Business context and reporting period
This is BB&T Corporation’s unaudited Form 10-Q for the quarter ended September 30, 2013, with comparisons to the third quarter and first nine months of 2012. The filing identifies the registrant as BB&T Corporation, not Truist Financial Corp.; investors should confirm the entity and filing match the intended research subject.
BB&T operated through its principal bank subsidiary, Branch Bank, and nonbank subsidiaries. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial results and position
| Metric | Q3 2013 | Comparable period / change |
|---|---|---|
| Total revenue | Approximately $2.4 billion | Down $124 million year over year |
| Net interest income | $1.417 billion GAAP; $1.454 billion FTE | GAAP down $66 million; FTE down 4.3% year over year |
| Net interest margin | 3.68% FTE | Down 26 basis points year over year |
| Net income / common earnings | $309 million / $268 million | Common earnings down 42.9% year over year |
| Diluted EPS | $0.37 | $0.66 in Q3 2012; $0.70 excluding the Q3 tax adjustment |
| Credit provision | $92 million | $244 million in Q3 2012 |
| Noninterest income / expense | $905 million / $1.471 billion | Income down $58 million; expense down $58 million year over year |
| Profitability | ROAA 0.68%; return on average common equity 5.44% | Adjusted for the Q3 tax item: 1.20% and 10.22%, respectively |
For the first nine months, net income was $1.141 billion and diluted EPS was $1.44, versus $1.479 billion and $1.99 in 2012. Excluding $516 million of tax-position adjustments, BB&T reported adjusted diluted EPS of $2.16 and adjusted ROAA of 1.22%.
At September 30, total assets were $181.1 billion, loans and leases net of allowance were $113.8 billion, deposits were $127.5 billion, total shareholders’ equity was $22.1 billion, and the allowance for loan and lease losses was $1.838 billion. Compared with December 31, 2012, total deposits declined $5.6 billion, while total assets declined $2.8 billion. Short-term borrowings rose to $4.8 billion from $2.9 billion, and long-term debt rose to $20.4 billion from $19.1 billion.
For the nine months, operating cash flow was $1.750 billion, investing cash flow was negative $17 million, and financing cash flow was negative $2.303 billion. Cash and cash equivalents ended at $2.469 billion, down $570 million from the start of the period.
Capital ratios at quarter-end were 11.3% Tier 1 risk-based, 13.9% total risk-based, and 9.0% leverage. The company’s preliminary Basel III common equity Tier 1 ratio was 9.0%. Its liquid-asset buffer was 9.5% of assets, above the stated 5% policy minimum; management reported approximately $54 billion of secured borrowing capacity. These are consolidated/company disclosures and do not replace review of bank-level regulatory capital and liquidity figures.
Material changes versus prior periods
- Q3 common earnings fell sharply, principally because of a $235 million income-tax adjustment tied to an adverse court ruling and other tax matters. The first-nine-month tax adjustments totaled $516 million, including a $281 million first-quarter charge.
- FTE NIM declined from 3.94% to 3.68% year over year, primarily reflecting lower yields on new loans and securities and runoff of covered loans; lower funding costs partly offset the pressure.
- Credit quality improved: Q3 net charge-offs were $144 million, or 0.48% of average loans and leases, versus $305 million and 1.05% a year earlier. Nonperforming assets excluding covered assets declined to $1.162 billion from $1.536 billion at year-end 2012.
- Q3 noninterest income decreased, led by a $94 million decline in mortgage banking income. First-nine-month noninterest income increased 5.4%, supported by insurance income and securities gains, partly offset by weaker mortgage banking income.
- Q3 noninterest expense declined 3.8%, including lower foreclosed-property and merger-related costs. First-nine-month expense increased 0.9%, with higher personnel, occupancy and professional-services costs partly offset by lower foreclosed-property expense.
- Shareholders’ equity increased $871 million from year-end, including $487 million of proceeds from a preferred-stock issuance; accumulated other comprehensive loss widened by $301 million, primarily reflecting lower unrealized AFS-security gains.
Outlook, commentary and risks
- Management expected Q4 2013 NIM to decrease 5–10 basis points, citing lower rates on new earning assets, covered-loan runoff, tighter retail credit spreads and the planned sale of a lending subsidiary; lower funding costs and favorable mix were expected to partly offset these effects.
- Management expected modest Q4 average loan growth excluding the lending-subsidiary sale, continued growth in noninterest-bearing deposits, and deposit costs below 0.30% by year-end. It expected net charge-offs near the lower end of its 55–75 basis-point normalized range, subject to normal consumer seasonality, and a modest pace of NPA improvement absent significant economic deterioration.
- BB&T recorded a $235 million Q3 reserve adjustment for uncertain tax positions after an adverse ruling in its dispute over a 2002 financing transaction. The company said it was considering procedural options, including appeal, and that a benefit of up to $750 million from changes in unrecognized tax benefits was reasonably possible within 12 months; timing and outcome remained uncertain.
- On October 11, 2013, BB&T sold a consumer lending subsidiary with approximately $500 million in loans. It estimated a $25–30 million gain, subject to closing adjustments, and conversion costs of up to $5 million. Branch Bank issued $650 million of floating-rate senior debt on October 28, 2013.
- Risks include interest-rate and margin sensitivity, credit and economic deterioration, regulatory and tax uncertainty, competition, market disruption, cyber-security threats, and merger integration. The filing added ERP implementation risk: the system was expected to be partially operational in 2014 and fully operational in 2015, with possible cost overruns, operational disruption, reporting delays, regulatory sanctions or impairment charges if implementation fails.
- The Federal Reserve did not object to BB&T’s revised capital plan in August 2013. Basel III requirements were scheduled to begin for BB&T in 2015, with the minimum common equity Tier 1 ratio including the conservation buffer increasing to 7.0% by 2019.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. It believed current liquidity sources were adequate. Legal proceedings were described as ordinary-course matters; management said established reserves were adequate, while acknowledging an unfavorable outcome could be material.
Important facts for investors to verify
- Confirm the filing’s registrant and reporting entity: the supplied filing is for BB&T Corporation, although the request metadata names Truist Financial Corp.
- Review the tax litigation, the $516 million year-to-date tax charge, the status of any appeal or other procedural response, and whether the potential tax benefit is realized.
- Assess underlying earnings using both reported and adjusted figures, including the recurring outlook for NIM, mortgage banking, insurance and expenses; adjusted results are non-GAAP.
- Verify credit trends, allowance adequacy, charge-offs, TDRs and NPA definitions, noting that some disclosed asset-quality measures exclude covered or government-guaranteed loans.
- Monitor deposit outflows and mix, borrowing growth, liquidity-buffer levels, capital ratios and the effect of Basel III rules.
- Track the lending-subsidiary sale proceeds and costs, ERP implementation milestones and costs, and any material litigation or regulatory developments.