TRUIST FINANCIAL CORPORATION Introduction
This MD&A is intended to assist readers in their analysis of the accompanying Consolidated Financial Statements and supplemental financial information. It should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements in this Form 10-K, as well as with the other information contained in this document.
Executive Overview
Overview of Recent Events and Financial Results
Recent Events
EffectiveDecember 6, 2019 , the Company completed the Merger. Upon closing, each SunTrust share was exchanged for 1.295 shares of BB&T stock. In connection with the Merger, the Company changed its name fromBB&T Corporation toTruist Financial Corporation . Reported results forTruist reflect heritage BB&T prior to the completion of the Merger and results from both BB&T and SunTrust from the Merger closing date forward. Period end balances reflect the combined companies. Significant Merger updates include: •InJuly 2019 , BB&T and SunTrust announced the Truist Bank Community Benefits Plan under which the combined company will lend or invest$60 billion to low and moderate-income borrowers and communities over a three-year period from 2020 to 2022. •InNovember 2019 , theDepartment of Justice completed its anti-trust review and the Company received all remaining regulatory approvals. As a condition for the Merger, the Company announced an agreement to divest 30 SunTrust branches inNorth Carolina ,Virginia andGeorgia . The divestiture includes approximately$2.4 billion in deposits and approximately$400 million in loans. •OnDecember 11, 2019 ,Truist announced its planned purchase of the new headquarters building,Hearst Tower , inCharlotte, NC . The deal is expected to close in the first half of 2020. The building will be renamed Truist Center. •InJanuary 2020 ,Truist officially launched the Truist brand and visual identity, andTruist's purpose: "Inspire and build better lives and communities," along with its mission and values.
Financial Results
Net income available to common shareholders totaled$3.0 billion for 2019, a 1.1% decrease from the prior year. On a diluted per common share basis, earnings for 2019 were$3.71 , compared to$3.91 for 2018.Truist's results of operations for 2019 produced a return on average assets of 1.31% and a return on average common shareholders' equity of 9.87% compared to prior year ratios of 1.47% and 11.50%, respectively. Results include merger-related and restructuring charges of$360 million ($285 million after-tax) for 2019 compared to$146 million ($111 million after-tax) for 2018. Additionally, the 2019 results include incremental operating expenses related to the Merger of$164 million ($127 million after-tax), securities losses of$116 million ($90 million after-tax), a reduction in net income available to common shareholders of$46 million arising from the redemption of preferred stock, partially offset by a$14 million after-tax net gain from the sale of residential mortgage loans.Truist's revenue for 2019 was$12.6 billion . On a TE basis, revenue was$12.7 billion , which represents an increase of$1.0 billion compared to 2018. Net interest income on a TE basis was$7.4 billion , an increase of$631 million compared to the prior year, which reflects a$1.3 billion increase in interest income and a$658 million increase in interest expense. The increase in net interest income was due primarily to a$15.2 billion increase in average outstanding loans, a$3.5 billion increase in average securities coupled with a 19 basis point increase in earning asset yields. NIM was 3.42% for 2019, down 4 basis points compared to the prior year. Average earning assets increased$20.6 billion or 10.5%, while average interest-bearing liabilities increased$17.6 billion , or 13.2%, and noninterest-bearing deposits increased$1.7 billion , or 3.1%. The annualized TE yield on the total loan portfolio for 2019 was 4.99%, up 22 basis points compared to the prior year. The annualized TE yield on the average securities portfolio was 2.62%, up 13 basis points compared to the prior year. The provision for credit losses was$615 million , compared to$566 million for the prior year. Net charge-offs for 2019 were$634 million , compared to$524 million for the prior year. The ratio of the ALLL to net charge-offs was 2.44X for 2019, compared to 2.98X in 2018. NPAs increased$99 million year over year, including NPAs from the Merger of$107 million that are classified as LHFS,$63 million for loans HFI and$63 million for other nonperforming assets, offset by NPL sales.Truist Financial Corporation 37
-------------------------------------------------------------------------------- Noninterest income increased$379 million for the year, driven by improvements in the majority of categories, partially offset by securities losses of$116 million and a decrease in other income of$39 million . Approximately$217 million of the increase in noninterest income is due to the contribution from the Merger. Additional increases in noninterest income were primarily due to higher insurance income driven by improved production levels and the acquisition ofRegions Insurance , as well as higher investment banking and trading income. Noninterest expense increased$1.0 billion for the year. Excluding merger-related and restructuring charges and other incremental operating expenses related to the Merger, noninterest expense increased$624 million . Approximately$400 million of the$624 million variance was the result of noninterest expense associated with merged operations. The residual variance was primarily due to an increase in personnel expense.Truist's total assets atDecember 31, 2019 were$473.1 billion , an increase of$247.4 billion compared toDecember 31, 2018 . The Merger contributed$235.7 billion in total assets, including$154.0 billion in loans and leases. Refer to "Note 2. Business Combinations" for additional details related to the opening balances from the Merger. The Company has undertaken a number of strategic actions to enhance the credit quality and manage interest-rate sensitivity of its loan and lease portfolio. During the third quarter of 2019, management sold a$4.3 billion residential mortgage loan portfolio. This sale was followed by a number of balance sheet restructuring actions taken in the fourth quarter of 2019, including the transfer of: •$2.5 billion of residential mortgage loans to LHFS; •$356 million of commercial loans to LHFS as a result of a decision to exit a business; and •$381 million of mortgage, consumer and commercial loans to LHFS related to the forthcoming branch divestiture arising from the Merger.
In addition,
Additionally, during the fourth quarter of 2019, management sold$33.2 billion of securities in order to improve yield and reduce premium amortization risk and reinvested the proceeds primarily in securities to position the Company to meet the new tailored LCR requirements. The Company also transferred the securities previously classified as HTM to AFS in response to changes in regulatory capital rules. Total deposits atDecember 31, 2019 were$334.7 billion , an increase of$173.5 billion from the prior year. The Merger contributed$170.7 billion in total deposits. The average cost of total deposits for 2019 was 0.64%, an increase of 23 basis points compared to the prior year. The average cost of interest-bearing deposits for 2019 was 0.93%, up 31 basis points compared to the prior year. Total shareholders' equity was$66.6 billion atDecember 31, 2019 , up$36.4 billion compared to the prior year. Equity issued in connection with the Merger was$33.5 billion and net income in excess of dividends paid was$1.8 billion . Additionally, the Company issued$1.7 billion of preferred stock during the year and redeemed a similar amount from two higher-cost issuances. In connection with the redemptions, net income available to common shareholders was reduced by$46 million to recognize the difference in the redemption price and the carrying value.Truist's Tier 1 risk-based capital and total risk-based capital ratios atDecember 31, 2019 were 10.8% and 12.6%, respectively, compared to 11.8% and 13.8% atDecember 31, 2018 , respectively. The CET1 ratio was 9.5% atDecember 31, 2019 compared to 10.2% in the prior year.
Key Challenges
Truist's business is dynamic and complex. Consequently, management annually evaluates and, as necessary, adjusts the Company's business strategy in the context of the current operating environment. During this process, management considers the current financial condition and performance of the Company and its expectations for future economic activity from both a national and local market perspective. Achieving key strategic objectives and established long-term financial goals is subject to many uncertainties and challenges. In the opinion of management, the following challenges are the most likely to impactTruist's near to medium term performance: •Achieving the potential benefits from the Merger, including anticipated synergies and cost savings; •Managing the integration of systems and operations, while safeguarding the Company against external threats; •Executing the Company's "T3 strategy" by focusing on personal touch and technology to engender trust and provide distinctive, secure and successful client experiences; •Driving innovation and remaining attuned to evolving client preferences to succeed in an intensely competitive environment; •Retaining key personnel and activating the Company's culture of striving to make things better for its clients, teammates and stakeholders; and •Navigating global economic and geopolitical risks and ensuring that the Company is well positioned for changes in the credit cycle. In addition, certain other challenges and unforeseen events could have a near term impact onTruist's financial condition and results of operations. See the sections titled "Forward-Looking Statements" and "Risk Factors" for additional examples of such challenges. 38Truist Financial Corporation --------------------------------------------------------------------------------
Analysis of Results of Operations
Net Interest Income and NIM
2019 compared to 2018
Net interest income on a TE basis was$7.4 billion for the year endedDecember 31, 2019 , an increase of$631 million compared to the same period in 2018. Interest income increased$1.3 billion , which reflects both earning asset growth and higher earning asset yields. Interest expense increased$658 million due primarily to higher funding costs reflecting the lagged impact of 2018 increases in the federal funds rate. Net interest margin was 3.42% for the year endedDecember 31, 2019 , down four basis points compared to the same period of 2018. Loan yields during 2019 averaged 4.99%, up 22 basis points year over year. The increase was due primarily to the lagged effect of rate increases in 2018. The yield on the average securities portfolio for the year endedDecember 31, 2019 was 2.62%, up 13 basis points compared to the same period of 2018 aided by the portfolio restructurings during 2019. Average earning assets for 2019 were$216.4 billion , up$20.6 billion compared to 2018, driven by an increase in total loans and leases of$15.2 billion and an increase in securities of$3.5 billion . The average cost of total deposits for the year endedDecember 31, 2019 was 0.64%, up 23 basis points compared to 2018. The average cost of interest-bearing deposits was 0.93% in 2019, up 31 basis points compared to the prior year. The average rate on short-term borrowings and long-term debt increased 48 and 34 basis points, respectively, to 2.34% and 3.22% during 2019. Average interest-bearing liabilities were$151.0 billion for the year endedDecember 31, 2019 , up$17.6 billion compared to 2018 driven by a$14.1 billion increase in interest-bearing deposits and a$2.5 billion increase in short-term borrowings. Upon completion of the Merger, the merged SunTrust loan portfolio was marked to fair value in accordance with GAAP. The below table includes the associated fair value marks by loan category, together with the Company's current expectation for when half of each fair value mark will be accreted into interest income. Current period results reflect$141 million of loan mark accretion arising from the Merger. As discussed in "Note 2. Business Combinations", the Company's purchase price allocation is preliminary and related fair value estimates are subject to change. Loan mark accretion may vary from period to period based on prepayments, which may shorten or extend the expected lives of the related loans and leases. (Dollars in millions) C&I Commercial Other Mortgage Consumer Other PCI
Fair value mark at
Expected half-life of purchase
accounting accretion 1-2 years 2-3 years 5-7 years 2-3 years Varies
The major components of net interest income and the related annualized yields as
well as the variances between the periods caused by changes in interest rates
versus changes in volumes are summarized below.
Truist Financial Corporation 39
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Table 5: Taxable-Equivalent Net Interest Income and Rate / Volume Analysis (1)
2019 vs. 2018 2018 vs. 2017
Year Ended December 31 , Average Balances (5) Yield/Rate Income/Expense Incr. Change due to Incr. Change due to
(Dollars in millions) 2019 2018 2017 2019 2018 2017 2019 2018 2017 Rate Volume Rate Volume (Decr.) (Decr.)
Assets
Total securities, at amortized cost: (2)
U.S. Treasury $ 2,644 $ 3,800 $ 4,179 2.01 % 1.89 % 1.71 % $ 53 $ 72 $ 72 $ (19) $ 4 $ (23) $ - $ 7 $ (7)
GSE 2,402 2,394 2,385 2.26 2.23 2.22 53 54 53 (1) (1) - 1 1 -
Agency MBS 44,710 39,559 37,250 2.59 2.45 2.26 1,161 969 841 192 59 133 128 74 54
States and political subdivisions 587 958 1,748 3.73 3.68 4.77 21 35 83 (14) - (14) (48) (16) (32)
Non-agency MBS 269 349 411 14.05 11.93 18.80 38 42 77 (4) 7 (11) (35) (25) (10)
Other 33 40 56 3.75 3.34 2.17 1 1 1 - - - - - -
Total securities 50,645 47,100 46,029 2.62 2.49 2.45 1,327 1,173 1,127 154 69 85 46 41 5
Interest earning trading assets 1,277 633 1,477 2.02 3.82 1.68 26 24 25 2 (15) 17 (1) 19 (20)
Other earning assets (3) 2,888 1,618 2,007 2.89 2.63 1.43 83 43 28 40 5 35 15 21 (6)
Loans and leases, net of unearned income: (4)
Commercial and industrial 67,435 59,663 57,994 4.25 3.98 3.59 2,868 2,374 2,080 494 169 325 294 233 61 CRE 17,651 16,994 16,349 4.79 4.67 4.11 849 798 672 51 21 30 126 98 28Commercial Construction 4,061 4,441 4,148 5.23 4.79 3.98 208 209 165 (1) 19 (20) 44 33 11 Lease financing 2,443 1,917 1,726 3.44 3.19 2.82 84 61 49 23 5 18 12 6 6 Residential mortgage 31,668 29,932 29,140 4.08 4.05 4.02 1,291 1,212 1,170 79 9 70 42 9 33 Residential home equity and direct 12,716 11,860 12,163 5.97 5.41 4.79 759 641 582 118 70 48 59 74 (15) Indirect auto 12,545 11,215 12,388 8.51 8.18 7.27 1,068 917 901 151 38 113 16 106 (90) Indirect other 6,654 5,896 5,452 6.65 6.25 6.05 443 368 329 75 25 50 39 11 28 Student 460 - - 5.20 - - 24 - - 24 - 24 - - - Credit card 3,181 2,723 2,467 9.05 8.73 8.26 288 238 204 50 9 41 34 12 22 PCI 631 548 784 16.05 19.64 18.86 102 108 148 (6) (21) 15 (40) 6 (46) Total loans and leases HFI 159,445 145,189 142,611 5.01 4.77 4.42 7,984 6,926 6,300 1,058 344 714 626 588 38 LHFS 2,159 1,228 1,464 3.91 4.13 3.62 85 50 53 35 (3) 38 (3) 7 (10) Total loans and leases 161,604 146,417 144,075 4.99 4.77 4.41 8,069 6,976 6,353 1,093 341 752 623 595 28 Total earning assets 216,414 195,768 193,588 4.39 4.20 3.89 9,505 8,216 7,533 1,289 400 889 683 676 7 Nonearning assets 31,080 26,505 27,477 Total assets$ 247,494 $ 222,273 $ 221,065 Liabilities and Shareholders' Equity Interest-bearing deposits: Interest-checking$ 31,592 $ 26,951 $ 28,033 0.62 0.43 0.25 197 116 70 81 59 22 46 49 (3) Money market and savings 67,922 62,257 63,061 0.91 0.62 0.30 621 387 190 234 196 38 197 199 (2) Time deposits 17,970 13,963 14,133 1.54 0.94 0.51 277 132 72 145 100 45 60 61 (1) Foreign office deposits - interest-bearing 272 494 1,142 2.35 1.67 1.05 6 9 12 (3) 2 (5) (3) 6 (9) Total interest-bearing deposits (6) 117,756 103,665 106,369 0.93 0.62 0.32 1,101 644 344 457 357 100 300 315 (15) Short-term borrowings 8,462 5,955 4,311 2.34 1.86 0.94 198 111 41 87 33 54 70 50 20 Long-term debt 24,756 23,755 21,660 3.22 2.88 2.10 797 683 454 114 84 30 229 182 47 Total interest-bearing liabilities 150,974 133,375 132,340 1.39 1.08 0.63 2,096 1,438 839 658 474 184 599 547 52 Noninterest-bearing deposits (6) 55,513 53,818 52,872 Other liabilities 6,899 5,337 5,852 Shareholders' equity 34,108 29,743 30,001 Total liabilities and shareholders' equity$ 247,494 $ 222,273 $ 221,065 Average interest-rate spread 3.00 % 3.12 % 3.26 % NIM/net interest income 3.42 % 3.46 % 3.46 %$ 7,409 $ 6,778 $ 6,694 $ 631 $ (74) $ 705 $ 84 $ 129 $ (45) Taxable-equivalent adjustment$ 96 $ 96 $ 159 (1) Yields are stated on a TE basis utilizing federal tax rate. The change in interest not solely due to changes in rate or volume has been allocated on a pro-rata basis based on the absolute dollar amount of each. (2) Total securities include AFS and HTM securities. (3) Includes cash equivalents, interest-bearing deposits with banks, FHLB stock and other earning assets. (4) Loan fees, which are not material for any of the periods shown, are included for rate calculation purposes. NPLs are included in the average balances. (5) Excludes basis adjustments for fair value hedges. (6) Total deposit costs were 0.64%, 0.41% and 0.22% for the years endedDecember 31, 2019 , 2018 and 2017, respectively. 40Truist Financial Corporation --------------------------------------------------------------------------------
Provision for Credit Losses
2019 compared to 2018
The provision for credit losses totaled$615 million for the year endedDecember 31, 2019 , compared to$566 million for 2018. Net charge-offs for the year endedDecember 31, 2019 were$634 million , compared to$524 million for 2018. Net charge-offs were 0.40% of average loans and leases for the year endedDecember 31, 2019 , compared to 0.36% of average loans and leases for 2018. The increase in net charge-offs was primarily related to credit cards, indirect auto and CRE. Noninterest Income Noninterest income is a significant contributor toTruist's financial results. Management focuses on diversifying its sources of revenue to further reduceTruist's reliance on traditional spread-based interest income, as certain fee-based activities are a relatively stable revenue source during periods of changing interest rates. Table 6: Noninterest Income % Change Year EndedDecember 31 , (Dollars in millions) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Insurance income$ 2,072 $ 1,852 $ 1,754 11.9 % 5.6 % Service charges on deposits 762 712 706 7.0 0.8 Wealth management income 715 660 594 8.3 11.1 Card and payment related fees 555 522 501 6.3 4.2 Residential mortgage income 285 258 309 10.5 (16.5) Investment banking and trading income 244 154 203 58.4 (24.1) Operating lease income 153 145 146 5.5 (0.7) Income from bank-owned life insurance 129 116 122 11.2 (4.9) Lending related fees 124 99 101 25.3 (2.0) Commercial real estate related income 116 100 106 16.0
(5.7)
Securities gains (losses), net (116) 3 (1) NM NM Other income 216 255 241 (15.3) 5.8 Total noninterest income$ 5,255 $ 4,876 $ 4,782 7.8 2.0 2019 compared to 2018 Noninterest income for the year endedDecember 31, 2019 was$5.3 billion , up$379 million compared to 2018. Approximately$217 million of the increase was due to the contribution from the Merger.
Insurance income was
Investment banking and trading income was
Residential mortgage income was$285 million , up$27 million compared to 2018 due to an increase in net MSRs valuation adjustments, partially offset by lower production-related revenues due to lower sales volumes prior to the Merger.
The increases in noninterest income were partially offset by
Truist Financial Corporation 41 --------------------------------------------------------------------------------
Noninterest Expense
The following table provides a breakdown of
% Change
Year Ended December 31 ,
(Dollars in millions) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
Personnel expense $ 4,833 $ 4,313 $ 4,226 12.1 % 2.1 %
Net occupancy expense 507 491 538 3.3 (8.7)
Professional fees and outside processing 433 365 369 18.6 (1.1)
Software expense 338 272 242 24.3 12.4
Equipment expense 280 267 246 4.9 8.5
Marketing and customer development 137 102 94 34.3 8.5
Depreciation - property under operating leases 136 120 120 13.3 -
Loan-related expense 123 108 130 13.9 (16.9)
Amortization of intangibles 164 131 142 25.2 (7.7)
Regulatory costs 81 134 153 (39.6) (12.4)
Merger-related and restructuring charges, net 360 146 115 146.6 27.0
Other expense 542 483 677 12.2 (28.7)
Total noninterest expense $ 7,934 $ 6,932 $ 7,444 14.5 (6.9) 2019 compared to 2018 Noninterest expense totaled$7.9 billion for the year endedDecember 31, 2019 , an increase of$1.0 billion , or 14.5%, from 2018. Merger-related and restructuring expense was$360 million , up$214 million due primarily to the Merger and the decision to exit a business. Additionally, the year endedDecember 31, 2019 included$164 million of incremental operating expenses related to the Merger. Excluding these items, noninterest expense was up$624 million , of which approximately$400 million was due to noninterest expenses from the merged operations. Personnel expense was$4.8 billion for the year endedDecember 31, 2019 , an increase of$520 million compared to 2018. The increase includes$227 million related to personnel expenses of the merged operations and$123 million in incremental operating expenses related to the Merger as well as a$157 million increase in production-based and other incentives, including the impact from theRegions Insurance acquisition.
Marketing and customer development expense increased
Amortization of intangibles increased
Other expense increased
The increases in noninterest expense were partially offset by a decrease in
regulatory charges of
42Truist Financial Corporation --------------------------------------------------------------------------------
Merger-Related and Restructuring Charges
•severance and personnel-related costs or credits; •occupancy and equipment charges or credits, which relate to costs or gains associated with lease terminations, obsolete equipment write-offs and the sale of duplicate facilities and equipment; •professional services, which relate to legal and investment banking advisory fees and other consulting services pertaining to restructuring initiatives or transactions; •systems conversion and related charges, which represent costs to integrate the entity's information technology systems; •other merger-related and restructuring charges or credits, which include expenses necessary to convert and combine the acquired branches and operations of merged companies, direct media advertising related to the mergers and acquisitions, asset and supply inventory write-offs, and other similar charges; and •writes-offs related to exiting certain businesses. Merger-related and restructuring accruals are established when the costs are incurred or once all requirements for a plan to dispose of or outsource certain business functions have been approved by management. Merger and restructuring accruals are re-evaluated periodically and adjusted as necessary. The remaining accruals atDecember 31, 2019 are generally expected to be utilized within one year, unless they relate to specific contracts that expire later. The 2019 merger-related and restructuring costs primarily reflect higher charges as a result of the Merger, including costs for severance and other benefits and costs related to exiting facilities, while the 2018 costs primarily reflect branch closures and other restructuring initiatives.
The following table presents a summary of merger-related and restructuring charges and the related accruals: Table 8: Merger-Related and Restructuring Accrual Activity
Accrual at Jan 1 , Accrual at Dec Accrual at Dec 31 ,
(Dollars in millions) 2018 Expense Utilized 31, 2018 Expense (2) Utilized 2019 (2)
Severance and personnel-related $ 14 $ 61 $ (32) $ 43 $ 149 $ (146) $ 46
Occupancy and equipment (1) 20 63 (60) N/A 13 (13) N/A
Professional services - 4 (3) 1 102 (61) 42
Systems conversion and related
costs - 5 (5) - 4 (4) -
Other adjustments - 13 (13) - 92 (91) 1
Total $ 34 $ 146 $ (113) $ 44 $ 360 $ (315) $ 89 (1) Certain lease reserves are no longer required as a result of new lease
accounting guidance adopted in the first quarter of 2019. See additional
information in "Note 1. Basis of Presentation."
(2) Includes
Segment Results
Effective at the close of the Merger, several business activities were realigned within the segments. See "Note 21. Operating Segments" for additional disclosures related toTruist's operating segments, the internal accounting and reporting practices used to manage these segments and financial disclosures for these segments, including additional details related to results of operations. Table 9: Net Income by Reportable Segment % Change Year EndedDecember 31 , (Dollars in millions) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Consumer Banking and Wealth$ 1,712 $ 1,488 $ 1,070 15.1 % 39.1 % Corporate and Commercial Banking 1,841 1,546 1,170 19.1 32.1Insurance Holdings 319 253 161 26.1 57.1 Other,Treasury & Corporate (635) (30) 14 NM NMTruist Financial Corporation $ 3,237 $ 3,257 $ 2,415 (0.6) 34.9 Truist Financial Corporation 43
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2019 compared to 2018
Consumer Banking and Wealth
Consumer Banking and Wealth had 2,958 banking offices atDecember 31, 2019 , an increase of 1,079 offices compared toDecember 31, 2018 . The increase in offices was driven primarily by the Merger, partially offset by the consolidation of nearby financial centers and closure of certain lower volume branches prior to the Merger. Consumer Banking and Wealth net income was$1.7 billion , an increase of$224 million , or 15.1%, compared to 2018. Segment net interest income increased$577 million driven by average loan growth, higher funding spreads on deposits and the Merger. Noninterest income increased$161 million due primarily to an increase in service charges on deposits, wealth management income, checkcard fees and the Merger. Noninterest expense increased$449 million driven by higher personnel expense, amortization of intangibles, merger-related charges and allocated corporate expenses primarily attributable to the Merger, as well as higher operating charge-offs and pension expense, excluding service costs. The allocated provision for income taxes increased$58 million due primarily to higher pre-tax income. Consumer Banking and Wealth average loans and leases HFI increased$6.9 billion , or 10.8%, compared to 2018 driven primarily by the Merger, mortgage warehouse loans and indirect auto loans. Average loan and leases HFI for mortgage, indirect auto, and home equity and direct lending increased$1.7 billion , or 5.8%,$1.3 billion , or 11.9%, and$891 million , or 7.5%, respectively. Consumer Banking and Wealth average total deposits increased$8.4 billion , or 10.1%, compared to 2018 driven primarily by the Merger, money market and savings accounts, and noninterest-bearing deposits. Average noninterest-bearing deposits, money market and savings accounts, and time deposits increased$2.4 billion , or 14.0%,$4.0 billion , or 10.6%, and$1.3 billion , or 11.6%, respectively. Client assets under administration totaled$349.7 billion as ofDecember 31, 2019 , an increase of$190.2 billion , or 119.2%, compared to 2018, primarily due to the Merger.
Corporate and Commercial Banking
Corporate and Commercial Banking net income was$1.8 billion for 2019, an increase of$295 million , or 19.1%, compared to 2018. Segment net interest income increased$302 million , driven by higher funding spreads on deposits, organic loan growth and the Merger, partially offset by lower credit spreads on loans. Noninterest income increased$161 million primarily due to the Merger and higher revenue from client derivatives, loan fees and gains on finance leases, partially offset by tax credit valuation adjustments and lower private equity investment income. Noninterest expense increased$190 million driven by higher personnel expense, merger-related charges, and amortization of intangibles primarily attributable to the Merger as well as lower credits for capitalized employee costs. The allocated provision for income taxes decreased$13 million primarily due to higher tax credits. Corporate and Commercial Banking average loans and leases HFI increased$7.3 billion , or 9.3%, compared to 2018 driven primarily by the Merger and growth in corporate loans. Average loan and leases HFI for theCorporate and Institutional Group increased$5.4 billion , or 21.8%, driven primarily by commercial and industrial loans, and lease financing, while average loans and leases HFI for Commercial Community Banking increased$1.8 billion , or 3.5%, driven primarily by commercial and industrial loans. Corporate and Commercial Banking average total deposits increased$4.3 billion , or 6.3%, compared to 2018 driven primarily by the Merger and Commercial Community Banking money market savings accounts. Average interest checking increased$3.7 billion , or 41.0%, and average money market and savings increased$981 million , or 4.2%, while average noninterest-bearing deposits declined$653 million , or 1.8%.Insurance Holdings Insurance Holdings net income was$319 million in 2019, an increase of$66 million , or 26.1%, compared to 2018. Noninterest income increased$240 million primarily due to the acquisition ofRegions Insurance , which contributed$78 million , and organic growth in commercial property and casualty and life insurance commissions. Noninterest expense increased$162 million driven by higher salaries, commission-based incentives, the acquisition ofRegions Insurance and merger-related and restructuring charges. 44Truist Financial Corporation --------------------------------------------------------------------------------
Other,
Other,Treasury and Corporate generated a net loss of$635 million in 2019, compared to a net loss of$30 million in 2018. Segment net interest income decreased$264 million driven by an increase in the net credit for funds provided to other operating segments, an increase in average balances and rates for long-term debt and short-term borrowings, partially offset by an increase in average balances and rates for securities. Noninterest income decreased$183 million due primarily to losses on the sale of securities and lower hedge and client derivative income, partially offset by an increase in income related to certain post-employment benefits. The allocated provision for credit losses increased$45 million driven primarily by an increase in the provision for unfunded commitments and purchased credit-impaired loans compared to 2018. Noninterest expense increased$201 million driven by the Merger, merger-related charges, lower credits for capitalized employee costs and an increase in expense related to certain post-retirement benefits, partially offset by lower restructuring charges. The benefit for income taxes increased$88 million due primarily to an increase in the pre-tax loss, partially offset by a lower tax benefit from discrete items compared to 2018.
Analysis of Financial Condition
Investment Activities
Truist Board-approved investment policy is carried out by the MRLCC, which meets regularly to review the economic environment and establish investment strategies. The MRLCC also has much broader responsibilities, which are discussed in the "Market Risk Management" section in MD&A.
Investment strategies are reviewed by the MRLCC based on the interest rate environment, balance sheet mix, actual and anticipated loan demand, funding opportunities and the overall interest rate sensitivity of the Company. In general, the goals of the investment portfolio are: (i) to provide a sufficient margin of liquid assets to meet unanticipated deposit and loan fluctuations and overall funds management objectives; (ii) to provide eligible securities to secure public funds, trust deposits and other borrowings; and (iii) to earn an optimal return on funds invested commensurate with meeting the requirements of (i) and (ii) and consistent with our risk appetite.Truist Bank invests in securities allowable under bank regulations. These securities may include obligations of theU.S. Treasury ,U.S. government agencies, GSEs (including MBS), bank eligible obligations of any state or political subdivision, non-agency MBS, structured notes, bank eligible corporate obligations (including corporate debentures), commercial paper, negotiable CDs, bankers acceptances, mutual funds and limited types of equity securities. Table 10: Composition of Securities PortfolioDecember 31 , (Dollars in millions) 2019 2018 AFS securities (at fair value): U.S. Treasury$ 2,276 $ 3,441 GSE 1,881 200 Agency MBS - residential 68,236 19,426 Agency MBS - commercial 1,341 729 States and political subdivisions 585 701 Non-agency MBS 368 505 Other 40 36 Total AFS securities 74,727 25,038 HTM securities (at amortized cost): U.S. Treasury - 1,099 GSE - 2,199 Agency MBS - residential - 17,248 States and political subdivisions - 5 Other - 1 Total HTM securities - 20,552 Total securities$ 74,727 $ 45,590 The securities portfolio totaled$74.7 billion atDecember 31, 2019 , compared to$45.6 billion atDecember 31, 2018 . The increase in the securities portfolio was due primarily to the Merger, which contributed$31.0 billion in AFS securities. During the fourth quarter of 2019, the Company transferred the securities previously classified as HTM to AFS in response to changes in regulatory capital rules. Additionally, during the fourth quarter of 2019, the Company sold$33.2 billion of securities to improve yield and lower premium amortization risk resulting in$116 million in securities losses. The majority of the proceeds were reinvested in new securities to achieve the desired level of AFS securities forTruist . Truist Financial Corporation 45
-------------------------------------------------------------------------------- As ofDecember 31, 2019 , approximately 3.6% of the securities portfolio was variable rate, compared to 6.5% as ofDecember 31, 2018 . The effective duration of the securities portfolio excluding certain non-agency MBS was 4.7 years atDecember 31, 2019 , compared to 4.8 years atDecember 31, 2018 .
The following table presents the securities portfolio atDecember 31, 2019 , segregated by major category of security holdings with ranges of maturities and average yields disclosed: Table 11: Securities Yields by Major Category and Maturity December 31, 2019 AFS (Dollars in millions) Fair Value Effective Yield (1)U.S. Treasury : Within one year$ 1,367 2.26 % One to five years 893 1.46 Five to ten years 16 1.73 Total 2,276 1.94 GSE: One to five years 1,800 2.30 After ten years 81 3.03 Total 1,881 2.33 Agency MBS - residential: (2) One to five years 1 3.73 Five to ten years 554 2.43 After ten years 67,681 2.79 Total 68,236 2.78 Agency MBS - commercial: (2) One to five years 1 2.80 Five to ten years 10 2.86 After ten years 1,330 2.64 Total 1,341 2.64 States and political subdivisions: Within one year 35 3.40 One to five years 100 3.29 Five to ten years 226 3.57 After ten years 224 3.71 Total 585 3.57 Non-agency MBS: (2) After ten years 368 14.86 Other: Within one year 2 3.45 One to five years 7 3.43 Five to ten years 1 2.93 After ten years 30 3.36 Total 40 3.36 Total securities$ 74,727 2.81 (1) Yields represent interest computed under the effective interest method on a TE basis using the federal income tax rate and the amortized cost of the securities. (2) For purposes of the maturity table, MBS, which are not due at a single maturity date, have been included in maturity groupings based on the contractual maturity. The expected life of MBS will differ from contractual maturities because borrowers may have the right to call or prepay the underlying mortgage loans. 46Truist Financial Corporation --------------------------------------------------------------------------------
Lending Activities
Truist strives to meet the credit needs of its clients while pursuing a balanced strategy of loan profitability, loan growth and loan quality. Management believes that this purpose can best be accomplished by building strong client relationships over time and developing in-depth local market knowledge.Truist's lending process adheres to a consistent company-wide credit culture. The Company employs strict underwriting criteria governing the degree of risk assumed and the diversity of the loan portfolio in terms of type, industry and geographical concentration.Truist lends to a diverse client base that is geographically dispersed to mitigate concentration risk arising from local and regional economic downturns. International loans were immaterial as ofDecember 31, 2019 and 2018. The following discussion provides additional information on the Company's loan and lease portfolios. Refer to the "Risk Management" section for a discussion of the credit risk management policies used to manage the portfolios.
Commercial Loan and Lease Portfolio
Commercial loans and leases represent the largest category of the Company's loan and lease portfolio. C&CB generally targets small-to-middle market businesses with annual sales between$2 million and$500 million , whileTruist's commercial banking provides lending solutions to large commercial clients. The commercial loan and lease portfolio consists of lending to public and private business clients and is composed of commercial and industrial, owner occupied, equipment leasing and financing and commercial real estate, as well as government and institutional financing. In accordance with the Company's lending policy, each commercial loan undergoes a detailed underwriting process. Commercial loans are typically priced with an interest rate tied to market indices, such as the prime rate or LIBOR and are individually monitored and reviewed for deterioration in the ability of the client to repay the loan. The majority ofTruist's commercial loans are secured by real estate, business equipment, inventories and other types of collateral.
Residential Mortgage Loan Portfolio
Truist Bank offers various types of fixed and adjustable-rate loans for the purpose of constructing, purchasing or refinancing residential properties.Truist primarily originates conforming mortgage loans and higher quality jumbo and construction-to-permanent loans for owner-occupied properties. Conforming loans are loans that are underwritten in accordance with the underwriting standards set forth byFNMA and FHLMC. They are generally collateralized by one-to-four-family residential real estate, typically have loan-to-collateral value ratios of 80% or less at origination, or have mortgage insurance as required by investors and are made to borrowers in good credit standing. Risks associated with mortgage lending include interest rate risk, which is mitigated through the sale of a substantial portion of conforming fixed-rate loans in the secondary mortgage market, and an effective MSR hedging process. Credit risk is managed through rigorous underwriting procedures and mortgage insurance. The right to service the loans and receive servicing income is generally retained when conforming loans are sold. Management believes that the retention of mortgage servicing is a relationship driver in retail banking and a part of management's strategy to establish long-term client relationships and offer high quality client service.Truist also purchases residential mortgage loans from correspondent originators. The loans purchased from third-party originators are subject to substantially the same underwriting and risk-management criteria as loans originated internally.
Residential Home Equity and Direct Loan Portfolio
The residential home equity and direct loan portfolio is composed of a wide variety of secured and unsecured loans offered throughTruist's branch network, as well as loans originated by LightStream,Truist's national online consumer lending division. Loans originated through theTruist branch network include revolving home equity lines of credit secured by first or second liens on residential real estate and certain other secured and unsecured lending marketed to qualifying clients and other creditworthy candidates inTruist's market areas. LightStream provides fixed-rate, unsecured lending to consumers with strong credit through its proprietary online loan origination system.Truist Financial Corporation 47 --------------------------------------------------------------------------------
Indirect Auto Loan Portfolio
The indirect auto portfolio primarily includes secured indirect installment loans to consumers for the purchase of new and used automobiles. The indirect auto portfolio also includes nonprime and near prime automobile finance. Such loans are originated through approved franchised and independent dealers throughout theTruist market area and nationally throughRegional Acceptance Corporation . These loans are relatively homogeneous and no single loan is individually significant in terms of its size and potential risk of loss. Indirect auto loans are subject to rigorous lending policies and procedures and are underwritten with note amounts and credit limits that are consistent with the Company's risk philosophy. In addition to its normal underwriting due diligence,Truist uses application systems and scoring systems to help underwrite and manage the credit risk in its indirect auto portfolio.
Indirect Other Loan Portfolio
The indirect other portfolio includes secured indirect installment loans to consumers for the purchase of new and used boats and recreational vehicles. The indirect other portfolio also includes small ticket consumer lending related to the purchase of power sports equipment. These loans are relatively homogeneous and no single loan is individually significant in terms of its size and potential risk of loss. These loans are subject to similar rigorous lending policies and procedures as the indirect auto loan portfolio. The indirect other loan portfolio also includes other indirect lending to consumers to finance home improvements, furniture purchases, and certain elective health-care services. These loans are originated in accordance with strict underwriting criteria as determined byTruist . Student Loan Portfolio The student loan portfolio is composed of securitized government-guaranteed student loans and certain private student loans originated by third parties. The government guarantee mitigates substantially all of the risk related to principal and interest repayment for this component of the portfolio. Private student loans are purchased from third-party originators with credit enhancements that partially mitigate the Company's credit exposure.
Credit Card Loan Portfolio
The credit card portfolio consists of the outstanding balances on credit cards.Truist markets credit cards to its existing client base and does not solicit cardholders through nationwide programs or other forms of mass marketing. Such balances are generally unsecured and actively managed.
PCI
The PCI balance includes loans acquired with credit deterioration subsequent to origination as well as loans that were formerly covered by loss sharing agreements. Refer to "Note 5. Loans and ACL" for additional information.
The following table summarizes the loan portfolio: Table 12: Composition of Loans and Leases as of Period EndDecember 31 , (Dollars in millions) 2019 2018 2017 2016 2015 Commercial: Commercial and industrial$ 130,180 $ 61,935 $ 59,153 $ 57,739 $ 53,746 CRE 26,832 16,808 17,173 15,945 14,580 Commercial construction 6,205 4,252 4,090 3,819 3,732 Lease financing 6,122 2,018 1,911 1,677 1,535 Consumer: Residential mortgage 52,071 31,393 28,725 29,921 30,533 Residential home equity and direct 27,044 11,775 12,088 12,295 11,341 Indirect auto 24,442 11,282 11,641 13,342 12,139 Indirect other 11,100 6,143 5,594 5,222 4,914 Student 6,743 - - - - Credit card 5,619 2,941 2,675 2,452 2,309 PCI 3,484 466 651 910 1,122 Total loans and leases HFI 299,842 149,013 143,701 143,322 135,951 LHFS 8,373 988 1,099 1,716 1,035 Total loans and leases$ 308,215 $ 150,001 $ 144,800 $ 145,038 $ 136,986 48Truist Financial Corporation -------------------------------------------------------------------------------- Loans and leases HFI were$299.8 billion atDecember 31, 2019 , an increase of$150.8 billion compared to 2018, which was driven primarily by the Merger. LHFS atDecember 31, 2019 were$8.4 billion , an increase of$7.4 billion compared to the prior year driven by the Merger as well as certain strategic actions which resulted in loans moving to LHFS. AtDecember 31, 2019 , there were$2.7 billion in LHFS measured on a nonrecurring basis primarily as a result of these strategic actions. The Company has undertaken a number of strategic actions to enhance the credit quality and interest-rate sensitivity of its loan and lease portfolio. During the third quarter of 2019, management sold a$4.3 billion residential mortgage loan portfolio. This sale was followed by a number of balance sheet restructuring actions taken in the fourth quarter of 2019, including the transfer of: •$2.5 billion of residential mortgage loans to LHFS; •$356 million of commercial loans to LHFS as a result of a decision to exit a business; and •$381 million of mortgage, consumer and commercial loans to LHFS related to the forthcoming branch divestiture arising from the Merger.
In addition,
The Merger and the strategic actions highlighted above were the primary drivers of change across the entire loan portfolio. Additional changes include the following:
•Commercial and industrial loans increased$1.2 billion due primarily to strong growth in a number of industry verticals and client segments including mortgage warehouse lending, premium finance, dealer floor plan and equipment finance. •Residential mortgage loans decreased$6.2 billion due to the transfer of loans to held for sale and a higher proportion of originations being sold rather than retained in the portfolio. Scheduled repayments are reported in the maturity category in which the payment is due. Determinations of maturities are based on contractual terms.Truist's credit policy typically does not permit automatic renewal of loans. At the scheduled maturity date (including balloon payment date), the client generally must request a new loan to replace the matured loan and execute either a new note or note modification with rate, terms and conditions negotiated at that time. Table 13: Commercial Loan Maturities December 31, 2019 Over 1 to 5 (Dollars in millions) 1 Year or Less Years After 5 Years Total Fixed rate: Commercial and industrial$ 5,913 $ 11,570 $ 16,923 $ 34,406 CRE 489 2,418 2,689 5,596 Commercial construction 14 118 137 269 Lease financing 232 2,511 1,949 4,692 Total fixed rate 6,648 16,617 21,698 44,963 Variable rate: Commercial and industrial 16,671 59,122 19,981 95,774 CRE 2,492 12,438 6,306 21,236 Commercial construction 1,869 3,618 449 5,936 Lease financing 34 685 711 1,430 Total variable rate 21,066 75,863 27,447 124,376 Total commercial loans and leases$ 27,714
Certain residential mortgage loans have an initial period where the borrower is only required to pay the periodic interest. After the interest-only period, the loan will require the payment of both interest and principal over the remaining term. The outstanding balances of variable rate residential mortgage loans in the interest-only phase were approximately$392 million and$64 million atDecember 31, 2019 andDecember 31, 2018 , respectively. Truist Financial Corporation 49 -------------------------------------------------------------------------------- The following table presents the composition of average loans and leases for the most recent calendar quarters: Table 14: Composition of Average Loans and Leases For the Three Months Ended (Dollars in millions) Dec 31, 2019 Sep 30, 2019 Jun 30, 2019 Mar 31, 2019 Dec 31, 2018 Commercial: Commercial and industrial$ 81,853 $ 63,768 $ 62,563 $ 61,370 $ 60,553 CRE 19,896 17,042 16,854 16,786 16,914 Commercial construction 4,506 3,725 3,894 4,119 4,387 Lease financing 3,357 2,260 2,122 2,021 1,990 Consumer: Residential mortgage 34,824 28,410 32,066 31,370 31,103 Residential home equity and direct 15,810 11,650 11,687 11,681 11,790 Indirect auto 15,390 11,810 11,633 11,308 11,255 Indirect other 7,772 6,552 6,246 6,029 6,181 Student 1,825 - - - - Credit card 3,788 3,036 2,970 2,922 2,880 PCI 1,220 411 432 455 486 Total average loans and leases HFI$ 190,241 $
148,664
Average loans held for investment for the fourth quarter of 2019 were$190.2 billion , up$41.6 billion compared to the third quarter of 2019, primarily due to the merged loans. The discussion below only highlights those portfolios where underlying performance was a meaningful driver of the variance. Average commercial and industrial loans increased$18.1 billion , with the merged portfolio contributing$18.3 billion of the increase. Excluding the impact of the merged portfolio, commercial and industrial loans declined slightly compared to the prior quarter, as strong growth in mortgage warehouse lending, premium finance and equipment finance were more than offset by paydowns in the corporate banking portfolio. Average residential mortgage loans held for investment increased$6.4 billion , primarily due to$7.3 billion of growth from the merged portfolio, partially offset by a decline due to the transfer of loans to held for sale and a higher proportion of loan originations being sold rather than retained in the portfolio.
Average indirect auto loans increased
50Truist Financial Corporation --------------------------------------------------------------------------------
Asset Quality
The following tables summarize asset quality information for the past five years: Table 15: Asset QualityDecember 31 , (Dollars in millions) 2019 2018 2017 2016 2015 NPAs: NPLs: Commercial and industrial$ 212 $ 200 $ 259 $ 369 $ 242 CRE 10 63 37 40 38 Commercial construction - 2 8 17 13 Lease financing 8 3 1 4 1 Residential mortgage 55 119 129 172 173 Residential home equity and direct 67 53 64 63 43 Indirect auto 100 82 71 71 66 Indirect other 2 - 1 - - Total NPLs HFI 454 522 570 736 576 Loans held for sale 107 - - - - Total nonaccrual loans and leases 561 522 570 736 576 Foreclosed real estate 82 35 32 50 108 Other foreclosed property 41 28 25 27 28 Total nonperforming assets$ 684 $ 585 $ 627 $ 813 $ 712 Performing TDRs: (1) Commercial and industrial$ 47 $ 65 $ 50 $ 57 $ 50 CRE 6 8 11 16 13 Commercial construction 37 2 5 9 16 Residential mortgage 470 656 605 769 604 Residential home equity and direct 51 56 63 69 75 Indirect auto 333 299 274 234 188 Indirect other 5 6 7 6 6 Credit card 31 27 28 27 30 Total performing TDRs$ 980 $ 1,119 $ 1,043 $ 1,187 $ 982 Loans 90 days or more past due and still accruing: (1) Commercial and industrial$ 1 $ -$ 1 $ - $ - CRE - - 1 - - Residential mortgage 543$ 405 465 522 541 Residential home equity and direct 9 8 6 6 7 Indirect auto 11 6 6 5 5 Indirect other 2 - - 1 - Student 188 - - - - Credit card 22 13 12 12 10 PCI 1,218 30 57 90 114 Total loans 90 days or more past due and still accruing$ 1,994 $ 462 $ 548 $ 636 $ 677 Loans 30-89 days past due and still accruing: (1) Commercial and industrial$ 94 $ 34 $ 41 $ 44 $ 53 CRE 5 4 8 6 13 Commercial construction 1 1 - 2 9 Lease financing 2 1 4 4 1 Residential mortgage 498 456 472 525 475 Residential home equity and direct 122 63 67 62 60 Indirect auto 560 390 373 347 331 Indirect other 85 46 39 30 27 Student 650 - - - - Credit card 56 26 21 21 20 PCI 140 23 27 36 42 Total loans 30-89 days past due and still accruing$ 2,213 $ 1,044 $ 1,052 $ 1,077 $ 1,031
(1) Excludes loans held for sale.
Truist Financial Corporation 51
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Nonperforming assets totaled $684 million at December 31, 2019 , up $99 million
compared to December 31, 2018 . This increase was driven by merged loans, which
included $107 million and $63 million of loans classified as HFS and HFI,
respectively, and $63 million of other nonperforming assets. These increases
were partially offset by a decrease in nonperforming residential mortgages loans
as a result of loan sales.
Nonperforming loans and leases held for investment represented 0.15% of loans
and leases HFI, down 20 basis points compared to December 31, 2018 . The decline
was due primarily to the impact of the merged nonperforming loans being
accounted for on a pooled basis in PCI and the sale of nonperforming mortgage
loans during the year. Upon adoption of CECL and the transition from pooled
level accounting for PCI, nonperforming loans will be identified based on the
loan-level characteristics and reported accordingly. There are approximately
$500 million of PCI loans that would be classified as nonperforming as of
December 31, 2019 .
Performing TDRs were down $139 million compared to the prior year, which was
driven by a decrease in residential mortgage loans due to the previously
discussed sale that was partially offset by increases in commercial construction
loans and indirect auto.
Loans 90 days or more past due and still accruing totaled $2.0 billion at
December 31, 2019 , up $1.5 billion compared to the prior year. This increase is
a result of merged loans, including $1.2 billion of PCI loans, $193 million of
government guaranteed residential mortgages and $188 million of government
guaranteed student loans. The ratio of loans 90 days or more past due and still
accruing as a percentage of loans and leases was 0.66% at December 31, 2019 , an
increase of 35 basis points from the prior year. Excluding government guaranteed
and PCI loans, the ratio of loans 90 days or more past due and still accruing as
a percentage of loans and leases was 0.03% at December 31, 2019 , down from 0.04%
at December 31, 2018 .
Loans 30-89 days past due and still accruing totaled $2.2 billion at
December 31, 2019 , up $1.2 billion compared to the prior year, due primarily to
the merged portfolio that added $1.2 billion . The ratio of loans 30-89 days or
more past due and still accruing as a percentage of loans and leases was 0.74%
at December 31, 2019 , an increase of four basis points from the prior year. The
primary driver of the increase is the addition of the merged guaranteed student
loan portfolio.
Problem loans include NPLs and loans that are 90 days or more past due and still
accruing as disclosed in Table 15. In addition, for the commercial portfolio
segment, loans that are rated special mention or substandard performing are
closely monitored by management as potential problem loans. Refer to "Note 5.
Loans and ACL" for additional disclosures related to these potential problem
loans.
Table 16: Asset Quality Ratios
As Of / For The Year Ended December 31, 2019 2018 2017 2016 2015
Loans 30-89 days past due and still accruing as a percentage of loans and leases HFI 0.74 % 0.70 % 0.73 % 0.75 % 0.76 % Loans 90 days or more past due and still accruing as a percentage of loans and leases HFI 0.66 0.31 0.38 0.44
0.50
NPLs as a percentage of loans and leases HFI 0.15 0.35 0.40 0.51
0.42
Nonperforming loans and leases as a percentage of loans and leases (1) 0.18 0.35 0.40 0.51 0.42 NPAs as a percentage of: Total assets (1) 0.14 0.26 0.28 0.37 0.34 Loans and leases HFI plus foreclosed property 0.19 0.39 0.44 0.57
0.52
Net charge-offs as a percentage of average loans and leases HFI 0.40 0.36 0.38 0.38
0.35
ALLL as a percentage of loans and leases HFI 0.52 1.05 1.04 1.04 1.07 Ratio of ALLL to: Net charge-offs 2.44x 2.98x 2.78x 2.80x 3.36x NPLs 3.41x 2.99x 2.62x 2.03x 2.53x Loans 90 days or more past due and still accruing as a percentage of loans and leases HFI (2) 0.03 % 0.04 % 0.05 % 0.07 % 0.06 % Applicable ratios are annualized. (1) Includes LHFS. (2) This asset quality ratio has been adjusted to remove the impact of government guaranteed mortgage and student loans andPCI. Management believes the inclusion of such assets in this asset quality ratio results in distortion of this ratio such that it might not be reflective of asset collectability or might not be comparable to other periods presented or to other portfolios that do not have government guarantees or were not impacted by PCI accounting requirements. 52Truist Financial Corporation --------------------------------------------------------------------------------
The following table presents activity related to NPAs: Table 17: Rollforward of NPAs (Dollars in millions)
2019 2018
Balance, January 1 $ 585 $ 627
New NPAs 1,499 1,184
Advances and principal increases 143 400
Disposals of foreclosed assets (1) (479) (459) Disposals of NPLs (2)
(239) (95)
Charge-offs and losses (295) (243)
Payments (392) (673)
Transfers to performing status (137) (155)
Other, net (1) (1)
Ending balance, December 31 $ 684 $ 585
(1) Includes charge-offs and losses recorded upon sale of $228 million and $216
million for the year ended December 31, 2019 and 2018, respectively.
(2) Includes charge-offs and losses recorded upon sale of $39 million and $31
million for the year ended December 31, 2019 and 2018, respectively.
TDRs occur when a borrower is experiencing, or is expected to experience,
financial difficulties in the near term and a concession has been granted to the
borrower. As a result, Truist will work with the borrower to prevent further
difficulties and seek to improve the likelihood of recovery on the loan. To
facilitate this process, a concessionary modification that would not otherwise
be considered may be granted, resulting in classification of the loan as a TDR.
TDRs identified by SunTrust prior to the Merger date are not included in
Truist's TDR disclosure because all such loans were recorded at fair value and a
new accounting basis was established as of the Merger. Subsequent modifications
will be evaluated and recorded as TDRs in accordance with Truist's accounting
policies.
The following table provides a summary of performing TDR activity:
Table 18: Rollforward of Performing TDRs
(Dollars in millions) 2019 2018
Balance, January 1 $ 1,119 $ 1,043
Inflows 641 510
Payments and payoffs (199) (169)
Charge-offs (67) (63)
Transfers to nonperforming TDRs (77) (69)
Removal due to the passage of time (18) (32) Non-concessionary re-modifications
(8) (6)
Transferred to LHFS and/or sold (411) (95)
Balance, December 31 $ 980 $ 1,119
Payments and payoffs include scheduled principal payments, prepayments and
payoffs of amounts outstanding. Transfers to nonperforming TDRs represent loans
that no longer meet the requirements necessary to reflect the loan in accruing
status.
TDR classification may be removed due to the passage of time if the loan: (1)
did not include a forgiveness of principal or interest, (2) has performed in
accordance with the modified terms (generally a minimum of six months), (3) was
reported as a TDR over a year-end reporting period, and (4) reflected an
interest rate on the modified loan that was no less than a market rate at the
date of modification. TDR classification may also be removed for an accruing
loan upon the occurrence of a subsequent non-concessionary modification granted
at market terms and within current underwriting guidelines.
In connection with consumer TDRs, a NPL will be returned to accruing status when
current as to principal and interest and upon a sustained historical repayment
performance (generally a minimum of six months).
Truist Financial Corporation 53
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The following table provides further details regarding the payment status of
TDRs outstanding at December 31, 2019 :
Table 19: Payment Status of TDRs (1)
December 31, 2019 Past Due 90 Days Or
(Dollars in millions) Current Past Due 30-89 Days More Total
Performing TDRs:
Commercial:
Commercial and industrial $ 46 97.9 % $ 1 2.1 % $ - - % $ 47
CRE 6 100.0 - - - - 6
Commercial construction 37 100.0 - - - - 37
Lease financing - - - - - - -
Consumer:
Residential mortgage 233 49.5 83 17.7 154 32.8 470
Residential home equity and direct 49 96.1 2 3.9 - - 51
Indirect auto 266 79.9 67 20.1 - - 333
Indirect other 5 100.0 - - - - 5
Student - - - - - - -
Credit card 25 80.7 5 16.1 1 3.2 31
Total performing TDRs 667 68.1 158 16.1 155 15.8 980
Nonperforming TDRs 36 43.9 6 7.3 40 48.8 82
Total TDRs $ 703 66.2 $ 164 15.4 $ 195 18.4 $ 1,062 (1)Past due performing TDRs are included in past due disclosures and nonperforming TDRs are included in NPL disclosures.
Truist Financial Corporation 54 --------------------------------------------------------------------------------
ACL
Activity related to the ACL is presented in the following tables: Table 20: Activity in ACL Year endedDecember 31 , (Dollars in millions) 2019 2018 2017 2016 2015 Balance, beginning of period$ 1,651 $ 1,609 $ 1,599 $ 1,550 $ 1,534 Provision for credit losses (excluding PCI loans) 616 583 562 574
430
Provision (benefit) for PCI loans (1) (17) (15) (2) (2) Charge-offs: Commercial and industrial (90) (92) (95) (143) (90) CRE (33) (10) (8) (8) (21) Commercial construction - (3) (2) (1) (3) Lease financing (11) (4) (5) (6) - Residential mortgage (21) (21) (47) (40) (46) Residential home equity and direct (93) (79) (69) (61) (62) Indirect auto (370) (342) (355) (315) (266) Indirect other (62) (49) (47) (51) (37) Student - - - - - Credit card (109) (76) (68) (61) (62) PCI - (2) (1) (15) (1) Total charge-offs (789) (678) (697) (701) (588) Recoveries: Commercial and industrial 25 39 36 44 38 CRE 5 3 9 9 7 Commercial construction 3 5 7 10 11 Lease financing 1 1 2 2 - Residential mortgage 2 2 2 3 3 Residential home equity and direct 30 25 27 28 31 Indirect auto 52 49 46 44 36 Indirect other 17 13 14 11 8 Student - - - - - Credit card 20 17 17 18 18 Total recoveries 155 154 160 169 152 Net charge-offs (634) (524) (537) (532) (436) Other 257 - - 9 24 Balance, end of period$ 1,889 $ 1,651 $ 1,609 $ 1,599 $ 1,550 ALLL (excluding PCI loans)$ 1,541 $ 1,549 $ 1,462 $ 1,445 $ 1,399 ALLL for PCI loans 8 9 28 44 61 RUFC 340 93 119 110 90 Total ACL$ 1,889 $ 1,651 $ 1,609 $ 1,599 $ 1,550 The ACL consists of the ALLL, which is presented separately on the Consolidated Balance Sheets, and the RUFC, which is included in Other liabilities on the Consolidated Balance Sheets. The ACL totaled$1.9 billion atDecember 31, 2019 , up$238 million compared toDecember 31, 2018 . The RUFC assumed in the Merger was$257 million . Total charge-offs during the year totaled$789 million , up$111 million compared to the prior year. As a percentage of average loans and leases, annualized net charge-offs were 0.40 percent, up four basis points compared to the prior year. The ALLL, excluding the allowance for PCI loans, was$1.5 billion , down$8 million compared to the prior year. The decrease in the ALLL was due primarily to the sale of residential mortgage loans during the year. As ofDecember 31, 2019 , the total ALLL was 0.52 percent of loans and leases held for investment. All of the merged loans were marked to fair value as ofDecember 6, 2019 and therefore, there is no allowance related to these loans. Upon the adoption of CECL, an allowance will be established for all loans held for investment, with the portion related to non-PCI loans and leases charged to retained earnings. Truist Financial Corporation 55 -------------------------------------------------------------------------------- The ALLL was 3.41 times nonperforming loans and leases held for investment, compared to 2.99 times atDecember 31, 2018 . AtDecember 31, 2019 , the ALLL was 2.44 times annualized net charge-offs, compared to 2.98 times atDecember 31, 2018 . The following table presents an allocation of the ALLL at the periods shown. This allocation of the ALLL is calculated on an approximate basis and is not necessarily indicative of future losses or allocations. The entire amount of the allowance is available to absorb losses occurring in any category of loans and leases. Table 21: Allocation of ALLL by Category 2019 2018 2017 2016 2015 December 31, % Loans in % Loans in % Loans in % Loans in % Loans in (Dollars in millions) Amount each category Amount each category Amount each category Amount each category Amount each category Commercial and industrial$ 560 43.4 %$ 546 41.4 %$ 522 41.1 %$ 530 40.4 %$ 488 39.8 % CRE 150 8.9 142 11.3 118 12.0 120 11.1 138 10.7 Commercial construction 52 2.1 48 2.9 42 2.8 25 2.7 37 2.7 Lease financing 10 2.0 11 1.4 9 1.3 7 1.2 5 1.1 Residential mortgage 176 17.4 232 21.1 209 20.0 227 20.8 217 22.4 Residential home equity and direct 107 9.0 104 7.9 113 8.4 111 8.6 113 8.3 Indirect auto 304 8.2 298 7.6 296 8.1 273 9.3 252 8.9 Indirect other 60 3.7 58 4.1 52 3.9 54 3.6 53 3.6 Student - 2.2 - - - - - - - - Credit card 122 1.9 110 2.0 101 1.9 98 1.7 96 1.7 PCI 8 1.2 9 0.3 28 0.5 44 0.6 61 0.8 Total ALLL 1,549 100.0 % 1,558 100.0 % 1,490 100.0 % 1,489 100.0 % 1,460 100.0 % RUFC 340 93 119 110 90 Total ACL$ 1,889 $ 1,651 $ 1,609 $ 1,599 $ 1,550 Truist monitors the performance of its home equity loans and lines secured by second liens similarly to other consumer loans and utilizes assumptions specific to these loans in determining the necessary ALLL.Truist also receives notification when the first lien holder, whetherTruist or another financial institution, has initiated foreclosure proceedings against the borrower. When notified that the first lien is in the process of foreclosure,Truist obtains valuations to determine if any additional charge-offs or reserves are warranted. These valuations are updated at least annually thereafter.Truist has limited ability to monitor the delinquency status of the first lien, unless the first lien is held or serviced byTruist . As a result, using migration assumptions that are based on historical experience and adjusted for current trends,Truist estimates the volume of second lien positions where the first lien is delinquent and adjusts the ALLL to reflect the increased risk of loss on these credits. Finally,Truist also provides additional reserves for second lien positions when the estimated combined current loan to value ratio for the credit exceeds 100%. As ofDecember 31, 2019 ,Truist held or serviced the first lien on 30.9% of its second lien positions. 56Truist Financial Corporation --------------------------------------------------------------------------------
Other Assets
The components of other assets are presented in the following table: Table 22: Composition of Other AssetsDecember 31 , (Dollars in millions) 2019 2018 Bank-owned life insurance$ 6,383 $ 4,656 Tax credit investments 5,448 2,557 Lease assets 4,978 1,375 Pension assets, net 3,579 1,270 Accounts receivable 2,418 1,116 Derivative assets 2,053 249 Operating lease - right of use asset 1,823 - Accrued income 1,807 745 Prepaid expenses 1,254 602 Equity securities at fair value 817 376 FHLB stock 764 281 Other 508 243 Total other assets$ 31,832 $ 13,470 Funding Activities Deposits are the primary source of funds for the Company's lending and investing activities. Scheduled payments and maturities from portfolios of loans and investment securities also provide a stable source of funds. FHLB advances, other secured borrowings, Federal funds purchased and other short-term borrowed funds, as well as long-term debt issued through the capital markets, all provide supplemental liquidity sources. Funding activities are monitored and governed throughTruist's overall ALM process under the governance and oversight of the MRLCC, which is further discussed in the "Market Risk Management" section in MD&A. The following section provides a brief description of the various sources of funds. Truist Financial Corporation 57
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Deposits
Deposits are obtained principally from individuals and businesses withinTruist's branch network and include noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money market deposit accounts, CDs and IRAs. Deposit account terms vary with respect to the minimum balance required, the time period the funds must remain on deposit and service charge schedules. Interest rates paid on specific deposit types are determined based on (i) competitor deposit rates, (ii) the anticipated amount and timing of funding needs, (iii) the availability and cost of alternative sources of funding, and (iv) anticipated future economic conditions and interest rates. Deposits are attractive sources of funding because of their stability and relative cost.
Deposits totaled
The following table presents average deposits for the most recent calendar quarters: Table 23: Composition of Average Deposits Three Months Ended (Dollars in millions)Dec 31, 2019
$ 64,485 $ 52,500 $ 52,680 $ 52,283 $ 53,732 Interest checking 43,246 27,664 27,708 27,622 26,921 Money market and savings 79,903 64,920 63,394 63,325 62,261 Time deposits 23,058 16,643 15,730 16,393 14,682 Foreign office deposits - interest-bearing 24 265 379 422
246
Total average deposits$ 210,716 $ 161,992 $ 159,891 $ 160,045 $ 157,842
Average deposits for the fourth quarter of 2019 were
Noninterest-bearing deposits represented 30.6% of total average deposits for the fourth quarter of 2019, compared to 32.4% for the prior quarter and 34.0% for the prior year quarter. The cost of average total deposits was 0.57% for the fourth quarter, down ten basis points compared to the prior quarter. The cost of average interest-bearing deposits was 0.82% for the fourth quarter, down 17 basis points compared to the prior quarter. Table 24: Scheduled Maturities of Time Deposits$100,000 and GreaterDecember 31, 2019 (Dollars in millions) Three months or less$ 6,311 Over three through six months 3,504 Over six through twelve months 4,455 Over twelve months 4,937 Total$ 19,207 Borrowings The types of short-term borrowings that have been, or may be, used by the Company include Federal funds purchased, securities sold under repurchase agreements, master notes, commercial paper, short-term bank notes and short-term FHLB advances. Short-term borrowings fluctuate based on the Company's funding needs. While deposits remain the primary source for funding loan originations, management uses short-term borrowings as a supplementary funding source for loan growth and other balance sheet management purposes. The following table summarizes certain information for the past three years with respect to short-term borrowings: 58Truist Financial Corporation -------------------------------------------------------------------------------- Table 25: Short-Term Borrowings As Of / For The Year EndedDecember 31 , (Dollars in millions) 2019 2018 2017 Securities sold under agreements to repurchase: Maximum outstanding at any month-end during the year$ 1,969 $ 836 $ 1,923 Balance outstanding at end of year 1,969 251 483 Average outstanding during the year 826 446 1,449 Average interest rate during the year 2.01 % 1.35 % 0.70 % Average interest rate at end of year 1.41 1.59 0.43
Federal funds purchased and short-term borrowed funds: Maximum outstanding at any month-end during the year
$ 16,249 $ 9,063 $ 6,859 Balance outstanding at end of year 16,249 4,927 4,455 Average outstanding during the year 7,636 5,509 2,862 Average interest rate during the year 2.24 % 1.92 % 1.06 % Average interest rate at end of year 1.75 2.49 1.34 AtDecember 31, 2019 , short-term borrowings totaled$18.2 billion , an increase of$13.0 billion compared toDecember 31, 2018 . Short-term borrowings of$6.8 billion were assumed as a result of the Merger. The remaining increase was due to increased liquidity in anticipation of the Merger. Average short-term borrowings were$8.5 billion , or 4.0% of total funding in 2019, as compared to$6.0 billion , or 3.1% in 2018. Long-term debt provides funding and, to a lesser extent, regulatory capital, and primarily consists of senior and subordinated notes issued byTruist andTruist Bank . Long-term debt totaled$41.3 billion atDecember 31, 2019 , an increase of$17.6 billion compared toDecember 31, 2018 . Long-term debt of$19.5 billion was assumed as a result of the Merger.Truist's issuances of debt included$3.5 billion of senior notes and$650 million of subordinated notes, partially offset by maturities of$3.1 billion of senior notes and$586 million of subordinated notes.Truist Bank's issuances included$1.2 billion of senior notes and$750 million of subordinated notes, partially offset by maturities of$4.7 billion of senior notes. The average cost of long-term debt was 3.22% for the year endedDecember 31, 2019 , up 34 basis points compared to the same period in 2018.
FHLB advances represented 10.0% of total outstanding long-term debt at
Shareholders' Equity
Total shareholders' equity was$66.6 billion atDecember 31, 2019 , an increase of$36.4 billion fromDecember 31, 2018 . Equity issued in connection with the Merger was$33.5 billion .Truist issued$1.7 billion of preferred stock during the year and redeemed a similar amount from two higher-cost issuances. In connection with the redemptions, net income available to common shareholders was reduced by$46 million to recognize the difference in the redemption price and the carrying value. Other significant changes include net income of$3.2 billion and an increase in AOCI of$871 million , which was partially offset by$1.5 billion for common and preferred dividends.Truist's book value per common share atDecember 31, 2019 was$45.66 , compared to$35.46 atDecember 31, 2018 .
Risk Management
Truist maintains a comprehensive risk management framework supported by people, processes and systems to identify, measure, monitor, manage and report significant risks arising from its exposures and business activities. Effective risk management involves appropriately managing risk to optimize risk and return, operate in a safe and sound manner, and is designed to ensure compliance with applicable laws and regulations. The Company's risk management framework is designed to ensure that business strategies and objectives are executed in alignment with its risk appetite.Truist is committed to fostering a culture that supports transparency and escalation of risks across the organization. All teammates are responsible for upholding the Company's purpose, mission, and values, and are encouraged to speak up if there is any activity or behavior that is inconsistent with the Company's culture. TheTruist code of ethics guides and unites the Company's decision making and informs teammates on how to act in the absence of specific guidance.
Compensation decisions take into account a teammate's adherence to, and successful implementation of,Truist's risk values and associated policies and procedures. The Company's compensation structure supports its core values and sound risk management practices in an effort to promote judicious risk-taking behavior.Truist Financial Corporation 59
--------------------------------------------------------------------------------Truist employs a comprehensive change management program to manage the risks associated with integrating heritage BB&T and heritage SunTrust. The Board and Executive Leadership oversee the change management program, which is designed to ensure key decisions are reviewed and that there is appropriate oversight of integration activities.Truist's purpose, mission and values are the foundation for the risk management framework utilized atTruist and therefore serve as the basis on which the risk appetite and risk strategy are built.Truist's RMO provides independent oversight and guidance for risk-taking across the enterprise. In keeping with the belief that consistent values drive long-term behaviors,Truist's RMO has established the following risk values which guide teammates' day-to-day activities: •Managing risk is the responsibility of every teammate. •Proactively identifying risk and managing the inherent risks of their businesses is the responsibility of the business units. •Managing risk with a balanced approach which includes quality, profitability, and growth. •Measuring what is managed and managing what is measured. •Utilizing sound and consistent risk management practices. •Thoroughly analyzing risk quantitatively and qualitatively. •Realizing lower cost of capital from high quality risk management.Truist places significant emphasis on risk management oversight and maintains a separate Board-level Risk Committee, which assists the Board in its oversight of the Company's risk management function. The Committee is responsible for approving and periodically reviewing the Company's risk management framework and risk management policies as well as monitoring the Company's risk profile, approving risk appetite statements, and providing input to management regardingTruist's risk appetite and risk profile. The RMO is led by the CRO and is responsible for overseeing the identification, measurement, monitoring, management and reporting of risk. The CRO has direct access to the Board to communicate any risk issues (current or emerging) as well as the performance of the risk management activities throughout the enterprise.
As illustrated below, the risk management framework is supported by three lines of defense. The following figure describes the roles of the three lines of defense:
[[Image Removed: tfc-20191231_g6.jpg]]
Truist's Risk Governance framework is designed to provide comprehensive Board
and Executive Leadership risk oversight, maintaining a committee governance
structure that is designed to ensure alignment and execution of the risk
management framework. The committee structure provides a mechanism to allow for
efficient aggregation and escalation of risk information from the BUs up to the
risk programs, Executive Leadership and ultimately the Board.
60 Truist Financial Corporation
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[[Image Removed: tfc-20191231_g7.jpg]]The executive level committees include the ERC, ECRPMC, MRLCC, EBPCC, TMC and DC, each of which is chaired by a member of Executive Leadership. These committees provide oversight of each of the primary risk types.
The ERC establishes a fully integrated view of risks across the company, provides broad strategic oversight of all risk types, and oversees corporate-wide strategies for identifying, assessing, controlling, measuring, monitoring and reporting risk at the enterprise level.
The ERC is responsible for maintaining an effective risk management framework and monitoring its adoption and execution across the enterprise. The ERC is chaired by the CRO and its membership includes all members of Executive Leadership and the General Auditor.
The principal types of inherent risk include credit, liquidity, compliance, strategic and reputation, operational, and market risks. The following is a discussion of these risks.
Credit risk
Credit risk is the risk to current or anticipated earnings or capital arising from the default, inability or unwillingness of a borrower, obligor, or counterparty to meet the terms of any financial obligation toTruist or otherwise perform as agreed. Credit risk exists in all activities where success depends on the performance of a borrower, obligor, or counterparty. Credit risk arises whenTruist funds are extended, committed, invested, or otherwise exposed through actual or implied contractual agreements, whether on or off-balance sheet. Credit risk increases when the credit quality of an issuer whose securities or other instruments the bank holds deteriorates.
•limiting the amount of credit that individual lenders may extend to a borrower; •establishing a process for credit approval accountability; •careful initial underwriting and analysis of borrower, transaction, market and collateral risks; •ongoing servicing and monitoring of individual loans and lending relationships; •continuous monitoring of the portfolio, market dynamics and the economy; and •periodically reevaluating the Company's strategy and overall exposure as economic, market and other relevant conditions change.
The following discussion describes the underwriting procedures and overall risk
management of
Truist Financial Corporation 61 --------------------------------------------------------------------------------
Underwriting Approach
The loan portfolio is a primary source of profitability and risk; therefore, proper loan underwriting is critical toTruist's long-term financial success.Truist's underwriting approach is designed to define acceptable combinations of specific risk-mitigating features that ensure credit relationships conform toTruist's risk philosophy. Provided below is a summary of the most significant underwriting criteria used to evaluate new loans and loan renewals: •Cash flow and debt service coverage - cash flow adequacy is a necessary condition of creditworthiness, meaning that loans must either be clearly supported by a borrower's cash flow or, if not, must be justified by secondary repayment sources. •Secondary sources of repayment - alternative repayment funds are a significant risk-mitigating factor as long as they are liquid, can be easily accessed, and provide adequate resources to supplement the primary cash flow source. •Value of any underlying collateral - loans are generally secured by the asset being financed. Because an analysis of the primary and secondary sources of repayment is the most important factor, collateral, unless it is liquid, does not justify loans that cannot be serviced by the borrower's normal cash flows. •Overall creditworthiness of the client, taking into account the client's relationships, both past and current, withTruist and other lenders -Truist's success depends on building lasting and mutually beneficial relationships with clients, which involves assessing their financial position and background. •Level of equity invested in the transaction - in general, borrowers are required to contribute or invest a portion of their own funds prior to any loan advances.
Refer to the "Lending Activities" section in this MD&A for a discussion of each loan and lease portfolio.
Liquidity risk Liquidity risk is the risk that (i)Truist will be unable to meet its obligations as they come due because of an inability to liquidate assets or obtain adequate funding (funding liquidity risk), or (ii)Truist cannot easily unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions (market liquidity risk).
Compliance risk
Compliance risk is the risk to current or anticipated earnings or capital arising from violations of laws, rules or regulations, or from non-conformance with prescribed practices, internal policies and procedures or ethical standards. This risk exposesTruist to fines, civil monetary penalties, payment of damages and the voiding of contracts. Compliance risk can result in diminished reputation, reduced franchise or enterprise value, limited business opportunities and lessened expansion potential.
Operational risk
Operational risk is the risk to current or anticipated earnings or capital arising from inadequate or failed internal processes, people and systems or from external events. It includes legal risk, which is the risk of loss arising from defective transactions, litigation or claims made, or the failure to adequately protect company-owned assets. An operational loss occurs when an event results in a loss or reserve originating from operational risk.Truist has developed and employs a risk taxonomy that further guides business functions in identifying, measuring, responding to, monitoring and reporting on possible operational losses to the organization. The risk taxonomy drives internal risk conversations and enablesTruist to clearly and transparently communicate to external stakeholders the level of potential operational risk we face, both presently and in the future, and our position on managing it to acceptable levels.
Technology risk
Technology risk is the business risk associated with the use, ownership, operation, involvement, influence and adoption of information technology across the Company.Truist has defined and adopted a technology risk framework that provides the foundation for technology risk strategy, program and oversight and defines key objectives, operating model components, risk domains and capabilities to manage this risk.
Cybersecurity risk
Digital technology is constantly evolving, and new and unforeseen threats and actions by others may disrupt operations or result in losses beyondTruist's risk control thresholds.Truist maintains a comprehensive risk-based information security / cybersecurity framework implemented through people, processes, and technology wherebyTruist monitors and evaluates threats, events, and the performance of its business operations and continually adapts its risk mitigation activities accordingly. 62Truist Financial Corporation --------------------------------------------------------------------------------Truist's framework aligns with those of theNational Institute of Standards and Technology , theInternational Standards Organization 27000 series, theIT Governance Institute , and the Control Objectives for Information and Related Technology, as well as conforms with the requirements and guidance from applicable regulatory authorities, including theFederal Financial Institutions Examination Council . In addition,Truist's risk-based information security / cybersecurity framework, which includes internally and externally focused capabilities, drives the development and implementation ofTruist's holistic data security strategy that is designed to reduce risk while enablingTruist's corporate business objectives.Truist has built an organization with dedicated, skilled talent to sustain the cross-company partnerships needed to operationalizeTruist's cybersecurity strategy as well as to continue enhancing multilayered defenses pertaining to early and rapid cyber threat identification, detection, protection, response, and recovery by identifying and deploying advanced capabilities best suited to help proactively prevent and mitigate risk.Truist also participates in the federally recognized financial sector information sharing organization structure, known as the Financial Services Information Sharing and Analysis Center as a key part ofTruist's cyber threat intelligence and response programs, as well as other industry organizations and initiatives that promote industry best practices such as harmonized cybersecurity standards, cyber readiness, and secure consumer financial data sharing. To further mitigate the risks presented by an evolving cyber threat landscape,Truist provides data protection guidance to clients through multiple print and digital channels as well as promotes data protection awareness and accountability through robust training for teammates.Truist conducts routine test simulation exercises which are scenario driven and simulate impacts and consequences developed through analysis of real-world technology incidents as well as known and anticipated cyber threats. These exercises are designed to assess the viability ofTruist's crisis response and management programs and provide the basis for continuous improvement.Truist also consults with third party data security experts.Truist's cybersecurity risk program is overseen by the Board and Executive Leadership. The Board devotes significant time and attention to its oversight of cyber security risk and approves related information security policies. AlthoughTruist has invested substantial time and resources to manage and reduce cyber risk, it is not possible to completely eliminate this risk.Truist obtains cyber security insurance that protects against certain losses, expenses, and damages associated with cyber risk. See Item 1A, "Risk Factors," for additional information regarding cybersecurity risk.
Model risk
Model risk is the risk to current or anticipated earnings or capital from decisions based on incorrect or misused model outputs.Truist uses models for many purposes, including the valuation of financial positions, estimation of credit losses, and the measurement of risk. Valuation models are used to value certain financial instruments for which quoted prices may not be readily available. Valuation models are also used as inputs for VaR, the estimation of VaR itself, regulatory capital, stress testing and the ACL. Models are owned by the applicable BUs, who are responsible for the development, implementation and use of their models. Oversight of these functions is performed by the MRM, which is a component of the RMO. Once models have been approved, model owners are responsible for the maintenance of an appropriate operating environment and must monitor and evaluate the performance of the models on a recurring basis. Models are updated in response to changes in portfolio composition, industry and economic conditions, technological capabilities and other developments. MRM manages model risk in a holistic manner through a suite of model governance and model validation activities. The risk of each model is assessed and classified into various risk tiers. Additionally, MRM maintains an enterprise-wide model inventory containing relevant model information. Regarding model validation, MRM utilizes internal validation analysts and managers with skill sets in predictive modeling to perform detailed reviews of model development, implementation and conceptual soundness. On certain occasions, the MRM will also engage external parties to assist with validation efforts. Once in a production environment, MRM assesses a model's performance on a periodic basis through ongoing monitoring reviews. MRM tracks issues that have been identified during model validation or through ongoing monitoring, and engages with model owners to ensure their timely remediation. MRM presents model limitations and risks to management and the Board of Directors via model validation reports and regular meetings with the Model Risk Management Committee.Truist Financial Corporation 63 --------------------------------------------------------------------------------
Strategic and reputation risk
Strategic risk is the risk of financial loss, diminished stakeholder confidence, or negative impact to human capital resulting from ineffective strategy setting and execution, adverse business decisions, or lack of responsiveness to changes in the banking industry and operating environment.Truist is committed to fulfilling its overall strategic objectives by selecting business strategies and operating businesses in a manner consistent with achieving profitability/earnings growth and maintaining strong confidence and trust with its key stakeholder constituencies. Reputation risk is the risk to current or anticipated earnings, capital, enterprise value, the Truist brand, and public confidence arising from negative publicity or public opinion, whether real or perceived, regardingTruist's business practices, products, services, transactions, or other activities undertaken byTruist , its representatives, or its partners. A negative reputation may impairTruist's relationship with clients, associates, communities or shareholders, and it is often a residual risk that arises when other risks are not managed properly.
Market risk management
Market risk is the risk to current or anticipated earnings or capital arising from changes in the market value of portfolios, securities, or other financial instruments. Market risk results from changes in the level, volatility or correlations among financial market rates or prices, including interest rates, foreign exchange rates, equity prices, commodity prices or other relevant rates or prices. Effective management of market risk is essential to achievingTruist's strategic financial objectives.Truist's most significant market risk exposure is to interest rate risk in its balance sheet; however, market risk also results from product liquidity risk, price risk and volatility risk inTruist's BUs. Interest rate risk results from differences between the timing of rate changes and the timing of cash flows (re-pricing risk); from changing rate relationships among different yield curves affecting bank activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest-related options embedded in bank products (options risk).
The primary objectives of market risk management are to minimize adverse effects
from changes in market risk factors on net interest income, net income and
capital and to offset the risk of price changes for certain assets and
liabilities recorded at fair value. At
Interest rate market risk (other than trading)
As a financial institution,Truist is exposed to interest rate risk both on its assets and on its liabilities. Since interest rate changes are out of the control of any private sector institution,Truist actively manages its interest rate risk with the strategic repricing of its assets and liabilities, taking into account the volumes, maturities and mix, with the goal of keeping net interest margin as stable as possible.Truist primarily uses three methods to measure and monitor its interest rate risk: (i) a model that simulates possible changes to net interest income over the next two years based on a set of assumptions; (ii) an analysis of interest rate shock scenarios; and (iii) a model that analyzes the economic value of equity based on changes in interest rates. The simulation model takes into account assumptions about prepayment trends, using a combination of market data and internal historical experiences for deposits and loans, as well as scheduled maturities and payments and the likely outlook for the economy and interest rates. These assumptions are reviewed and adjusted monthly to reflect changes in market interest rates as compared to the rates ofTruist's assets and liabilities. The model also considersTruist's current and prospective liquidity position, current balance sheet volumes and projected growth, accessibility of funds for short-term needs and capital maintenance. Deposit betas are an important assumption in the interest rate risk modeling process.Truist applies an average deposit beta (the difference between ratesTruist pays and market rates) of approximately 60% to its non-maturity interest-bearing deposit accounts for determining its interest rate sensitivity. Non-maturity, interest-bearing deposit accounts include interest checking accounts, savings accounts and money market accounts that do not have a contractual maturity.Truist also regularly conducts sensitivity analyses on other key variables, including noninterest-bearing deposits, to determine the impact they could have on the interest rate risk position. The predictive value of the simulation model depends upon the accuracy of the assumptions, but management believes that it provides helpful data for the management of interest rate risk. 64Truist Financial Corporation -------------------------------------------------------------------------------- The following table shows the effect that the indicated changes in interest rates would have on net interest income as projected for the next twelve months assuming a gradual change in interest rates as described below. The decrease in rate sensitivity versus the prior period is related to the Merger, alignment of modeling assumptions and recent balance sheet restructuring activities. Table 26: Interest Sensitivity Simulation Analysis Annualized Interest Rate Scenario Hypothetical Prime Rate Percentage Change in Linear Change in Net Interest Income Prime Rate (bps) Dec 31, 2019 Dec 31, 2018 Dec 31, 2019 Dec 31, 2018 Up 100 5.75 % 6.50 % 0.95 % 1.22 % Up 50 5.25 6.00 0.75 0.65 No Change 4.75 5.50 - - Down 50 4.25 5.00 (1.18) (1.30) Down 100 3.75 4.50 (1.72) (3.17)Truist has established parameters related to interest rate sensitivity measures that prescribe a maximum impact on net interest income under different interest rate scenarios that would result in an escalation to the Board. The following parameters and interest rate scenarios are consideredTruist's primary measures of interest rate risk: •Maximum impact on net interest income of 7.5% for the next 12 months assuming a 25 basis point change in interest rates each quarter for four quarters; and a •Maximum impact on net interest income of 10% for an immediate 100 basis point parallel change in rates.
This interest rate shock analysis is designed to create an outer bound of acceptable interest rate risk.
Truist also uses an EVE analysis to focus on longer-term projected changes in asset and liability values given potential changes in interest rates. This measure allowsTruist to analyze interest rate risk that falls outside the simulation model parameters. The EVE model is a discounted cash flow of the portfolio of assets, liabilities and derivative instruments. The difference in the present value of assets minus the present value of liabilities is defined as EVE. The following table shows the effect that the indicated changes in interest rates would have on EVE: Table 27: EVE Simulation Analysis Change in Interest Hypothetical Percentage Change in EVE Rates (bps) Dec 31, 2019 Dec 31, 2018 Up 100 (2.9) % (0.7) % No Change - - Down 100 (3.0) (6.2)Truist uses derivatives primarily to manage interest rate risk related to securities, commercial loans, MSRs and mortgage banking operations, long-term debt and other funding sources.Truist also uses derivatives to facilitate transactions on behalf of its clients. As ofDecember 31, 2019 ,Truist had derivative financial instruments outstanding with notional amounts totaling$315.9 billion , with a net fair value of$1.7 billion . See "Note 19. Derivative Financial Instruments" for additional disclosures. LIBOR in its current form may no longer be available after 2021.Truist has LIBOR-based contracts that extend beyond 2021. To prepare for the possible transition to an alternative reference rate, management has formed a cross-functional project team to address the LIBOR transition. The project team has performed an assessment to identify the potential risks related to the transition from LIBOR to a new index. The project provides regular reports to the Board and Risk Management Committees. The project team is reviewing contract fallback language for loans and leases and noted that certain contracts will need updated provisions for the transition and is coordinating with impacted lines of business to update LIBOR fallback language generally consistent with the ARRC recommendation.Truist is continuing to evaluate the impact on these contracts and other financial instruments, systems implications, hedging strategies, and other related operational and market risks. Market risks associated with this change are dependent on the alternative reference rates available and market conditions at transition. For a further discussion of the various risks associated with the potential cessation of LIBOR and the transition to alternative reference rates, refer to the section titled "Item 1A. Risk Factors." Truist Financial Corporation 65 --------------------------------------------------------------------------------
Market risk from trading activities
Truist also manages market risk associated with trading activities.Truist is a financial intermediary that provides its clients access to derivatives, foreign exchange and securities markets. Trading market risk is managed using a comprehensive risk management approach, which includes measuring risk using VaR, stress testing and sensitivity analysis. Risk metrics are monitored against limits on a daily basis at both trading desks and at the aggregate portfolio level to ensure exposures are in line withTruist's risk appetite.
Covered trading positions
The trading portfolio of covered positions subject to the Market Risk Rule results primarily from market making and underwriting services for our clients, as well as associated risk mitigating hedging activity. The trading portfolio, measured in terms of VaR, consists primarily of four sub-portfolios of covered positions: (i) credit trading, (ii) fixed income securities, (iii) interest rate derivatives and (iv) equity derivatives. As a market maker,Truist's trading portfolio also contains other sub-portfolios, including foreign exchange rate and commodity derivatives; however, these portfolios do not generate material trading risk exposures. Valuation policies, procedures, and methodologies exist for all covered positions. Additionally, trading positions are subject to independent price verification. See "Note 19. Derivative Financial Instruments," "Note 18. Fair Value Disclosures," and "Critical Accounting Policies" herein for discussion of valuation policies, procedures and methodologies.
Securitizations
As ofDecember 31, 2019 , the aggregate market value of on-balance sheet securitization positions subject to the Market Risk Rule was$23 million , all of which were non-agency asset backed securities positions. Consistent with the Market Risk Rule requirements, the Company performs pre-purchase due diligence on each securitization position to identify the characteristics including, but not limited to, deal structure and the asset quality of the underlying assets, that materially affect valuation and performance. Securitization positions are subject toTruist's comprehensive risk management framework, which includes daily monitoring against a full suite of limits. There were no off-balance sheet securitization positions during the reporting period.
Correlation trading positions
The trading portfolio of covered positions did not contain any correlation
trading positions as of
VaR-based measures
VaR measures the estimated potential loss at a specified confidence level and time horizon.Truist utilizes a historical VaR methodology to measure and aggregate risks across its covered trading positions. Following the Merger,Truist elected to migrate all covered positions to the heritage SunTrust VaR system and methodology. For an interim period, VaR for a subset of heritage BB&T positions, specifically those covered positions held inBB&T Securities , will be calculated using the heritage BB&T VaR system and methodology. As such, pending full integration,Truist will operate two historical VaR models and aggregate company-wide VaR will be determined additively with no benefit of diversification. For risk management purposes, the VaR calculation is based on a historical simulation approach and measures the potential trading losses using a one-day holding period at a one-tail, 99% confidence level. For Market Risk Rule purposes, the Company calculates VaR using a 10-day holding period and a 99% confidence level. Due to inherent limitations of the VaR methodology, such as the assumption that past market behavior is indicative of future market performance, VaR is only one of several tools used to measure and manage market risk. Other tools used to actively manage market risk include stress testing, profit and loss attribution, and stop loss limits. 66Truist Financial Corporation -------------------------------------------------------------------------------- The trading portfolio's VaR profile is influenced by a variety of factors, including the size and composition of the portfolio, market volatility and the correlation between different positions. The following table summarizes certain VaR-based measures. VaR measures atDecember 31, 2019 reflects the aggregate VaR measure of theTruist trading portfolio. Average VaR measures reflect heritage SunTrust after the Merger. Table 28: VaR-based Measures 2019 2018 Year EndedDecember 31 , (Dollars in millions) 10-Day Holding
Period 1-Day Holding Period 10-Day Holding Period
1-Day Holding Period VaR-based Measures: Maximum $ 9 $ 2 $ 2 $ 1 Average 1 1 1 1 Minimum - - - - Period-end 7 2 1 1 VaR by Risk Class: Interest Rate Risk 2 1 Credit Spread Risk 3 - Equity Price Risk 2 - Foreign Exchange Risk - - Portfolio Diversification (5) - Period-end 2 1
Stressed VaR-based measures
Stressed VaR, another component of market risk capital, is calculated using the same internal models as used for the VaR-based measure. Stressed VaR is calculated over a ten-day holding period at a one-tail, 99% confidence level and employs a historical simulation approach based on a continuous twelve-month historical window selected to reflect a period of significant financial stress for our trading portfolio. The following table summarizes Stressed VaR-based measures: Table 29: Stressed VaR-based Measures - 10 Day Holding Period Year EndedDecember 31 , (Dollars in millions) 2019 2018 Maximum$ 33 $ 7 Average 5 5 Minimum 2 3 Period-end 28 5 Specific risk measures Specific risk is a measure of idiosyncratic risk that could result from risk factors other than broad market movements (e.g. default, event risks). The Market Risk Rule provides fixed risk weights under a standardized measurement method while also allowing a model-based approach, subject to regulatory approval.Truist utilizes the standardized measurement method to calculate the specific risk component of market risk regulatory capital. As such, incremental risk capital and comprehensive risk measure capital requirements do not apply.
VaR model backtesting
In accordance with the Market Risk Rule, the Company evaluates the accuracy of its VaR model through daily backtesting by comparing aggregate daily trading gains and losses (excluding fees, commissions, reserves, net interest income, and intraday trading) from covered positions with the corresponding daily VaR-based measures generated by the model. The number of company-wide VaR backtesting exceptions over the preceding twelve months is used to determine the multiplication factor for the VaR-based capital requirement under the Market Risk Rule. The capital multiplication factor increases from a minimum of three to a maximum of four, depending on the number of exceptions. There were two company-wide VaR backtesting exceptions during the twelve months endedDecember 31, 2019 . In accordance with established policy and procedure, all company-wide VaR backtesting exceptions are thoroughly reviewed in the context of VaR model use and performance. There was no change in the capital multiplication factor over the preceding twelve months.Truist Financial Corporation 67 --------------------------------------------------------------------------------
Model risk management
Management's approach to the validation and evaluation of the accuracy of
MRM is responsible for the independent model validation of all decision tools and models including trading market risk models. The validation activities are conducted in accordance with MRM standards, which includes regulatory guidance related to the evaluation of model conceptual soundness, ongoing monitoring and outcomes analysis. As part of ongoing monitoring efforts, the performance of all trading risk models are reviewed regularly to preemptively address emerging developments in financial markets, assess evolving modeling approaches, and to identify potential model enhancement.
Stress testing
The Company uses a comprehensive range of stress testing techniques to help monitor risks across trading desks and to augment standard daily VaR and other risk limits reporting. The stress testing framework is designed to quantify the impact of extreme, but plausible, stress scenarios that could lead to large unexpected losses. Stress tests include simulations for historical repeats and hypothetical risk factor shocks. All trading positions within each applicable market risk category (interest rate risk, equity risk, foreign exchange rate risk, credit spread risk, and commodity price risk) are included in the Company's comprehensive stress testing framework. Management reviews stress testing scenarios on an ongoing basis and makes updates, as necessary, to ensure that both current and emerging risks are captured appropriately. Management also utilizes stress analyses to support the Company's capital adequacy assessment standards. See the "Capital" section of this MD&A for additional discussion of capital adequacy. Liquidity Liquidity represents the continuing ability to meet funding needs, including deposit withdrawals, timely repayment of borrowings and other liabilities, and funding of loan commitments. In addition to the level of liquid assets, such as cash, cash equivalents and AFS securities, other factors affect the ability to meet liquidity needs, including access to a variety of funding sources, maintaining borrowing capacity in national money markets, growing core deposits, loan repayment and the ability to securitize or package loans for sale.Truist monitors the ability to meet client demand for funds under both normal and stressed market conditions. In considering its liquidity position, management evaluatesTruist's funding mix based on client core funding, client rate-sensitive funding and national markets funding. In addition, management evaluates exposure to rate-sensitive funding sources that mature in one year or less. Management also measures liquidity needs against 30 days of stressed cash outflows forTruist andTruist Bank . To ensure a strong liquidity position, and compliance with regulatory requirements, management maintains a liquid asset buffer of cash on hand and highly liquid unencumbered securities. As ofDecember 31, 2019 andDecember 31, 2018 ,Truist's liquid asset buffer was 16.5% and 14.7%, respectively, of total assets. LCR rules require largeU.S. banking organizations to hold unencumbered high-quality liquid assets sufficient to withstand projected 30-day total net cash outflows, each as defined under the LCR rule. As ofDecember 31, 2019 ,Truist is subject to modified LCR requirements.Truist's modified average LCR was 165% for the three months endedDecember 31, 2019 , relative to the regulatory minimum for such entities of 100%. This represents the month-end results for heritage BB&T from October andNovember 2019 averaged with the mergedTruist result forDecember 2019 . Under the Tailoring Rules,Truist is a Category III banking organization, and therefore is subject to a reduced tailored LCR requirement (85%) effectiveJanuary 1, 2020 and will be subject to daily calculation beginningJanuary 1, 2021 . See additional disclosures in the "Regulatory Considerations" section in this MD&A. Parent CompanyThe Parent Company serves as the primary source of capital for the operating subsidiaries.The Parent Company's assets consist primarily of cash on deposit withTruist Bank , equity investments in subsidiaries, advances to subsidiaries, and accounts receivable from subsidiaries. The principal obligations of the Parent Company are payments on long-term debt. The main sources of funds for the Parent Company are dividends and management fees from subsidiaries, repayments of advances to subsidiaries, and proceeds from the issuance of equity and long-term debt. The primary uses of funds by the Parent Company are investments in subsidiaries, advances to subsidiaries, dividend payments to common and preferred shareholders, retirement of common stock, and payments on long-term debt.
See "Note 22. Parent Company Financial Information" for additional information regarding dividends from subsidiaries and debt transactions.
68Truist Financial Corporation -------------------------------------------------------------------------------- Access to funding at the Parent Company is more sensitive to market disruptions. Therefore,Truist prudently manages cash levels at the Parent Company to cover a minimum of one year of projected cash outflows which includes unfunded external commitments, debt service, common and preferred dividends and scheduled debt maturities, without the benefit of any new cash inflows.Truist maintains a significant buffer above the projected one year of cash outflows. In determining the buffer,Truist considers cash requirements for common and preferred dividends, unfunded commitments to affiliates, serving as a source of strength toTruist Bank , and being able to withstand sustained market disruptions that could limit access to the capital markets. AtDecember 31, 2019 andDecember 31, 2018 , the Parent Company had 29 months and 28 months, respectively, of cash on hand to satisfy projected contractual cash outflows, and 20 months and 19 months, respectively, when including the payment of common stock dividends.
Truist carefully manages liquidity risk atTruist Bank .Truist Bank's primary source of funding is client deposits. Continued access to client deposits is highly dependent on public confidence in the stability ofTruist Bank and its ability to return funds to clients when requested.Truist Bank has several major sources of funding to meet its liquidity requirements, including access to capital markets through issuance of senior or subordinated bank notes and institutional CDs, FHLB advances, repurchase agreements, overnight and term Federal funds markets, retail brokered CDs, and the FRB discount window. AtDecember 31, 2019 ,Truist Bank has approximately$121.8 billion of secured borrowing capacity, which represents approximately 3.4 times the amount of one year wholesale funding maturities. The ability to raise funding at competitive prices is affected by the rating agencies' views of the Parent Company's andTruist Bank's credit quality, liquidity, capital and earnings. Management meets with the rating agencies on a regular basis to discuss current outlooks. The ratings forTruist andTruist Bank by the major rating agencies are detailed in the table below: Table 30: Credit Ratings ofTruist Financial Corporation andTruist Bank S&P Moody's Fitch DBRSTruist Financial Corporation : Commercial paper A-2 N/A F1 R-1(low) Issuer A- A3 A+ A(high) LT/senior debt A- A3 A+ A(high) Subordinated debt BBB+ A3 A A Preferred stock BBB- Baa2(hyb) BBB- BBB(high) Truist Bank: Long term deposits N/A Aa2 AA- AA(low) LT/Senior unsecured bank notes A A2 A+ AA(low) Other long term senior obligations A N/A A+ AA(low) Other short term senior obligations A-1 N/A F1 R-1(middle) Short term bank notes A-1 P-1 F1 R-1(middle) Short term deposits N/A P-1 F1+ R-1(middle) Subordinated bank notes A- A3 A A(high) Ratings outlook: Credit trend Stable Stable Stable PositiveTruist has a contingency funding plan designed to ensure that liquidity sources are sufficient to meet ongoing obligations and commitments, particularly in the event of a liquidity contraction. This plan is designed to examine and quantify the organization's liquidity under various "stress" scenarios. Additionally, the plan provides a framework for management and other critical personnel to follow in the event of a liquidity contraction or in anticipation of such an event. The plan addresses authority for activation and decision making, liquidity options, and the responsibilities of key departments in the event of a liquidity contraction. Management believes current sources of liquidity are adequate to meetTruist's current requirements and plans for continued growth. See "Note 9. Other Assets and Liabilities," "Note 11. Borrowings" and "Note 16. Commitments and Contingencies" for additional information regarding outstanding balances of sources of liquidity and contractual commitments and obligations. Truist Financial Corporation 69 --------------------------------------------------------------------------------
Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements
The following table presentsTruist's contractual obligations by payment date as ofDecember 31, 2019 . The payment amounts represent amounts contractually due. The table excludes liabilities recorded where management cannot reasonably estimate the timing of any payments that may be required in connection with these liabilities. UTBs, which represent a reserve for tax positions taken or expected to be taken, which ultimately may not be sustained upon examination by taxing authorities, have been excluded from the table below since the ultimate amount and timing of any future tax settlements are uncertain. Refer to "Note 14. Income Taxes" for additional details related to UTBs. Table 31: Contractual Obligations and Other Commitments December 31, 2019 Less than 1 (Dollars in millions) Total Year
1 to 3 Years 3 to 5 Years After 5 Years Long-term debt and finance leases
$ 41,362 $ 6,393
2,366 375 711 517 763
Commitments to fund affordable housing
investments 1,271 1,018 208 16 29
Private equity and other investments
commitments (1) 577 319 133 100 25
Time deposits 35,896 29,397 5,349 1,052 98
Contractual interest payments (2) 4,615 1,384 1,692 973 566
Purchase obligations (3) 2,173 976 633 180 384
Nonqualified benefit plan obligations (4) 1,358 26 48 50 1,234
Total contractual cash obligations $ 89,618 $ 39,888 (1)Based on estimated payment dates. (2)Includes accrued interest and future contractual interest obligations. Variable rate payments are based upon the rate in effect atDecember 31, 2019 . (3)Represents obligations to purchase goods or services that are enforceable and legally binding. Many of the purchase obligations have terms that are not fixed and determinable and are included in the table above based upon the estimated timing and amount of payment. In addition, certain of the purchase agreements contain clauses that would allowTruist to cancel the agreement with specified notice; however, that impact is not included in the table above. (4)Although technically unfunded plans, rabbi trusts and insurance policies on the lives of certain of the covered employees are available to finance future benefit plan payments.Truist's commitments include investments in affordable housing projects throughout its market area and private equity funds. Refer to "Note 1. Basis of Presentation" and "Note 16. Commitments and Contingencies" for further discussion of these commitments. In addition,Truist enters into derivative contracts to manage various financial risks. Further discussion of derivative instruments is included in "Note 1. Basis of Presentation" and "Note 19. Derivative Financial Instruments." Further discussion related to the nature ofTruist's obligations is included in "Note 16. Commitments and Contingencies." Further discussion ofTruist's commitments is included in "Note 16. Commitments and Contingencies" and "Note 18. Fair Value Disclosures."
Capital
The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis.Truist's principal goals related to the maintenance of capital are to provide adequate capital to supportTruist's risk profile consistent with the Board-approved risk appetite, provide financial flexibility to support future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, achieve optimal credit ratings forTruist and its subsidiaries and provide a competitive return to shareholders. Risk-based capital ratios, which include CET1 capital, Tier 1 capital and Total capital are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets. 70Truist Financial Corporation --------------------------------------------------------------------------------Truist regularly performs stress testing on its capital levels and is required to periodically submit the Company's capital plans and stress testing results to the banking regulators. Management regularly monitors the capital position ofTruist on both a consolidated and bank-level basis. In this regard, management's overriding policy is to maintain capital at levels that are in excess of internal capital targets, which are above the regulatory "well capitalized" minimums. Management has implemented stressed capital ratio minimum targets to evaluate whether capital ratios calculated after the effect of alternative capital actions are likely to remain above minimums specified by the FRB for the annual CCAR process. Breaches of stressed minimum targets prompt a review of the planned capital actions included inTruist's capital plan. Table 32: Capital Requirements and Targets Minimum Well Capitalized Capital Plus Truist Targets (1) Capital Conservation Minimum Capital Truist Truist Bank Buffer Operating (2) Stressed CET1 4.5 % NA 6.5 % 7.0 % 8.5 % 7.0 % Tier 1 capital 6.0 6.0 8.0 8.5 10.0 8.5 Total capital 8.0 10.0 10.0 10.5 12.0 10.5 Leverage ratio 4.0 NA 5.0 N/A 8.0 7.0 (1)TheTruist targets are subject to revision based on finalization of pending regulatory guidance and other strategic factors. (2)Truist's goal is to maintain capital levels above all regulatory minimums. While nonrecurring events or management decisions may result in the Company temporarily falling below its operating minimum guidelines for one or more of these ratios, it is management's intent to return to these targeted operating minimums within a reasonable period of time through capital planning. Such temporary decreases below the operating minimums shown above are not considered an infringement ofTruist's overall capital policy, provided a return above the minimums is forecasted to occur within a reasonable time period. Payments of cash dividends and repurchases of common shares are the methods used to manage any excess capital generated. In addition, management closely monitors the Parent Company's double leverage ratio (investments in subsidiaries as a percentage of shareholders' equity). The active management of the subsidiaries' equity capital, as described above, is the process used to manage this important driver of Parent Company liquidity and is a key element in the management ofTruist's capital position. Management intends to maintain capital atTruist Bank at levels that will result in classification as "well-capitalized" for regulatory purposes. Secondarily, it is management's intent to maintainTruist Bank's capital at levels that result in regulatory risk-based capital ratios that are generally comparable with peers of similar size, complexity and risk profile. If the capital levels ofTruist Bank increase above these guidelines, excess capital may be transferred to the Parent Company in the form of special dividend payments, subject to regulatory and other operating considerations. Management's capital deployment plan in order of preference is to focus on (i) organic growth, (ii) dividends, and (iii) strategic opportunities and/or share repurchases depending on opportunities in the marketplace andTruist's interest and ability to proceed with acquisitions.Truist has suspended share repurchases until capital ratios return to higher levels.
2019 2018
CET1 to risk-weighted assets 10.6 % 11.2 %
Tier 1 capital to risk-weighted assets 10.6 11.2
Total capital to risk-weighted assets 12.0 13.2
Leverage ratio 14.5 9.3
Truist Financial Corporation 71--------------------------------------------------------------------------------
2019 2018
Risk-based:
CET1 capital to risk-weighted assets 9.5 % 10.2 % Tier 1 capital to risk-weighted assets 10.8 11.8 Total capital to risk-weighted assets 12.6 13.8 Leverage ratio 14.7 9.9 Non-GAAP capital measure (1): Tangible common equity per common share$ 25.93 $ 21.89 Calculation of tangible common equity (1): Total shareholders' equity$ 66,558 $ 30,178 Less: Preferred stock 5,102 3,053 Noncontrolling interests 174 56 Goodwill and intangible assets, net of deferred taxes 26,482 10,360 Tangible common equity$ 34,800 $ 16,709 Risk-weighted assets$ 376,056 $ 181,260 Common shares outstanding at end of period 1,342,166 763,326 (1)Tangible common equity and related measures are non-GAAP measures that exclude the impact of intangible assets, net of deferred taxes, and their related amortization. These measures are useful for evaluating the performance of a business consistently, whether acquired or developed internally.Truist's management uses these measures to assess the quality of capital and returns relative to balance sheet risk and believes investors may find them useful in their analysis of the Corporation. These capital measures are not necessarily comparable to similar capital measures that may be presented by other companies. During 2019,Truist paid$1.3 billion in common stock dividends, which resulted in a total payout ratio of 43.2% for the year.Truist's Board increased the dividend by$0.045 during 2019, which increased the amount of the quarterly dividend to$0.45 per share. As previously communicated,Truist suspended its share repurchase program until capital ratios return to higher levels. 72Truist Financial Corporation --------------------------------------------------------------------------------
Table 35: Quarterly Financial Summary - Unaudited
2019 2018
(Dollars in millions, except per share
data) Fourth Quarter Third Quarter Second Quarter First Quarter Fourth Quarter Third Quarter Second Quarter First Quarter
Consolidated summary of operations:
Interest income $ 2,812 $ 2,218 $ 2,206 $ 2,173 $ 2,136 $ 2,069 $ 1,994 $ 1,921
Interest expense 585 518 516 477 431 382 337 288
Provision for credit losses 171 117 172 155 146 135 135 150
Noninterest income 1,398 1,303 1,352 1,202 1,235 1,239 1,222 1,180
Noninterest expense 2,575 1,840 1,751 1,768 1,784 1,742 1,720 1,686
Provision for income taxes 153 218 234 177 205 210 202 186
Net income 726 828 885 798 805 839 822 791
Noncontrolling interest 5 3 (1) 6 7 7 3 3
Preferred stock dividends 19 90 44 43 44 43 44 43
Net income available to common
shareholders $ 702 $ 735 $ 842 $ 749 $ 754 $ 789 $ 775 $ 745
Basic EPS $ 0.76 $ 0.96 $ 1.10 $ 0.98 $ 0.99 $ 1.02 $ 1.00 $ 0.96
Diluted EPS $ 0.75 $ 0.95 $ 1.09 $ 0.97 $ 0.97 $ 1.01 $ 0.99 $ 0.94
Selected average balances:
Assets $ 302,059 $
232,420
60,699 48,900 46,115 46,734 46,610 46,299 47,145 48,374
Loans and leases (1) 193,641 152,042 151,557 148,790 148,457 147,489 145,752
143,906
Total earning assets 263,115 203,408 200,839 197,721 197,213 196,200 195,094 194,530 Deposits 210,716 161,992 159,891 160,045 157,842 157,271 157,676 157,138 Short-term borrowings 11,489 8,307 8,367 5,624 6,979 6,023 5,323 5,477 Long-term debt 29,888 22,608 23,233 23,247 23,488 24,211 23,639 23,677 Total interest-bearing liabilities 187,608 140,407 138,811 136,633 134,577 133,331 132,675
132,896
Shareholders' equity 41,740 32,744 31,301 30,541 29,965 29,887 29,585 29,528
(1) Loans and leases are net of unearned income and include LHFS.
Fourth Quarter Results
Total taxable-equivalent revenues were$3.7 billion for the fourth quarter of 2019, an increase of$686 million compared to the earlier quarter, which reflects an increase of$523 million in taxable-equivalent net interest income and an increase of$163 million in noninterest income. Net interest margin was 3.41%, down eight basis points compared to the earlier quarter. Average earning assets increased$65.9 billion . The increase in average earning assets reflects a$45.2 billion increase in average total loans and leases and a$14.1 billion increase in average securities. Average interest earning trading assets and other earning assets increased$6.6 billion due to higher trading securities and interest-bearing balances at theFederal Reserve . Average interest-bearing liabilities increased$53.0 billion compared to the earlier quarter. Average interest-bearing deposits increased$42.1 billion , average long-term debt increased$6.4 billion and average short-term borrowings increased$4.5 billion . The yield on the total loan portfolio for the fourth quarter of 2019 was 4.91%, down five basis points compared to the earlier quarter, reflecting the impact of rate decreases, partially offset by the accretion from the merged loans. The yield on the average securities portfolio was 2.65 percent, up 12 basis points compared to the earlier period. The average cost of total deposits was 0.57 percent, up five basis points compared to the earlier quarter. The average cost of interest-bearing deposits was 0.82 percent, up four basis points compared to the earlier quarter. The average rate on short-term borrowings was 2.15 percent, down three basis points compared to the earlier quarter. The average rate on long-term debt was 2.92 percent, down 27 basis points compared to the earlier quarter. The lower rates on long-term debt also reflect the amortization of the fair value mark on the assumed debt. The provision for credit losses was$171 million , compared to$146 million for the earlier quarter. The increase in the provision for credit losses was primarily due to higher net-charge offs, partially offset by the residential mortgage loan sale in the current quarter. Net charge-offs for the fourth quarter of 2019 totaled$192 million compared to$143 million in the earlier quarter. Noninterest income for the fourth quarter of 2019 increased$163 million compared to the earlier quarter. Excluding the net change in securities losses of$118 million and$22 million of losses recognized from the transfer of mortgage loans to held for sale, noninterest income increased$303 million . Approximately$217 million of the variance is due to the contribution from the merger. Insurance income increased$22 million due to higher production. The remaining increase is due to$42 million in income related to assets for certain post-employment benefits, which was offset by higher personnel expense.Truist Financial Corporation 73 -------------------------------------------------------------------------------- Noninterest expense for the fourth quarter of 2019 was up$791 million compared to the earlier quarter. Merger-related and restructuring charges and other incremental operating expenses related to the merger increased$147 million and$101 million , respectively. Excluding these charges, noninterest expense was up$543 million . Approximately$400 million of the remaining variance was the result of noninterest expenses associated with the merged operations. Personnel expense increased$369 million compared to the earlier quarter. The increase was largely attributable to a$227 million impact from the merged operations, an$80 million increase in incremental operating expenses related to the merger, a$40 million increase for certain post-employment benefits that were offset by higher noninterest income, and a$29 million increase in production-based and other incentives. Amortization of intangibles increased$37 million , primarily due to the new intangibles created in the Merger. The provision for income taxes was$153 million for the fourth quarter of 2019, compared to$205 million for the earlier quarter. This produced an effective tax rate for the fourth quarter of 2019 of 17.4%, compared to 20.3% for the earlier quarter. The decrease in the effective tax rate was primarily due to an increase in the realization of income tax credits and a decrease in earnings during the current quarter. Reclassifications In connection with the Merger, captions in the Consolidated Balance Sheets, Noninterest income and Noninterest expense in the Consolidated Statements of Income, loan categories and business activities within the segments were realigned. Amounts reported in prior periods' consolidated financial statements have been reclassified to conform to the current presentation. In certain other circumstances, reclassifications have been made to prior period information to conform to the current presentation. Such reclassifications had no effect on previously reported shareholders' equity or net income. Refer to "Note 1. Basis of Presentation" for additional discussion regarding reclassifications.
Critical Accounting Policies
The accounting and reporting policies ofTruist are in accordance with GAAP and conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. The financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Different assumptions in the application of these policies could result in material changes in the consolidated financial position and/or consolidated results of operations and related disclosures. UnderstandingTruist's accounting policies is fundamental to understanding the consolidated financial position and consolidated results of operations. Accordingly,Truist's significant accounting policies and effects of new accounting pronouncements are discussed in detail in "Note 1. Basis of Presentation."
The following is a summary of
ACL
Truist's policy is to maintain an ACL, which includes the ALLL and the RUFC, which represent management's best estimate of probable credit losses incurred in the loan and lease portfolios and off-balance sheet lending commitments at the balance sheet date. Estimates for loan and lease losses are determined by analyzing historical loan and lease losses, historical loan and lease migration to charge-off experience, current trends in delinquencies and charge-offs, changes in internal risk ratings, expected cash flows on PCI loans, current assessment of impaired loans and leases, the results of regulatory examinations and changes in the size, composition and risk assessment of the loan and lease portfolio. As part of the ACL estimation process,Truist develops a series of loss estimate factors, which are modeled projections of the frequency and severity of losses. These loss estimate factors are based on historical loss experience, economic and political environmental considerations and any other data that management believes will provide evidence about the collectability of outstanding loan and lease amounts. The following table summarizes the loss estimate factors used to determine the ALLL: Loss Estimate Factor Description Loss frequency Indicates the likelihood of a borrower defaulting on a loan Loss severity Indicates the amount of estimated loss at the time of default 74Truist Financial Corporation -------------------------------------------------------------------------------- For collectively evaluated loans, the ALLL is determined by multiplying the loan exposure estimated at the time of default by the loss frequency and loss severity factors. For individually evaluated loans, the ALLL is determined through review of data specific to the borrower. For TDRs, default expectations and estimated prepayment speeds that are specific to each of the restructured loan populations are incorporated in the determination of the ALLL. Also included in management's estimates for loan and lease losses are considerations with respect to the impact of current economic events, the outcomes of which are uncertain. These events may include, but are not limited to, fluctuations in overall interest rates, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting specific geographical areas and industries in whichTruist conducts business. The methodology used to determine an estimate for the RUFC is inherently similar to that used to determine the collectively evaluated component of the ALLL, adjusted for factors specific to binding commitments, including the probability of funding and exposure at default. A detailed discussion of the methodology used in determining the ACL is included in "Note 1. Basis of Presentation."
Fair Value of Financial Instruments
The vast majority of assets and liabilities carried at fair value on a recurring basis are based on either quoted market prices or market prices for similar instruments. Refer to "Note 18. Fair Value Disclosures" for additional disclosures regarding the fair value of financial instruments and "Note 2. Business Combinations" for additional disclosures regarding business combinations.
Securities
Truist generally utilizes a third-party pricing service in determining the fair value of its AFS investment securities, whereas trading securities are priced internally. Fair value measurements for investment securities are derived from market-based pricing matrices that were developed using observable inputs that include benchmark yields, benchmark securities, reported trades, offers, bids, issuer spreads and broker quotes. Management performs procedures to evaluate the fair values provided by the third-party service provider. These procedures, which are performed independent of the responsible BU, include comparison of pricing information received from the third party pricing service to other third-party pricing sources, review of additional information provided by the third-party pricing service and other third-party sources for selected securities and back-testing to compare the price realized on security sales to the daily pricing information received from the third-party pricing service. The IPV Committee, which provides oversight toTruist's enterprise-wide IPV function, is responsible for the comparison of pricing information received from the third-party pricing service or internally to other third-party pricing sources, approving tolerance limits determined by IPV for price comparison exceptions, reviewing significant changes to pricing and valuation policies and reviewing and approving the pricing decisions made on any illiquid and hard-to-price securities. When market observable data is not available, which generally occurs due to the lack of liquidity for certain securities, the valuation of the security is subjective and may involve substantial judgment by management. Certain securities are less actively traded and quoted market prices may not be readily available. The determination of fair value may require benchmarking to similar instruments or performing a discounted cash flow analysis using estimates of future cash flows and prepayment, interest and default rates.Truist periodically reviews AFS securities with an unrealized loss. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. The purpose of the review is to consider the length of time and the extent to which the market value of a security has been below its amortized cost. The primary factorsTruist considers in determining whether an impairment is other-than-temporary are long-term expectations and recent experience regarding principal and interest payments andTruist's intent to sell and whether it is more likely than not that the Company would be required to sell those securities before the anticipated recovery of the amortized cost basis.
MSRs
Truist's primary class of MSRs for which it separately manages the economic risks relates to residential mortgages. Residential MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs do occur, the precise terms and conditions typically are not readily available. Accordingly,Truist estimates the fair value of residential MSRs using a stochasticOAS valuation model to project residential MSR cash flows over multiple interest rate scenarios, which are then discounted at risk-adjusted rates. TheOAS model considers portfolio characteristics, contractually-specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors.Truist reassesses and periodically adjusts the underlying inputs and assumptions in theOAS model to reflect market conditions and assumptions that a market participant would consider in valuing the residential MSR asset.Truist Financial Corporation 75
-------------------------------------------------------------------------------- Fair value estimates and assumptions are compared to industry surveys, recent market activity, actual portfolio experience and, when available, observable market data. Due to the nature of the valuation inputs, residential MSRs are classified within Level 3 of the valuation hierarchy. The value of residential MSRs is significantly affected by mortgage interest rates available in the marketplace, which influence mortgage loan prepayment speeds. In general, during periods of declining interest rates, the value of MSRs declines due to increasing prepayments attributable to increased mortgage-refinance activity. Conversely, during periods of rising interest rates, the value of residential MSRs generally increases due to reduced refinance activity.Truist typically hedges against market value changes in the residential MSRs. Refer to "Note 8. Loan Servicing" for quantitative disclosures reflecting the effect that changes in management's assumptions would have on the fair value of residential MSRs.
LHFS
Truist originates certain residential and commercial mortgage loans for sale to investors that are carried at fair value. The fair value is primarily based on quoted market prices for securities backed by similar types of loans. Changes in the fair value are recorded as components of residential mortgage income and commercial real estate related income, while the related origination costs are generally recognized in personnel expense when incurred. The changes in fair value are largely driven by changes in interest rates subsequent to loan funding and changes in the fair value of servicing associated with the LHFS.Truist uses various derivative instruments to mitigate the economic effect of changes in fair value of the underlying loans. LHFS also includes certain loans, generally carried at LOCOM, where management has committed to a formal plan of sale and the loans are available for immediate sale. Adjustments to reflect unrealized gains and losses resulting from changes in fair value, up to the original carrying amount, and realized gains and losses upon ultimate sale are classified as noninterest income. The fair value of these loans is estimated using observable market prices when available, although may also incorporate other unobservable inputs such as indicative bids or broker price opinions. Refer to "Note 1. Basis of Presentation" for further description of the Company's accounting for LHFS.
Trading Loans
Truist elects to measure certain loans at fair value for financial reporting where fair value aligns with the underlying business purpose. Specifically, loans included within this classification include trading loans that are (i) purchased in connection with the Company's TRS business, (ii) part of the loan sales and trading business within the C&CB segment, or (iii) backed by the SBA. Refer to "Note 16. Commitments and Contingencies," and "Note 19. Derivative Financial Instruments," for further discussion of the Company's TRS business. The loans purchased in connection with the Company's TRS and sales and trading businesses are primarily commercial and corporate leveraged loans valued based on quoted prices for identical or similar instruments in markets that are not active by a third-party pricing service. SBA loans are fully guaranteed by theU.S. government as to contractual principal and interest and there is sufficient observable trading activity upon which to base the estimate of fair value.
Derivative Assets and Liabilities
Truist uses derivatives to manage various financial risks and in a dealer capacity to facilitate client transactions.Truist mitigates credit risk by subjecting counterparties to credit reviews and approvals similar to those used in making loans and other extensions of credit. In addition, certain counterparties are required to provide collateral toTruist when their unsecured loss positions exceed certain negotiated limits. The fair values of derivative financial instruments are determined based on quoted market prices and internal pricing models that use market observable data for interest rates, foreign exchange, equity and credit. The fair value of interest rate lock commitments, which are related to mortgage loan commitments, is based on quoted market prices adjusted for commitments thatTruist does not expect to fund and includes the value attributable to the net servicing fee. Refer to "Note 19. Derivative Financial Instruments" for further information on the Company's derivatives.
Purchased loans
The fair value for purchased loans in a business combination is based on a discounted cash flow methodology that considers credit loss expectations, market interest rates and other market factors such as liquidity from the perspective of a market participant. Loans are grouped together according to similar characteristics and are treated in the aggregate when applying various valuation techniques. The probability of default, loss given default and prepayment assumptions are key factors driving credit losses which are embedded into the estimated cash flows. These assumptions are informed by internal data on loan characteristics, historical loss experience, and current and forecasted economic conditions. The interest and liquidity component of the estimate is determined by discounting interest and principal cash flows through the expected life of each loan. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity. The discount rate does not include a factor for credit losses as that has been included as a reduction to the estimated cash flows. 76Truist Financial Corporation --------------------------------------------------------------------------------
Intangible Assets
The acquisition method of accounting requires that assets acquired and liabilities assumed in business combinations are recorded at their fair values. This often involves estimates based on third-party valuations or internal valuations based on discounted cash flow analyses or other valuation techniques, which are inherently subjective. The amortization of definite-lived intangible assets is based upon the estimated economic benefits to be received, which is also subjective. Business combinations also typically result in goodwill, which is subject to ongoing periodic impairment tests based on the fair values of the reporting units to which the acquired goodwill relates. Refer to "Note 1. Basis of Presentation" for a description of the impairment testing process. Management considers the sensitivity of the significant assumptions in its impairment analysis including consideration of changes in estimated future cash flows or the discount rate for each reporting unit. The discount rates used are based on current market rates. Income TaxesTruist is subject to income tax laws of theU.S. , its states, and the municipalities in which it conducts business. In estimating the net amount due to or to be received from tax jurisdictions either currently or in the future, the Company assesses the appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent, and other pertinent information. The income tax laws are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities. Significant judgment is required in determining the tax accruals and in evaluating our tax positions, including evaluating uncertain tax positions. Changes in the estimate of accrued taxes occur periodically due to changes in tax rates, interpretations of tax laws and new judicial guidance, the status of examinations by the tax authorities, and newly enacted statutory and regulatory guidance that could impact the relative merits and risks of tax positions. These changes, when they occur, impact tax expense and can materially affect operating results.Truist reviews tax positions quarterly and adjusts accrued taxes as new information becomes available. Deferred income tax assets represent amounts available to reduce income taxes payable in future years. Such assets arise due to temporary differences between the financial reporting and the tax bases of assets and liabilities, as well as from NOL and tax credit carryforwards. The Company regularly evaluates the realizability of DTAs, recognizing a valuation allowance if, based on the weight of available evidence, it is more-likely-than-not that some portion or all of the DTA will not be realized. In determining whether a valuation allowance is necessary, the Company considers the level of taxable income in prior years to the extent that carrybacks are permitted under current tax laws, as well as estimates of future pre-tax and taxable income and tax planning strategies that would, if necessary, be implemented.Truist currently maintains a valuation allowance for certain state carryforwards and certain other state DTAs. For additional income tax information, refer to "Note 1. Basis of Presentation" and "Note 14. Income Taxes".
Pension and Postretirement Benefit Obligations
Truist offers various pension plans and postretirement benefit plans to employees. Calculation of the obligations and related expenses under these plans requires the use of actuarial valuation methods and assumptions, which are subject to management judgment and may differ significantly if different assumptions are used. The discount rate assumption used to measure the postretirement benefit obligations is set by reference to a high-quality (AA-rated or higher) corporate bond yield curve and the individual characteristics of the plans such as projected cash flow patterns and payment durations. Management considered the sensitivity that changes in the expected return on plan assets and the discount rate would have on pension expense. For the Company's qualified plans, a decrease of 25 basis points in the discount rate would result in additional pension expense of approximately$50 million for 2020, while a decrease of 100 basis points in the expected return on plan assets would result in an increase of approximately$126 million in pension expense for 2020. Refer to "Note 15. Benefit Plans" for disclosures related to the benefit plans.Truist Financial Corporation 77
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