TRUIST FINANCIAL CORP quarterly report, Q1 FY2015

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BB&T Corporation — Q1 2015 Form 10-Q

Entity note: The supplied filing is for BB&T Corporation, not Truist Financial Corp. It covers the quarter ended March 31, 2015; financial statements are unaudited. Dollar amounts are in millions unless stated otherwise.

Business context and reporting period

BB&T operated through its bank and nonbank subsidiaries. Its businesses included community banking, mortgage banking, dealer and specialized lending, insurance, and financial services. During the quarter, it acquired 41 Texas branches from Citigroup, adding about $1.9 billion in deposits.

Financial results and position

  • Revenue and earnings: Net interest income was $1,312, down 2.6% on a fully taxable-equivalent basis from Q1 2014. Noninterest income rose 7.6% to $997; management reported total revenue of $2.3 billion, up $34 million. Net income was $547, compared with $573; income available to common shareholders was $488 versus $496. Diluted EPS was $0.67 versus $0.68.
  • Margins and returns: Net interest margin declined to 3.33% from 3.52%. Annualized returns on average assets, risk-weighted assets, and common equity were 1.18%, 1.48%, and 9.05%, respectively, versus 1.27%, 1.69%, and 9.77%.
  • Credit costs and asset quality: Provision for credit losses rose to $99 from $60, largely reflecting a prior-year reserve release and a higher commercial-and-industrial provision. Net charge-offs fell to $101 from $159 (0.34% versus 0.56% of average loans). Nonperforming assets were $765, down from $782 at year-end; the NPA ratio was 0.64%. The allowance for loan and lease losses was $1,464, or 1.22% of loans held for investment.
  • Expenses: Noninterest expense increased to $1,422 from $1,385, including personnel expense of $830 versus $782. Income before taxes was $788, and the effective tax rate was 30.6% versus 30.9%.
  • Balance sheet: Total assets were $189.2 billion, up from $186.8 billion at year-end. Loans and leases were $119.9 billion, essentially unchanged; deposits were $131.2 billion versus $129.0 billion. Shareholders’ equity was $24.7 billion versus $24.4 billion.
  • Debt and liquidity: Short-term borrowings were $3.1 billion, down from $3.7 billion; long-term debt was $23.4 billion, up from $23.3 billion. The liquid-asset buffer equaled 13.7% of total assets. Management estimated a 130% Liquidity Coverage Ratio, above the then-applicable 90% minimum, and reported approximately $69.5 billion of secured borrowing capacity.
  • Cash flow: Operating activities used $583, compared with $632 provided in Q1 2014; investing activities provided $783, including $1.9 billion net cash from business combinations; financing activities used $526. Cash and cash equivalents ended at $2.0 billion, down $326 during the quarter.
  • Capital and shareholder returns: Basel III Common Equity Tier 1 was 10.5%; total capital was 14.5% and leverage capital 10.1%. The estimated fully phased-in CET1 ratio was 10.3%. The quarterly dividend declared was $0.24 per share.

Material changes versus comparable periods

  • Common earnings and diluted EPS declined year over year despite higher noninterest income; lower net interest income, increased provision, and higher expenses contributed.
  • Mortgage banking income rose to $110 from $74, and insurance income reached a record $440, up from $427. Management attributed revenue growth primarily to these businesses.
  • Average loan yields declined 35 basis points to 4.23%; NIM fell 19 basis points. Management cited lower yields on new loans and runoff of higher-yielding FDIC-acquired assets, partly offset by lower funding costs.
  • Asset-quality indicators improved year over year: NPLs were $599 versus $903 and NPAs were $765 versus $1,084 at March 31, 2014. Provision nevertheless increased, in part because Q1 2014 included reserve releases.
  • Noninterest expense increased $37, chiefly from higher personnel and other expense; personnel costs included higher pension expense, incentives, and employee health costs, partly offset by about 1,600 fewer full-time employees.
  • Deposits grew from year-end, with noninterest-bearing deposits increasing and time deposits declining. The Texas branch acquisition contributed to deposit growth.

Outlook, commentary, risks, and unusual items

  • Capital actions: The Federal Reserve accepted BB&T’s capital plan without objection. Proposed actions included increasing the quarterly dividend from $0.24 to $0.27 and authorizing up to $820 million of cumulative share repurchases beginning in Q3 2015. These were proposed future actions, not completed repurchases.
  • Transactions: BB&T had pending agreements to acquire Susquehanna Bancshares and The Bank of Kentucky Financial Corporation, subject to regulatory approval. It also agreed to increase its AmRisc partnership interest and sell American Coastal Insurance Company; management expected a $30–$40 million loss on that sale from goodwill allocation.
  • Interest-rate exposure: The company’s simulation projected next-12-month net interest income increasing 1.90% under a gradual 100-basis-point rise and 2.55% under a 200-basis-point rise; a 25-basis-point decline was projected to reduce it 0.18%. Results depend on assumptions, including deposit behavior and repricing.
  • Legal and tax contingency: BB&T was appealing an IRS-related tax case involving approximately $892 million of taxes, penalties, and interest paid for 2002–2007; the exposure was fully reserved. Management said a benefit of up to approximately $700 million could result from changes in unrecognized tax benefits, penalties, and interest, but timing and outcome remained uncertain.
  • Other notable items: Q1 included $13 million of merger-related and restructuring charges. The residential mortgage servicing-rights fair value fell from $844 to $764, primarily due to prepayment-speed assumptions; hedging instruments partly offset income-statement effects. Certain Colonial-related FDIC loss-sharing coverage had ended, while specified single-family coverage continued through August 2019.
  • Principal risks: Management cited economic and credit conditions, interest rates and NIM, competition, regulatory and accounting changes, litigation and tax matters, cybersecurity, disasters, acquisition integration and realization of expected benefits, and implementation of the ERP system. The filing reported no material change to previously disclosed risk factors.
  • Guidance: The filing provides no clear formal earnings or revenue forecast. Management’s forward-looking statements are subject to significant risks and assumptions.

Investor verification priorities

  1. Confirm the intended issuer: the filing identifies BB&T Corporation, whereas the request names Truist Financial Corp.
  2. Review the bridge from higher fee income to lower common earnings, including NIM, credit provision, personnel costs, and any comparability adjustments from affordable-housing accounting adoption.
  3. Track credit quality and reserve adequacy, especially C&I trends, past-due and nonperforming loans, and the distinction between FDIC-acquired and other loans.
  4. Verify completion, regulatory approval, funding, and integration effects of the announced acquisitions and insurance transactions, including the expected American Coastal sale loss.
  5. Monitor execution of the capital plan, including the proposed dividend increase and buyback authorization, alongside Basel III capital and liquidity requirements.
  6. Follow the tax appeal and any changes to the fully reserved exposure, as well as FDIC loss-sharing settlements and related liabilities.
  7. Assess the quality and sustainability of cash generation: quarterly operating cash flow was negative, with substantial changes in loans held for sale and other operating assets.