BB&T Corporation — Q3 2019 Form 10-Q
Business context and period. This unaudited report covers the quarter and nine months ended September 30, 2019. The registrant was BB&T Corporation; shareholders had approved Truist Financial Corporation as the name of the proposed combined company. BB&T reported a pending all-stock merger with SunTrust, expected to close in Q4 2019 subject to remaining closing conditions and regulatory approvals.
Financial performance and position
| Metric | Q3 2019 | Comparable period / change |
|---|---|---|
| Net interest income, taxable-equivalent | $1.723 billion | Up $9 million year over year |
| Net interest margin | 3.37% | Down 10 basis points year over year |
| Total revenue, taxable-equivalent | About $3.0 billion | Up $73 million year over year |
| Net income | $828 million | $839 million year over year |
| Net income available to common shareholders | $735 million | $789 million year over year |
| Diluted EPS | $0.95 | $1.01 year over year |
| Provision for credit losses | $117 million | $135 million year over year |
| Annualized net charge-offs / average loans | 0.41% | Up 6 basis points year over year |
| ROAA / return on average common equity | 1.41% / 10.04% | 1.49% / 11.69% a year earlier |
For the first nine months, net interest income was $5.086 billion, net income was $2.511 billion, common net income was $2.326 billion, and diluted EPS was $3.00, versus $2.452 billion, $2.309 billion, and $2.94, respectively, in 2018. Net interest margin was 3.43%, down 2 basis points year over year. Noninterest income grew 5.9% to $3.857 billion, while noninterest expense rose 4.1% to $5.359 billion.
At September 30, total assets were $236.750 billion, up from $225.697 billion at year-end 2018. Loans and leases were $149.413 billion, deposits $162.280 billion, short-term borrowings $10.405 billion, long-term debt $25.520 billion, and shareholders’ equity $32.303 billion. The allowance for loan and lease losses was $1.573 billion; total allowance for credit losses, including unfunded commitments, was $1.653 billion. Nonperforming assets were $509 million, or 0.22% of assets; nonperforming loans were 0.30% of loans held for investment.
Cash and cash equivalents plus restricted cash totaled $3.018 billion at quarter-end. Nine-month operating cash flow was $1.964 billion, investing cash flow was negative $9.400 billion, and financing cash flow was positive $6.467 billion. The liquid-asset buffer was 18.2% of assets, and preliminary average modified LCR was approximately 139%, above the stated 100% minimum. Secured borrowing capacity at Branch Bank was approximately $89.1 billion.
Preliminary capital ratios were 10.6% CET1, 12.2% Tier 1, 14.7% total capital, and 10.3% leverage. Tangible common equity per share, a non-GAAP measure, was $24.66. The quarterly common dividend was $0.45 per share; share repurchases were suspended during the merger process.
Material changes and notable items
- Quarterly common earnings and diluted EPS declined year over year despite higher revenue, reflecting increased expenses and preferred-stock redemption costs. Noninterest expense rose $98 million; results included $34 million of merger-related and restructuring charges and $52 million of incremental merger operating expenses.
- BB&T issued $1.7 billion of new preferred stock and redeemed approximately $1.7 billion of Series D and E preferred stock. The redemptions reduced common earnings by $46 million.
- BB&T sold $4.3 billion of residential mortgage loans in Q3. Management reported a $20 million pretax benefit from the sale, including a $4 million gain and a $16 million allowance release. The sale also affected loan balances and credit-loss provision.
- The securities portfolio increased to $54.8 billion from $45.6 billion at year-end, including approximately $5 billion of Agency MBS acquired to increase high-quality liquid assets ahead of the merger. Management said approximately $7.2 billion of Agency MBS was sold and reinvested in Q4; the transaction was expected to produce an approximately $95 million pretax loss, with an estimated 2.6-year payback period.
- Credit quality indicators were mixed: nonperforming assets declined from $585 million at year-end 2018 to $509 million, while nine-month net charge-offs increased to $442 million from $381 million. The allowance-to-loans ratio remained 1.05%.
Outlook, risks and contingencies
The SunTrust merger remained subject to remaining regulatory approvals and other closing conditions; a mutual break-up fee of approximately $1.1 billion could apply in customary circumstances. Management cited integration execution, merger costs, customer and deposit retention, economic conditions, interest rates, credit quality, competition, regulation, cybersecurity, litigation, models, and operational or third-party system failures among risks that could affect results. BB&T also continued preparation for the expected LIBOR transition after 2021.
BB&T’s parallel testing for adoption of the expected-credit-loss standard, scheduled for January 1, 2020, preliminarily indicated a possible 30%–50% increase in the allowance for credit losses. Management cautioned that the estimate depended materially on economic conditions at adoption and did not include the anticipated SunTrust merger impact. The filing also disclosed merger-related shareholder lawsuits resolved through supplemental proxy disclosures; several dismissals were agreed or completed, while four suits were to be dismissed with prejudice as to named plaintiffs only and without prejudice to other putative class members. Management stated that existing legal reserves were adequate, but acknowledged that an unfavorable outcome in unexpected developments could be material.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the merger closed as expected, the final regulatory conditions, integration costs, and any realized synergies or customer attrition.
- The realized Q4 securities-sale loss and payback against the anticipated approximately $95 million pretax loss and 2.6-year payback.
- The actual CECL allowance impact at adoption, including the effect of merger accounting and economic forecasts.
- Trends in funding costs, net interest margin, noninterest expense, and merger-related expenses as interest rates and funding mix change.
- Subsequent credit performance and charge-offs, particularly in indirect consumer, revolving-credit, and commercial real estate portfolios, and the adequacy of reserves.