Business context and reporting period
Truist Financial Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2023. The company operates Consumer Banking and Wealth, Corporate and Commercial Banking, and Insurance Holdings, with other activities reported in Other, Treasury and Corporate. Figures below are in U.S. dollars; financial statement amounts are generally in millions.
Key financial results
| Metric | Q2 2023 | Q2 2022 |
|---|---|---|
| Net interest income | $3,625 million | $3,407 million |
| Noninterest income | $2,293 million | $2,248 million |
| Noninterest expense | $3,748 million | $3,580 million |
| Provision for credit losses | $538 million | $171 million |
| Net income | $1,345 million | $1,532 million |
| Net income available to common shareholders | $1,234 million | $1,454 million |
| Diluted EPS | $0.92 | $1.09 |
| Taxable-equivalent NIM | 2.91% | 2.89% |
Quarterly diluted EPS fell 15.6% year over year. Net interest income growth reflected higher rates and loan growth, partly offset by higher deposit and other funding costs and lower purchase-accounting accretion. Record insurance income supported fee revenue; lower investment banking and trading income was a headwind. Adjusted noninterest expense increased 9.9% year over year, according to management.
For the six months ended June 30, net income available to common shareholders was $2.644 billion versus $2.781 billion a year earlier; diluted EPS was $1.98 versus $2.08. Net interest income was $7.493 billion versus $6.590 billion, while provision for credit losses rose to $1.040 billion from $76 million. Taxable-equivalent NIM was 3.04%, up 21 basis points year over year.
Balance sheet, funding, liquidity and capital
- Total assets were $554.5 billion at June 30, 2023, versus $555.3 billion at December 31, 2022. Loans and leases were $322.1 billion, down from $326.0 billion.
- Deposits totaled $406.0 billion, compared with $413.5 billion at year-end. Average deposits in Q2 were $399.8 billion, down 2.1% from Q1; average noninterest-bearing deposits were 30.9% of average deposits. Management estimated uninsured deposits at $171.8 billion. About 63% of deposits were insured or collateralized.
- Short-term borrowings were $24.5 billion and long-term debt was $44.7 billion at quarter-end. Interest expense rose sharply year over year as funding costs increased.
- Available liquidity was reported at $178.5 billion, including $153.8 billion of available secured borrowing capacity and $24.7 billion of eligible cash at the Federal Reserve. Average consolidated LCR was 112%; NSFR was 127% at June 30.
- Preliminary CET1 was 9.6%, up from 9.0% at year-end; the IH minority stake sale contributed 31 basis points to risk-based capital ratios. Truist declared a $0.52 per-share common dividend and made no Q2 share repurchases.
- Six-month cash flows were $3.848 billion from operating activities, $9.517 billion from investing activities and negative $4.776 billion from financing activities. Cash and cash equivalents increased $8.589 billion to $30.010 billion.
Material changes and unusual items
- On April 3, Truist sold a 20% common-equity stake in Insurance Holdings for $1.9 billion; net proceeds of $1.922 billion were reflected in financing cash flows, and $1.413 billion net of tax increased shareholders’ equity. Truist retained a controlling interest.
- Truist sold its student loan portfolio at the end of Q2 at net carrying value, with no income impact. The sale included $98 million of charge-offs previously provided for and affected the quarter’s net charge-off ratio by 12 basis points.
- Shareholders’ equity increased to $63.7 billion from $60.5 billion at year-end. Tangible book value per common share, a non-GAAP measure, rose to $20.44 from $18.04.
- The AFS securities portfolio had $11.891 billion of gross unrealized losses at June 30; HTM securities had $10.002 billion. Management attributed substantially all portfolio unrealized losses to interest-rate movements rather than credit deterioration. AOCI was negative $13.374 billion.
- Q2 included $54 million of merger-related and restructuring charges. The prior-year quarter included $121 million of such charges, $117 million of incremental merger operating expenses, and a $39 million gain on redemption of FHLB advances.
Credit, outlook and risks
- Nonperforming loans and leases held for investment were $1.511 billion, or 0.47% of loans, up from 0.36% at March 31. Management said the increase was concentrated in commercial real estate and commercial and industrial loans. Nonperforming assets totaled $1.583 billion.
- The allowance for credit losses was $4.879 billion, including $4.606 billion for loans and leases and $273 million for unfunded commitments. The ALLL ratio was 1.43%, up from 1.37% at Q1. Q2 net charge-offs were $440 million; the annualized net charge-off ratio was 0.54%.
- CRE and commercial construction loans totaled $28.8 billion. Office loans were $5.2 billion, with $264 million nonperforming, compared with $75 million at year-end. Truist reported increases in nonperforming and criticized office loans and identified CRE and commercial construction as areas of heightened risk.
- Management described Q2 results as mixed, citing funding-cost and capital-markets headwinds, record insurance income, and prudent reserve increases amid economic uncertainty. It said it was accelerating plans to adjust the cost base and shifting loan mix toward higher-return assets. No specific earnings or revenue guidance was provided in the supplied filing text.
- A proposed FDIC special assessment was estimated to cost Truist approximately $460 million if finalized as proposed; recognition would occur when finalized, with payments expected over eight quarters beginning Q1 2024. The amount and timing remain subject to the final rule.
- Truist estimated reasonably possible legal losses, in excess of accrued amounts, of up to approximately $200 million; this is not a maximum exposure estimate. Disclosed matters include litigation and SEC/CFTC inquiries regarding business-related electronic communications.
- Management identified risks including deposit outflows and funding costs, interest-rate and securities valuation exposure, credit deterioration and economic uncertainty, regulatory changes, litigation, and operational and cybersecurity risks. Banking regulators proposed capital-rule changes after quarter-end; Truist was evaluating potential effects.
Important facts for investors to verify
- Whether deposit balances, uninsured deposits, deposit mix and funding costs stabilize or continue to pressure margins and liquidity.
- Subsequent trends in commercial and industrial and CRE delinquencies, criticized loans, office exposure, charge-offs and allowance coverage.
- The final FDIC special assessment, its timing and any additional bank regulatory capital or liquidity requirements.
- Whether cost actions offset expense growth, and whether insurance growth and core banking revenue can sustain earnings as funding costs and credit provisions evolve.
- How interest-rate changes affect net interest income, AOCI and the fair value of AFS and HTM securities; management’s sensitivity estimates depend on assumptions about deposit behavior and betas.
- Developments in disclosed legal and regulatory matters, including the stated potential-loss estimate and significant cases.