TRUIST FINANCIAL CORP quarterly report, Q2 FY2018

Business context and reporting period

BB&T Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2018. The filing identifies BB&T Corporation as the registrant; the request metadata names Truist Financial Corp.

Key financial metrics

For the six months ended June 30, net income was $1.613 billion versus $1.100 billion a year earlier; diluted EPS was $1.93 versus $1.23. Net interest income was $3.290 billion versus $3.244 billion, while noninterest expense was $3.406 billion versus $3.844 billion.

At June 30, 2018, total assets were $222.7 billion, loans and leases were $146.2 billion, and deposits were $159.5 billion. Long-term debt was $24.1 billion and short-term borrowings were $3.6 billion. Shareholders’ equity was $29.8 billion. Cash, cash equivalents and restricted cash totaled $3.1 billion.

For the first six months, operating cash flow was $1.427 billion, investing cash flow was negative $1.563 billion, and financing cash flow was $106 million; cash, cash equivalents and restricted cash declined $30 million. The allowance for loan and lease losses was $1.530 billion; total credit-loss allowance, including unfunded commitments, was $1.640 billion.

Material changes versus comparable periods

• Q2 common earnings rose $144 million year over year. Management attributed the higher earnings in part to a lower effective tax rate: 19.7% versus 31.1%, reflecting the lower federal tax rate enacted in 2017.
• Q2 taxable-equivalent net interest income was essentially flat, as higher interest income was largely offset by higher funding costs. NIM eased to 3.45% from 3.47%.
• Q2 net charge-offs declined to $109 million from $132 million; the annualized net charge-off ratio was 0.30% versus 0.37%. Nonperforming assets were $624 million, down $45 million from the prior quarter; nonperforming loans were 0.38% of held-for-investment loans.
• Loans increased $2.5 billion from December 31, 2017, and deposits increased $2.1 billion. Compared with year-end, long-term debt rose $433 million and short-term borrowings fell $1.4 billion.
• First-half noninterest expense fell $438 million year over year, chiefly because the prior-year period included a $392 million loss on early extinguishment of debt.
• Accumulated other comprehensive loss widened to $1.706 billion from $1.467 billion at year-end, primarily reflecting lower available-for-sale securities valuations.

Outlook, management commentary, risks and unusual items

• The board-approved capital actions include a $0.03 increase in the quarterly dividend to $0.405 and authorization for up to $1.7 billion of repurchases through June 30, 2019. The filing cautions that BB&T may not use the full authorization to preserve desired capital levels. Q2 dividends declared were $0.375 per share; $310 million of shares were repurchased during the quarter.
• Management highlighted continued expense control, higher loan yields from rising rates, and increasing deposit and borrowing costs. It reported Q2 NIM of 3.45%, compared with 3.47% a year earlier. The filing provides no specific earnings or revenue guidance.
• Interest-rate simulations estimated next-12-month net interest income would increase 3.05% under a gradual 200-basis-point rate increase and decline 4.64% under a 100-basis-point decrease. These are model estimates, subject to assumptions including deposit behavior and prepayments.
• Liquidity measures included a liquid-asset buffer equal to 14.3% of total assets and an approximately 131% Liquidity Coverage Ratio, above the stated 100% regulatory minimum. Branch Bank reported approximately $82.4 billion of secured borrowing capacity. CET1 was 10.2%, Tier 1 capital 11.9%, total capital 13.9%, and leverage 10.0%; current-quarter regulatory capital figures were preliminary.
• On June 30, regulators terminated the FDIC and North Carolina consent order concerning Branch Bank’s BSA/AML controls; the filing says no money-laundering activity was identified and no penalty was imposed. BB&T said a separate Federal Reserve order remained in place.
• The Regions Insurance acquisition closed July 2, 2018, after quarter-end. The filing also identifies cybersecurity, system outages, interest-rate and deposit-mix changes, credit quality, regulatory matters, litigation, and merger integration as risks. Management said existing legal reserves were adequate, while acknowledging an unfavorable resolution could be material.
• BB&T expected the new lease standard, planned for adoption in 2019, to increase reported assets and liabilities without materially affecting income. It expected the 2020 credit-loss standard could materially increase the allowance, but had not quantified the effect.

Important facts for investors to verify

• Confirm the issuer identity: this 2018 filing is for BB&T Corporation, notwithstanding the Truist name in the request metadata.
• Track deposit pricing, funding mix, and NIM as interest rates rise; funding costs increased sharply year over year.
• Review credit trends, including the allowance, nonperforming loans, past-due balances, and performing troubled debt restructurings.
• Assess the sustainability of earnings growth after separating the lower tax rate and the prior-year debt-extinguishment charge from underlying operating performance.
• Monitor capital levels, actual share repurchases and dividends, and integration effects from the Regions Insurance acquisition.
• Follow resolution of the continuing Federal Reserve order, material legal contingencies, and the estimated effects of upcoming accounting standards.