Truist Financial Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; comparisons are primarily with Q3 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context and results
Truist is a diversified banking and financial services company with Consumer Banking and Wealth, Corporate and Commercial Banking, and Insurance Holdings segments. Management said it is simplifying the organization, focusing on core clients, reducing lower-return portfolios, and strengthening capital.
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $3,564 | $3,745 | $11,057 | $10,335 |
| Noninterest income | $2,108 | $2,102 | $6,635 | $6,492 |
| Net income | $1,183 | $1,637 | $4,043 | $4,585 |
| Net income available to common shareholders | $1,071 | $1,536 | $3,715 | $4,317 |
| Diluted EPS | $0.80 | $1.15 | $2.77 | $3.22 |
| Net interest margin, taxable-equivalent | 2.95% | 3.12% | 3.01% | 2.93% |
Q3 total revenue, calculated as net interest income plus noninterest income, was $5.7 billion, down about 1.4% year over year. Q3 net income available to common shareholders fell 30%; management reported annualized return on average assets of 0.86% and return on average common equity of 7.5%.
Financial condition, liquidity and capital
- Balance sheet at September 30: Assets were $542.7 billion, down from $555.3 billion at December 31, 2022. Loans and leases were $315.7 billion, down from $326.0 billion; deposits were $400.0 billion, versus $413.5 billion. Noninterest-bearing deposits declined to $116.7 billion from $135.7 billion.
- Funding and debt: Short-term borrowings were $23.5 billion and long-term debt was $41.2 billion. Average deposit costs rose to 1.81% in Q3 from 0.31% a year earlier; average costs of short-term borrowings and long-term debt were 5.47% and 4.51%, respectively.
- Cash flow: For the first nine months, operating cash flow was $6.3 billion, investing cash flow was $17.9 billion, and financing cash flow was negative $15.7 billion. Cash and cash equivalents ended the period at $29.8 billion.
- Liquidity: Average consolidated LCR was 110% for Q3, above the 100% regulatory minimum. Available secured borrowing capacity plus eligible cash at the Federal Reserve totaled $175.4 billion. Approximately 64% of deposits were insured or collateralized; estimated uninsured deposits were $164.5 billion.
- Capital and equity: CET1 was 9.9% at quarter-end, up from 9.0% at December 31, 2022; the company reported a 29-basis-point sequential Q3 increase. Total shareholders’ equity was $62.0 billion. Tangible book value per share, a non-GAAP measure, was $19.25, up from $18.04 at year-end. Truist declared a $0.52 common dividend and made no Q3 share repurchases.
- Investment securities: AFS and HTM securities totaled $120.1 billion. Their reported unrealized losses were substantial; AOCI was negative $15.6 billion. Management attributed substantially all securities losses to market interest-rate changes rather than credit deterioration and reported no securities ACL.
Material changes and credit trends
- Q3 net interest income declined 4.3% on a taxable-equivalent basis year over year as higher funding costs and lower purchase-accounting accretion outweighed higher asset yields. The loan yield rose to 6.25%, while average deposits fell $19.1 billion, or 4.5%, year over year.
- Credit provision was $497 million in Q3 versus $234 million a year earlier; nine-month provision was $1.5 billion versus $310 million. Management cited higher net charge-offs and an allowance build. The Q3 net charge-off ratio was 0.51%, up 24 basis points year over year.
- The allowance for credit losses was $5.0 billion, including $4.7 billion for loans and leases; the ALLL ratio was 1.49%. Nonperforming assets were $1.6 billion, compared with $1.2 billion at year-end 2022.
- CRE and commercial construction loans totaled $29.1 billion. Office loans were $5.1 billion, with $278 million nonperforming, versus $75 million at year-end 2022. Management identified CRE and commercial construction as areas of heightened risk.
- Truist sold its student loan portfolio at the end of Q2. The sale reduced average loans and included $98 million of charge-offs previously provided for in the allowance.
- Insurance income increased, but deposit service charges declined; Q3 included an $87 million reduction associated with client refund accruals after a revision to deposit service-fee protocols. Adjusted noninterest expense increased 6.7% year over year in Q3, according to management’s non-GAAP presentation.
Outlook, management commentary and risks
- Management announced a $750 million gross cost-savings program and said implementation was underway. The filing does not provide a formal earnings or revenue forecast or a clear completion timetable for the program.
- Management said asset quality continues to normalize but remains in line with expectations; it also emphasized expense discipline, capital improvement, and investment in core businesses and risk management systems.
- Truist sold a 20% stake in Insurance Holdings in April for $1.9 billion; the transaction generated $1.4 billion of net-of-tax equity proceeds. The sale also brought in a minority investor and changed the segment’s income allocation and tax treatment.
- The FDIC proposed a special assessment estimated at approximately $460 million for Truist, subject to the final rule; payment was expected in eight quarterly installments beginning Q1 2024 if adopted as proposed.
- Goodwill impairment testing found no impairment, but Consumer Banking and Wealth and Corporate and Commercial Banking fair values exceeded carrying values by less than 10%. The filing identifies continued forecast deterioration, lower peer valuation multiples, or higher discount rates as potential impairment pressures.
- Legal matters include the Bickerstaff overdraft-fee class action, in which the plaintiff seeks up to $452 million plus interest; trial was scheduled for April 2024. Truist estimated reasonably possible legal losses above accruals of up to approximately $200 million, while noting actual outcomes could vary and some matters could not yet be estimated. The USAA patent case was settled without a material adverse financial effect.
- Other key risks include deposit attrition and funding costs, interest-rate sensitivity, credit deterioration (particularly CRE), regulatory changes, litigation, cybersecurity and operational risks. Moody’s placed certain ratings under review for downgrade in August; Fitch revised its outlook to negative after quarter-end.
Important facts for investors to verify
- Whether deposit levels, mix, and pricing stabilize, and how deposit costs affect net interest margin and earnings.
- Whether CRE, commercial construction, auto, and other consumer credit trends lead to further charge-offs, nonperforming loans, or allowance builds.
- Progress, timing, and realized costs and savings from the $750 million gross cost-savings program.
- The final FDIC special-assessment rule and Truist’s resulting expense and payment schedule.
- Developments in goodwill valuations for the two reporting units with less than 10% fair-value headroom, and in the Bickerstaff litigation.
- Capital and liquidity trends, including the effect of unrealized securities losses, regulatory proposals, rating-agency actions, and the company’s dividend and repurchase decisions.