TRUIST FINANCIAL CORP annual report, FY2017

Business context and reporting period

This is BB&T Corporation’s Form 10-K for the fiscal year ended December 31, 2017, filed February 20, 2018. BB&T was a regional financial holding company operating primarily through Branch Bank, with banking, insurance, wealth, brokerage, and specialized finance businesses. The filing identifies the registrant as BB&T Corporation, not Truist Financial Corp.; verify the company and filing match the request metadata.

Financial results and condition

Revenue increased 4.9% and taxable-equivalent NIM expanded 7 basis points, as higher loan and securities yields and average loan growth outweighed rising funding costs. Common earnings declined 1.7%; diluted EPS fell 1.1%. Return on average assets was 1.09% (1.12% in 2016), and return on average common equity was 8.25% (8.57%). The effective tax rate fell to 27.4% from 30.2%.

At year-end, total assets were $221.642 billion, loans and leases were $144.800 billion, deposits were $157.371 billion, long-term debt was $23.648 billion, and shareholders’ equity was $29.695 billion. Compared with 2016, assets rose $2.366 billion, loans and leases declined $238 million, deposits fell $2.863 billion, long-term debt rose $1.683 billion, and equity declined $231 million. BB&T’s CET1 ratio was 10.2% (unchanged); Tier 1 and total risk-based capital ratios were 11.9% and 13.9%, versus 12.0% and 14.1%.

Operating cash flow was $4.635 billion, investing cash flow was negative $5.309 billion, and financing cash flow was negative $549 million. Cash and cash equivalents declined $1.223 billion to $2.713 billion. The liquid asset buffer was 14.3% of assets, and the Liquidity Coverage Ratio was approximately 138%, above the applicable 100% minimum. The company reported approximately $80.9 billion of secured borrowing capacity.

Material changes versus the prior period

• Noninterest income increased $310 million to a record $4.782 billion, with broad-based gains, including higher insurance, deposit service charges, and other income. Mortgage banking income fell $48 million, mainly from lower mortgage servicing rights valuation.
• Noninterest expense rose $723 million. Key items included a $392 million pretax loss on early extinguishment of $2.9 billion of higher-cost FHLB advances, a $100 million philanthropic contribution, and $36 million in one-time employee bonuses related to tax reform. Merger and restructuring charges declined to $115 million from $171 million.
• Asset quality improved: nonperforming assets fell to $627 million from $813 million, and NPA-to-loans-and-foreclosed-property declined to 0.44% from 0.57%. Net charge-offs were $537 million versus $532 million; the ratio to average loans remained 0.38%.
• Share repurchases totaled $1.6 billion (35.5 million shares), and common dividends were $1.005 billion. The total payout ratio was 117.9%, above management’s usual 30%–80% guideline. The common dividend declared was $1.26 per share, up from $1.15.
• BB&T reorganized reportable segments in 2017; prior periods were recast. Segment results may not be comparable with other institutions because of internal allocation methods.

Outlook, commentary, risks, and unusual items

The filing provides no numerical earnings or revenue guidance. Management cited competition and challenges to asset growth, changing technology and customer preferences, global and geopolitical uncertainty, and the costs and risks of regulatory initiatives and IT projects. Management said current liquidity sources were adequate for requirements and planned growth; the Federal Reserve did not object to the 2017 capital plan, and the 2018 plan was expected to be submitted in April 2018.

The Tax Cuts and Jobs Act, enacted in December 2017, reduced the federal corporate tax rate to 21% beginning in 2018. BB&T recorded a $43 million net tax benefit in 2017 and one-time tax-reform-related expenses described above. The filing also reports a $247 million reclassification of deferred tax effects from AOCI to retained earnings.

Regulatory compliance is a notable risk: Branch Bank entered an FDIC/North Carolina consent order in December 2016, and BB&T entered an FRB/North Carolina cease-and-desist order in January 2017 concerning BSA/AML control deficiencies. The filing says remediation progressed during 2017, no criminal activity was identified, and no financial penalty was levied; orders may constrain acquisitions or certain activities. Separately, BB&T paid $83 million in 2016 to settle FHA lending matters with the Department of Justice. Other key risks include credit deterioration, interest-rate and deposit-cost sensitivity, cybersecurity and operational disruption, litigation, regulatory change, and execution/integration risks.

Important facts for investors to verify

• Confirm that this BB&T 2017 10-K is the intended filing despite the request naming Truist Financial Corp.
• Review the full audited statements and notes for cash flow classification, credit-loss allowance assumptions, loan quality, and securities valuation.
• Track progress and any continuing restrictions or costs associated with the BSA/AML regulatory orders.
• Assess whether earnings excluding the debt-extinguishment loss and tax-reform-related items are sustainable, and how 2018’s lower tax rate affects results.
• Evaluate deposit trends and funding costs, capital distributions relative to earnings, and the effect of interest-rate changes on NIM and economic value.
• Review legal contingencies, off-balance-sheet commitments, and the potential future effect of the expected credit-loss accounting standard; management said the allowance could be materially higher, but had not quantified the impact.