Truist Financial Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Truist completed its merger with SunTrust on December 6, 2019; 2019 income comparisons reflect heritage BB&T only, so year-over-year results are not directly comparable.
Financial results and position
- Q2 earnings: Net income was $958 million and net income available to common shareholders was $902 million, compared with $885 million and $842 million, respectively, in Q2 2019. Diluted EPS was $0.67 versus $1.09, reflecting a substantially larger post-merger share count. Annualized return on average assets was 0.75% and return on average common equity was 5.90%, compared with 1.55% and 11.98% a year earlier.
- Revenue and margin: Q2 revenue was approximately $5.9 billion, including net interest income of $3.448 billion and noninterest income of $2.423 billion. Net interest margin was 3.13%, down 29 basis points year over year. Growth in reported revenue was largely merger-driven. The quarter included $300 million of securities gains.
- Credit costs: Provision for credit losses was $844 million, versus $172 million in Q2 2019. Net charge-offs were $316 million, or 0.39% of average loans and leases on an annualized basis. At June 30, the allowance for credit losses was $6.133 billion, including $5.702 billion for loans and leases and $431 million for unfunded commitments; allowance coverage was 5.24 times nonperforming loans and leases held for investment.
- Expenses and unusual items: Noninterest expense was $3.878 billion. It included $209 million of merger-related and restructuring charges and a $235 million loss from early extinguishment of debt. Management also identified $129 million of incremental merger operating expenses and $115 million of additional COVID-related expenses versus Q2 2019.
- Balance sheet and funding: Total assets were $504.3 billion, loans and leases were $314.8 billion, and deposits were $376.2 billion. Deposits rose $41.5 billion from year-end, while loans increased $15.0 billion. Short-term borrowings fell to $5.7 billion from $18.2 billion; long-term debt was $42.1 billion, versus $41.3 billion at year-end.
- Cash flow: For the six months, operating cash flow was $4.604 billion, investing cash flow was negative $11.969 billion, and financing cash flow was $29.497 billion. Cash and cash equivalents increased $22.132 billion to $41.197 billion.
- Capital and liquidity: Preliminary CET1 was 9.7%, total risk-based capital was 13.9%, and average liquidity coverage ratio was 116%. The liquid asset buffer equaled 17.8% of assets. Truist reported $166.1 billion of available secured borrowing capacity at Truist Bank.
Material changes and drivers
- The merger materially expanded the balance sheet and affected revenue, expenses, credit costs, and comparisons with 2019. Truist remained committed to achieving $1.6 billion of net cost savings on a run-rate basis by Q4 2022.
- CECL adoption on January 1 increased the allowance for credit losses by approximately $3.1 billion and reduced retained earnings by $2.1 billion after tax and other impacts. Additional 2020 reserve building reflected pandemic-related economic deterioration.
- Mortgage production and refinancing supported residential mortgage income; insurance income reached a quarterly record of $581 million. Deposit service charges were affected by lower overdraft activity and fee waivers.
- COVID-19 relief and stimulus contributed to deposit growth. Truist reported $12.0 billion of PPP loans outstanding and accommodations on $35.2 billion of loans and credit card balances, equal to 11.2% of loans held for investment.
Outlook, risks, and contingencies
- Management said the duration and financial impact of the pandemic could not be estimated and expected continued adverse effects on operating results. Its June 30 credit-loss forecast assumed an extended GDP recovery and unemployment initially in double digits, then remaining at sustained high single-digit levels.
- Credit exposures identified as particularly vulnerable totaled $30.1 billion, or 9.6% of loans held for investment, including hotels, senior care, oil and gas, acute care, restaurants, and sensitive retail. CARES Act accommodations and deferrals may obscure underlying payment stress; management noted asset quality measures were tempered by relief programs.
- The Federal Reserve’s preliminary stress capital buffer was 2.7%, with the final determination due by August 31, 2020. For Q3 2020, the Federal Reserve required Truist and other large banks to suspend share repurchases and imposed dividend limits. Truist had already suspended buybacks; its Q2 common dividend was $0.45 per share.
- Truist reported an estimated range of reasonably possible legal losses, in excess of accruals, of zero to approximately $200 million, while noting some matters could not be estimated. It also disclosed lawsuits related to PPP participation and ongoing litigation including Bickerstaff v. SunTrust Bank.
- In July 2020, Truist completed a regulatory branch divestiture involving 30 branches, $425 million of loans and $2.2 billion of deposits. Subsequent to quarter-end, Truist issued $925 million of preferred stock and $750 million of senior notes; the filing also reports the July branch sale.
Important facts for investors to verify
- How much of earnings and revenue growth is merger-related, and whether the $1.6 billion cost-savings target remains achievable on schedule.
- Whether pandemic accommodations, government relief, and PPP guarantees mask emerging delinquencies or losses, particularly in vulnerable industries and consumer portfolios.
- How credit provisions and the $6.1 billion allowance evolve as economic forecasts change, including the effect of CECL assumptions and qualitative adjustments.
- Whether margins and fee income remain under pressure from low interest rates, client relief measures, and changing mortgage activity.
- The final stress capital buffer, applicable dividend restrictions, capital levels, and capacity to maintain distributions while supporting lending and integration.
- Developments in the disclosed legal matters and any losses beyond the estimated range or existing accruals.