A controversial new accounting standard gives BB&T and SunTrust Bank greater reason to complete their merger before the turn of the year.
The companies are still hopeful that the deal will be finalized this year, a view bolstered by the announcement Friday that SunTrust will sell 30 branches to secure the Justice Department's support. Banks continued to warn last month that the closing date could slip into 2020. The biggest remaining obstacle is approval by the Federal Reserve Bank.
A predominant assessment is the current accounting standard for expected credit losses, which many banks ̵[ads1]1; including BB&T and SunTrust – must implement by January. 1. The rule requires companies to account for estimated losses when a loan occurs and replaces the existing standard that allows them to wait until a default is likely.
Ending in 2019 would allow the merged company, Truist Financial, to avoid any revenue being made related to CECL. Otherwise, the SunTrust CECL reserve would "have to be wound up 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 agreement is terminated this year, Klock wrote. At the end of 2020, the capital adjustment had to be immediate unless Truist receives a waiver from the Fed.
These actions would make Truist's performance "look much worse than it actually is," said Stephen Scouten, an analyst at Sandler O & Neill. "That's not the way Truist wants to get out of the gate."
Regardless, the same accounting rule is being implemented, said BB&T CFO Daryl Bible at an investment conference Thursday. The difference is "more cosmetic" than real, the 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 in SunTrust, would like to avoid the more complicated scenario if it can help, he said.
A large quarterly earnings, for whatever reason, can hurt the new company's stock price, Scouten said. Computer-based stock trading, where buying and selling decisions are made solely by algorithms, may not be able to adjust for an accounting-based hit, he said.
"It can have an unnecessary impact on the stock, although I suppose it would be temporary," Scouten said.
CECL enters into force on January 1 for banks reporting to the Securities and Exchange Commission, with the exception of institutions defined as smaller reporting companies. Some banks have cited the new CECL rule as a reason to try to complete ongoing acquisitions in 2019 instead of 2020, including the $ 18 billion Simmons First National asset in Pine Bluff, Ark., Which purchases Landmark Bank in Columbia, Mo. . 19659002] The time is too short before the BB&T-SunTrust agreement ends this year, and King acknowledged last month that the completion date could come next year. The scout said the Fed approval must be made by December 12 for the acquisition to close this year. BB&T has said that they plan to complete the acquisition on the first Friday after a mandated 15-day wait.
BB&T and SunTrust are part of a group advocating for a two-stage remuneration structure for CECL. One level would have included expected depreciation within 12 months, which would flow through net income. The second would have included settlements expected over the remaining contractual life of a loan, which would flow through other comprehensive income.
The proposal was intended to dampen CECL's impact 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 detailing the proposal. While banks also hinted at a broad-based delay on CECL's effective dates, FASB has not provided any indication that they would.