BB&T Corporation (historical registrant; metadata identifies Truist Financial Corp.) — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. This filing is by BB&T Corporation, not a filing under the Truist name. Unless stated otherwise, amounts are in U.S. dollars.
Financial performance and position
| Metric | Q3 2018 | Comparable period / change |
|---|---|---|
| Net interest income | $1.687 billion GAAP; $1.714 billion taxable-equivalent (TE) | GAAP: $1.647 billion in Q3 2017; TE increased $26 million |
| Net interest margin | 3.47% TE | Down 1 basis point year over year |
| Noninterest income | $1.239 billion | Up $73 million, or 6.3% |
| Noninterest expense | $1.742 billion | Nearly unchanged from $1.745 billion |
| Provision for credit losses | $135 million | Up from $126 million |
| Net income / common earnings | $839 million / $789 million | Compared with $648 million / $597 million |
| Diluted EPS | $1.01 | Up from $0.74 |
| Returns | ROAA 1.49%; return on average common equity 11.69% | 1.16% and 8.82%, respectively, in Q3 2017 |
For the nine months, net income was $2.452 billion and diluted EPS was $2.94, versus $1.748 billion and $1.97 in 2017. Nine-month net interest income was $4.977 billion GAAP ($5.049 billion TE); TE NIM was 3.45%, compared with 3.47%.
- Balance sheet at September 30: Assets $222.9 billion; loans and leases $146.7 billion; deposits $154.6 billion; total shareholders’ equity $30.0 billion.
- Funding and debt: Short-term borrowings were $9.7 billion, up $4.7 billion from year-end 2017; long-term debt was $23.2 billion, down $412 million. Deposits declined $2.8 billion from year-end.
- Cash flow, nine months: Operating cash flow $2.978 billion; investing cash outflow $2.733 billion; financing cash outflow $175 million. Cash, cash equivalents and restricted cash ended at $3.153 billion.
- Capital and liquidity: CET1 10.2%, Tier 1 11.9%, total risk-based capital 13.9%, and leverage ratio 10.0%. The liquid asset buffer was 14.4% of assets and LCR approximately 137%, above the applicable 100% minimum. BB&T reported about $77.4 billion of Branch Bank secured borrowing capacity.
- Shareholder returns: Q3 dividend declared was $0.405 per share; $200 million of shares were repurchased in the quarter. Nine-month repurchases totaled $830 million.
Material changes versus comparable periods
- Q3 revenue on a TE basis rose $99 million year over year, reflecting higher interest income and noninterest income. Higher rates lifted loan yields, while funding costs also rose substantially; Q3 total deposit cost was 0.43%, up 20 basis points year over year.
- Q3 insurance income increased $51 million, including $33 million from the July 2 acquisition of Regions Insurance and the remainder primarily from organic growth. The acquisition added $215 million of goodwill and $175 million of identifiable intangible assets.
- Mortgage banking income fell $35 million in Q3, principally from lower gain-on-sale margins and retaining more mortgage production on balance sheet.
- Q3 net income growth included a lower effective tax rate: 20.0% versus 31.2%, primarily reflecting the lower federal tax rate enacted in 2017. Nine-month rates were 19.6% versus 28.7%.
- Nine-month noninterest expense declined 7.9% to $5.148 billion, chiefly because 2017 included a $392 million loss on early debt extinguishment. Excluding that unusual prior-year charge, year-over-year expense comparisons are less favorable than the headline decline suggests.
- Loan and lease balances increased $3.0 billion from year-end, led by residential mortgage and commercial and industrial loans. Securities declined $2.2 billion; their effective duration increased to 5.4 years from 4.7 years.
- Net charge-offs were $127 million in Q3, unchanged year over year; the annualized ratio was 0.35%. Nine-month net charge-offs declined to $381 million from $407 million.
Outlook, risks, contingencies and unusual items
- The filing provides no explicit earnings or revenue guidance. Management describes active balance-sheet and funding management but does not give a quantified forward forecast.
- Management’s interest-rate simulation estimated next-12-month net interest income would increase 2.06% under a gradual 200-basis-point rise and decline 3.13% under a 100-basis-point fall. The model depends on assumptions including deposit behavior, repricing, prepayments and loan volumes. EVE was estimated to decline 7.4% under a 200-basis-point rise.
- Management noted that continued rate increases could raise deposit betas and funding costs; loss of noninterest-bearing deposits could reduce balance-sheet asset sensitivity. Mortgage banking results and MSR values are exposed to interest rates, prepayment speeds and valuation assumptions.
- Credit indicators were generally stable or improved: NPAs were $601 million, down $23 million from Q2; NPLs were 0.37% of HFI loans. However, loans 30–89 days past due rose $170 million quarter over quarter to $1.075 billion, which management attributed mainly to seasonal residential/indirect lending and partly to Hurricane Florence. The allowance for credit losses was $1.648 billion, or 1.05% of HFI loans and leases.
- BB&T expected adoption of the current expected credit loss standard in 2020 could materially increase its allowance, but it had not quantified the impact. The new lease standard, expected in 2019, was estimated to increase assets and liabilities by $800 million–$1.2 billion without material income-statement impact.
- Substantially all securities unrealized losses were attributed to market interest-rate changes rather than issuer or collateral credit quality. AFS securities had $1.369 billion of gross unrealized losses at quarter-end; HTM securities had $850 million.
- Branch Bank’s FDIC and North Carolina consent order related to BSA/AML internal controls was terminated in June 2018; no money-laundering activity or financial penalty was identified. A separate Federal Reserve order remained outstanding, and the company said it continued working toward resolution.
- Management said established legal reserves were adequate and did not expect outstanding proceedings to materially affect consolidated results, but noted that an unfavorable unexpected resolution could be material. Other disclosed risks include economic and credit deterioration, competition, regulation, cybersecurity, system outages, litigation and acquisition integration.
Important facts for investors to verify
- Confirm the issuer identity: this 2018 filing is BB&T Corporation; the supplied company metadata says Truist Financial Corp.
- Assess whether rising deposit and wholesale funding costs could outpace asset-yield increases, and compare reported results with the stated NIM and rate-sensitivity assumptions.
- Review credit trends, especially past-due loans, commercial credit quality, reserve coverage and the potential effects of Hurricane Florence.
- Evaluate the Regions Insurance acquisition’s contribution to earnings, integration costs, goodwill and intangible-asset amortization.
- Track AFS valuation declines, securities duration, the disclosed interest-rate sensitivities and CECL implementation uncertainty.
- Verify capital and liquidity remain adequate alongside dividends and repurchases, and monitor resolution of the remaining Federal Reserve BSA/AML order and material legal contingencies.