TRUIST FINANCIAL CORP quarterly report, Q3 FY2015

BB&T Corporation Form 10-Q Summary — Quarter Ended September 30, 2015

Issuer note: The supplied filing is for BB&T Corporation, not an entity named Truist Financial Corp. It reports the quarter ended September 30, 2015; confirm the issuer and filing match the intended research subject.

Business context and reporting period

BB&T is a financial holding company operating primarily through Branch Banking and Trust Company. The filing presents unaudited third-quarter and nine-month results through September 30, 2015. Susquehanna Bancshares was acquired on August 1, 2015, and its results were included for two months; its financial data remained in Other, Treasury and Corporate pending systems conversion. BB&T also completed The Bank of Kentucky acquisition in the second quarter.

Key financial metrics

MetricQ3 2015Q3 2014Nine months 2015Nine months 2014
Net interest income$1.464B$1.349B$4.088B$4.039B
Net interest margin3.35% (FTE)3.38% (FTE)3.31% (FTE)3.44% (FTE)
Noninterest income$988M$949M$3.004B$2.834B
Provision for credit losses$103M$34M$299M$168M
Noninterest expense$1.594B$1.539B$4.669B$4.458B
Net income$533M$553M$1.581B$1.603B
Net income available to common shareholders$492M$512M$1.434B$1.432B
Diluted EPS$0.64$0.70$1.92$1.97

Third-quarter annualized returns were 1.04% on average assets, 1.32% on average risk-weighted assets, 8.14% on average common equity, and 13.23% on average tangible common equity. Quarter revenue on a fully taxable-equivalent basis was $2.5B, up $155M year over year, primarily reflecting the Susquehanna acquisition.

For the nine months, operating cash flow was $1.933B, versus $1.504B a year earlier; investing cash flow was $(639)M and financing cash flow was $(839)M. Cash and cash equivalents ended at $2.780B. These cash flow figures should be considered alongside the bank’s funding and liquidity measures.

At September 30, total assets were $208.8B, loans and leases were $135.5B, deposits were $147.8B, short-term borrowings were $2.6B, long-term debt was $24.9B, and shareholders’ equity was $27.3B. Compared with December 31, 2014, total assets increased $22.0B, loans $15.6B, deposits $18.8B, and long-term debt $1.6B; acquisition activity was a major driver. Total loans grew to $135.5B from $119.9B.

Credit metrics improved overall: nonperforming assets were $744M, or 0.55% of loans and leases plus foreclosed property, versus $782M and 0.65% at year-end 2014. Third-quarter net charge-offs were $107M, or 0.32% annualized; nine-month net charge-offs were $306M, versus $422M in 2014. The allowance for loan and lease losses was $1.458B, 1.08% of held-for-investment loans, compared with 1.23% at year-end; management attributed the ratio decline in part to acquired Susquehanna loans having no allowance at acquisition under purchase accounting.

Capital measures at September 30 included Basel III common equity Tier 1 of 10.1%, Tier 1 capital of 11.6%, total capital of 14.1%, and leverage capital of 9.9%. The estimated fully phased-in standardized common equity Tier 1 ratio was 9.8%. The liquid asset buffer was 13.3% of assets, and the modified Liquidity Coverage Ratio was approximately 136%, above the then-applicable 90% minimum. Parent-company cash covered 32 months of projected contractual cash outflows.

Material changes versus comparable periods

  • Third-quarter common earnings fell $20M and diluted EPS fell $0.06 year over year despite higher net interest income and noninterest income. Higher credit-loss provision, expenses, and the larger share count contributed.
  • Third-quarter NIM edged down to 3.35% from 3.38%; nine-month NIM declined to 3.31% from 3.44%, reflecting lower asset yields and runoff of higher-yielding FDIC-acquired assets, partly offset by lower funding costs.
  • Nine-month common earnings were nearly flat at $1.434B versus $1.432B, while diluted EPS declined to $1.92 from $1.97.
  • Higher provision reflected commercial and industrial risk considerations, including the energy sector, credit-trend stabilization, and higher unfunded commitment reserves. The quarter’s provision also compares with a prior-year period that included a mortgage-loan-sale reserve release.
  • Acquisitions expanded the balance sheet and share count: BB&T issued 54 million shares in business combinations. Susquehanna contributed $14.1B of deposits and $12.9B of loans at acquisition.

Outlook, risks, contingencies, and unusual items

  • Outlook: The filing provides no specific earnings or revenue guidance. Management cited pressure from low interest rates, lower yields on new loans, and runoff of higher-yielding acquired assets. It expected Susquehanna systems conversion in the fourth quarter of 2015. A National Penn Bancshares acquisition was expected in 2016, subject to shareholder and regulatory approvals.
  • Acquisition and restructuring costs: Third-quarter merger and restructuring charges were $77M; nine-month charges were $115M, primarily related to Susquehanna, The Bank of Kentucky, and AmRisc/American Coastal. The remaining $64M accrual was expected to be used within one year, except for certain longer-term contracts.
  • Debt extinguishment: A $172M pretax loss was recorded in the second quarter after BB&T terminated $931M of higher-cost FHLB advances. The third quarter of 2014 had included a $122M loss on early debt extinguishment.
  • Tax litigation: An appeals-court ruling generated a $107M tax benefit in the second quarter. BB&T sought U.S. Supreme Court review; changes in unrecognized tax benefits, penalties, and interest could result in a benefit of up to approximately $596M. Separately, the prior-year third quarter included a $50M tax benefit, affecting year-over-year tax comparisons.
  • Other unusual transactions: Sale of American Coastal generated a $26M pretax loss ($34M after tax) and reduced insurance income. BB&T also recorded a $222M charge to shareholders’ equity for buying additional AmRisc ownership.
  • Credit and legal risks: Management identified energy-sector credit risk, consumer delinquency and loss severity in certain portfolios, and acquisition integration and execution risk. The filing describes ordinary-course legal proceedings and states that established reserves are considered adequate, while acknowledging an unfavorable resolution could be material. The Colonial FDIC loss-share arrangements include ongoing obligations; BB&T projected approximately $183M payable to the FDIC in 2019 under the aggregate loss calculation.
  • Other risks: Forward-looking risk factors include economic weakness, interest-rate changes, competition, regulatory and tax changes, cybersecurity, outages, disasters, litigation, and merger integration. Management noted a proposed FDIC assessment change could raise annual assessments by an estimated $40M–$50M.

Most important facts for investors to verify

  • Confirm that BB&T’s 2015 filing is the intended filing for the requested company; the filing itself does not identify Truist Financial Corp.
  • Separate organic growth from acquired growth, particularly for loans, deposits, revenue, expenses, and share count, and assess the timing and costs of Susquehanna integration.
  • Review credit trends and reserve adequacy, including energy exposure, retail other-lending delinquencies, purchase-accounted Susquehanna loans, and the decline in allowance coverage as a percentage of loans.
  • Assess sustainability of NIM and earnings given lower loan and securities yields, acquired-asset runoff, and funding-cost assumptions.
  • Track the IRS litigation, possible tax-benefit changes, FDIC loss-share obligations, merger charges, and the projected 2019 FDIC payment.
  • Check regulatory capital and liquidity measures against fully phased-in requirements, including the LCR transition and management’s capital targets.