Business context and reporting period
This is BB&T Corporation’s unaudited Form 10-Q for the quarter ended September 30, 2010, with nine-month results through that date. The request identifies Truist Financial Corp., but the filing names BB&T Corporation as registrant; confirm the intended issuer. BB&T operated a regional banking and financial-services business, including community banking, mortgage banking, insurance, lending, wealth management and capital markets. The filing discusses the Colonial Bank acquisition and related FDIC loss-sharing agreements.
Key financial metrics
Amounts are in millions of dollars unless stated otherwise.
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net interest income | 1,314 | 1,237 | 3,988 | 3,521 |
| Provision for credit losses | 770 | 709 | 1,995 | 2,086 |
| Noninterest income | 1,110 | 940 | 2,993 | 2,964 |
| Noninterest expense | 1,408 | 1,320 | 4,249 | 3,570 |
| Net income | 219 | 157 | 637 | 683 |
| Net income available to common shareholders | 210 | 152 | 608 | 544 |
| Diluted earnings per share | $0.30 | $0.23 | $0.87 | $0.88 |
| Net interest margin, taxable-equivalent | 4.09% | 3.68% | 4.03% | 3.61% |
Q3 return on average assets was 0.56% and return on average common equity was 4.91%, versus 0.40% and 3.90% a year earlier. Nine-month returns were 0.53% and 4.84%, respectively, versus 0.60% and 5.09%.
- Balance sheet at September 30: Total assets were $157.2 billion, down 5.1% from December 31, 2009. Loans and leases held for investment were $102.2 billion, down $1.5 billion from year-end; available-for-sale securities were $24.5 billion, down $8.8 billion.
- Funding and debt: Deposits were $106.4 billion, down 7.4% from year-end; short-term borrowings were $5.8 billion, down 28.2%; long-term debt was $22.1 billion, up 3.4%. Noninterest-bearing deposits improved to 19.4% of deposits from 16.5% at year-end.
- Cash flow, nine months: Operating activities provided $2.3 billion, investing activities provided $7.1 billion, and financing activities used $9.6 billion. Cash and cash equivalents declined $195 million to $2.454 billion.
- Credit: The allowance for loan and lease losses was $2.611 billion, or 2.56% of loans held for investment; total allowance for credit losses, including unfunded commitments, was $2.650 billion. Q3 net charge-offs were $873 million, an annualized 3.31% of average loans (3.54% excluding covered loans). Nonperforming assets excluding covered assets were $4.147 billion at quarter-end.
- Capital: Tier 1 and total risk-based capital ratios were 11.7% and 15.7%; leverage was 9.3%. Tangible common equity to tangible assets was 7.0%, a non-GAAP measure. Shareholders’ equity was $16.8 billion.
Material changes versus comparable periods
- Q3 net income rose 39.5% year over year; common income rose 38.2% and diluted EPS increased from $0.23 to $0.30. For the first nine months, net income declined 6.7%, while common income rose 11.8%; 2009 common income included $124 million of preferred-stock dividends and accretion, and diluted EPS was slightly lower in 2010.
- Q3 net interest income increased 6.2%, and margin expanded 41 basis points, reflecting lower deposit costs and higher-yielding acquired Colonial loans. Q3 noninterest income rose 18.1%, primarily on securities gains and mortgage banking; Q3 net securities gains were $239 million versus $31 million.
- Credit costs remained high. Q3 provision increased 8.6% year over year, while net charge-offs nearly doubled. The company said this was partly attributable to accelerated disposition of problem assets, including $432 million of Q3 net charge-offs associated with that strategy.
- Q3 noninterest expense rose 6.7%; nine-month expense increased 19.0%, including higher foreclosed-property costs and Colonial-related expenses. Foreclosed-property expense was $167 million in Q3 and $585 million for nine months.
- Residential mortgage banking income was $184 million in Q3, up from $144 million, but $383 million for nine months, down from $516 million, reflecting weaker production income and lower refinance activity. Residential mortgage servicing rights fell to $585 million from $832 million at year-end after a $327 million adverse valuation change in the first nine months.
Outlook, commentary, risks and unusual items
- Management provided no formal numeric earnings or revenue guidance in the supplied filing text. It expected near-term service-charge revenue pressure from overdraft-policy changes and regulatory reform, while expecting product and service changes to mitigate longer-term effects.
- Management accelerated problem-asset dispositions: it transferred $1.3 billion of nonperforming loans to held-for-sale, liquidated $451 million of problem assets in Q3, and reported nonperforming assets down 4.2% from Q2. It described Q3 as the first quarter since the recession began with no allowance build, as provision was $103 million below net charge-offs.
- The bank sold $10.7 billion of securities and purchased $12.4 billion during its duration-reduction strategy; it recorded $239 million of Q3 net gains. Management said the strategy aimed to increase asset sensitivity and reduce exposure to rising rates.
- The Dodd-Frank Act may raise costs or reduce revenues; implementation and effects were uncertain. BB&T expected to be designated systemically significant and potentially subject to additional regulation. Moody’s had lowered certain ratings after removing systemic-support assumptions and put long-term ratings on review; Fitch placed government-support ratings on negative watch. These rating developments were disclosed after quarter-end.
- Tax matters include an $892 million IRS deficiency relating to foreign tax credits and deductions. BB&T paid the disputed amount and sued for a refund; management believed reserves adequate, but outcome remained uncertain. It received about $379 million of federal tax refunds during the first nine months and recorded a $117 million reserve related to Colonial tax-basis valuation; unrecognized tax benefits were $296 million.
- The FDIC loss-sharing agreements may require a payment by BB&T in 2019 under a contractual formula. The filing also describes mortgage-loan recourse and repurchase exposures, credit commitments, legal proceedings, and valuation uncertainty in certain securities and servicing rights. Management said its foreclosure-process review identified no concerns and that it had not engaged in “robo-signing.”
Important facts for investors to verify
- Confirm whether BB&T Corporation, rather than the company named in the request, is the intended filing subject.
- Assess whether Q3 earnings growth is sustainable without the $239 million securities gain and in light of the $321 million earnings impact management attributed to the problem-asset transfer strategy.
- Track underlying credit quality, especially commercial real estate and acquisition, development and construction exposures, charge-offs, delinquencies, restructurings, and allowance coverage; distinguish covered Colonial assets from other loans.
- Review deposit outflows, funding mix, liquidity, debt costs, and capital effects from regulatory changes and potential rating actions.
- Monitor the IRS refund litigation, Colonial purchase-accounting adjustments and FDIC loss-share estimates, mortgage repurchase/recourse claims, and fair-value assumptions for servicing rights and less-liquid securities.