TRUIST FINANCIAL CORP annual report, FY2018

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Business context and reporting period

This is BB&T Corporation’s Form 10-K for the fiscal year ended December 31, 2018, filed February 26, 2019. Although the request identifies Truist Financial Corp., the filing issuer is BB&T Corporation; the filing describes Truist’s later merger history only as a pending transaction with SunTrust. BB&T operated as a regional financial holding company, with banking, insurance, wealth, brokerage and specialty-finance businesses.

Financial performance and condition

  • Annual earnings: Revenue was $11.56 billion, up 2.1% from 2017. Net income was $3.26 billion, versus $2.42 billion; net income available to common shareholders was $3.06 billion, up 38.0%. Diluted EPS was $3.91, versus $2.74. Return on average assets was 1.47% and return on average common equity was 11.50%.
  • Net interest and margins: Net interest income was $6.68 billion reported ($6.78 billion on a taxable-equivalent basis), up $147 million reported year over year. Taxable-equivalent NIM was 3.46%, unchanged. Higher loan yields and balances were partly offset by increased funding costs.
  • Fees and expenses: Noninterest income rose 2.0% to $4.88 billion. Insurance income increased to $1.85 billion, including $67 million from Regions Insurance; mortgage banking income fell 13.7% to $358 million. Noninterest expense declined 6.9% to $6.93 billion, largely because 2017 included a $392 million debt-extinguishment loss and $100 million philanthropic contribution. 2018 included $146 million of merger-related and restructuring charges.
  • Credit: Provision for credit losses was $566 million, compared with $547 million. Net charge-offs decreased to $524 million, or 0.36% of average loans. Nonperforming assets fell to $585 million from $627 million; nonperforming loans were 0.35% of loans held for investment. The allowance for credit losses was $1.65 billion, and the allowance for loan and lease losses was 1.05% of held-for-investment loans.
  • Balance sheet and funding: Year-end assets were $225.7 billion, loans and leases held for investment $149.0 billion, deposits $161.2 billion, and shareholders’ equity $30.2 billion. Long-term debt was $23.7 billion and short-term borrowings $5.2 billion. Average total deposit cost rose to 0.41% from 0.22%; year-end deposits increased $3.8 billion.
  • Capital and liquidity: BB&T’s CET1 ratio was 10.2%, Tier 1 risk-based capital 11.8%, total risk-based capital 13.8%, and leverage ratio 9.9%. The reported liquid-asset buffer was 14.7% of assets, and modified LCR was approximately 126%, above the stated 100% regulatory minimum. Branch Bank had $78.9 billion of secured borrowing capacity.
  • Cash flows: Operating cash flow was $4.35 billion, investing cash flow was negative $4.95 billion, and financing cash flow was $1.50 billion. Cash, cash equivalents and restricted cash increased $904 million to $3.99 billion.
  • Fourth quarter: Common net income was $754 million and diluted EPS $0.97, versus $614 million and $0.77 in Q4 2017. Taxable-equivalent revenue was $3.0 billion. NIM was 3.49%; provision for credit losses was $146 million and noninterest expense $1.78 billion.

Changes versus prior periods

  • Annual earnings and EPS rose materially, reflecting revenue growth, a lower effective tax rate and lower noninterest expense. The 2018 effective tax rate was 19.8%, versus 27.4% in 2017; 2017 included tax-reform-related items and substantial unusual expenses.
  • Loans held for investment increased $5.3 billion year over year, led by commercial and industrial and residential mortgage lending. The securities portfolio declined $2.0 billion.
  • Deposit balances grew, but deposit costs rose as market rates increased. Despite higher loan yields, NIM remained flat year over year.
  • Credit indicators generally improved: NPAs and net charge-offs declined, although provision expense increased modestly and the allowance balance rose.
  • BB&T repurchased $1.2 billion of shares and paid $1.2 billion in common dividends during 2018. Common shares outstanding declined to 763.3 million from 782.0 million.

Outlook, risks and unusual items

  • On February 7, 2019, BB&T and SunTrust agreed to an all-stock merger of equals. SunTrust shareholders were to receive 1.295 BB&T shares per share. Closing was expected in late Q3 or Q4 2019, subject to shareholder and regulatory approvals; a mutual break-up fee of approximately $1.1 billion applies in customary circumstances. BB&T suspended share repurchases pending the merger.
  • Management cited merger execution and integration, technology investment and competition, regulatory costs, and economic and geopolitical uncertainty as near-term challenges. The filing provides no specific forward earnings or revenue guidance.
  • BB&T reported progress on BSA/AML remediation: the FDIC and North Carolina regulator terminated their Branch Bank consent order in June 2018, but the Federal Reserve order remained in effect at filing. The company said no money-laundering activity had been identified and no financial penalty was levied.
  • Key risks include merger approvals, integration costs and customer or employee attrition; credit deterioration; deposit outflows and funding costs; interest-rate and LIBOR-transition risk; cybersecurity, systems and vendor failures; litigation and regulatory enforcement; and changes in tax or banking rules. Moody’s had placed BB&T’s ratings under review for possible downgrade in connection with the merger.
  • BB&T expected CECL adoption on January 1, 2020 to increase the allowance for credit losses, potentially materially, but had not quantified the effect. The lease standard, effective January 1, 2019, was expected to add approximately $850 million of right-of-use assets and $1.0 billion of lease liabilities, with an estimated $40 million reduction in equity.
  • The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective. The filing identifies no unresolved SEC staff comments.

Investor facts to verify

  • Confirm the filing entity and reporting period: this is BB&T’s 2018 Form 10-K, not a filing under the Truist Financial Corp. name.
  • Track required approvals, closing timing, exchange terms, break-up provisions and integration costs for the SunTrust merger.
  • Assess the remaining Federal Reserve BSA/AML order and whether remediation affects expansion or merger approvals.
  • Compare loan growth and asset-quality trends with deposit pricing, NIM sensitivity and funding needs.
  • Review capital and liquidity after merger-related changes, including the suspended repurchase program and any ratings actions.
  • Monitor CECL’s quantified allowance and capital impact, as well as lease-standard implementation.