BB&T Corporation (predecessor to Truist Financial Corporation) — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. The supplied filing is for BB&T Corporation, not a 2017 filing under the Truist name. Dollar amounts are in millions unless stated otherwise.
Business context and financial performance
BB&T operated through its bank and nonbank subsidiaries, including community banking, mortgage banking, consumer and commercial lending, insurance, and wealth and financial services. The 2016 comparisons include the effects of the National Penn and Swett & Crawford acquisitions.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net interest income | $1,647 | $1,610 | $4,891 | $4,756 |
| Net interest margin, taxable-equivalent | 3.48% | 3.39% | 3.47% | 3.41% |
| Provision for credit losses | $126 | $148 | $409 | $443 |
| Noninterest income | $1,166 | $1,164 | $3,557 | $3,310 |
| Noninterest expense | $1,745 | $1,711 | $5,589 | $5,053 |
| Net income | $648 | $642 | $1,748 | $1,799 |
| Net income available to common shareholders | $597 | $599 | $1,606 | $1,667 |
| Diluted EPS | $0.74 | $0.73 | $1.97 | $2.05 |
| Cash dividends declared per common share | $0.33 | $0.30 | $0.93 | $0.85 |
Q3 total revenue on a taxable-equivalent basis was $2.9 billion, up $40 million year over year. Q3 annualized returns were 1.16% on average assets, 1.45% on average risk-weighted assets, and 8.82% on average common equity. The filing does not provide a single consolidated operating-margin figure.
Balance sheet, cash flow, capital, and asset quality
- Balance sheet at September 30: Total assets were $220.3 billion, loans and leases were $142.8 billion, deposits were $156.1 billion, total liabilities were $190.5 billion, and shareholders’ equity was $29.9 billion.
- Funding and liquidity: Deposits declined $4.1 billion from December 31, 2016; short-term borrowings rose $6.5 billion to $7.9 billion, while long-term debt fell $1.1 billion to $20.9 billion. The liquid-asset buffer was 14.3% of assets, and the reported liquidity coverage ratio was approximately 128%, above the stated 100% minimum. Secured borrowing capacity at Branch Bank was approximately $78.8 billion.
- Cash flow: For the nine months, operating cash flow was $3.0 billion, investing cash flow was negative $3.1 billion, and financing cash flow was negative $1.1 billion. Cash and cash equivalents ended at $2.7 billion, down $1.2 billion from the start of the period. For a bank, these cash-flow totals reflect significant securities, lending, deposit, and funding activity and should not be read like those of a nonfinancial company.
- Capital and shareholder returns: CET1 was 10.1%, Tier 1 capital 11.8%, total capital 13.9%, and leverage ratio 9.9%. BB&T repurchased $920 million of shares in Q3; year-to-date repurchases were $1.24 billion. The company declared a $0.33 quarterly dividend, a 10% increase year over year.
- Credit: Nonperforming assets were $680 million, down from $813 million at year-end 2016; nonperforming loans were 0.42% of loans held for investment. Q3 net charge-offs were $127 million, or 0.35% annualized. The allowance for credit losses was $1.6 billion, including $35 million for estimated potential hurricane-related losses.
Material changes versus prior periods
- Q3 diluted EPS increased one cent year over year, while common net income declined $2 million. Higher net interest income and a lower credit provision were partly offset by higher expenses and taxes.
- Net interest income benefited from higher rates and loan yields; funding costs also rose. Q3 interest expense was $230 million versus $185 million a year earlier.
- Year-to-date net income available to common shareholders declined $61 million. Noninterest expense increased $536 million, including a $392 million pretax loss from early termination of $2.9 billion of higher-cost FHLB advances. Excluding that loss, expense trends still reflected higher personnel and other costs, while merger-related charges declined.
- Year-to-date noninterest income rose $247 million, supported by insurance, deposit service charges, bankcard fees, and other income. Mortgage banking income fell, and 2016 included $45 million of securities gains. The prior-year comparison also included FDIC loss-share effects and a net $73 million benefit from settlement of certain legacy mortgage matters.
- Loans held for investment were broadly stable versus year-end. Growth in other lending subsidiaries and commercial real estate was offset by declines in sales finance and residential mortgage loans. The company said it was optimizing sales finance exposure and continuing targeted residential mortgage runoff.
- Noninterest-bearing deposits grew $3.4 billion from year-end, despite the overall decline in deposits. Common shares outstanding fell to 788.9 million from 809.5 million, reflecting repurchases and other share activity.
Outlook, commentary, and risks
The filing provides no formal earnings or revenue guidance. Management described improving asset quality and continued organic deposit growth, while noting that higher rates increased both asset yields and funding costs. It reported that hurricanes contributed to higher mortgage delinquencies and included a $35 million estimated hurricane-loss component in the allowance.
Key disclosed risks include economic deterioration and credit quality, interest-rate changes and deposit pricing or attrition, market disruption, competition, regulatory and tax changes, cybersecurity incidents, operational or third-party system outages, acquisition integration and cost savings, and litigation or regulatory proceedings. Management’s interest-rate simulation projected a 3.86% increase in next-12-month net interest income under a gradual +200-basis-point scenario and a 6.53% decline under a gradual -100-basis-point scenario. Management had temporarily suspended exposure limits for declining rates, citing deposit-pricing dynamics. These estimates depend on assumptions and are not forecasts.
Other notable items: BB&T issued $2.3 billion of fixed- and floating-rate debt in October 2017, after quarter-end. The company said its disclosure controls were effective and reported no material change in internal control over financial reporting, while noting implementation of a new commercial loan software system. It stated that established legal reserves were adequate, but acknowledged that an unfavorable resolution of proceedings could be material.
Important facts for investors to verify
- Confirm the issuer and historical corporate relationship: this is BB&T Corporation’s 2017 filing, not a filing under the Truist name.
- Assess underlying earnings after the $392 million debt-extinguishment charge and other period-specific items, including prior-year mortgage settlement benefits and acquisition-related effects.
- Track deposit mix, deposit pricing, short-term borrowing growth, and the sensitivity of earnings to rising or falling rates; the disclosed simulations rely on behavioral assumptions.
- Review credit trends in other lending subsidiaries, including used-car loss severity, as well as hurricane-related exposures, delinquencies, and allowance adequacy.
- Evaluate the sustainability of share repurchases and dividends against capital needs, liquidity, and the stated $1.88 billion repurchase authorization.
- Review legal contingencies, the post-quarter debt issuance, and the implementation and control implications of the new commercial loan system.