TRUIST FINANCIAL CORP quarterly report, Q3 FY2016

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BB&T Corporation (historical filing; metadata identifies Truist Financial Corp.) — Q3 2016 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2016. The filing registrant is BB&T Corporation, not Truist Financial Corp.; verify the entity and filing mapping before relying on this summary.

Business context and key results

BB&T is a financial holding company operating primarily through Branch Bank. Results reflect significant acquisition activity, including National Penn, acquired April 1, 2016, and insurance broker Swett & Crawford, purchased the same day. Unless noted otherwise, financial amounts below are in millions of dollars.

  • Q3 revenue and earnings: Taxable-equivalent total revenue was approximately $2.8 billion, up $325 million year over year, largely due to acquisitions. Net income was $642 million versus $533 million; net income available to common shareholders was $599 million versus $492 million. Diluted EPS was $0.73 versus $0.64.
  • Nine-month results: Net interest income was $4.756 billion versus $4.088 billion; noninterest income was $3.310 billion versus $3.004 billion. Net income was $1.799 billion versus $1.581 billion, and diluted EPS was $2.05 versus $1.92.
  • Margins and returns: Q3 net interest margin was 3.39%, compared with 3.35% a year earlier; nine-month NIM was 3.41% versus 3.31%. Q3 annualized return on average assets was 1.15%, and return on average common equity was 8.87%.
  • Expenses and credit costs: Q3 noninterest expense was $1.711 billion, up $117 million year over year; provision for credit losses was $148 million versus $103 million. Nine-month provision was $443 million versus $299 million.

Financial position, cash flow, and liquidity

  • Balance sheet at September 30: Total assets were $222.6 billion; loans and leases were $142.4 billion, net of a $1.5 billion allowance. Deposits totaled $159.9 billion, up from $149.1 billion at year-end 2015. Total shareholders’ equity was $30.1 billion.
  • Debt: Short-term borrowings were $4.1 billion and long-term debt was $22.8 billion, down $1.0 billion from year-end. Long-term debt issuance of $3.0 billion during the nine months was more than offset by repayments and maturities.
  • Cash flow, nine months: Operating cash flow was $300 million versus $1.902 billion in 2015; investing cash flow was negative $2.486 billion and financing cash flow was positive $1.447 billion. Cash and cash equivalents ended at $2.972 billion. Operating cash flow included a $1.617 billion increase in loans held for sale and a $230 million FDIC termination payment.
  • Liquidity and capital: The liquid asset buffer was 13.6% of total assets, above the 5% policy minimum; the reported LCR was approximately 122%, versus a 90% regulatory minimum then in effect. Basel III ratios included CET1 of 10.1%, Tier 1 of 11.8%, total capital of 14.0%, and leverage of 9.8%. The company estimated fully phased-in standardized CET1 at 9.9%.

Material changes versus comparable periods

  • Growth in revenue, loans, deposits, and assets was substantially influenced by acquisitions. National Penn added $10.1 billion of assets and $6.6 billion of deposits at acquisition; it was acquired for $1.6 billion in total consideration. Swett & Crawford was purchased for $465 million cash.
  • Noninterest expense increased with acquisition-related staffing, occupancy, technology, regulatory costs, and intangible amortization. Q3 personnel expense alone increased $124 million year over year.
  • Credit quality weakened in some areas: NPAs were $843 million versus $712 million at year-end 2015, and NPLs were 0.53% of loans held for investment versus 0.42%. Nine-month net charge-offs rose to $381 million from $306 million.
  • Common shares outstanding rose to 811.4 million from 780.3 million at year-end, principally reflecting acquisition-related issuance. The company repurchased $160 million of shares in Q3 and declared a $0.30 quarterly dividend.

Management commentary, risks, and unusual items

  • Management attributed higher credit provision partly to energy-lending exposure and retail other-lending growth. The energy portfolio was approximately $1.3 billion with allocated reserves of 11.5%; management reported $30 million of energy-related net charge-offs in Q1. Used-car value deterioration also contributed to higher losses in other lending subsidiaries.
  • During Q3, BB&T paid approximately $230 million to terminate Colonial-related FDIC loss-share agreements, recorded $18 million of pretax expense, and eliminated future loss/gain sharing for those agreements.
  • A Department of Justice settlement resolved legacy FHA mortgage matters: BB&T paid $83 million and separately received $71 million, producing a reported $73 million Q3 net benefit, including the effect of the previously recorded reserve and recoveries.
  • The company made a $50 million charitable contribution. Q3 merger-related and restructuring charges were $43 million; nine-month charges were $158 million.
  • Management cited exposure to economic and interest-rate changes, credit deterioration, competition, regulatory and accounting changes, cyber and operational disruptions, litigation, and the execution and integration of acquisitions. It provided no specific earnings guidance in the supplied filing text.
  • BB&T expected the new expected-credit-loss accounting standard to increase its allowance, but had not quantified the impact. The filing states that legal reserves were considered adequate, while acknowledging an unfavorable outcome in legal matters could be material.

Investor verification priorities

  1. Confirm the filing belongs to the intended issuer: this 2016 report names BB&T Corporation, while the request metadata names Truist Financial Corp.
  2. Assess whether earnings growth is sustainable apart from acquired businesses and one-time items, especially the FHA settlement benefit and FDIC termination effects.
  3. Track energy and used-car credit performance, nonperforming loans, charge-offs, allowance coverage, and the composition of the reported energy exposure.
  4. Review acquisition integration costs, purchase accounting, goodwill and intangible-asset balances, and the effect of issued shares on per-share results.
  5. Verify liquidity and capital trends, including the transition in LCR minimums, capital-buffer requirements, and the impact of planned dividends and repurchases.