Truist Financial Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unless noted, amounts are in U.S. dollars. Truist completed its merger with SunTrust on December 6, 2019; 2019 income-statement comparisons include only heritage BB&T before the merger and are therefore not directly comparable with 2020.
Financial results and position
| Metric | Q3 2020 / September 30, 2020 | Comparison |
|---|---|---|
| Revenue | $5.6 billion | Up $2.6 billion from Q3 2019, primarily reflecting the merger |
| Net income | $1.141 billion | Up 37.8% from $828 million in Q3 2019 |
| Net income available to common shareholders | $1.068 billion | Up 45.3% from $735 million |
| Diluted EPS | $0.79 | Down from $0.95; weighted-average diluted shares rose to 1.358 billion from 776 million, largely reflecting the merger |
| Net interest income / NIM | $3.362 billion / 3.10% | NIM down 27 basis points year over year |
| Provision for credit losses | $421 million | Versus $117 million in Q3 2019 |
| Noninterest income / expense | $2.210 billion / $3.755 billion | Income included $104 million of securities gains; expense included $236 million of merger-related and restructuring charges |
| Assets / loans and leases | $499.2 billion / $306.6 billion | Assets up $26.1 billion and loans up $6.8 billion from year-end 2019 |
| Deposits | $370.7 billion | Up $36.0 billion from year-end 2019 |
| Credit allowance | $6.229 billion total ACL, including $5.863 billion ALLL | Versus $1.889 billion ACL at year-end 2019; increase chiefly reflects CECL adoption and pandemic-related reserves |
| Debt | $6.244 billion short-term borrowings; $41.008 billion long-term debt | Short-term borrowings down $12.0 billion; long-term debt down $331 million from year-end 2019 |
| Capital and liquidity | CET1 10.0%; average LCR 117%; liquid-asset buffer 18.6% of assets | CET1 was 9.5% at year-end 2019; LCR exceeded the regulatory minimum |
For the first nine months, net income was $3.162 billion, versus $2.511 billion in 2019; diluted EPS was $2.18, versus $3.00. Net interest income was $10.460 billion, provision for credit losses $2.158 billion, and noninterest income $6.594 billion. Net cash from operating activities was $5.029 billion; investing activities used $14.087 billion and financing activities provided $27.101 billion. Cash and cash equivalents were $37.108 billion at September 30.
Material changes and management commentary
- The merger drove much of the year-over-year growth in revenue, expenses, assets, deposits and loans. Truist reported $1.6 billion in targeted net cost savings on a run-rate basis by Q4 2022, excluding changes in net pension costs for 2021 and 2022.
- Lower interest rates reduced asset yields: Q3 loan yield was 4.04%, down 94 basis points year over year. Lower funding costs partly offset this; average cost of interest-bearing liabilities was 0.35%, down 112 basis points.
- Q3 net charge-offs were $326 million, with an annualized rate of 0.42%. Nonperforming assets were $1.314 billion, or 0.26% of assets. Management cited pandemic uncertainty, exposures to vulnerable industries, and possible credit deterioration after relief programs expire.
- Truist held $12.2 billion in PPP loans. At quarter-end, 98.0% of exited commercial accommodations and 94.3% of exited consumer accommodations were current or paid off; active accommodations totaled $6.858 billion, excluding certain government-guaranteed loans.
- Truist issued $3.5 billion of preferred stock and $6.5 billion of senior and subordinated long-term debt during the first nine months. The common dividend was $0.45 per share for Q3; the company declared the same amount for Q4.
- COVID-19 and government stimulus contributed to deposit growth and client accommodations, while low rates, deferred interest, fee disruption and higher operating costs affected results. Management warned that the pandemic’s duration and financial impact remain uncertain.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said continued pandemic effects could adversely affect credit quality, fee income, net interest margin, expenses, capital and liquidity.
- The Federal Reserve’s 2.7% stress capital buffer took effect October 1, 2020. Truist said it would resubmit its capital plan in early November. Federal Reserve restrictions for Q3 and Q4 2020 suspended share repurchases and limited common dividends.
- CECL adoption on January 1 increased the allowance by approximately $3.1 billion and reduced retained earnings by $2.1 billion after tax and other impacts. Truist elected the five-year regulatory capital transition for CECL.
- The company recorded a $235 million loss from early extinguishment of debt after redeeming $20 billion of FHLB advances in Q2. Q3 results also included $104 million of securities gains and a $50 million charitable contribution.
- Legal proceedings are ongoing. Estimated reasonably possible losses in excess of accruals ranged from zero to approximately $200 million; Truist said it could not estimate losses for certain matters. The filing states an unfavorable resolution could be material.
- Other risks include merger integration and savings execution, goodwill impairment if conditions worsen, vulnerable-sector loan losses, LIBOR transition, deposit outflows, market and interest-rate exposure, litigation and regulatory changes. Fitch revised Truist’s outlook to negative in April and downgraded senior unsecured debt to A in July under its revised rating methodology.
Important facts for investors to verify
- How the merger affects comparability of reported growth, expenses, earnings per share and segment results against 2019.
- Whether pandemic-related credit deterioration, accommodation exits and exposures to hotels, senior care, oil and gas, restaurants and sensitive retail require further reserve builds or drive charge-offs.
- The sustainability of fee income, mortgage production and securities gains, and the trajectory of NIM in a low-rate environment.
- Progress toward the $1.6 billion run-rate cost-savings target, alongside merger integration charges and operating costs.
- Capital and dividend capacity under regulatory limits, including the updated capital plan and the effect of any worsening economic outlook.
- Potential outcomes of legal and regulatory matters, including losses beyond current accruals and the PPP-related litigation.