BB&T Corporation — Q1 2017 Form 10-Q
Entity note: The supplied filing is for BB&T Corporation, not Truist Financial Corporation. It covers the quarter ended March 31, 2017; the financial statements are unaudited.
Business context and reporting period
BB&T is a bank holding company with banking and nonbanking businesses, including insurance, mortgage banking, consumer and commercial lending, and wealth services. Results reflect the 2016 acquisitions of National Penn and insurance broker Swett & Crawford; their contributions affect year-over-year comparisons.
Financial results and condition
| Metric | Q1 2017 / March 31, 2017 | Comparable period / change |
|---|---|---|
| Total revenue, taxable-equivalent basis | $2.8 billion | Up $236 million year over year |
| Net interest income | $1.609 billion | Up $81 million year over year |
| Net interest margin | 3.46% | 3.43% in Q1 2016 |
| Net income | $426 million | $570 million in Q1 2016 |
| Net income available to common shareholders | $378 million | $527 million in Q1 2016 |
| Diluted EPS | $0.46 | $0.67 in Q1 2016 |
| Provision for credit losses | $148 million | $184 million in Q1 2016 |
| Operating cash flow | $158 million | $(130) million in Q1 2016 |
| Total assets | $220.5 billion | $219.3 billion at December 31, 2016 |
| Total deposits | $161.3 billion | $160.2 billion at December 31, 2016 |
| Long-term debt | $21.6 billion | $22.0 billion at December 31, 2016 |
| Shareholders’ equity | $30.0 billion | $29.9 billion at December 31, 2016 |
Noninterest income was $1.171 billion, up $155 million year over year; noninterest expense was $2.102 billion, up $557 million. The effective tax rate was 19.6%, versus 30.1%. BB&T reported an annualized return on average assets of 0.79% and return on average common equity of 5.72%.
Loans and leases totaled $142.6 billion, down from $143.3 billion at year-end. The allowance for loan and lease losses was $1.487 billion, or 1.04% of loans held for investment; the total allowance for credit losses, including unfunded commitments, was $1.599 billion. Nonperforming assets were $801 million, and nonperforming loans were 0.51% of loans held for investment. Net charge-offs were $148 million, or 0.42% annualized of average loans.
Liquidity and capital were reported as strong: the liquid asset buffer was 12.7% of assets and the estimated liquidity coverage ratio was approximately 124%, above the 100% regulatory minimum applicable to BB&T. The CET1 ratio was 10.3% and the leverage ratio was 10.0%. The company paid common dividends of $0.30 per share and repurchased $160 million of stock during the quarter.
Material changes versus prior comparable period
- Common earnings declined $149 million and diluted EPS fell $0.21 year over year, chiefly reflecting a $392 million pretax loss on early extinguishment of FHLB advances.
- Net interest income and noninterest income increased, primarily reflecting acquisition activity; NIM improved modestly to 3.46%.
- Provision for credit losses and net charge-offs declined year over year. The prior-year quarter included $30 million of charge-offs tied to energy lending exposures.
- Noninterest expense rose substantially, driven by the debt extinguishment loss, higher personnel costs, and acquired businesses. The quarter also included $36 million of merger-related and restructuring charges.
- At quarter-end, noninterest-bearing deposits increased from year-end while interest-bearing deposits decreased; total deposits rose $1.1 billion.
Outlook, management commentary, risks and unusual items
- The filing does not provide specific forward earnings or revenue guidance. Management describes interest-rate, economic, credit, competitive, regulatory, cybersecurity, operational, litigation, and acquisition-integration risks.
- The $392 million pretax debt-extinguishment loss arose from terminating $2.9 billion of FHLB advances. BB&T said the action contributed to a lower average cost of long-term debt.
- Management cited acquisition-related contributions to revenue and expense. It also reported $35 million of excess tax benefits from equity-based compensation in Q1.
- Management expects adoption of the expected-credit-loss accounting standard to likely increase the allowance materially, but had not determined the amount. Lease accounting adoption is expected to materially increase reported assets and liabilities; the size was not yet determined.
- Legal claims and proceedings are described as ordinary-course matters. Management believes established reserves are adequate and does not expect a material adverse effect, while noting an unfavorable resolution could be material.
- The DOL fiduciary rule implementation was extended and phased in from June 9, 2017 through January 1, 2018; management estimated the 2017 impact to be immaterial.
Important facts for investors to verify
- Confirm the issuer identity: this is BB&T’s 2017 filing, despite the request metadata naming Truist Financial Corporation.
- Assess normalized earnings excluding the $392 million debt-extinguishment charge, merger costs, and tax benefits; consider that acquisition-related impacts also affect comparisons.
- Review loan quality and reserve adequacy, including auto and other lending subsidiary charge-offs, TDRs, and the treatment of government-guaranteed and purchased credit-impaired loans.
- Verify capital and liquidity measures, regulatory definitions, and the sustainability of the 0.30-per-share dividend and share repurchases.
- Track acquisition integration costs, future credit-loss accounting impacts, interest-rate sensitivity, and developments in legal and regulatory matters.