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-Q, other information contained in this document, as well as information contained in theDecember 31, 2019 Form 10-K.
Government Response to COVID-19
Congress , the FRB and the otherU.S. state and federal financial regulatory agencies have taken actions to mitigate disruptions to economic activity and financial stability resulting from COVID-19 and can be expected to continue to evolve such approaches and requirements in ways that further impact the business of the Company. The descriptions below summarize certain significant government actions taken in response to the COVID-19 pandemic. The descriptions are qualified in their entirety by reference to the particular statutory or regulatory provisions or government programs summarized.
The CARES Act
The CARES Act was signed into law onMarch 27, 2020 . Among other provisions, the CARES Act includes funding for theSmall Business Administration to expand lending, relief from certainU.S. GAAP requirements to allow COVID-19-related loan modifications to not be categorized as troubled debt restructurings and a range of incentives to encourage deferment, forbearance or modification of consumer credit and mortgage contracts. One of the key CARES Act programs is the Paycheck Protection Program, which temporarily expands theSmall Business Administration's business loan guarantee program throughJune 30, 2020 . Paycheck Protection Program loans are available to a broader range of entities than ordinarySmall Business Administration loans, require six-month deferral of principal and interest repayment, and the loan may be forgiven in an amount equal to payroll costs and certain other expenses during an eight-week covered period. The CARES Act contains additional protections for homeowners and renters of properties with federally backed mortgages, including a 60-day moratorium on the initiation of foreclosure proceedings beginning onMarch 18, 2020 and a 120-day moratorium on initiating eviction proceedings effectiveMarch 27, 2020 . Borrowers of federally backed mortgages have the right under the CARES Act to request up to 360 days of forbearance on their mortgage payments if they experience financial hardship directly or indirectly due to the coronavirus-related public health emergency. Also pursuant to the CARES Act, theU.S. Treasury has the authority to provide loans, guarantees and other investments in support of eligible businesses, states and municipalities affected by the economic effects of COVID-19. Some of these funds have been used to support the several FRB programs and facilities described below or additional programs or facilities that are established by the FRB under its Section 13(3) authority and meeting certain criteria.
FRB Actions
The FRB has taken a range of actions to support the flow of credit to households and businesses. For example, onMarch 15, 2020 , the FRB reduced the target range for the federal funds rate to 0 to 0.25% and announced that it would increase its holdings ofU.S. Treasury securities and agency mortgage-backed securities and begin purchasing agency commercial mortgage-backed securities. The FRB has also encouraged depository institutions to borrow from the discount window and has lowered the primary credit rate for such borrowing by 150 basis points while extending the term of such loans up to 90 days. Reserve requirements have been reduced to zero as ofMarch 26, 2020 . In addition, the FRB has established, or has taken steps to establish, a range of facilities and programs to support theU.S. economy andU.S. marketplace participants in response to economic disruptions associated with COVID-19. Through these facilities and programs, the FRB, relying on its authority under Section 13(3) of the Federal Reserve Act, has taken steps to directly or indirectly purchase assets from, or make loans to,U.S. companies, financial institutions, municipalities and other market participants.
FRB facilities and programs established, or in the process of being established, include:
•a Paycheck Protection Program Liquidity Facility to provide financing related to Paycheck Protection Program loans made by banks; •a Main Street New Loan Facility and a Main Street Expanded Loan Facility to purchase loan participations, under specified conditions, from banks lending to small and medium sizedU.S. businesses; •a Primary Dealer Credit Facility to provide liquidity to primary dealers through a secured lending facility; •a Commercial Paper Funding Facility to purchase the commercial paper of certainU.S. issuers; 42Truist Financial Corporation -------------------------------------------------------------------------------- •a Primary Market Corporate Credit Facility to purchase corporate bonds directly from, or make loans directly to, eligible participants; •a Secondary Market Corporate Credit Facility to purchase corporate bonds trading in secondary markets, including from exchange-traded funds, that were issued by eligible participants; •a Term Asset-Backed Securities Loan Facility to make loans secured by asset-backed securities; •a Municipal Liquidity Facility to purchase bonds directly fromU.S. state, city and county issuers; and •a Money Market Mutual Fund Liquidity Facility to purchase certain assets from, or make loans to, financial institutions providing financing to eligible money market mutual funds.
These facilities and programs are in various stages of development, and the
Company and
Regulatory Considerations
The regulatory framework applicable to banking organizations is intended primarily for the protection of depositors and the stability of the financial system, rather than for the protection of shareholders and creditors.Truist is subject to banking laws and regulations and various other laws and regulations, which affect the operations and management ofTruist and its ability to make distributions to shareholders.Truist and its subsidiaries are also subject to supervision and examination by multiple regulators. Refer toTruist's Annual Report on Form 10-K for the year endedDecember 31, 2019 for additional disclosures with respect to significant laws and regulations affectingTruist . The descriptions below summarize certain significant updates since the filing of the Annual Report on Form 10-K for the year endedDecember 31, 2019 to state and federal laws to whichTruist is subject. The descriptions are qualified in their entirety by reference to the particular statutory or regulatory provisions summarized. They do not summarize all possible or proposed changes in current laws or regulations and are not intended to be a substitute for the related statues or regulatory provisions.
Final Stress Capital Buffer Rule
The FRB has adopted a final rule that integrates its annual capital planning and stress testing requirements with existing regulatory capital requirements. For risk-based capital requirements, the stress capital buffer replaces the existing capital conservation buffer, which is 2.5% as ofJanuary 1, 2019 . Under the final rule, beginning in the 2020 CCAR cycle,Truist will be required to calculate a stress capital buffer equal to the greater of (i) the difference between its starting and minimum projected CET1 capital ratios under the severely adverse scenario in the supervisory stress test, plus the sum of the dollar amount ofTruist's planned common stock dividends for each of the fourth through seventh quarters of the planning horizon as a percentage of risk-weighted assets, or (ii) 2.5%. The final rule also makes related changes to the capital planning and stress testing process. Among other changes, the revised capital plan rule eliminates the assumption thatTruist's balance sheet assets would increase over the planning horizon. In addition, provided thatTruist is otherwise in compliance with automatic restrictions on distributions under the FRB's capital rules,Truist will no longer be required to seek prior approval to make capital distributions in excess of those included in its capital plan.
Revisions to Definition of Eligible Retained Income
TheU.S. banking agencies have adopted an interim final rule altering the definition of eligible retained income in their respective capital rules. Under the new rule, eligible retained income is the greater of a firm's (i) net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (ii) average net income over the preceding four quarters. This definition applies with respect to all ofTruist's capital requirements. The interim final rule became effectiveMarch 20, 2020 .
Current Expected Credit Losses Methodology
TheU.S. banking agencies have adopted an interim final rule that permits banking organizations that implement CECL before the end of 2020 to elect to follow the three-year transition available under the prior rule or a new five-year transition to phase in the effects of CECL on regulatory capital. Under the five-year transition, the banking organization would defer for two years 100% of the day-one effect of adopting CECL and 25% of the cumulative increase in the allowance for credit losses since adoption of CECL. Following the first two years, the electing organization will phase out the aggregate capital effects over the next three years consistent with the transition in the original three-year transition rule. The interim final rule became effectiveMarch 31, 2020 .Truist has elected to use the five-year transition to phase in the impacts of CECL on regulatory capital.Truist Financial Corporation 43 --------------------------------------------------------------------------------
Supplementary Leverage Ratio
In response to the COVID-19 pandemic, the FRB has adopted an interim final rule that temporarily changes the supplementary leverage ratio to excludeU.S. treasury securities and deposits at Federal Reserve Banks from the calculation of a firm's leverage exposure. The interim final rule applies to BHCs and became effectiveApril 1, 2020 and will remain in effect throughMarch 31, 2021 .
Loan modifications
In response to the COVID-19 pandemic, banking regulators have encouraged financial institutions to work with borrowers.Truist implemented loan modification programs in order to provide borrowers with flexibility with respect to repayment terms. These loan modifications are not considered TDRs to the extent that the borrower was impacted by the COVID-19 pandemic and was less than 30 days past due at the time that the COVID-19 loan modification program was implemented, unless the loan was previously classified as a TDR.
CARES Act
In addition to authorizing several programs to provide loans, guarantees and other investments in support of eligible organizations, states and municipalities affected by the economic effects of the COVID-19 pandemic, the CARES Act also includes several measures that temporarily adjust existing laws or regulations. These include providing theFDIC with additional authority to guarantee the deposits of solvent insured depository institutions held in noninterest-bearing business transaction accounts to a maximum amount specified by theFDIC , reinstating theFDIC's Temporary Liquidity Guarantee Authority to guarantee debt obligations of solvent insured depository institutions or depository institution holding companies, and temporarily allowing theTreasury to fully guarantee money market mutual funds. The CARES Act also provides financial institutions with the option to suspend certain GAAP requirements for coronavirus-related loan modifications that would otherwise constitute troubled debt restructurings and further requires the federal banking agencies to defer to financial institutions' determinations in making such suspensions. Refer to "Note 1. Basis of Presentation" forTruist's policy related to COVID-19 loan modifications. Executive Overview
Overview of Significant Events and Financial Results
Recent Events
EffectiveDecember 6, 2019 , the Company completed the Merger. 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. As such, comparative income statement data in this MD&A for the first quarter of 2019 is only for heritage BB&T. Significant Merger updates include: •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. •InMarch 2020 , the purchase of the newCharlotte, NC headquarters building was completed and the building was renamed Truist Center. •Purchase accounting valuations for loans and intangibles were updated during the first quarter resulting in a$193 million reduction in the fair value mark for loans, a$165 million increase in CDI and other intangibles and a$258 million reduction in goodwill. •Truist remains committed to achieving$1.6 billion in net cost saves. •The realization of net cost savings is conditioned on the duration of the pandemic and post-crisis economic conditions, including the normalization of interest rates. The Company is closely monitoring the COVID-19 pandemic and its effects on clients, counterparties and the financial markets in which the Company conducts business. The Company expects the effects of this widespread health crisis, which include disruptions or restrictions in clients' supply chains, closures of clients' facilities or decreases in demand for clients' products and services, to adversely impact economic conditions. Also related to the health crisis, theU.S. has been operating under a presidential declared emergency sinceMarch 13, 2020 , with various actions by theU.S. Congress and regulatory agencies.Truist acted swiftly to support our clients, teammates and communities during the COVID-19 pandemic. The following are some of the more significant actions related to our crisis response. •Provided support for clients through payment relief assistance, waiving certain fees and offering additional incentives, including: •Commercial - clients may elect to defer their loan payments for up to 90 days without late fees being incurred but with finance charges continuing to accrue. Similar payment deferrals were offered to commercial leasing clients upon request. •Consumer - clients may elect to defer loan payments for time periods that range from 30 to 90 days without late fees being incurred but with finance charges generally continuing to accrue. 44Truist Financial Corporation -------------------------------------------------------------------------------- •Credit card - clients may elect to defer payments for up to 90 days without late fees being incurred but with financing charges accruing. In addition,Truist is providing credit card clients with 5% cash back on qualifying card purchases for certain important basic needs. •Truist implemented multiple strategies to keep our branches operational and clients safe, including lobby access by appointment and the extensive use of drive-thrus.Truist created an online, automated process for the Paycheck Protection Program and began to accept applications during the first weekend of the program. Additionally,Truist funded extensive line draws for commercial clients to help them fund liquidity and working capital needs. •Provided support for teammates including additional paid time off, flexibility and family care benefits. Provided teammates who have base pay below$100,000 annually a one-time pre-tax bonus of$1,200 in March to recognize their ongoing commitment to our clients and help alleviate some of the financial pressures caused by the pandemic. Enabled alternative work strategies that allowed more than half of our teammates to work remotely. Offered an additional onsite special pay rate of$6.25 per hour or$50 per day for teammates required to work in offices. •Launched the Truist Cares initiative, a pledge of$25 million in philanthropic support that is providing aid for basic needs, medical supplies, and financial hardship across the nation. The remaining charitable funds will be given as grants toTruist's community partners to support and expand technology initiatives and programs for youth, seniors, small businesses and people to rebuild, restore and create thriving communities.
See Part II, Item 1A, "Risk Factors," in this Form 10-Q for additional information regarding risks related to the effects of COVID-19.
Financial Results
Net income available to common shareholders for the first quarter of 2020 totaled$986 million . On a diluted per common share basis, earnings for the first quarter of 2020 were$0.73 , a decrease of$0.24 compared to the first quarter of 2019.Truist's results of operations for the first quarter of 2020 produced an annualized return on average assets of 0.90% and an annualized return on average common shareholders' equity of 6.58% compared to prior year ratios of 1.43% and 11.08%, respectively. Results for the first quarter of 2020 included merger-related and restructuring charges of$107 million ($82 million after-tax), incremental operating expenses related to the merger of$74 million ($57 million after-tax), and impacts associated with certain discretionary actions undertaken by management related to COVID-19 of$71 million ($54 million after-tax). Results for the first quarter of 2019 included$80 million ($64 million after-tax) of merger-related and restructuring charges and$2 million ($1 million after-tax) of incremental operating expenses related to the Merger.Truist's revenue for the first quarter of 2020 was$5.6 billion . On a TE basis, revenue was also$5.6 billion for the first quarter of 2020, an increase of$2.7 billion compared to the same period in 2019, which reflects an increase of$2.0 billion in TE net interest income and an increase of$759 million in noninterest income. The increase in net interest income was primarily due to the Merger, as average loans and leases increased$159.0 billion and average securities increased$29.0 billion . In addition, average interest earning trading assets and other earning assets increased$27.9 billion due to higher trading assets from the Merger and higher interest bearing balances at theFederal Reserve asTruist increased liquidity to support clients. NIM was 3.58% for the first quarter of 2020, up 7 basis points compared to the prior year. Average earning assets increased$215.8 billion , while average interest-bearing liabilities increased$170.3 billion and noninterest-bearing deposits increased$40.9 billion . The annualized TE yield on the total loan portfolio for the first quarter of 2020 was 4.98%, down 8 basis points compared to the prior year. The annualized TE yield on the average securities portfolio was 2.62%, up 2 basis points compared to the prior year. The provision for credit losses was$893 million compared to$155 million for the first quarter of 2019. The increase in the provision for credit losses was primarily due to the recognition of an economic downturn and significant growth in loans related to COVID-19, including the impact of reserving for the expected losses under CECL. Higher net charge-offs also contributed to the increase in the provision for credit losses and primarily reflect increases as a result of the Merger. Net charge-offs were 0.36% of average loans and leases on an annualized basis for the first quarter of 2020, down four basis points compared to the first quarter of 2019. Noninterest income for the first quarter of 2020 increased$759 million compared to the earlier quarter. Nearly all categories of noninterest income were impacted by the Merger. In addition to impacts from the Merger, insurance income increased due to higher production and residential mortgage banking income was up due to strong production and refinance activity driven by the declining rate environment. Investment banking and trading income was negatively impacted by credit valuation adjustments on the derivatives portfolio primarily due to the decline in interest rates and widening of credit spreads. Noninterest expense for the first quarter of 2020 was up$1.7 billion compared to the earlier quarter. Excluding merger-related and restructuring charges, incremental operating expenses related to the Merger and certain discretionary expenses related to COVID-19, noninterest expense was up$1.5 billion , primarily reflecting the impact of the Merger.Truist Financial Corporation 45 -------------------------------------------------------------------------------- The provision for income taxes was$224 million for the first quarter of 2020, compared to$177 million for the earlier quarter. This produced an effective tax rate for the first quarter of 2020 of 17.4%, compared to 18.2% for the earlier quarter. The lower effective tax rate is primarily due to higher income tax credits in the current year.Truist's total assets atMarch 31, 2020 were$506.2 billion , an increase of$33.1 billion compared toDecember 31, 2019 . The increase in total assets was primarily driven by an increase of$15.8 billion in total loans and leases as many commercial clients drew on lines of credit to build liquidity in response to COVID-19 and an increase of$16.1 billion in interest-bearing deposits with banks, which primarily reflects higher balances held at theFederal Reserve . Total deposits atMarch 31, 2020 were$350.2 billion , an increase of$15.5 billion compared toDecember 31, 2019 . The growth in deposits reflects clients retaining a portion of their credit line draws in the bank and solid growth in all non-time deposit products. Asset quality remained strong, although significant uncertainties exist related to COVID-19. As ofMarch 31, 2020 , nonperforming assets were 0.23% of total assets. The allowance for loan and lease loss coverage ratio was 5.04X nonperforming loans and leases held for investment, compared to 3.41X atDecember 31, 2019 . The higher coverage ratio reflects the CECL adoption build of$3.1 billion , as well as$582 million of reserve build in the first quarter of 2020 in connection with COVID-19 and the economic downturn.Truist maintained strong capital and liquidity. As ofMarch 31, 2020 , the CET1 ratio was 9.3% and the average LCR was 117%. During the first quarter of 2020, the company redeemed$500 million of Series K preferred stock. Additionally, the Company issued$4.3 billion of senior and subordinated long-term debt.Truist declared common dividends of$0.450 per share during the first quarter of 2020. The dividend and total payout ratios for the first quarter of 2020 were 61.4 percent. As previously communicated at the time of the Merger announcement,Truist suspended its share repurchase program until capital ratios return to higher levels. InApril 2020 ,Truist declared common dividends of$0.450 per share for the second quarter of 2020.
Analysis of Results of Operations
Net Interest Income and NIM
First Quarter 2020 compared to First Quarter 2019
Net interest income on a TE basis was$3.7 billion for the first quarter of 2020, an increase of$2.0 billion compared to the same period in 2019. Interest income increased$2.3 billion . Interest expense increased$299 million . Net interest margin was 3.58%, up seven basis points compared to the earlier quarter. Average earning assets increased$215.8 billion . The increase in average earning assets reflects a$159.0 billion increase in average total loans and leases and a$29.0 billion increase in average securities. Average interest earning trading assets and other earning assets increased$27.9 billion due to higher trading securities and interest-bearing balances at theFederal Reserve . Average interest-bearing liabilities increased$170.3 billion compared to the earlier quarter. Average interest-bearing deposits increased$133.8 billion , average long-term debt increased$23.3 billion and average short-term borrowings increased$13.3 billion . The yield on the total loan portfolio for the first quarter of 2020 was 4.98%, down eight basis points compared to the earlier quarter, reflecting the impact of rate decreases, partially offset by purchase accounting accretion from merged loans. The yield on the average securities portfolio was 2.62%, up two basis points compared to the earlier period. The average cost of total deposits was 0.51%, down 13 basis points compared to the earlier quarter. The average cost of interest-bearing deposits was 0.70%, down 25 basis points compared to the earlier quarter. The average rate on short-term borrowings was 1.76%, down 56 basis points compared to the earlier quarter. The average rate on long-term debt was 2.34%, down 96 basis points compared to the earlier quarter. The lower rates on interest-bearing liabilities reflect declines in fed funds and LIBOR rates. The lower rates on long-term debt also reflect the amortization of the fair value mark on the assumed debt and the recent issuance of new senior and subordinated notes and long-term FHLB advances. As ofMarch 31, 2020 , the remaining unamortized fair value marks on the loan and lease portfolio, deposits and long-term debt were$3.5 billion ,$54 million and$285 million respectively. These amounts will be recognized over the remaining contractual lives of the underlying instruments or as prepayments occur. 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. 46Truist Financial Corporation -------------------------------------------------------------------------------- Table 1: Taxable-Equivalent Net Interest Income and Rate / Volume Analysis (1) Three Months EndedMarch 31 , Average Balances (5) Annualized Yield/Rate Income/Expense Incr. Change due to (Dollars in millions) 2020 2019 2020 2019 2020 2019 Rate Volume (Decr.)
Assets
Total securities, at amortized cost: (2)U.S. Treasury $ 2,274 $ 3,302 1.93 % 2.01 %$ 11 $ 16 $ (5) $ (1) $ (4) GSE 1,856 2,418 2.33 2.24 10 14 (4) 1 (5) Agency MBS 70,816 40,044 2.60 2.58 461 258 203 2 201 States and political subdivisions 530 620 3.56 3.73 5 6 (1) - (1) Non-agency MBS 185 315 16.72 12.51 8 10 (2) 3 (5) Other 40 35 3.01 3.96 - - - - - Total securities 75,701 46,734 2.62 2.60 495 304 191 5 186 Interest earning trading assets 6,334 602 4.04 2.27 64 4 60 5 55 Other earning assets (3) 23,750 1,595 1.55 7.43 92 29 63 (41) 104
Loans and leases, net of unearned income: (4)
Commercial and industrial 131,743 61,370 4.33 4.33 1,419 656 763 - 763 CRE 27,046 16,786 4.25 4.99 287 207 80 (34) 114Commercial Construction 6,409 4,119 4.87 5.33 76 54 22 (5) 27 Lease financing 6,070 2,021 4.27 3.33 65 17 48 6 42 Residential mortgage 52,993 31,370 4.48 4.13 594 324 270 29 241 Residential home equity and direct 27,564 11,681 6.60 5.92 452 171 281 22 259 Indirect auto 24,975 11,308 6.89 8.62 428 240 188 (56) 244 Indirect other 10,950 6,029 7.37 6.57 201 98 103 13 90 Student 7,787 - 5.38 - 104 - 104 - 104 Credit card 5,534 2,922 9.68 9.03 133 65 68 5 63 PCI - 455 - 17.99 - 20 (20) - (20) Total loans and leases HFI 301,071 148,061 5.02 5.06 3,759 1,852 1,907 (20) 1,927 LHFS 6,677 729 3.14 4.38 53 8 45 (3) 48 Total loans and leases
307,748 148,790 4.98 5.06 3,812 1,860 1,952 (23) 1,975
Total earning assets 413,533 197,721 4.33 4.49 4,463 2,197 2,266 (54) 2,320
Nonearning assets 64,017 27,852
Total assets $ 477,550 $ 225,573
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-checking $ 85,008 $ 27,622 0.61 0.59 129 40 89 1 88
Money market and savings 120,936 63,325 0.59 0.96 178 150 28 (73) 101 Time deposits 35,570 16,393 1.29 1.50 114 60 54 (10) 64 Foreign office deposits - interest-bearing - 422 - 2.43 - 3 (3) -
(3)
Total interest-bearing deposits (6) 241,514 107,762 0.70 0.95 421 253 168 (82) 250 Short-term borrowings 18,900 5,624 1.76 2.32 83 32 51 (10) 61 Long-term debt 46,547 23,247 2.34 3.30 272 192 80 (68) 148 Total interest-bearing liabilities 306,961 136,633 1.02 1.41 776 477 299 (160)
459
Noninterest-bearing deposits (6) 93,135 52,283 Other liabilities 12,042 6,116 Shareholders' equity 65,412 30,541 Total liabilities and shareholders' equity$ 477,550 $ 225,573 Average interest-rate spread 3.31 % 3.08 % NIM/net interest income 3.58 % 3.51 %$ 3,687 $ 1,720 $ 1,967 $ 106 $ 1,861 Taxable-equivalent adjustment$ 37 $ 24 (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 0.51% and 0.64% for the three months endedMarch 31, 2020 and 2019, respectively. Truist Financial Corporation 47 --------------------------------------------------------------------------------
Provision for Credit Losses
First Quarter 2020 compared to First Quarter 2019
The provision for credit losses was$893 million , compared to$155 million for the earlier quarter. The increase in the provision for credit losses was primarily due to the recognition of an economic downturn and significant growth in loans related to COVID-19, including the impact of reserving for the expected losses under CECL. Net charge-offs for the first quarter of 2020 totaled$272 million compared to$147 million in the earlier quarter. Higher net charge-offs also contributed to the increase in the provision for credit losses and primarily reflect increases as a result of the Merger. The net charge-off rate for the current quarter of 0.36% was down four basis points compared to the first quarter of 2019.
Noninterest Income
Noninterest income is a significant contributor toTruist's financial results. Management focuses on diversifying its sources of revenue to reduceTruist's reliance on traditional spread-based interest income, as certain fee-based activities are a relatively stable revenue source during periods of changing interest rates. Table 2: Noninterest Income % Change Three Months EndedMarch 31 , (Dollars in millions) 2020 2019 2020 vs. 2019 Insurance income$ 549 $ 510 7.6 % Service charges on deposits 305 171 78.4 Wealth management income 332 162 104.9 Card and payment related fees 187 128
46.1
Residential mortgage income 245 49
NM
Investment banking and trading income 118 27 NM Operating lease income 77 35 120.0 Income from bank-owned life insurance 44 28 57.1 Lending related fees 67 25 168.0 Commercial real estate related income 44 14 NM Securities gains (losses) (2) - NM Other income (loss) (5) 53 (109.4) Total noninterest income
$ 1,961 $ 1,202 63.1
First Quarter 2020 compared to First Quarter 2019
Noninterest income for the first quarter of 2020 increased$759 million compared to the earlier quarter. Nearly all categories of noninterest income were impacted by the Merger. Insurance income increased$39 million due to higher production. Residential mortgage banking income was up due to strong production and refinance activity driven by the declining rate environment. Investment banking and trading income was up$91 million , but was negatively impacted by credit valuation adjustments of$92 million on the derivatives portfolio primarily related to the decline in interest rates and widening of credit spreads. Other income was worse by$58 million , primarily as a result of a$26 million change in the market value of assets held for certain post-retirement benefits, which was primarily offset by lower personnel expense. 48Truist Financial Corporation --------------------------------------------------------------------------------
Noninterest Expense
The following table provides a breakdown of
% Change
Three Months Ended March 31 ,
(Dollars in millions) 2020 2019 2020 vs. 2019
Personnel expense $ 1,972 $ 1,087 81.4 %
Net occupancy expense 221 122 81.1
Professional fees and outside processing 247 86 187.2
Software expense 210 72 191.7
Equipment expense 116 65 78.5
Marketing and customer development 84 27 NM
Operating lease depreciation 71 29 144.8
Loan-related expense 62 25 148.0
Amortization of intangibles 165 32 NM
Regulatory costs 29 18 61.1
Merger-related and restructuring charges 107 80 33.8
Other expense 147 125 17.6
Total noninterest expense $ 3,431 $ 1,768 94.1
First Quarter 2020 compared to First Quarter 2019
Noninterest expense for the first quarter of 2020 was up$1.7 billion compared to the earlier quarter. All categories of noninterest expense reflect the impact of the Merger. Merger-related and restructuring charges and other incremental operating expenses related to the Merger increased$27 million and$72 million , respectively. In addition, the current quarter was impacted by$65 million of discretionary expenses related to COVID-19. On an adjusted basis, noninterest expense was up$1.5 billion , primarily reflecting the impact of the Merger. Marketing and customer development expense reflects higher spend related to the launch of the Truist brand. Amortization of intangibles increased$133 million due to the intangibles recognized in the Merger.Truist Financial Corporation 49 --------------------------------------------------------------------------------
Merger-Related and Restructuring Charges
The following table presents a summary of merger-related and restructuring charges and the related accruals: Table 4: Merger-Related and Restructuring Accrual Activity
Accrual at Jan 1 , Accrual at Mar 31 ,
(Dollars in millions) 2020 Expense (1) Utilized 2020 (1)
Severance and personnel-related $ 46 $ 44 $ (70) $ 20
Occupancy and equipment - 19 (19) -
Professional services 42 14 (53) 3
Other adjustments 1 30 (30) 1
Total $ 89 $ 107 $ (172) $ 24
(1) In connection with the Merger, the Company recognized $92 million of expense
for the first quarter of 2020 and has a remaining accrual of $15 million at
March 31, 2020 . The remaining expense and accrual relate to activities other
than the Merger.
Segment Results
See "Note 17. Operating Segments" herein, and "Note 21. Operating Segments" in
Truist's Annual Report on Form 10-K for the year ended December 31, 2019 , for
additional disclosures related to Truist's reportable business segments,
including additional details related to results of operations. Fluctuations in
noninterest income and noninterest expense are more fully discussed in the
Noninterest Income and Noninterest Expense sections above.
Table 5: Net Income by Reportable Segment
% Change
Three Months Ended March 31 ,
(Dollars in millions) 2020 2019 2020 vs. 2019
Consumer Banking and Wealth $ 681 $ 390 74.6 %
Corporate and Commercial Banking 423 430 (1.6)
Insurance Holdings 105 88 19.3
Other, Treasury & Corporate (146) (110) 32.7
Truist Financial Corporation $ 1,063 $ 798 33.2
First Quarter 2020 compared to First Quarter 2019
Consumer Banking and Wealth
CB&W serves individuals and small business clients by offering a variety of loan and deposit products, payment services, bankcard products and other financial services by connecting clients to a wide range of financial products and services. CB&W includes Dealer Retail Services, which originates loans on an indirect basis to individuals for the purchase of automobiles, boats and recreational vehicles. Additionally, CB&W includes National Consumer Finance & Payments, which provides a comprehensive set of technology-enabled lending solutions to individuals and small businesses through several national channels, as well as merchant services and payment processing solutions to business clients. CB&W also includes Mortgage Banking, which offers residential mortgage products nationally through its retail and correspondent channels, the internet and by telephone. These products are either sold in the secondary market, primarily with servicing rights retained, or held in the Company's loan portfolio. Mortgage Banking also services loans for other investors, in addition to loans held in the Company's loan portfolio. Mortgage Banking also includes Mortgage Warehouse Lending, which provides short-term lending solutions to finance first-lien residential mortgage LHFS by independent mortgage companies. Wealth delivers investment management, financial planning, banking, fiduciary services and related solutions to institutions, affluent and high net worth individuals and families, with financial expertise and industry-specific insights in the medical, legal, sports and entertainment industries. CB&W net income was$681 million for the first quarter of 2020, an increase of$291 million compared to the earlier quarter. Segment net interest income increased$1.2 billion primarily due to the Merger. Noninterest income increased$565 million , due to the Merger and higher residential mortgage income as a result of the lower rate environment driving mortgage production through refinance activity. The allocated provision for credit losses increased$306 million primarily due to the recognition of an economic downturn related to COVID-19 and higher net charge-offs in the current quarter as there was a full quarter of activity from the Merger. Noninterest expense increased$1.1 billion primarily due to operating expenses and amortization of intangibles related to the Merger and discretionary management impacts from COVID-19 in the current quarter. 50Truist Financial Corporation -------------------------------------------------------------------------------- CB&W loans and leases were up$74.7 billion atMarch 31, 2020 , compared to the earlier quarter, primarily due to the merged loans. Total deposits were up$116.9 billion atMarch 31, 2020 , compared to the earlier quarter, primarily due to the merged deposits and reduced consumer spending late in the current quarter related to COVID-19.
Corporate and Commercial Banking
C&CB serves large, medium and small business clients by offering a variety of loan and deposit products and connecting clients to the combined organization's broad array of financial services. C&CB includes Corporate and Investment Banking, which delivers a comprehensive range of strategic advisory, capital raising, risk management, financing, liquidity and investment solutions to both public and private companies in the C&CB segment and Wealth. Additionally, C&CB includes Commercial Community Banking, which offers an array of traditional banking products, including lending, cash management and investment banking to commercial clients via CIB. C&CB also includesCommercial Real Estate , which provides a range of credit and deposit services as well as fee-based product offerings to privately held developers, operators, and investors in commercial real estate properties. C&CB also includesGrandbridge Real Estate Capital , which is a fully integrated commercial mortgage banking company that originates commercial and multi-family real estate loans, services loan portfolios and provides asset and portfolio management as well as real estate brokerage services. Treasury Solutions, within C&CB, provides business clients across the organization with services required to manage their payments and receipts, combined with the ability to manage and optimize their deposits across all aspects of their business. C&CB net income was$423 million for the first quarter of 2020, a decrease of$7 million compared to the earlier quarter. Segment net interest income increased$706 million primarily due to the Merger. Noninterest income increased$216 million due to the Merger, partially offset by losses in trading income primarily related to the decline in interest rates and widening of credit spreads. The allocated provision for credit losses increased$379 million primarily due to the recognition of an economic downturn and significant growth in loans related to COVID-19. Noninterest expense increased$571 million primarily due to operating expenses and amortization of intangibles related to the Merger in the current quarter. C&CB loans and leases were up$95.6 billion compared to the earlier quarter primarily due to the merged loans and significant growth in commercial and industrial loans in the current quarter related to COVID-19. Total deposits were up$64.6 billion atMarch 31, 2020 , compared to the earlier quarter, primarily due to the merged deposits and commercial clients retaining a portion of their credit line draws in the bank.
Truist's IH segment is one of the largest insurance agency / brokerage networks in the world, providing property and casualty, employee benefits and life insurance to businesses and individuals. It also provides small business and corporate services, such as workers compensation and professional liability, as well as surety coverage and title insurance. In addition, IH includes commercial and retail insurance premium finance. IH net income was$105 million for the first quarter of 2020, an increase of$17 million compared to the earlier quarter. Noninterest income increased$42 million primarily due to higher production. Noninterest expense increased$23 million primarily due to commissions on higher production in the current quarter.
Other,
Net income in OT&C can vary due to the changing needs of the Corporation, including the size of the investment portfolio, the need for wholesale funding and variability associated with derivatives used to hedge the balance sheet.
OT&C generated a net loss of$146 million in the first quarter of 2020, compared to a net loss of$110 million in the earlier quarter. Segment net interest income increased$19 million . Noninterest income decreased$64 million primarily due to lower income related to certain post-employment benefits and higher tax credit equivalents allocated to the segments. The allocated provision for credit losses increased$55 million primarily due to the provision for unfunded commitments. Noninterest expense decreased$42 million primarily due to lower merger-related charges and increased corporate expenses allocated to the segments. The benefit for income taxes increased$22 million primarily due to a higher pre-tax loss.Truist Financial Corporation 51
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Analysis of Financial Condition
Investment Activities
The securities portfolio totaled$78.4 billion atMarch 31, 2020 , compared to$74.7 billion atDecember 31, 2019 . The increase was due primarily to a$3.7 billion increase in Agency MBS. As ofMarch 31, 2020 , approximately 3.5% of the securities portfolio was variable rate, compared to 3.6% as ofDecember 31, 2019 . The effective duration of the securities portfolio excluding certain non-agency MBS was 3.4 years atMarch 31, 2020 , compared to 4.7 years atDecember 31, 2019 .
Lending Activities
The following tables summarize the loans and leases HFI portfolio for each of the last five quarters: Table 6: Loans and Leases as of Period End (Dollars in millions) Mar 31, 2020 Dec
31, 2019
$ 149,161 $
130,180
27,532 26,832 17,080 16,976 16,718
Commercial construction 6,630 6,205 3,804 3,746 4,111
Lease financing 5,984 6,122 2,356 2,203 2,098
Consumer:
Residential mortgage 53,096 52,071 28,297 32,607 31,572
Residential home equity and direct 27,629 27,044 11,646 11,675 11,646
Indirect auto 25,146 24,442 11,871 11,756 11,506
Indirect other 10,980 11,100 6,590 6,453 6,017
Student 7,771 6,743 - - -
Credit card 5,300 5,619 3,058 3,056 2,970
PCI - 3,484 387 421 441
Total loans and leases HFI $ 319,229 $ 299,842 $ 149,413 $ 152,586 $ 149,057
Total loans and leases held for investment were $319.2 billion at March 31,
2020 , compared to $299.8 billion at December 31, 2019 . In connection with the
adoption of CECL, all loans previously in the PCI portfolio became PCD loans and
were transferred to their respective portfolios. The significant growth in the
commercial and industrial portfolio was primarily due to draws on lines of
credit by clients building liquidity in response to COVID-19.
52 Truist Financial Corporation
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The following table presents the composition of average loans and leases for
each of the last five quarters:
Table 7: Average Loans and Leases
For the Three Months Ended
(Dollars in millions) Mar 31, 2020 Dec 31, 2019 Sep 30, 2019 Jun 30, 2019 Mar 31, 2019
Commercial:
Commercial and industrial $ 131,743 $ 81,853 $ 63,768 $ 62,563 $ 61,370
CRE 27,046 19,896 17,042 16,854 16,786
Commercial construction 6,409 4,506 3,725 3,894 4,119
Lease financing 6,070 3,357 2,260 2,122 2,021
Consumer:
Residential mortgage 52,993 34,824 28,410 32,066 31,370
Residential home equity and direct 27,564 15,810 11,650 11,687 11,681
Indirect auto 24,975 15,390 11,810 11,633 11,308
Indirect other 10,950 7,772 6,552 6,246 6,029
Student 7,787 1,825 - - -
Credit card 5,534 3,788 3,036 2,970 2,922
PCI - 1,220 411 432 455
Total average loans and leases HFI $ 301,071 $
190,241
Average loans and leases held for investment for the first quarter of 2020 were$301.1 billion , up$110.8 billion compared to the fourth quarter of 2019, primarily due to the merged loans and the line draws in response to COVID-19. Excluding the impact from these items, average loans were down slightly due to a decline in residential mortgage loans as a result of transferring loans to held for sale in the fourth quarter of 2019, partially offset by increases in indirect automobile loans and student loans.
COVID-19 Lending Activities
The CARES Act includes provisions that were designed to encourage financial
institutions to practice prudent efforts to work with borrowers impacted by
COVID-19. These modifications are generally not considered a TDR as disclosed in
"Note 1. Basis of Presentation."
•Commercial - approximately 23,000 accommodations requests with an aggregate carrying value totaling$25.1 billion . •Consumer - approximately 463,000 accommodations requests with an aggregate carrying value totaling$12.6 billion . •Credit card - approximately 37,000 accommodations requests with an aggregate carrying value totaling$0.2 billion .
A significant portion of the borrowers that were provided payment relief were current as of the date that the relief was initially provided.
The CARES Act also created the Paycheck Protection Program, which temporarily expands theSmall Business Administration's business loan guarantee program.Truist has obtained SBA authorizations for clients of approximately$12.6 billion , of which$9.1 billion was funded through the end of April. The following table provides a summary of exposure to industries that management believes are most vulnerable in the current environment. These selected industry exposures represent 8.9% of loans held for investment atMarch 31, 2020 .Truist is actively managing these portfolios and will continue to make underwriting or risk acceptance adjustments as appropriate. In addition, management is closely monitoring its leveraged lending portfolio which comprised 3.3% of loans held for investment atMarch 31, 2020 . Certain leveraged lending loans would also be included in the selected industry credit exposures. Table 8: Selected Credit Exposures March 31, 2020 Percentage of Loans (Dollars in billions) Outstandings HFI Hotels, resorts and cruise lines$ 6.6 2.1 % Oil and gas portfolio 5.9 1.8 Senior care 5.6 1.8 Acute care facilities 4.9 1.5 Sensitive retail 2.9 0.9 Restaurants 2.5 0.8 Total$ 28.4 8.9 % Leveraged lending (inclusive of above industries)$10.5 3.3 % Truist Financial Corporation 53
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Asset Quality
The following tables summarize asset quality information for each of the last five quarters: Table 9: Asset Quality (Dollars in millions) Mar 31, 2020 Dec 31, 2019 Sep 30, 2019 Jun 30, 2019 Mar 31, 2019 NPAs: NPLs: Commercial and industrial$ 443 $ 212 $ 172 $ 193 $ 196 CRE 18 10 27 31 73 Commercial construction 2 - 2 2 2 Lease financing 27 8 2 2 1 Residential mortgage 248 55 106 104 121 Residential home equity and direct 170 67 56 54 53 Indirect auto 125 100 81 74 79 Indirect other 1 2 1 1 1 Total NPLs HFI 1,034 454 447 461 526 Loans held for sale 41 107 - - - Total nonaccrual loans and leases 1,075 561 447 461 526 Foreclosed real estate 63 82 33 36 33 Other foreclosed property 39 41 29 26 25 Total nonperforming assets$ 1,177 $ 684 $ 509 $ 523 $ 584 TDRs: Performing TDRs: Commercial and industrial$ 65 $ 47 $ 69 $ 84 $ 63 CRE 7 6 6 7 8 Commercial construction 36 37 1 1 1 Lease financing 1 - - - - Residential mortgage 513 470 570 581 669 Residential home equity and direct 66 51 54 53 54 Indirect auto 350 333 324 311 302 Indirect other 5 5 4 4 4 Student 1 - - - - Credit card 35 31 29 29 29 Total performing TDRs$ 1,079 $ 980 $ 1,057 $ 1,070 $ 1,130 Nonperforming TDRs 121 82 115 135 178 Total TDRs$ 1,200 $ 1,062 $ 1,172 $ 1,205 $ 1,308 Loans 90 days or more past due and still accruing: Commercial and industrial $ 5 $ 1 $ - $ - $ - CRE 1 - - - - Residential mortgage 610 543 347 350 377 Residential home equity and direct 10 9 8 11 8 Indirect auto 11 11 9 7 5 Indirect other 2 2 - - - Student 1,068 188 - - - Credit card 41 22 15 13 13 PCI - 1,218 24 26 28 Total loans 90 days or more past due and still accruing$ 1,748 $ 1,994 $ 403 $ 407 $ 431 Loans 30-89 days past due and still accruing: (1) Commercial and industrial$ 262 $ 94 $ 34 $ 32 $ 36 CRE 8 5 1 3 3 Commercial construction 16 1 - - - Lease financing 8 2 1 5 3 Residential mortgage 679 498 432 480 478 Residential home equity and direct 156 122 56 60 69 Indirect auto 521 560 380 354 281 Indirect other 74 85 43 39 35 Student 593 650 - - - Credit card 57 56 29 26 25 PCI - 140 16 17 18 Total loans 30-89 days past due and still accruing$ 2,374 $ 2,213 $ 992 $ 1,016 $ 948 (1) Excludes loans held for sale. 54Truist Financial Corporation -------------------------------------------------------------------------------- Nonperforming assets totaled$1.2 billion atMarch 31, 2020 , up$493 million compared toDecember 31, 2019 due almost entirely to the adoption of CECL, which resulted in the discontinuation of the pool-level accounting for PCI loans and replaced that with a loan-level evaluation for nonaccrual status. As ofDecember 31, 2019 , there was approximately$500 million of PCI loans that would have been classified as nonperforming had we evaluated accrual status on a loan level basis. Nonperforming loans and leases held for investment represented 0.32% of loans and leases held for investment, up 17 basis points compared toDecember 31, 2019 , but down three basis points fromMarch 31, 2019 . Performing TDRs were up$99 million during the first quarter, primarily in residential mortgage loans, commercial and industrial loans and indirect automobile loans. Loans 90 days or more past due and still accruing totaled$1.7 billion atMarch 31, 2020 , down$246 million compared to the prior quarter. The decline was due to loans that transitioned into nonaccrual status as a result of the change in pool level accounting described above, partially offset by an increase in 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 0.55% atMarch 31, 2020 , down 11 basis points from the prior quarter. 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 0.04% atMarch 31, 2020 , up one basis point from 0.03% atDecember 31, 2019 . Loans 30-89 days past due and still accruing totaled$2.4 billion atMarch 31, 2020 , up$161 million compared to the prior quarter. The increase was largely in commercial and industrial loans and residential mortgage loans, partially offset by a decrease in student loans. The ratio of loans 30-89 days or more past due and still accruing as a percentage of loans and leases was 0.74% atMarch 31, 2020 , unchanged from the prior quarter. Problem loans include NPLs and loans that are 90 days or more past due and still accruing as disclosed in Table 9. 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 10: Asset Quality Ratios As of / For the Three Months Ended Mar 31, 2020 Dec
31, 2019
0.74 % 0.74 % 0.66 % 0.67 % 0.64 %
Loans 90 days or more past due and still accruing
as a percentage of loans and leases HFI 0.55 0.66 0.27 0.27 0.29
NPLs as a percentage of loans and leases HFI 0.32 0.15 0.30 0.30 0.35
Nonperforming loans and leases as a percentage of
loans and leases (1) 0.33 0.18 0.30 0.30 0.35
NPAs as a percentage of:
Total assets (1) 0.23 0.14 0.22 0.23 0.26
Loans and leases HFI plus foreclosed property 0.36 0.19 0.34 0.34 0.39
Net charge-offs as a percentage of average loans
and leases HFI 0.36 0.40 0.41 0.38 0.40
ALLL as a percentage of loans and leases HFI 1.63 0.52 1.05 1.05 1.05
Ratio of ALLL to:
Net charge-offs 4.76x 2.03x 2.59x 2.80x 2.62x
NPLs 5.04x 3.41x 3.52x 3.46x 2.97x
Loans 90 days or more past due and still accruing
as a percentage of loans and leases HFI (2) 0.04 % 0.03 % 0.04 % 0.04 % 0.04 %
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 and PCI, as applicable.
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.
Truist Financial Corporation 55
--------------------------------------------------------------------------------The following table presents activity related to NPAs: Table 11: Rollforward of NPAs (Dollars in millions)
2020 2019
Balance, January 1 $ 684 $ 585
New NPAs (1) 949 294
Advances and principal increases 86 64
Disposals of foreclosed assets (2) (158) (122) Disposals of NPLs (3)
(23) (30)
Charge-offs and losses (124) (71)
Payments (147) (106)
Transfers to performing status (85) (30)
Other, net (5) -
Ending balance, March 31 $ 1,177 $ 584
(1) For 2020, includes approximately $500 million of PCI loans that would have
been classified as nonperforming as of December 31, 2019 .
(2) Includes charge-offs and losses recorded upon sale of $53 million and $58
million for the three months ended March 31, 2020 and 2019, respectively.
(3) Includes charge-offs and losses recorded upon sale of $7 million and $6
million for the three months ended March 31, 2020 and 2019, 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 works with borrowers to prevent further
difficulties and 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.
In accordance with the CARES Act, Truist implemented loan modification programs
in response to the COVID-19 pandemic in order to provide borrowers with
flexibility with respect to repayment terms. These loan modifications are not
considered TDRs to the extent that the borrower was impacted by the COVID-19
pandemic and was less than 30 days past due at December 31, 2019 , or in certain
circumstances, at the time that the COVID-19 loan modification program was
implemented, unless the loan was previously classified 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 date. Subsequent
modifications will be evaluated for potential treatment as TDRs in accordance
with Truist's accounting policies.
The following table provides a summary of performing TDR activity:
Table 12: Rollforward of Performing TDRs
(Dollars in millions) 2020 2019
Balance, January 1 $ 980 $ 1,119
Inflows 183 152
Payments and payoffs (15) (55)
Charge-offs (18) (16)
Transfers to nonperforming TDRs (19) (19)
Removal due to the passage of time (4) (14)
Non-concessionary re-modifications (1) (4)
Transferred to LHFS and/or sold (27) (33)
Balance, March 31 $ 1,079 $ 1,130
56 Truist Financial Corporation
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The following table provides further details regarding the payment status of
TDRs outstanding at March 31, 2020 :
Table 13: Payment Status of TDRs (1)
March 31, 2020 Past Due 90 Days Or
(Dollars in millions) Current Past Due 30-89 Days More Total
Performing TDRs:
Commercial:
Commercial and industrial $ 64 98.5 % $ 1 1.5 % $ - - % $ 65
CRE 7 100.0 - - - - 7
Commercial construction 36 100.0 - - - - 36
Lease financing 1 100.0 - - - - 1
Consumer:
Residential mortgage 272 53.0 87 17.0 154 30.0 513
Residential home equity and direct 64 97.0 2 3.0 - - 66
Indirect auto 295 84.3 55 15.7 - - 350
Indirect other 5 100.0 - - - - 5
Student 1 100.0 - - - - 1
Credit card 29 82.9 4 11.4 2 5.7 35
Total performing TDRs 774 71.7 149 13.8 156 14.5 1,079
Nonperforming TDRs 75 61.9 6 5.0 40 33.1 121
Total TDRs $ 849 70.8 $ 155 12.9 $ 196 16.3 $ 1,200 (1)Past due performing TDRs are included in past due disclosures and nonperforming TDRs are included in NPL disclosures.
Truist Financial Corporation 57 --------------------------------------------------------------------------------
ACL
Activity related to the ACL is presented in the following tables: Table 14: Activity in ACL Quarters ended (Dollars in millions) Mar 31, 2020 Dec 31, 2019 Sep 30, 2019 Jun 30, 2019 Mar 31, 2019 Balance, beginning of period$ 1,889 $ 1,653
2,762 - - - -
CECL adoption - reserves on PCD assets 378 - - - -
Provision for credit losses 893 171 117 172 155
Charge-offs:
Commercial and industrial (39) (23) (28) (22) (17)
CRE (1) (5) (2) (18) (8)
Commercial construction (3) - - - -
Lease financing (2) (9) (1) - (1)
Residential mortgage (11) (8) (3) (5) (5)
Residential home equity and direct (68) (25) (24) (24) (20)
Indirect auto (142) (107) (92) (79) (92)
Indirect other (18) (19) (14) (12) (17)
Student (8) - - - -
Credit card (53) (37) (25) (23) (24)
PCI - - - - -
Total charge-offs (345) (233) (189) (183) (184)
Recoveries:
Commercial and industrial 17 6 5 8 6
CRE - - 3 2 -
Commercial construction 1 1 - 1 1
Lease financing - - 1 - -
Residential mortgage 2 1 - - 1
Residential home equity and direct 15 10 6 8 6
Indirect auto 23 13 12 14 13
Indirect other 7 5 3 5 4
Student - - - - -
Credit card 8 5 6 3 6
Total recoveries 73 41 36 41 37
Net charge-offs (272) (192) (153) (142) (147)
Other (39) 257 - - -
Balance, end of period $ 5,611 $ 1,889 $ 4,880 $ 1,541 $ 1,565 $ 1,587 $ 1,552 ALLL for PCD / PCI loans 331 8 8 8 9 RUFC 400 340 80 94 98 Total ACL$ 5,611 $ 1,889 $ 1,653 $ 1,689 $ 1,659 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$5.6 billion atMarch 31, 2020 , up$3.7 billion compared to the prior quarter. The increase in the allowance for credit losses was primarily due the adoption of CECL. Upon adoption, the Company recorded a$3.1 billion increase in the allowance for credit losses, including$2.8 billion that was charged to retained earnings before tax, and$378 million related to the gross up for PCD loans. The remaining increase in the allowance for credit losses primarily reflects deteriorated economic conditions as well as significant loan growth from clients drawing down their lines of credit to build liquidity in response to COVID-19. The allowance for credit losses includes$5.2 billion for loans and leases and$400 million for the reserve for unfunded commitments. As ofMarch 31, 2020 , the allowance for loan and lease losses was 1.63% of loans and leases held for investment.
The allowance for loan and lease losses was 5.04 times nonperforming loans and
leases held for investment, compared to 3.41 times at
58Truist Financial Corporation -------------------------------------------------------------------------------- Net charge-offs during the first quarter totaled$272 million , up$80 million compared to the prior quarter. The increase was largely due to the impact of a full quarter from the Merger. As a percentage of average loans and leases, annualized net charge-offs were 0.36%, down four basis points compared to the prior quarter. The following table presents an allocation of the ALLL. The entire amount of the allowance is available to absorb losses occurring in any category of loans and leases. Table 15: Allocation of ALLL by Category March 31, 2020 December 31, 2019 % Loans in % Loans in (Dollars in millions) Amount each category Amount each category Commercial and industrial$ 1,813 46.7 %$ 560 43.4 % CRE 299 8.6 150 8.9 Commercial construction 88 2.1 52 2.1 Lease financing 79 1.9 10 2.0 Residential mortgage 427 16.6 176 17.4 Residential home equity and direct 607 8.7 107 9.0 Indirect auto 1,192 7.9 304 8.2 Indirect other 213 3.4 60 3.7 Student 146 2.4 - 2.2 Credit card 347 1.7 122 1.9 PCI - - 8 1.2 Total ALLL 5,211 100.0 % 1,549 100.0 % RUFC 400 340 Total ACL$ 5,611 $ 1,889 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 ofMarch 31, 2020 ,Truist held or serviced the first lien on 30.9% of its second lien positions. Truist Financial Corporation 59 --------------------------------------------------------------------------------
Other Assets
The components of other assets are presented in the following table: Table 16: Other Assets as of Period End (Dollars in millions) March 31, 2020 December 31, 2019 Bank-owned life insurance$ 6,413 $ 6,383 Tax credit and other private equity investments 5,617 5,448 Pension assets 3,915 3,579 Accounts receivable 3,168 2,418 Derivative assets 4,040 2,053 Lease assets - leased assets and related assets 1,726 1,897 ROU assets 1,773 1,823 Accrued income 1,879 1,807 Prepaid expenses 1,281 1,254 Structured real estate 813 987 Equity securities at fair value 641 817 FHLB stock 1,415 764 Other 1,071 2,602 Total other assets$ 33,752 $ 31,832 Funding Activities Deposits
The following table presents deposits for each of the last five quarters: Table 17: Deposits as of Period End (Dollars in millions)
Mar 31, 2020
$ 97,618 $ 92,405 $ 52,667 $ 52,458 $ 53,021 Interest checking 92,950 85,492 27,723 28,021 28,028 Money market and savings 124,072 120,934 64,454 63,972 63,739 Time deposits 35,539 35,896 16,526 15,070 14,978 Foreign office deposits - interest-bearing - - 910 - - Total deposits$ 350,179 $ 334,727 $ 162,280 $ 159,521 $ 159,766 Deposits totaled$350.2 billion atMarch 31, 2020 , an increase of$15.5 billion fromDecember 31, 2019 . Growth in deposits reflects clients retaining a portion of their credit line draws in the bank and solid growth in all non-time deposit products. The following table presents average deposits for each of the last five quarters: Table 18: Average Deposits Three Months Ended (Dollars in millions) Mar 31, 2020
$ 93,135 $ 64,485 $ 52,500 $ 52,680 $ 52,283 Interest checking 85,008 43,246 27,664 27,708 27,622 Money market and savings 120,936 79,903 64,920 63,394 63,325 Time deposits 35,570 23,058 16,643 15,730 16,393 Foreign office deposits - interest-bearing - 24 265 379
422
Total average deposits$ 334,649 $ 210,716 $ 161,992 $ 159,891 $ 160,045
Average deposits for the first quarter of 2020 were
Noninterest-bearing deposits represented 27.8% of total average deposits for the first quarter of 2020, compared to 30.6% for the prior quarter and 32.7% for the prior year quarter. The cost of average total deposits was 0.51% for the first quarter, down six basis points compared to the prior quarter. The cost of average interest-bearing deposits was 0.70% for the first quarter, down 12 basis points compared to the prior quarter. 60Truist Financial Corporation --------------------------------------------------------------------------------
Borrowings
AtMarch 31, 2020 , short-term borrowings totaled$12.7 billion , a decrease of$5.5 billion compared toDecember 31, 2019 , due largely to a decrease of$4.7 billion in short-term FHLB advances. Average short-term borrowings were$18.9 billion , or 4.7% of total funding for the first quarter 2020, as compared to$5.6 billion , or 3.0% for the prior year quarter. 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$65.7 billion atMarch 31, 2020 , an increase of$24.3 billion compared toDecember 31, 2019 , as management took actions to increase liquidity to meet potential funding needs. These actions included an increase of$20.0 billion in long-term FHLB advances, and issuances of$2.5 billion of senior notes with interest rates from 1.25% to 1.50% maturing in 2023 to 2025,$500 million in floating rate senior notes maturing in 2023 and$1.3 billion of subordinated notes with an interest rate of 2.25% maturing in 2030. These increases were partially offset by the redemption of$750 million of senior notes during the first quarter of 2020. The average cost of long-term debt was 2.34% for the three months endedMarch 31, 2020 , down 96 basis points compared to the same period in 2019. FHLB advances represented 36.8% of total outstanding long-term debt atMarch 31, 2020 , compared to 10.0% atDecember 31, 2019 .
During the second quarter of 2020,
Shareholders' Equity Total shareholders' equity was$66.1 billion atMarch 31, 2020 , a decrease of$497 million fromDecember 31, 2019 . The decrease in shareholders' equity includes$2.1 billion related to the adoption of CECL and$679 million for common and preferred dividends, which was partially offset by$1.1 billion in net income available to common shareholders and an increase of$1.7 billion in AOCI. In addition,Truist redeemed$500 million of its Series K preferred stock during the first quarter of 2020.Truist's book value per common share atMarch 31, 2020 was$45.49 , compared to$45.66 atDecember 31, 2019 .
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, and operate in a safe and sound manner while ensuring 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.
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 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.
Refer to
Market risk management
Market risk is the risk to current or anticipated earnings, capital or economic
value 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 risk factors or prices,
including interest rates, credit spreads, foreign exchange rates, equity, and
commodity prices.
Truist Financial Corporation 61-------------------------------------------------------------------------------- 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 underlying 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 associated with assets and liabilities (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 inherently embedded in bank products (options risk). The primary objectives of effective 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. AtTruist , market risk management also includes the enterprise-wide IPV function.
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 exposure through 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) simulations of possible changes to net interest income over the next two years based on gradual changes in interest rates; (ii) analysis of interest rate shock scenarios; and (iii) analysis of economic value of equity based on changes in interest rates. The Company's simulation model takes into account assumptions related to 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 expected outlook for the economy and interest rates. These assumptions are reviewed and adjusted monthly to reflect changes in current interest rates compared to the rates applicable toTruist's assets and liabilities. The model also considersTruist's current and prospective liquidity position, current balance sheet volumes and projected growth and/or contractions, 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 sensitivity of deposit rate changes relative to market rate changes) of approximately 55% 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 Company's 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 information for the management of interest rate risk.
The following table shows the effect that the indicated changes in interest rates would have on net interest income as projected for the next 12 months assuming a gradual change in interest rates as described below. Table 19: Interest Sensitivity Simulation Analysis
Annualized
Interest Rate Scenario Hypothetical
Prime Rate Percentage Change in
Linear Change in Net Interest Income
Prime Rate (bps) Mar 31, 2020 Mar 31, 2019 Mar 31, 2020 Mar 31, 2019
Up 100 4.25 % 6.50 % 2.56 % 1.04 %
Up 50 3.75 6.00 2.00 0.64
No Change 3.25 5.50 - -
Down 25 3.00 5.25 (2.11) N/A
Down 50 (1) 2.75 5.00 (3.86) (1.58)
(1) The Down 50 rates are floored at one basis point and may not reflect Down 50 basis points for all rate indices.
Rate sensitivity increased compared to the prior periods, primarily driven by loan and deposit mix changes related to the Merger and recent activity, increased fixed rate funding, and increased noninterest-bearing deposits
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. 62Truist Financial Corporation --------------------------------------------------------------------------------
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 net interest income simulation period. 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 20: EVE Simulation Analysis Change in Interest Hypothetical Percentage Change in EVE Rates (bps) Mar 31, 2020 Mar 31, 2019 Up 100 4.8 % 1.1 % No Change - - Down 100 (10.7) (11.0)Truist uses financial instruments including derivatives 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 and as part of associated hedging activities. As ofMarch 31, 2020 ,Truist had derivative financial instruments outstanding with notional amounts totaling$326.0 billion , with an associated net fair value of$3.3 billion . See "Note 15. 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. 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 the team 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" in the Form 10-K for the year endedDecember 31, 2019 .
Market risk from trading activities
Truist also manages market risk associated with trading activities. As a financial intermediary,Truist 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 a suite of 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
Covered positions subject to the Market Risk Rule include trading assets and liabilities, specifically those held for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements, or to lock in arbitrage profits.Truist's trading portfolio of covered positions 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 across different asset classes,Truist's trading portfolio also contains other sub-portfolios, including foreign exchange, loan trading, 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 15. Derivative Financial Instruments," "Note 14. Fair Value Disclosures," and "Critical Accounting Policies" herein for discussion of valuation policies, procedures and methodologies.Truist Financial Corporation 63 --------------------------------------------------------------------------------
Securitizations
As ofMarch 31, 2020 , the aggregate market value of on-balance sheet securitization positions subject to the Market Risk Rule was$4 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 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, however, 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. 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. A portfolio of trading positions is typically less risky than the sum of risk from each of the individual sub-portfolios. As such, risk within each category partially offsets the exposure to other risk categories thereby creating portfolio diversification benefit. The following table summarizes certain VaR-based measures for the three months endedMarch 31, 2020 and 2019. The increase from the prior year was mainly due to the integration of the heritage SunTrust trading business and the market volatility due to COVID-19 pandemic in March. Table 21: VaR-based Measures 2020 2019 Three Months Ended March 31, 10-Day Holding 1-Day Holding (Dollars in millions) Period Period 10-Day Holding Period 1-Day Holding Period VaR-based Measures: Maximum$ 30 $ 10 $ 1 $ 1 Average 10 3 1 - Minimum 3 1 - - Period-end 19 8 1 1 VaR by Risk Class: Interest Rate Risk 5 1 Credit Spread Risk 4 - Equity Price Risk 8 - Foreign Exchange Risk - - Portfolio Diversification (9) - Period-end 8 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: 64Truist Financial Corporation -------------------------------------------------------------------------------- Table 22: Stressed VaR-based Measures - 10 Day Holding Period Three Months EndedMarch 31 , (Dollars in millions) 2020 2019 Maximum$ 65 $ 6 Average 33 5 Minimum 16 4 Period-end 19 6
The increase from the prior year in stressed VaR-based measures was due to the integration of heritage SunTrust trading business after the Merger.
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. There were seven company-wide VaR backtesting exceptions during the twelve months endedMarch 31, 2020 , primarily driven by the COVID-19 pandemic which led to a sudden and significant repricing of financial markets, amid an increase in market volatility and deterioration in overall market liquidity. 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. Following such reviews, it was determined that the VaR model performed in line with expectations. However, the extreme moves in underlying market risk factors caused by the COVID-19 pandemic would not typically have been captured within the 1-day VaR measure. [[Image Removed: tfc-20200331_g3.jpg]]Truist Financial Corporation 65 --------------------------------------------------------------------------------
Model risk management
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 policy and 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, 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, 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 ofMarch 31, 2020 andDecember 31, 2019 ,Truist's liquid asset buffer, as a percent of total assets, was 19.6% and 16.5%, respectively. The LCR rule directs 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 ofJanuary 1, 2020 ,Truist is subject to the Category III reduced LCR requirements (85% of the full requirements).Truist's average LCR was 117% for the three months endedMarch 31, 2020 , well above the regulatory minimum. 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. InApril 2020 , DBRS revised its outlook forTruist andTruist Bank from "positive" to "stable," citing economic deterioration related to COVID-19. DBRS affirmed all other ratings forTruist andTruist Bank . Additionally, Fitch revised its outlook forTruist andTruist Bank from "stable" to "negative," also citing pandemic-related economic deterioration. Fitch downgradedTruist's subordinated debt to A-, and upgradedTruist's preferred stock to BBB, in order to align these ratings to its recently revised bank rating methodology. Fitch affirmed all otherTruist ratings. See "Liquidity" section of the MD&A of the Annual Report on Form 10-K for the year endedDecember 31, 2019 for additional information regarding credit ratings.
Parent Company
The 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" of the Annual Report on Form 10-K for the year endedDecember 31, 2019 for additional information regarding dividends from subsidiaries and debt transactions. 66Truist 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. AtMarch 31, 2020 andDecember 31, 2019 , the Parent Company had 26 months and 29 months, respectively, of cash on hand to satisfy projected cash outflows, and 17 months and 20 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 maintains a number of diverse funding sources to meet its liquidity requirements. These sources include unsecured borrowings from the capital markets through the issuance of senior or subordinated bank notes, institutional CDs, overnight and term Federal funds markets, and retail brokered CDs.Truist Bank also maintains access to secured borrowing sources including FHLB advances, repurchase agreements, and the FRB discount window. AtMarch 31, 2020 ,Truist Bank has approximately$137.8 billion of available secured borrowing capacity, which represents approximately 3.5 times the amount of one year wholesale funding maturities.
Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements
Refer toTruist's Annual Report on Form 10-K for the year endedDecember 31, 2019 for discussion with respect toTruist's quantitative and qualitative disclosures about its fixed and determinable contractual obligations.Truist's commitments include investments in affordable housing projects throughout its market area, renewable energy credits, private equity funds, derivative contracts to manage various financial risks, as well as other commitments. Refer to "Note 13. Commitments and Contingencies," "Note 14. Fair Value Disclosures" and "Note 15. Derivative Financial Instruments" in this Form 10-Q, and "Note 16. Commitments and Contingencies" of the Annual Report on Form 10-K for further discussion of these commitments.
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.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 23: Capital Requirements and Targets Minimum Well Capitalized Capital Plus Truist Targets (1) Capital Conservation Interim Operating Minimum Capital Truist Truist Bank Buffer (2) Stressed CET1 4.5 % NA 6.5 % 7.0 % 8.0 % 7.0 % Tier 1 capital 6.0 6.0 8.0 8.5 9.3 8.5 Total capital 8.0 10.0 10.0 10.5 11.3 10.5 Leverage ratio 4.0 NA 5.0 N/A 7.5 7.0 Supplementary leverage ratio 3.0 NA NA NA 6.5 6.0 (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. Truist Financial Corporation 67 -------------------------------------------------------------------------------- During the first quarter of 2020, as market conditions evolved,Truist received Board approval to establish new interim operating targets that provide for sufficient capital levels while allowing the company to support clients through the economic downturn. These interim operating targets will be evaluated as economic conditions evolve. 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.
(Dollars in millions, except per share data, shares in thousands)
Mar 31, 2020 Dec 31, 2019 Risk-based:
(preliminary)
CET1 capital to risk-weighted assets 9.3 % 9.5 % Tier 1 capital to risk-weighted assets 10.5 10.8 Total capital to risk-weighted assets 12.6 12.6 Leverage ratio 9.0 14.7 Supplementary leverage ratio 7.8 NA Non-GAAP capital measure (1): Tangible common equity per common share$ 26.00 $ 25.93 Calculation of tangible common equity (1): Total shareholders' equity$ 66,061 $ 66,558 Less: Preferred stock 4,599 5,102 Noncontrolling interests 167 174 Goodwill and intangible assets, net of deferred taxes 26,263 26,482 Tangible common equity$ 35,032 $ 34,800 Risk-weighted assets$ 391,387 $ 376,056 Common shares outstanding at end of period 1,347,461 1,342,166 (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. Capital ratios declined slightly primarily due to the significant balance sheet growth related to commercial clients drawing on lines of credit in response to COVID-19. The leverage and supplementary leverage ratios were also impacted by higher balances held at theFederal Reserve . As noted previously, the FRB issued an interim rule that is effective beginning with the second quarter of 2020 and endingMarch 31, 2021 that will removeU.S. treasuries and FRB balances from the calculation of the supplementary leverage ratio for BHCs. InMarch 2020 , the company redeemed$500 million of Series K preferred stock and issued$1.3 billion of subordinated debt.Truist's capital levels remain strong compared to the regulatory levels for well capitalized banks atMarch 31, 2020 .Truist declared common dividends of$0.450 per share during the first quarter of 2020. The dividend and total payout ratios for the first quarter of 2020 were 61.4%. As previously communicated at the time of the Merger announcement,Truist suspended its share repurchase program until capital ratios return to higher levels. 68Truist Financial Corporation -------------------------------------------------------------------------------- Share Repurchase Activity Table 25: Share Repurchase Activity Maximum Remaining Average Dollar Value of Shares Price Paid Total Shares Repurchased Available for (Dollars in millions, except per share Total Shares Per Share Pursuant to Repurchase Pursuant to data, shares in thousands) Repurchased (1) (2) Publicly-Announced Plan Publicly-Announced Plan
January 2020 - $ - - $ - February 2020 2 54.86 - - March 2020 60 33.83 - - Total 62 34.65 -
(1)Includes shares exchanged or surrendered in connection with the exercise of equity-based awards under equity-based compensation plans. (2)Excludes commissions.
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.Truist's 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. The more critical policies include accounting for the ACL, determining fair value of financial instruments, intangible assets, income taxes and costs and benefit obligations associated with pension and postretirement benefit plans. UnderstandingTruist's accounting policies is fundamental to understanding the consolidated financial position and consolidated results of operations. The critical accounting policies are discussed in MD&A inTruist's Annual Report on Form 10-K for the year endedDecember 31, 2019 . Significant accounting policies and changes in accounting principles and effects of new accounting pronouncements are discussed in "Note 1. Basis of Presentation" in Form 10-K for the year endedDecember 31, 2019 . Additional disclosures regarding the effects of new accounting pronouncements are included in the "Note 1. Basis of Presentation" included herein. Except for the items noted below, there have been no changes to the significant accounting policies during 2020. Intangible Assets The severe economic disruption and related financial effects of the COVID-19 pandemic have impactedTruist's businesses.Truist's commercial clients have experienced varying levels of disruptions to business activity, supply chains and demand for products and services. Additionally, many consumer clients have experienced interrupted income or unemployment. The pandemic also resulted in significant volatility to the global andU.S. financial markets, negatively impacting equity prices and corporate credit spreads, including for the banking sector andTruist . In response to the pandemic's adverse effects, intensive relief actions by theU.S. Congress and regulatory agencies are intended to mitigate the extent of adverse economic effects, while also stabilizing financial markets and liquidity. As a result of these considerations,Truist performed a qualitative assessment of the goodwill carried by the CB&W, C&CB and IH reporting units for impairment in the first quarter of 2020. In performing this assessment,Truist considered whether macroeconomic and market factors, industry and banking sector events, a sensitivity analysis on management's forecast and assumptions, andTruist specific performance indicators, including any changes from when the merger closed inDecember 2019 , would more-likely-than-not reduce the fair value of one or more of its reporting units below its respective carrying amount as of period-end. Despite the adverse economic and highly uncertain environment caused by the pandemic, Trust's first quarter 2020 results reflected profitable performance across each of its reporting units; strong capital and liquidity levels that have facilitated swift actions in support of clients, teammates and communities andTruist's affirmation that it remains committed to achieving its merger value proposition, including targeted net cost saves. Based on the qualitative assessment performed,Truist concluded that it was not more-likely-than-not that the fair value of one or more of its reporting units is below its respective carrying amount as ofMarch 31, 2020 , and therefore no triggering event occurred that required a quantitative goodwill impairment test. If economic conditions deteriorate, or the pandemic's effects prolong or worsen, it may be more-likely-than-not that the fair value of one or more ofTruist's reporting units falls below its respective carrying amount, which would require a quantitative goodwill impairment test. 69Truist Financial Corporation --------------------------------------------------------------------------------
ACL
Truist's policy is to maintain an ACL, which includes the ALLL and the RUFC, which represents management's best estimate of expected future credit losses related to the loan and lease portfolios and off-balance sheet lending commitments at the balance sheet date. Estimates of expected future loan and lease losses are determined by using statistical models and management's judgement. The models are designed to forecast probability of default, exposure at default and loss given default by correlating certain macroeconomic variables to historical experience. The models are generally applied at the portfolio level to pools of loans with similar risk characteristics. The macroeconomic data used in the models is based on forecasted variables for the reasonable and supportable period of two years. Beyond this forecast period the models gradually revert to an historical average over a one year period. Expected losses are estimated through contractual maturity estimated through contractual maturity, giving appropriate consideration to expected prepayments unless the borrower has a right to renew that is not cancellable or it is reasonably expected that the loan will be modified as a TDR.
A qualitative allowance which incorporates management's judgement is also
included in the estimation of expected future loan and lease losses. This
allowance is used to capture risks in the portfolio such as 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, political
conditions, legislation that may directly or indirectly affect the banking
industry and economic conditions affecting specific geographical areas and
industries in which
Loans and leases that do not share similar risk characteristics and significant loans that are considered collateral-dependent are individually evaluated. For these loans, the ALLL is determined through review of data specific to the borrower and related collateral, if any. 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. The methodology used to determine an estimate for the RUFC is inherently similar to that used to determine the funded component of the ALLL and is measured over the period there is a contractual obligation to extend credit that is not unconditionally cancellable. The RUFC is 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."
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