Truist Financial Corporation — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Comparisons are primarily with Q1 2020 for earnings and cash flow, and December 31, 2020 for balance-sheet measures. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context and results
Truist is a bank holding company formed through the 2019 BB&T–SunTrust merger. It reports Consumer Banking and Wealth, Corporate and Commercial Banking, Insurance Holdings, and Other, Treasury and Corporate. Management described Q1 performance as strong while continuing COVID-19 support and merger integration.
- Revenue was approximately $5.5 billion; taxable-equivalent revenue was also approximately $5.5 billion, down $138 million year over year.
- Net income was $1.473 billion; net income available to common shareholders was $1.334 billion, up 35.3%. Diluted EPS was $0.98, versus $0.73.
- Annualized return on average assets was 1.17%, compared with 0.90%; return on average common equity was 8.69%, compared with 6.58%.
- Net interest income was $3.285 billion, down $365 million. Net interest margin was 3.01%, down 57 basis points. Lower asset yields outweighed lower funding costs.
- Noninterest income rose 12.0% to $2.197 billion, led by investment banking and trading, insurance, and lending-related fees. Residential mortgage income fell $145 million and deposit service charges fell $47 million.
- Noninterest expense increased 5.2% to $3.610 billion. Management cited merger-related and restructuring charges, incremental merger operating costs, and terminated-hedge expense. Adjusted noninterest expense, as described by management, was up $32 million year over year.
Financial position, credit, and liquidity
- Total assets were $517.5 billion, up $8.3 billion from year-end. Deposits totaled $395.6 billion, up $14.5 billion; management attributed growth to stimulus-related inflows and pandemic-era client behavior. Loans and leases were $291.5 billion, down $8.2 billion.
- Cash and cash equivalents ended the quarter at $32.1 billion. Cash from operating activities was negative $33 million, versus positive $4.6 billion in Q1 2020; investing cash flow was positive $3.1 billion and financing cash flow positive $10.2 billion.
- Short-term borrowings were $5.9 billion and long-term debt $37.8 billion, both lower than at year-end. The company issued $1.3 billion of senior notes during the quarter.
- Provision for credit losses was $48 million, versus $893 million in Q1 2020, when the pandemic’s onset drove a substantial allowance build. Net charge-offs were $238 million; the annualized net charge-off rate was 0.33%.
- Allowance for credit losses was $6.0 billion, including $5.7 billion for loans and leases. The allowance was 1.94% of held-for-investment loans and 4.84 times nonperforming loans. Nonperforming assets were $1.3 billion, or 0.25% of assets.
- CET1 capital ratio was 10.1%; average liquidity coverage ratio was 111%, above the 100% regulatory minimum. The liquid asset buffer was 23.2% of assets. Total shareholders’ equity fell $3.0 billion to $67.9 billion, including a $2.2 billion decline in accumulated other comprehensive income, primarily reflecting unrealized securities losses.
Material changes, outlook, and notable items
- The year-over-year earnings comparison benefited from the sharp reduction in credit-loss provision relative to Q1 2020. Fee income improved overall, but mortgage income weakened; NIM remained pressured by lower market rates and loan yields.
- Management reaffirmed a target of $1.6 billion in merger-related net cost savings on a run-rate basis by Q4 2022. It reported progress on wealth transitions and core-bank conversion work; no earnings or revenue guidance was provided in the supplied filing text.
- COVID-19 remains a source of uncertainty. Management’s ACL forecast assumed GDP recovery to pre-pandemic levels in Q3 2021 and unemployment improving through 2021, while noting that qualitative credit-reserve adjustments may remain significant. PPP loans had a carrying value of $10.1 billion.
- Selected industries considered vulnerable to pandemic effects totaled $27.0 billion, or 9.2% of held-for-investment loans. Active client accommodations totaled $1.8 billion; exited accommodations had $30.0 billion outstanding, of which $657 million was nonperforming.
- Q1 included $141 million of merger-related and restructuring charges, $175 million of incremental merger operating expenses, and $36 million of accelerated loss recognition on terminated cash flow hedges. It also included a $37 million gain from business divestitures, largely offset in the comparison by prior-year credit-default-swap gains.
- Truist repurchased $506 million of common stock, redeemed $950 million of preferred stock, and declared a $0.45 common dividend per share. It had $1.5 billion of repurchase authorization remaining. Subsequent to quarter-end, it declared another $0.45 dividend, announced a $465 million Series H preferred redemption, and redeemed senior notes in April and May.
- Management estimated reasonably possible legal losses above accrued amounts of up to approximately $200 million at quarter-end, while noting that some matters could not be estimated. It stated that the ultimate resolution of proceedings could be material.
- Interest-rate sensitivity was positive in modeled rising-rate scenarios: projected next-12-month net interest income increased 3.74% under a gradual 100-basis-point rise. The filing cautions that results depend on assumptions, including deposit behavior. Truist also identified LIBOR transition, merger integration, credit quality, cyber and operational risks, regulatory matters, and pandemic impacts as material risk areas.
Important facts for investors to verify
- Whether deposit growth persists and how deposit mix and pricing affect net interest margin and interest-rate sensitivity.
- Whether loan balances, delinquency trends, accommodations, and vulnerable-sector exposures translate into higher credit losses as relief programs change.
- How much of Q1 earnings growth reflects lower credit provisioning and volatile or nonrecurring items, versus sustainable operating performance.
- Progress toward the $1.6 billion cost-savings target, integration spending, and the timing and execution of core-system conversion.
- The effects of the $2.2 billion AOCI decline, securities portfolio duration increase to 6.0 years, and capital returns on capital ratios and common equity value.
- Developments in legal proceedings, including the disclosed possible losses, and the completion and financial effects of announced preferred-stock and debt redemptions.