BB&T Corporation (now Truist Financial) — Q1 2010 Form 10-Q
Reporting period: Three months ended March 31, 2010; balance-sheet comparisons are with December 31, 2009 unless noted. The filing is for BB&T Corporation and its subsidiaries and is unaudited.
Financial results and condition
- Earnings: Net income was $194 million, down 39.0% from $318 million in Q1 2009. Net income available to common shareholders was $188 million; diluted EPS was $0.27 versus $0.48. The declared common dividend was $0.15 per share, down from $0.47.
- Revenue and margin: Net interest income was $1.314 billion, up 14.7%; net interest margin was 3.88%, up 31 basis points. Noninterest income was $844 million, down 18.1%. Combined interest and noninterest income was $2.623 billion versus $2.710 billion in Q1 2009. Lower mortgage banking income and securities gains weighed on noninterest income.
- Credit costs and expenses: Provision for credit losses was $575 million, versus $676 million. Noninterest expense rose 25.4% to $1.341 billion, driven principally by foreclosed-property costs and Colonial-related expenses. Foreclosed-property expense was $178 million versus $36 million.
- Profitability: Annualized return on average assets was 0.48% (0.86% in Q1 2009); return on average common equity was 4.59% (8.29%).
- Cash flow: Operating activities provided $637 million, investing activities provided $453 million, and financing activities used $1.501 billion. Cash and cash equivalents ended the quarter at $2.238 billion, down $411 million from the beginning of the period.
- Balance sheet and funding: Total assets were $163.7 billion; loans and leases were $104.4 billion, down 1.7% from year-end. Deposits totaled $113.7 billion, down 1.1%; client deposits were $104.1 billion, down 2.5%. Long-term debt was $21.4 billion and short-term borrowings were $7.0 billion.
- Capital: Tier 1 and total risk-based capital ratios were 11.7% and 15.9%; Tier 1 common ratio was 8.7%. Shareholders’ equity was $16.5 billion. Management stated capital remained above regulatory well-capitalized standards.
- Asset quality: Nonperforming assets, excluding covered assets, were $4.464 billion, up from $4.227 billion at year-end. Annualized net charge-offs were 1.84% of average loans (1.99% excluding FDIC-covered loans). The allowance for loan and lease losses was $2.714 billion, or 2.65% of loans held for investment.
Material changes and management commentary
- Compared with Q1 2009, net interest income improved with lower deposit costs and higher-yielding Colonial-acquired loans. Management expected margin to continue improving, citing acquired-loan accretion, wider spreads on new loans, and lower deposit costs.
- The Colonial integration was reported to be progressing smoothly and exceeding expectations; remaining system conversions were expected in Q2 2010. Estimated one-time Colonial costs were reduced by $45 million to $140 million; $44 million had been expensed through March 31.
- Mortgage banking income fell to $89 million from $188 million, reflecting lower production amid slower refinancing and changes in mortgage-servicing-rights valuation. Securities results shifted from $150 million net gains in Q1 2009 to a $3 million net loss in Q1 2010.
- Management reported signs of improvement in early-stage consumer delinquencies, but nonperforming assets continued to rise, particularly in real-estate-related lending. Performing restructurings increased to $1.715 billion from $1.070 billion at year-end.
- Following its first quarterly reassessment of Colonial-acquired loan cash flows, BB&T recorded $22 million of additional interest accretion and $19 million of additional provision; after the FDIC receivable effects, the net earnings benefit was less than $1 million.
Outlook, risks, contingencies, and unusual items
- Management expected the securities portfolio to decline as a share of earning assets because it was not reinvesting most portfolio cash flows in the low-rate environment. No formal earnings or full-year numerical guidance is provided in the supplied filing text.
- BB&T received approximately $354 million of federal tax refunds, including interest, during Q1 and expected a further approximately $25 million refund later in 2010. Separately, it paid approximately $892 million in a disputed IRS matter concerning foreign tax credits and deductions for tax years 2002–2007, filed suit for a refund, and said the outcome was uncertain and not expected within twelve months.
- Credit, real estate, interest-rate, funding, integration, regulatory, and tax risks remain important. The filing also warned that proposed financial reform legislation could prompt ratings downgrades; lower ratings could impair liquidity, raise borrowing costs, restrict market access, or trigger contractual consequences.
- Key exposures include $339 million of unrealized losses on securities held in loss positions for at least 12 months, $1.5 billion of foreclosed real estate (excluding FDIC-covered property), and $37.956 billion of commitments to extend, originate, or purchase credit. The Colonial FDIC loss-sharing agreements include a possible BB&T payment to the FDIC in 2019 under specified conditions.
- Subsequent events disclosed: BB&T issued $500 million of 3.95% senior notes due 2016 on April 29, 2010; shareholders approved an increase in authorized common shares to two billion on April 27, 2010.
Most important facts for investors to verify
- Whether worsening nonperforming assets, real-estate credit losses, and foreclosed-property costs continue despite management’s reported improvement in some early-stage delinquencies.
- The sustainability of the improved net interest margin and the contribution, timing, and FDIC offsets associated with accretion on Colonial-acquired loans.
- The ultimate cost and completion of the Colonial integration, including the remaining estimated restructuring charges and system conversions.
- The outcome and financial-statement treatment of the $892 million IRS dispute and any expected refund, as well as the timing of the additional tax refund.
- Capital, liquidity, and borrowing-cost effects if ratings agencies respond negatively to financial reform or other developments.
- Comparability of asset-quality ratios: many covered Colonial loans are treated as performing under acquisition accounting and FDIC loss sharing, so reported ratios may not be directly comparable across periods or with other banks.