BB&T Corporation (now Truist Financial Corporation) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing is by BB&T Corporation; the company name in the request reflects its later identity as Truist. Unless stated otherwise, amounts are in U.S. dollars.
Business context and financial performance
BB&T operated through its bank and nonbank subsidiaries, including community banking, mortgage banking, dealer finance, specialty lending, insurance and financial services. Year-over-year comparisons were affected by the 2016 acquisitions of National Penn and Swett & Crawford, as well as the 2016 National Penn systems conversion.
- Q2 2017: Net income was $674 million, up from $587 million; net income available to common shareholders was $631 million, up from $541 million. Diluted EPS was $0.77 versus $0.66.
- First half 2017: Net income was $1.10 billion versus $1.16 billion; common net income was $1.01 billion versus $1.07 billion. Diluted EPS was $1.23 versus $1.32.
- Q2 total revenue on a taxable-equivalent basis was approximately $2.9 billion, up $108 million year over year. GAAP net interest income was $1.64 billion for the quarter and $3.24 billion for the first half.
- Net interest margin was 3.47% in Q2, compared with 3.41% in Q2 2016; first-half NIM was 3.47% versus 3.42%.
- Q2 provision for credit losses was $135 million, up from $111 million; first-half provision was $283 million, down from $295 million. Q2 net charge-offs were $132 million, or 0.37% of average loans, versus $97 million and 0.28% a year earlier.
- Q2 noninterest income was $1.22 billion, up $90 million year over year. Noninterest expense was $1.74 billion, down $55 million. First-half noninterest expense rose to $3.84 billion from $3.34 billion, principally reflecting a $392 million debt-extinguishment loss.
- Q2 annualized returns were 1.22% on average assets, 1.53% on average risk-weighted assets and 9.30% on average common equity; the respective prior-year-quarter measures were 1.06%, 1.38% and 8.21%.
Financial position, liquidity and capital
- Total assets were $221.2 billion at June 30, 2017, versus $219.3 billion at year-end 2016. Loans and leases were $143.6 billion, approximately flat with year-end; securities totaled $45.3 billion.
- Deposits were $157.0 billion, down $3.3 billion from year-end. Short-term borrowings increased to $6.1 billion from $1.4 billion; long-term debt was $21.7 billion, down slightly from $22.0 billion.
- Shareholders’ equity was $30.3 billion, compared with $29.9 billion at year-end. Preliminary CET1, Tier 1, total capital and leverage ratios were 10.3%, 12.1%, 14.1% and 10.1%, respectively.
- The liquid asset buffer was 13.0% of total assets; the reported LCR was approximately 122%, above the stated 100% regulatory minimum. Branch Bank reported approximately $77.0 billion of secured borrowing capacity.
- First-half operating cash flow was $1.49 billion, investing cash flow was negative $2.56 billion and financing cash flow was positive $142 million. Cash and cash equivalents ended the period at $3.01 billion, down $927 million from the beginning of the year.
Material changes and management commentary
- Q2 revenue and earnings improved year over year, while first-half common earnings and EPS declined. Q2 results benefited from stronger noninterest income and lower merger-related charges; first-half results included the $392 million early-extinguishment loss.
- Management attributed Q2 noninterest-income growth mainly to insurance commissions, bankcard fees and the absence of FDIC loss-share agreement income recorded as a loss in the prior-year comparison. Mortgage banking income was lower, partly due to weaker net MSR valuation gains.
- Asset quality improved from year-end: nonperforming assets were $690 million versus $813 million, and NPLs were 0.43% of HFI loans. However, Q2 and first-half net charge-offs were higher year over year; management cited increased loss severity in other lending subsidiaries and higher residential mortgage charge-offs.
- Loans grew in commercial and other lending subsidiary portfolios, while sales finance and residential mortgage balances declined amid portfolio optimization and targeted runoff. BB&T sold $300 million of residential mortgage loans in Q2, including $40 million of nonaccrual loans and $199 million of performing TDRs.
- In Q1, BB&T terminated $2.9 billion of FHLB advances, recording the $392 million pretax loss. The filing also reports a July 20, 2017 accelerated repurchase agreement for $920 million of common stock. The board-approved capital plan included raising the quarterly dividend by $0.03 to $0.33 and buybacks of up to $1.88 billion from Q3 2017 through Q2 2018.
- Management identified economic and credit conditions, interest-rate changes, competition, regulation, cybersecurity, operational outages, litigation, and acquisition integration and execution as risks. The filing states there were no material changes to the risk factors in the 2016 Form 10-K. Legal proceedings were described as ordinary-course matters; management considered recorded reserves adequate but noted an unfavorable outcome could be material.
- Management expected adoption of the new expected-credit-loss standard to result in a materially higher allowance, but had not determined the amount. The lease standard was expected to increase reported assets and liabilities; the magnitude was still under evaluation. No specific earnings guidance was provided.
Most important facts for investors to verify
- Whether higher net charge-offs—especially in auto/other lending subsidiaries and residential mortgages—continue, and how loss severity affects provisions and reserves.
- Whether deposit outflows and higher deposit pricing pressure NIM, given the increase in short-term borrowings and management’s stated sensitivity to deposit mix and interest rates.
- The sustainability of Q2 earnings growth after separating recurring operating performance from acquisition effects, FDIC loss-share comparisons, restructuring charges and the debt-extinguishment loss.
- Execution and capital effects of the planned dividend increase and up-to-$1.88 billion repurchase program, including the $920 million accelerated repurchase.
- Future expected-credit-loss adoption impact, and any material changes in legal, regulatory, cybersecurity or acquisition-integration exposures.