BB&T Corporation (10-Q) — First Quarter 2016
Entity and period: The filing is for BB&T Corporation, for the three months ended March 31, 2016; it is not filed under the name Truist Financial Corp. The company name in the request should be verified against the intended filing.
Financial results and position
- Earnings: Net income was $570 million, up from $547 million a year earlier. Net income available to common shareholders was $527 million versus $488 million. Diluted EPS was $0.67, unchanged year over year; common dividends declared were $0.27 per share, compared with $0.24.
- Revenue and margin: FTE total revenue was approximately $2.6 billion, up $240 million year over year. GAAP net interest income was $1.529 billion, versus $1.312 billion. Net interest margin increased to 3.43% from 3.33%. The filing attributes much of revenue and balance-sheet growth to acquisitions completed in 2015.
- Credit costs: Provision for credit losses rose to $184 million from $99 million. Net charge-offs were $154 million, or 0.46% of average loans on an annualized basis, compared with $101 million and 0.34% a year earlier. The current-quarter provision included about $58 million related to energy lending.
- Expenses and returns: Noninterest expense was $1.545 billion, up $123 million. Annualized return on average assets was 1.09%, versus 1.18%; return on average common equity was 8.45%, versus 9.05%.
- Balance sheet and funding: Total assets were $212.4 billion, up from $209.9 billion at year-end 2015. Loans and leases were $135.1 billion, down from $136.0 billion; deposits were $150.5 billion, up from $149.1 billion. Long-term debt declined to $22.8 billion from $23.8 billion; short-term borrowings increased to $4.1 billion from $3.6 billion.
- Cash flow: Operating cash flow was negative $130 million, compared with negative $593 million in Q1 2015. Investing cash flow was negative $1.781 billion and financing cash flow was positive $978 million. Cash and cash equivalents ended the quarter at $2.778 billion, down $933 million during the quarter.
- Capital and liquidity: Common Equity Tier 1 was 10.4%, Tier 1 capital 12.2%, total capital 14.6%, and leverage capital 10.1% at quarter-end; current-quarter regulatory figures were preliminary. The liquidity buffer was 14.5% of assets, and the reported LCR was approximately 135%, above the then-applicable 90% minimum.
Material changes versus comparable periods
- Year-over-year earnings available to common shareholders increased, but diluted EPS was flat, reflecting a larger average share count.
- Net interest margin improved, while credit provision, net charge-offs, and nonperforming loans increased. Nonperforming loans rose to 0.58% of held-for-investment loans from 0.42% at year-end, principally following energy-related commercial loan downgrades.
- Operating expenses increased largely with acquisition-related staffing and other costs. Noninterest income rose modestly, with securities gains and improved FDIC loss-share income partly offset by lower insurance, mortgage banking, and other income.
- Quarter-end equity increased to $28.2 billion from $27.3 billion at year-end, including $451 million of net proceeds from a preferred stock issuance.
Outlook, risks, contingencies, and unusual items
- Acquisitions after quarter-end: On April 1, 2016, BB&T acquired National Penn Bancshares for $1.6 billion in cash and stock; National Penn had $9.6 billion of assets and $6.6 billion of deposits. BB&T also acquired insurance broker Swett & Crawford for $500 million cash. Purchase accounting was not finalized. These events are subsequent to the reporting period.
- Credit and economic risks: The energy portfolio was approximately $1.6 billion, with allocated reserves of 8.5%. The filing identifies deterioration in energy lending as a driver of higher provision and nonperforming loans. Other disclosed risks include economic conditions, interest rates, competition, regulation, cybersecurity, litigation, and acquisition integration.
- Legal and regulatory matters: BB&T was cooperating with a HUD-OIG/Department of Justice investigation concerning FHA lending practices; no claims had been asserted, and the outcome was unknown. The filing cites potential FHA exposure of $25 million to $105 million and an $85 million charge recognized in 2014. Management stated that established legal reserves were considered adequate, while acknowledging unfavorable outcomes could be material.
- FDIC loss sharing: BB&T projected it could owe the FDIC approximately $170 million in 2019 under the aggregate loss calculation. Certain acquired securities also carried FDIC gain-sharing obligations if sold before October 1, 2017; the company said it did not intend to sell them.
- Interest-rate sensitivity: The company’s simulation projected next-12-month net interest income to rise 2.09% in a gradual +200 basis-point scenario and decline 0.85% in a gradual 25-basis-point-down scenario. Results depend on assumptions, including deposit behavior and prepayments; the filing does not provide earnings guidance.
- Unusual items: BB&T recognized $45 million of securities gains in the quarter. The effective tax rate was 30.1%; the filing reports that a tax dispute was effectively concluded after the Supreme Court declined review, with related tax benefits recognized in 2015.
Investor verification priorities
- Confirm the intended issuer: the supplied filing identifies BB&T Corporation, not Truist Financial Corp.
- Assess whether energy-related credit deterioration, charge-offs, and reserve adequacy continue beyond this quarter.
- Review integration costs, purchase accounting, and expected financial effects of the National Penn and Swett & Crawford acquisitions.
- Track the FHA lending investigation and the FDIC loss-sharing obligations, including the projected 2019 payment.
- Check whether reported capital and liquidity measures, including preliminary capital ratios and LCR, remain above regulatory and internal targets.