Business context and reporting period
Truist Financial Corporation filed this unaudited Form 10-Q for the quarter ended March 31, 2020. The quarter reflects the combined BB&T and SunTrust businesses following their December 6, 2019 merger. Comparisons with Q1 2019 are not like-for-like: that period reflects heritage BB&T only.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Comparison or context |
|---|---|---|
| Revenue | $5.6 billion (taxable-equivalent) | Up $2.7 billion year over year, mainly reflecting the merger |
| Net interest income | $3.65 billion GAAP; $3.69 billion taxable-equivalent | Taxable-equivalent amount rose $2.0 billion, primarily due to merger-related balance-sheet growth |
| Net interest margin | 3.58% | Up 7 basis points year over year |
| Provision for credit losses | $893 million | Compared with $155 million in Q1 2019; reflected CECL, COVID-19 outlook and loan growth |
| Noninterest income / expense | $1.96 billion / $3.43 billion | Expense included $107 million of merger-related and restructuring charges, $74 million of incremental merger operating costs and $71 million of discretionary COVID-19-related actions, as described in the MD&A |
| Net income / common earnings | $1.06 billion net income; $986 million available to common shareholders | Diluted EPS was $0.73 versus $0.97 in Q1 2019; the merger substantially increased the share count |
| Loans and leases HFI | $319.2 billion | Up $19.4 billion from year-end, including commercial clients drawing credit lines for liquidity |
| Deposits | $350.2 billion | Up $15.5 billion from year-end |
| Cash flow | $4.63 billion operating cash inflow; cash and cash equivalents ended at $36.35 billion | Investing cash outflow was $19.52 billion and financing cash inflow was $32.17 billion |
| Debt and liquidity | $12.7 billion short-term borrowings; $65.7 billion long-term debt; 117% average LCR | Liquid-asset buffer was 19.6% of total assets |
| Capital and equity | 9.3% CET1; $66.1 billion shareholders’ equity | Common dividend was $0.45 per share; share repurchases were suspended pending higher capital ratios |
Material changes versus comparable periods
- Total assets were $506.2 billion, up $33.1 billion from December 31, 2019; loan growth and higher balances at the Federal Reserve were key contributors.
- Net income increased year over year, but diluted EPS declined, reflecting the materially larger post-merger share base. Revenue, expenses and balances also increased substantially because 2020 includes SunTrust while Q1 2019 does not.
- CECL adoption on January 1 increased the allowance for loan and lease losses by $3.1 billion and reduced retained earnings by $2.1 billion after tax and other impacts. The quarter-end total allowance for credit losses was $5.6 billion, including $5.2 billion for loans and leases and $400 million for unfunded commitments.
- Allowance coverage was 1.63% of loans and leases HFI and 5.04 times nonperforming loans. Nonperforming assets were $1.18 billion, or 0.23% of total assets; the reported increase from year-end was substantially affected by CECL’s loan-level treatment of previously pooled purchased credit-impaired loans.
- Other comprehensive income included $1.72 billion of after-tax unrealized gains on available-for-sale securities, contributing to the increase in AOCI from negative $844 million to positive $898 million.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said the duration and effects of COVID-19 were highly uncertain and could further affect credit losses, borrower repayment, collateral values, fee income, expenses, capital, liquidity and goodwill valuations.
- Management’s March 31 credit-loss outlook assumed a sharp economic contraction and home-price decline, sharply lower used-car values, and unemployment remaining at a high-single-digit level through the two-year forecast period, followed by gradual reversion assumptions.
- By the end of April, Truist reported about 23,000 commercial payment-accommodation requests totaling $25.1 billion, 463,000 consumer requests totaling $12.6 billion, and 37,000 credit-card requests totaling $0.2 billion. It had SBA authorizations for approximately $12.6 billion of Paycheck Protection Program loans, with $9.1 billion funded through April.
- Management remained committed to $1.6 billion in merger net cost savings, while noting realization depends on the pandemic’s duration and post-crisis conditions. Purchase-accounting valuations remained preliminary.
- Interest-rate risk increased: the filing’s 12-month simulation estimated net interest income would rise 6.50% under a gradual 100-basis-point increase and decline 3.86% under a 50-basis-point decrease. These are model scenarios, not guidance. Truist also identified LIBOR transition, integration execution, cyber/operational risks and market volatility as risks.
- In April, DBRS changed its Truist outlook from positive to stable and Fitch changed its outlook from stable to negative, citing pandemic-related economic deterioration. The filing disclosed reasonably possible legal losses in excess of accruals ranging from zero to approximately $200 million; some matters could not be estimated.
Important facts for investors to verify
- How subsequent credit performance, modifications and economic forecasts change the $5.6 billion credit-loss allowance and charge-offs.
- Whether COVID-19 accommodations and PPP lending translate into sustainable borrower performance, earnings and credit exposure.
- Merger integration progress, achievement and timing of the $1.6 billion cost-savings target, and any further purchase-accounting adjustments.
- Capital, liquidity and funding trends, including the effects of credit-line utilization, debt issuance, dividends and the suspended repurchase program.
- Developments in COVID-19-related impairment testing, litigation contingencies and other material risks identified in the filing.