economic weakness, credit deterioration, interest-rate changes, market disruption, competition, regulatory and accounting changes, tax positions and integration challenges as factors that could affect results. It cautioned that forward-looking statements were subject to risks and not guarantees.
- Unusual items: Affordable-housing investment write-downs and related tax expense affected results; mortgage servicing rights valuation and related hedging contributed materially to mortgage banking income. Management reported no material changes to internal control over financial reporting and concluded disclosure controls were effective.
Important facts for investors to verify
- Confirm the issuer and reporting entity: this source is BB&T Corporation, notwithstanding the request’s Truist Financial Corp. label.
- Review the quality and repeatability of mortgage banking gains, mortgage servicing rights valuations and related derivative offsets.
- Track credit trends, allowance adequacy and the distinction between covered and non-covered assets in reported asset-quality measures.
- Monitor the IRS refund litigation, proposed debit-ordering class actions, mortgage recourse exposures and affordable-housing commitments.
- Check the outcome, timing, financing and integration costs of the BankAtlantic and Crump transactions, and the expected second-quarter margin and credit metrics.