BB&T and SunTrust have extra incentive to close deal in '19

A controversial new accounting standard is giving BB&T and SunTrust Banks more reason to complete their merger before year-end.

The companies remain hopeful the deal will close this year, a view reinforced by the announcement Friday that SunTrust will sell 30 branches to secure Justice Department support. Still, the banks cautioned last month that the closing date could slip into 2020. The biggest remaining hurdle is Federal Reserve Bank approval.

A looming consideration is the Current Expected Credit Loss accounting standard, which many banks — including BB&T and SunTrust — must implement by Jan. 1. The rule requires companies to account for projected losses when a loan is originated, replacing the existing standard that lets them wait until a default is likely.

Closing in 2019 would let the merged company, Truist Financial, avoid an earnings hit tied to CECL. Otherwise, SunTrust’s CECL reserve “would have to be unwound and rebooked through” Truist’s income statement, Brian Klock, an analyst at Keefe, Bruyette & Woods, wrote in a research note to clients Thursday.

Also under accounting rules, Truist would be allowed to phase in the impact on capital over three years if the deal closes this year, Klock wrote. In a 2020 closing, the capital adjustment would have to be immediate unless Truist receives a waiver from the Fed.

Those actions would make Truist's performance "look a lot worse than it actually is," said Stephen Scouten, an analyst at Sandler O’Neill. "That’s not the way Truist wants to come out of the gate.”

Either way, the same accounting rule is being implemented, BB&T Chief Financial Officer Daryl Bible said at an investor conference Thursday. The difference is “more cosmetic” than real, Bible said. “At the end of the day, the capital levels will be the same.”

Still, Kelly King, BB&T's chairman and CEO, and Bill Rogers, his counterpart at SunTrust, would like to avoid the more complicated scenario if it can be helped, he said.

A large quarterly hit to earnings, regardless of the reason, could hurt the new company's stock price, Scouten said. Computer-based stock trading, where buy-and-sell decisions are made solely by algorithms, might be unable to adjust for an accounting-based hit, he said.

“It could have some unnecessary impact on the stock, although I assume that would be temporary,” Scouten said.

CECL takes effect Jan. 1 for banks that report to the Securities and Exchange Commission, except those institutions defined as smaller reporting companies. Some banks have cited the new CECL rule as a reason for trying to complete pending acquisitions in 2019 instead of 2020, including the $18 billion-asset Simmons First National in Pine Bluff, Ark., which is buying Landmark Bank in Columbia, Mo.

Time is running short for the BB&T-SunTrust deal to close this year, and King acknowledged last month that the completion date could slip into next year. Scouten said the Fed approval needs to happen by Dec. 12 for the acquisition to close this year. BB&T has said it plans to complete the acquisition on the first Friday after a mandated 15-day waiting period.

BB&T and SunTrust are part of a group that advocated for a two-tier allowance structure for CECL. One tier would have included charge-offs expected within 12 months, which would flow through net income. The second would have included charge-offs expected over the remaining contractual life of a loan, which would flow through other comprehensive income.

The proposal was intended to mitigate CECL's effect on capital.

The group, which also included Fifth Third Bancorp, Capital One Financial, Huntington Bancshares and U.S. Bancorp, sent the Financial Accounting Standards Board a letter earlier this year outlining the details of its proposal. While the banks also suggested a broad-based delay in CECL's effective dates, the FASB has not given any indication that it would do that.