BB&T Corporation (now Truist Financial Corporation) — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The filing is for BB&T Corporation before its proposed merger with SunTrust; financial statements are unaudited.
Business context and financial results
BB&T is a financial holding company operating primarily through Branch Bank and nonbank subsidiaries, with banking, finance and insurance businesses. Unless otherwise noted, amounts below are in U.S. dollars.
| Metric | Q2 2019 | Comparable period / change |
|---|---|---|
| Total revenue, taxable-equivalent basis | $3.1 billion | Up $165 million year over year |
| Net interest income | $1.690 billion GAAP; $1.714 billion taxable-equivalent | GAAP up $33 million; taxable-equivalent up $35 million year over year |
| Net interest margin | 3.42% | Down 3 basis points year over year |
| Noninterest income | $1.352 billion | Up $130 million, or 10.6% |
| Noninterest expense | $1.751 billion | Up $31 million, or 1.8% |
| Net income / available to common shareholders | $885 million / $842 million | $822 million / $775 million in Q2 2018 |
| Diluted EPS | $1.09 | $0.99 in Q2 2018 |
| Return on average assets / common equity | 1.55% / 11.98% | 1.49% / 11.74% in Q2 2018 |
For the six months ended June 30, net income was $1.683 billion and diluted EPS was $2.06, compared with $1.613 billion and $1.93 in 2018. Taxable-equivalent net interest income was $3.434 billion, up $99 million, and net interest margin was 3.47%, up 2 basis points.
Balance sheet, cash flow, credit and capital
- Balance sheet at June 30: Total assets were $230.9 billion, up from $225.7 billion at year-end 2018. Loans and leases were $152.6 billion, up from $149.0 billion; deposits were $159.5 billion, down from $161.2 billion.
- Funding and debt: Short-term borrowings increased to $10.3 billion from $5.2 billion; long-term debt declined to $22.6 billion from $23.7 billion. Higher funding costs contributed to the margin pressure.
- Cash flow, six months: Operating activities provided $189 million, versus $1.427 billion in the prior-year period. Investing activities used $2.807 billion and financing activities provided $1.332 billion. Cash, cash equivalents and restricted cash ended at $2.701 billion.
- Credit: Q2 provision for credit losses was $172 million versus $135 million; net charge-offs were $142 million, or 0.38% of average loans on an annualized basis, versus $109 million and 0.30%. Nonperforming assets were $523 million, down from $585 million at year-end. The allowance for loan and lease losses was $1.595 billion; total allowance for credit losses, including unfunded commitments, was $1.689 billion.
- Capital and liquidity: Preliminary CET1, Tier 1, total risk-based capital and leverage ratios were 10.3%, 12.0%, 14.2% and 10.2%, respectively. The liquid-asset buffer was 14.3% of assets; preliminary average modified LCR was approximately 129%, above the 100% regulatory minimum. Branch Bank reported about $81.6 billion of secured borrowing capacity.
Material changes and management commentary
- Revenue growth reflected loan growth, higher rates and fee income. Insurance income rose to $566 million from $481 million, reflecting stronger production and the Regions Insurance acquisition. Investment banking and brokerage fees also increased. Mortgage banking income rose in Q2, but declined for the first six months year over year.
- Interest income increased, but interest expense rose faster in Q2 as deposit and borrowing costs increased. Q2 deposit costs were 0.68% overall and 1.02% for interest-bearing deposits.
- Q2 noninterest expense included $23 million of merger-related and restructuring charges and $9 million of incremental merger operating expenses. First-half merger-related and restructuring charges were $103 million, versus $52 million in 2018.
- Management reported that Q2 net charge-offs increased year over year, primarily in commercial real estate and indirect loans; the six-month increase also included revolving credit. Management noted the quarter’s improvement in nonperforming assets versus the prior quarter.
- BB&T suspended common-share repurchases due to the proposed merger. The Board approved an increase in the quarterly common dividend to $0.45 per share from $0.405.
Outlook, risks and unusual items
- SunTrust merger: The all-stock merger was expected to close late in Q3 or Q4 2019, subject to remaining approvals and closing conditions. BB&T received North Carolina regulatory approval on July 10, and both companies’ shareholders approved the merger on July 30. The proposed exchange ratio is 1.295 BB&T shares per SunTrust share; the agreement includes a roughly $1.1 billion break-up fee in customary circumstances.
- Management announced an estimated $70 million in one-time bonuses for certain associates following merger closing, and a community benefits plan to lend or invest $60 billion over 2020–2022. These are prospective commitments, not Q2 results.
- Management expected to sell approximately $4 billion of residential mortgage loans in Q3. BB&T also issued $1.7 billion of Series N preferred stock on July 29 and reported a subsequent $1.0 billion fixed-rate medium-term note issuance in Q3.
- BB&T expected adoption of the new expected-credit-loss standard (CECL) in 2020 to increase its allowance materially, but had not quantified the impact; the estimate depends on economic conditions and merger-related portfolio effects.
- Key stated risks include merger approvals, closing and integration; deposit attrition and funding costs; interest-rate changes and LIBOR transition; credit deterioration; cyber, operational and model risks; and litigation or regulatory developments. Management reported no material change to the previously disclosed risk factors. It said existing legal reserves were adequate, while noting that an unfavorable resolution of legal matters could still be material.
Important facts for investors to verify
- Merger closing progress, final regulatory approvals, integration costs, expected synergies and the effect of the proposed share exchange on ownership and capital.
- Whether loan and fee growth can offset higher deposit and wholesale funding costs, and how deposit mix and interest-rate sensitivity evolve.
- Credit trends, especially commercial real estate, indirect lending and revolving credit; the adequacy of reserves and the eventual CECL transition impact.
- Execution and proceeds of the planned residential mortgage portfolio sale, and subsequent changes in loan balances and mortgage servicing valuations.
- Liquidity and capital after the post-quarter preferred and debt issuances, merger-related spending and planned dividend increase.