OREANDA-NEWS. BB&T Corporation (NYSE: BBT) today reported quarterly earnings for the second quarter of 2016. Net income available to common shareholders was $541 million, up 19.2% from the second quarter of 2015. Earnings per diluted common share were $0.66 for the second quarter of 2016. Excluding merger-related and restructuring charges of $58 million, net of tax, and a tax benefit related to specific tax-advantaged assets of $13 million, net income available to common shareholders was $586 million, or $0.71 per diluted share.

Net income available to common shareholders was $527 million ($0.67 per diluted share) for the first quarter of 2016 and $454 million ($0.62 per diluted share) for the second quarter of 2015.

"We are pleased to report record revenues and total assets for the second quarter," said Chairman and Chief Executive Officer Kelly S. King. "Our strategic acquisitions and strong organic growth have allowed us to expand our footprint and achieve record results. We look forward to further benefits from our recent transactions as we capture efficiencies and grow in these new markets.

"Total FTE revenues were $2.8 billion, up $420 million compared to the second quarter of 2015," said King. "While we remain well-positioned for rising interest rates, our diversified businesses allow us to maintain strong profitability even in a challenging environment.

"We were also pleased to receive the Federal Reserve's non-objection to our capital plan that includes a seven percent dividend increase and a share repurchase program," said King. "This will allow us to continue to provide one of the strongest dividend payouts in the industry.

"As previously announced, we completed the acquisitions of National Penn and Swett & Crawford on April 1st," continued King. "The National Penn systems conversion was completed in mid-July, and both of these acquisitions contributed to our strong second quarter results."

Second Quarter 2016 Performance Highlights

  • Taxable equivalent revenues were $2.8 billion for the second quarter, up $203 million from the first quarter of 2016
    • Net interest income was up $89 million
    • Net interest margin was 3.41%, down two basis points
    • Adjusted fee income ratio was 42.8%, compared to 40.6% for the prior quarter
  • Noninterest expense was $1.8 billion, up $252 million compared to the first quarter
    • Personnel expense increased $124 million partially due to the acquisitions, production-based incentives and employee benefits
    • Merger-related and restructuring charges were $69 million higher due to the acquisitions and certain restructuring activities
    • Adjusted efficiency ratio was 59.3%, compared to 58.3% in the prior quarter
  • Average loans and leases held for investment were $141.1 billion compared to $134.4 billion for the first quarter of 2016
    • National Penn added $5.9 billion in average loans
    • Excluding National Penn, average loans and leases increased $860 million, or 2.6% annualized:
      • Average commercial and industrial loans increased $1.1 billion, or 9.4% annualized
      • Average other lending subsidiaries loans increased $522 million, or 15.6% annualized
      • Average sales finance loans declined $533 million and residential mortgage loans declined $360 million
  • Average deposits were $160.3 billion compared to $149.9 billion for the prior quarter
    • National Penn added $6.6 billion in average deposits
    • Excluding National Penn, average deposits increased $3.9 billion, or 10.5% annualized:
      • Average noninterest-bearing deposits increased $1.4 billion, or 12.1% annualized
      • Average interest checking deposits increased $1.0 billion, or 15.8% annualized
    • Average interest-bearing deposit costs were 0.23%, down two basis points
    • Deposit mix remained strong, with average noninterest-bearing deposits representing 30.4% of total deposits, compared to 30.8% in the prior quarter
  • Asset quality remained strong
    • Net charge-offs as a percentage of average loans and leases were 0.28% annualized
    • Loans 90 days or more past due and still accruing were 0.43% of loans held for investment, compared to 0.45% in the prior quarter
    • Loans 30-89 days past due and still accruing were 0.64% of loans held for investment, compared to 0.61% in the prior quarter
    • The allowance for loan and lease losses was 1.06% of loans held for investment, compared to 1.10% in the prior quarter
    • Nonperforming assets decreased $17 million driven by reductions in foreclosed properties
    • The allowance for loan loss coverage ratio was 1.90 times nonperforming loans held for investment, versus 1.89 times in the prior quarter
  • Capital levels remained strong across the board
    • Common equity tier 1 to risk-weighted assets was 10.0%, or 9.8% on a fully phased-in basis
    • Tier 1 risk-based capital was 11.7%
    • Total capital was 13.9%
    • Leverage capital was 9.6%
    • Tangible common equity to tangible assets was 7.6%

EARNINGS HIGHLIGHTS

  

(dollars in millions, except per share data)

                    

Change 2Q16 vs.

  
   

2Q16

    

1Q16

    

2Q15

    

1Q16

    

2Q15

  

Net income available to common shareholders

  

$

541

    

$

527

    

$

454

    

$

14

    

$

87

  

Diluted earnings per common share

  

0.66

    

0.67

    

0.62

    

(0.01)

    

0.04

  
                               

Net interest income - taxable equivalent

  

$

1,657

    

$

1,568

    

$

1,348

    

$

89

    

$

309

  

Noninterest income

  

1,130

    

1,016

    

1,019

    

114

    

111

  

Total revenue

  

$

2,787

    

$

2,584

    

$

2,367

    

$

203

    

$

420

  
                               

Return on average assets (%)

  

1.06

    

1.09

    

1.06

    

(0.03)

    

—

  

Return on average risk-weighted assets (%)

  

1.38

    

1.37

    

1.32

    

0.01

    

0.06

  

Return on average common shareholders' equity (%)

  

8.21

    

8.45

    

8.20

    

(0.24)

    

0.01

  

Return on average tangible common shareholders' equity (1) (%)

  

14.33

    

13.87

    

12.76

    

0.46

    

1.57

  

Net interest margin - taxable equivalent (%)

  

3.41

    

3.43

    

3.27

    

(0.02)

    

0.14

  

Adjusted efficiency ratio (1) (%)

  

59.3

    

58.3

    

59.2

    

1.0

    

0.1

  
                               

(1)

Excludes certain items as detailed in the non-GAAP reconciliations in the Quarterly Performance Summary.

Second Quarter 2016 compared to First Quarter 2016

Total revenues were $2.8 billion for the second quarter of 2016, an increase of $203 million compared to the prior quarter, which reflects an increase of $89 million in taxable-equivalent net interest income, while noninterest income was up $114 million, primarily due to the acquisitions.

The net interest margin was 3.41% for the second quarter, down two basis points compared to the prior quarter. Average earning assets increased $11.2 billion, which primarily reflects a $3.9 billion increase in average securities and a $7.5 billion increase in average loans, driven by the acquisition of National Penn. Average interest-bearing liabilities increased $8.4 billion, which primarily reflects a $7.9 billion increase in interest-bearing deposits primarily due to the National Penn acquisition as well as a $365 million increase in long-term debt due to $3.0 billion of new debt issuances, partially offset by normal maturities and paydowns.

The annualized yield on the total loan portfolio for the second quarter was 4.31%, down four basis points compared to the prior quarter due to sustained low interest rates. The annualized fully taxable-equivalent yield on the average securities portfolio for the second quarter was 2.47%, up seven basis points compared to the prior quarter, primarily due to securities duration adjustments in the second quarter of 2016.

The average annualized cost of interest-bearing deposits was 0.23%, down two basis points compared to the prior quarter. The average annualized rate paid on long-term debt was 2.10%, down nine basis points compared to the prior quarter primarily due to favorable rates on new issuances compared to higher rates on recent maturities.

Excluding acquired from FDIC and purchased credit impaired ("PCI") loans, the provision for credit losses was $109 million and net charge-offs were $97 million for the second quarter, compared to $182 million and $154 million, respectively, for the prior quarter. The prior quarter included $30 million of charge-offs and approximately $28 million of provision in excess of charge-offs related to the energy lending portfolio.

Noninterest income of $1.1 billion was up $114 million compared to the prior quarter as higher other income, insurance income and mortgage banking income were partially offset by declines in securities gains.

Noninterest expense was $1.8 billion for the second quarter, up $252 million compared to the prior quarter. Personnel expense and merger-related and restructuring charges were higher following the acquisitions and restructuring activities, while other expense was up due to operating charge-offs and other smaller increases.

The provision for income taxes was $252 million for the second quarter, compared to $246 million for the prior quarter. This includes the previously mentioned $13 million tax benefit related to specific tax-advantaged assets. The effective tax rate for the second quarter was 30.0%, compared to 30.1% for the prior quarter.

Second Quarter 2016 compared to Second Quarter 2015

Total revenues were $2.8 billion for the second quarter of 2016, an increase of $420 million compared to the earlier quarter. This reflects an increase of $309 million in taxable-equivalent net interest income, while noninterest income was up $111 million. These increases reflect the acquisitions during the past year.

Net interest margin was 3.41%, up 14 basis points compared to the earlier quarter. Average earning assets increased $29.4 billion, while average interest-bearing liabilities increased $21.7 billion, both of which were primarily driven by acquisition activity. The annualized yield on the total loan portfolio for the second quarter was 4.31%, up 13 basis points compared to the earlier quarter, which primarily reflects the impact of acquisitions. The annualized fully taxable-equivalent yield on the average securities portfolio for the second quarter was 2.47%, up six basis points compared to the earlier period. This increase is primarily due to securities duration adjustments in the second quarter of 2016.

The average annualized cost of interest-bearing deposits was 0.23%, down one basis point compared to the earlier quarter. The average annualized rate paid on long-term debt was 2.10%, down four basis points compared to the earlier quarter due to favorable rates on new issuances and the extinguishment of higher cost FHLB advances in the earlier quarter.

Excluding acquired from FDIC and PCI loans, the provision for credit losses was $109 million, compared to $97 million in the earlier quarter. Net charge-offs for the second quarter of 2016, excluding loans acquired from the FDIC and PCI, totaled $97 million, compared to $98 million for the earlier quarter.

Noninterest income was $1.1 billion, up $111 million from the earlier quarter. Other income increased $49 million as the prior period included the $26 million loss on sale of American Coastal. Insurance income was up $43 million, primarily due to acquisitions.

Noninterest expense for the second quarter of 2016 was $1.8 billion, up $144 million compared to the earlier quarter. This increase reflects higher expense in a number of categories primarily resulting from acquisition activity and current quarter restructuring activities, partially offset by a $172 million loss on early extinguishment of debt recorded in the earlier quarter.

The provision for income taxes was $252 million for the second quarter of 2016, compared to $80 million for the earlier quarter. This produced an effective tax rate for the second quarter of 2016 of 30.0%, compared to 13.8% for the earlier quarter. This reflects a $107 million tax benefit recorded during the second quarter of 2015 in connection with a U.S. Court of Appeals ruling related to previously disallowed deductions in connection with a financing transaction.

NONINTEREST INCOME

  

(dollars in millions)

                    

% Change 2Q16 vs.

  
   

2Q16

    

1Q16

    

2Q15

    

1Q16

    

2Q15

  
                     

(annualized)

        

Insurance income

  

$

465

    

$

419

    

$

422

    

44.2

    

10.2

  

Service charges on deposits

  

166

    

154

    

154

    

31.3

    

7.8

  

Mortgage banking income

  

111

    

91

    

130

    

88.4

    

(14.6)

  

Investment banking and brokerage fees and commissions

  

102

    

97

    

108

    

20.7

    

(5.6)

  

Trust and investment advisory revenues

  

67

    

62

    

57

    

32.4

    

17.5

  

Bankcard fees and merchant discounts

  

60

    

56

    

55

    

28.7

    

9.1

  

Checkcard fees

  

50

    

45

    

43

    

44.7

    

16.3

  

Operating lease income

  

35

    

34

    

30

    

11.8

    

16.7

  

Income from bank-owned life insurance

  

31

    

31

    

27

    

—

    

14.8

  

FDIC loss share income, net

  

(64)

    

(60)

    

(64)

    

26.8

    

—

  

Securities gains (losses), net

  

—

    

45

    

(1)

    

NM

    

(100.0)

  

Other income

  

107

    

42

    

58

    

NM

    

84.5

  

Total noninterest income

  

$

1,130

    

$

1,016

    

$

1,019

    

45.1

    

10.9

  
                     

NM - not meaningful.

                    

Second Quarter 2016 compared to First Quarter 2016

Noninterest income was $1.1 billion for the second quarter, up $114 million compared to the prior quarter as higher other income, insurance income and mortgage banking income were partially offset by declines in securities gains.

Insurance income increased $46 million driven by $57 million in revenues attributable to the Swett & Crawford acquisition, $34 million seasonal increase in property and casualty commissions and a $13 million increase in life and certain other insurance revenues. These increases were partially offset by a $36 million seasonal decline in employee benefit commissions and a $23 million decline at AmRisc, primarily due to lower bonus commissions.

Other income increased $65 million, primarily due to a $55 million increase in income related to assets for certain post-employment benefits, which is offset in personnel expense. Mortgage banking income increased $20 million primarily due to increased saleable residential loan volume and a seasonal increase in commercial mortgage fee income. Service charges on deposits increased $12 million and all other fee-based businesses increased a combined $20 million primarily resulting from higher volumes, partially due to acquisitions. The prior quarter included $45 million of securities gains, versus none in the current period.

Second Quarter 2016 compared to Second Quarter 2015

Noninterest income for the second quarter of 2016 was up $111 million compared to the earlier quarter. This increase was driven by higher other income, insurance income, service charges on deposits and trust and investment advisory revenues, partially offset by lower mortgage banking income.

Insurance income increased $43 million, primarily the result of the Swett & Crawford acquisition partially offset by the sale of American Coastal in the earlier quarter. Service charges on deposits increased $12 million, while trust and investment advisory revenues increased $10 million, both of which were largely the result of acquisition-related volumes.

Other income increased $49 million primarily due to the $26 million loss on sale of American Coastal recorded in the earlier period as well as $18 million of higher income related to assets for certain post-employment benefits (which is offset in personnel expense) during the current period.

Mortgage banking income declined $19 million, driven by net mortgage servicing rights valuation adjustments.

NONINTEREST EXPENSE

  

(dollars in millions)

                    

% Change 2Q16 vs.

  
   

2Q16

    

1Q16

    

2Q15

    

1Q16

    

2Q15

  
                     

(annualized)

        

Personnel expense

  

$

1,039

    

$

915

    

$

864

    

54.5

    

20.3

  

Occupancy and equipment expense

  

194

    

191

    

166

    

6.3

    

16.9

  

Software expense

  

53

    

51

    

46

    

15.8

    

15.2

  

Loan-related expense

  

36

    

32

    

37

    

50.3

    

(2.7)

  

Outside IT services

  

44

    

41

    

29

    

29.4

    

51.7

  

Professional services

  

26

    

22

    

35

    

73.1

    

(25.7)

  

Amortization of intangibles

  

42

    

32

    

23

    

125.7

    

82.6

  

Regulatory charges

  

32

    

30

    

25

    

26.8

    

28.0

  

Foreclosed property expense

  

8

    

11

    

14

    

(109.7)

    

(42.9)

  

Merger-related and restructuring charges, net

  

92

    

23

    

25

    

NM

    

NM

  

Loss (gain) on early extinguishment of debt

  

—

    

(1)

    

172

    

NM

    

(100.0)

  

Other expense

  

231

    

198

    

217

    

67.0

    

6.5

  

Total noninterest expense

  

$

1,797

    

$

1,545

    

$

1,653

    

65.6

    

8.7

  
                     

NM - not meaningful.

                    

Second Quarter 2016 compared to First Quarter 2016

Noninterest expense was $1.8 billion for the second quarter, up $252 million compared to the prior quarter. This change was driven by higher personnel expense, merger-related and restructuring charges, and amortization of intangibles, all of which were primarily the result of acquisitions as well as higher other expense.

Personnel expense increased $124 million, primarily driven by an increase in salary expense of $44 million, which reflects an increase in full-time equivalent employees of 1,896 following recent acquisition activity. The higher personnel expense also includes a $40 million increase in certain post-employment benefits expense, which is offset in other income. Additionally, incentives increased $36 million, which is primarily due to the Swett and Crawford acquisition and higher overall volume.

Merger-related and restructuring charges increased $69 million, primarily the result of the second quarter acquisitions as well as $29 million in restructuring charges related to severance and real estate initiated during the quarter.

Other expense increased $33 million primarily due to operating charge-offs, charitable contributions, travel expenses, certain checkcard expenses and taxes and licenses.

Second Quarter 2016 compared to Second Quarter 2015

Noninterest expense for the second quarter of 2016 was up $144 million compared to the earlier quarter. This increase reflects higher expense in a number of categories primarily resulting from acquisition activity, as well as an increase in other expense.

Personnel expense increased $175 million, driven by a $94 million increase in salaries, which reflects an increase in full time equivalent employees of 5,046 primarily resulting from acquisitions. Personnel expense also reflects a $31 million increase in incentives due to improved performance relative to target measures and the Swett and Crawford acquisition. Additionally, expense related to certain post-employment benefits expense (offset in other income) was higher $18 million, and pension expense increased $13 million primarily due to changes in actuarial assumptions.

Occupancy and equipment expense, amortization of intangibles and merger-related and restructuring charges increased $28 million, $19 million and $67 million, respectively, as a result of acquisition activity. Merger-related and restructuring charges also included the $29 million in previously described restructuring activities. Outside IT services increased $15 million primarily due to various systems-related initiatives.

Other expense increased $14 million primarily due to higher checkcard expense and higher depreciation of property held under operating leases.

LOANS AND LEASES - average balances

  

(dollars in millions)

                    

Change Due To

  
   

2Q16

    

1Q16

    

Change

    

NPBC

    

Organic

  
                               

Commercial and industrial

  

$

51,646

    

$

48,013

    

$

3,633

    

$

2,505

    

$

1,128

  

CRE-income producing properties

  

14,786

    

13,490

    

1,296

    

1,151

    

145

  

CRE-construction and development

  

3,669

    

3,619

    

50

    

129

    

(79)

  

Dealer floor plan

  

1,305

    

1,239

    

66

    

—

    

66

  

Direct retail lending

  

12,031

    

11,107

    

924

    

889

    

35

  

Sales finance

  

9,670

    

10,049

    

(379)

    

154

    

(533)

  

Revolving credit

  

2,477

    

2,463

    

14

    

8

    

6

  

Residential mortgage

  

30,471

    

29,864

    

607

    

967

    

(360)

  

Other lending subsidiaries

  

13,961

    

13,439

    

522

    

—

    

522

  

Acquired from FDIC and PCI

  

1,130

    

1,098

    

32

    

102

    

(70)

  

Total loans and leases held for investment

  

$

141,146

    

$

134,381

    

$

6,765

    

$

5,905

    

$

860

  

Average loans held for investment for the second quarter of 2016 were $141.1 billion, up $6.8 billion compared to the first quarter of 2016. National Penn ("NPBC") contributed $5.9 billion of average loans. Excluding National Penn, average loans were up 2.6% annualized. The following discussion describes the growth of average loans excluding National Penn for the second quarter of 2016 compared to the first quarter.

Average commercial and industrial loans increased 9.4% annualized primarily due to growth in large corporate lending as well as seasonal growth in mortgage warehouse lending.

Average commercial real estate – income producing properties loans increased 4.3% annualized, while average commercial real estate – construction and development loans decreased 8.8% annualized. These fluctuations reflect the completion of client construction projects and the related movement to permanent financing sources.

Dealer floor plan average loans were up 21.4% annualized, due to organic client additions during the first half of 2016 and higher utilization by existing clients.

Average sales finance loans declined approximately 21.3% annualized, primarily due to the continued effects of the dealer pricing structure changes implemented during the third quarter of 2015.

Average residential mortgage loans decreased 4.8% annualized, which primarily reflects the continuing strategy to sell conforming residential mortgage loan production.

Other lending subsidiaries average loans increased 15.6% annualized, due to strong seasonal growth.

DEPOSITS - average balances

  

(dollars in millions)

                    

Change Due To

  
   

2Q16

    

1Q16

    

Change

    

NPBC

    

Organic

  
                               

Noninterest-bearing deposits

  

$

48,801

    

$

46,203

    

$

2,598

    

$

1,210

    

$

1,388

  

Interest checking

  

28,376

    

25,604

    

2,772

    

1,765

    

1,007

  

Money market and savings

  

63,195

    

60,424

    

2,771

    

2,445

    

326

  

Time deposits

  

18,101

    

16,884

    

1,217

    

1,136

    

81

  

Foreign office deposits - interest-bearing

  

1,865

    

752

    

1,113

    

—

    

1,113

  

Total deposits

  

$

160,338

    

$

149,867

    

$

10,471

    

$

6,556

    

$

3,915

  

Average deposits for the second quarter were $160.3 billion, an increase of $10.5 billion compared to the prior quarter. National Penn contributed $6.6 billion of average deposits. Excluding National Penn, average deposits were up 10.5% annualized. The following discussion describes growth of average deposits excluding National Penn for the second quarter of 2016 compared to the first quarter.

Average noninterest-bearing deposits increased 12.1% annualized due to increases in personal balances and commercial balances, partially offset by decreases in public funds. 

Interest checking grew 15.8% annualized primarily due to increases in personal balances and commercial balances.

Money market and savings increased 2.2% annualized as increases in personal balances and commercial balances were partially offset by declines in public funds.

Average foreign office deposits were up $1.1 billion primarily due to elevated short-term funding needs as a result of the acquisitions of National Penn and Swett & Crawford.

Including acquisitions, noninterest-bearing deposits represented 30.4% of total average deposits for the second quarter, compared to 30.8% for the prior quarter and 31.5% a year ago. The cost of interest-bearing deposits was 0.23% for the second quarter, down two basis points compared to the prior quarter.

SEGMENT RESULTS

  

(dollars in millions)

                    

Change 2Q16 vs.

  

Segment Net Income

  

2Q16

    

1Q16

    

2Q15

    

1Q16

  

2Q15

  

Community Banking

  

$

294

    

$

301

    

$

231

    

$

(7)

    

$

63

  

Residential Mortgage Banking

  

44

    

39

    

69

    

5

    

(25)

  

Dealer Financial Services

  

51

    

42

    

49

    

9

    

2

  

Specialized Lending

  

61

    

56

    

58

    

5

    

3

  

Insurance Holdings

  

44

    

53

    

53

    

(9)

    

(9)

  

Financial Services

  

87

    

27

    

70

    

60

    

17

  

Other, Treasury and Corporate

  

6

    

52

    

(29)

    

(46)

    

35

  

Total net income

  

$

587

    

$

570

    

$

501

    

$

17

    

$

86

  

Second Quarter 2016 compared to First Quarter 2016

The financial information related to National Penn's operations is included in the Other, Treasury & Corporate segment for the second quarter of 2016 and will be presented in the other segments following the systems conversion date in July 2016.

Community Banking

Community Banking serves individual and business clients by offering a variety of loan and deposit products and other financial services. The segment is primarily responsible for acquiring and maintaining client relationships.

Community Banking net income was $294 million for the second quarter of 2016, a decrease of $7 million compared to the prior quarter.

Segment net interest income was up slightly, primarily due to deposit growth and higher funding spreads on deposits. Noninterest income increased $17 million driven by higher service charges on deposits, checkcard fees, and bankcard and merchant services fees. Intersegment net referral fees increased $10 million primarily the result of higher mortgage loan referrals.

The allocated provision for credit losses was $23 million for the second quarter of 2016 compared to a benefit of $10 million in the prior quarter. This change was primarily the result of loan growth and an increase in loss estimates related to commercial and industrial loans, partially offset by lower net charge-offs.

Noninterest expense increased $13 million driven by higher merger-related and restructuring charges, checkcard expense, and donations and contributions.

Residential Mortgage Banking

Residential Mortgage Banking originates and purchases mortgage loans to either hold for investment or sell to third-parties. BB&T generally retains the servicing rights to loans sold. Mortgage products include fixed and adjustable-rate government guaranteed and conventional loans used for the purpose of constructing, purchasing or refinancing residential properties. Substantially all of the properties are owner-occupied.

Residential Mortgage Banking net income was $44 million for the second quarter of 2016, an increase of $5 million compared to the prior quarter.

Segment net interest income was slightly higher, primarily the result of growth in loans held for sale. Noninterest income increased $11 million driven by higher gains on residential mortgage loan production and sales. Noninterest expense increased $11 million driven by higher personnel expense associated with increased production volumes.