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 the December 31, 2019 Form 10-K.
Government Response to COVID-19
Congress, the FRB and the other U.S. state and federal financial regulatory
agencies, as well as state legislatures and officials, have taken actions to
mitigate disruptions to economic activity and financial stability resulting from
COVID-19 and may 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 on March 27, 2020 and subsequently has been
amended several times. Among other provisions the CARES Act includes funding for
the Small Business Administration to expand lending, relief from certain U.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 loans. One of the key CARES
Act programs is the PPP, which temporarily expands the Small Business
Administration's business loan guarantee program through August 8, 2020. PPP
loans are available to a broader range of entities than ordinary Small Business
Administration loans, require deferral of principal and interest repayment, and
the loan may be forgiven in an amount equal to payroll costs and certain other
expenses during either an eight-week or 24-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 on March 18, 2020 and a 120-day
moratorium on initiating eviction proceedings effective March 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. FNMA, FHLMC, FHA and VA have
extended their moratorium on foreclosures and evictions for single-family
federally backed mortgages until at least December 31, 2020.
Also pursuant to the CARES Act, the U.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, on March 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 of U.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 of March 26, 2020.
In addition, the FRB has established, or has taken steps to establish, a range
of facilities and programs to support the U.S. economy and U.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 PPP Liquidity Facility to provide financing related to PPP loans made by
banks;
•three Main Street Loan Facilities to purchase loan participations, under
specified conditions, from banks lending to small and medium sized U.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 certain
U.S. issuers;
46 Truist Financial Corporation
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•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 from U.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.
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 of Truist and its ability to make
distributions to shareholders. Truist and its subsidiaries are also subject to
supervision and examination by multiple regulators. Refer to Truist's Annual
Report on Form 10-K for the year ended December 31, 2019 for additional
disclosures with respect to significant laws and regulations affecting Truist.
The descriptions below summarize updates since the filing of the Annual Report
on Form 10-K for the year ended December 31, 2019 to state and federal laws to,
which Truist is subject. These descriptions 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.
Stress Capital Buffer and CCAR
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 capital
conservation buffer, which was 2.5% through September 30, 2020. Under the final
rule, beginning in the 2020 CCAR cycle, the FRB will notify Truist of its SCB
requirements, which is 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 of
Truist'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 that Truist's balance sheet assets would increase over the
planning horizon. In addition, provided that Truist 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.
The FRB assigned Truist a SCB of 2.7%, which is effective from October 1, 2020
through September 30, 2021. Consistent with the FRB's mandate across the
industry, Truist will update and resubmit its capital plan in early November
2020 to reflect changes in financial markets and the macroeconomic outlook, and
the FRB will conduct additional analysis each quarter to determine if
adjustments to this response are appropriate.
The FRB also took several actions following its stress tests in light of the
uncertainty caused by the COVID-19 pandemic. Specifically, for the third and
fourth quarter of 2020, the FRB is requiring certain large banking
organizations, including Truist, to suspend share repurchases, cap common
dividends per share to the amount paid in the second quarter, and further limit
dividends according to a formula based on recent income. The FRB is also
requiring banks to re-evaluate their longer-term capital plans.
Revisions to Definition of Eligible Retained Income
The U.S. banking agencies have adopted a 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 of Truist's
capital requirements.
Current Expected Credit Losses Methodology
The U.S. banking agencies have adopted a 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. Truist has elected to use the five-year transition
to phase in the impacts of CECL on regulatory capital.
Truist Financial Corporation 47
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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 exclude U.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, became
effective April 1, 2020 and will remain in effect through March 31, 2021.
Loan modifications
In response to the COVID-19 pandemic, banking regulators have encouraged
financial institutions to support borrowers impacted by COVID-19. Refer to "Note
1. Basis of Presentation" for Truist's policy related to COVID-19 loan
modifications.
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 the FDIC 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 the FDIC, reinstating the FDIC'sTemporary Liquidity Guarantee Authority to
guarantee debt obligations of solvent insured depository institutions or
depository institution holding companies, and temporarily allowing the Treasury
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" for Truist's policy related to COVID-19 loan
modifications.
Volcker Rule
In June 2020, the five regulatory agencies charged with implementing the Volcker
Rule finalized amendments to the Volcker Rule's restrictions on ownership
interests in and relationships with covered funds. Among other things, these
amendments permit banking entities to have relationships with and offer
additional financial services to additional types of funds and investment
vehicles. These requirements are not expected to have a material impact on
Truist's consolidated financial position, results of operations or cash flows.
NSFR Rule
The U.S. banking agencies have finalized a rule to implement the NSFR in the
United States. The NSFR rule requires each of Truist and Truist Bank to maintain
an amount of available stable funding, which is a weighted measure of a
company's funding sources over a one-year time horizon, calculated by applying
standardized weightings to the company's equity and liabilities based on their
expected stability, that is no less than the amount of required stable funding,
which is calculated by applying standardized weightings to assets, derivatives
exposures and certain other items based on their liquidity characteristics. As a
Category III banking organization, Truist and Truist Bank are subject to an NSFR
requirement equal to 85% of the full requirement. These requirements will become
effective as of July 1, 2021.
48 Truist Financial Corporation
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Executive Overview
Overview of Significant Events and Financial Results
Recent Events
Effective December 6, 2019, the Company completed the Merger. Reported results
for Truist 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 2019 is only for heritage BB&T. Significant Merger updates
include:
•In January 2020, Truist officially launched the Truist brand and visual
identity, and Truist's purpose: "Inspire and build better lives and
communities," along with its mission and values.
•In March 2020, the purchase of the new Charlotte, NC headquarters building was
completed and the building was renamed Truist Center.
•Purchase accounting valuations for loans and intangibles were updated during
2020 resulting in a $193 million reduction in the fair value mark for loans, a
$202 million increase in CDI and other intangibles and a $322 million reduction
in goodwill.
•In July 2020, Truist completed the previously announced divestiture of 30
branches with $425 million in loans and leases and $2.2 billion in deposits.
•Completed the first major brand milestone in the client-facing conversion of
Truist Securities.
•Recently announced Truist Ventures, which is about building strategic
partnerships and making investments in innovative companies and solutions.
•Launched the "blended branch" pilot program, which is a key step towards
closing branches that are very close to one another while continuing to take
care of clients.
•Truist remains committed to achieving $1.6 billion in net cost saves on a run
rate basis by the fourth quarter of 2022, excluding changes in net pension costs
for 2021 and 2022.
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 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
continue to adversely impact economic conditions. Also related to the health
crisis, the U.S. has been operating under a presidential declared emergency
since March 13, 2020, with various actions by the U.S. Congress and regulatory
agencies. As a result of COVID-19, the Company experienced the decline of asset
prices, reduction in interest rates, widening of credit spreads, borrower and
counterparty credit deterioration and market volatility. Although the Company is
unable to estimate the extent of the impact, the continuing pandemic and related
global economic crisis is likely to adversely impact its future operating
results.
Truist acted swiftly to support our clients, teammates and communities during
the COVID-19 pandemic. The following are some significant actions related to our
crisis response.
•Truist funded extensive line draws for commercial clients to help them fund
liquidity and working capital needs during the onset of the pandemic.
Additionally, Truist created an online, automated process for the PPP and began
to accept applications during the first weekend of the program. Truist Served as
the fourth largest PPP lender based on gross fundings. The carrying value of PPP
loans was $12.2 billion as of September 30, 2020.
•Provided accommodations to commercial and consumer clients. Of clients that
have exited accommodation programs, 98.0% of commercial clients, and 94.5% of
consumer and credit card clients, respectively, are current on or have paid-off
their loans.
•Pledged $50 million in philanthropic support through the Truist Cares
initiative that is providing aid for basic needs, medical supplies and financial
hardship across the nation, as well as grants to Truist'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.
•Provided support for clients through payment relief assistance, including
payments deferrals, waiving certain fees and offering additional accommodations.
•Implemented multiple strategies to keep teammates and clients safe, including
temporarily limiting branch lobby access and the extensive use of drive-thrus.
Approximately 90% of branches are open and unlocked, or open with controlled
access. Truist continues to follow appropriate COVID-19 safety protocols,
including proper social distancing. Additionally, alternative work assignments
for certain teammates currently working remotely have been extended until
January 31, 2021.
•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. Temporarily paid an additional
onsite special pay rate of $6.25 per hour or $50 per day for teammates required
to work in offices.
Truist Financial Corporation 49
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•From mid-October to the end of 2020, Truist is providing teammates search tools
for their in-home needs at no cost, including caregiver search tools, virtual
academic support, child care priority and discounts, nanny placement services,
elder care resources, and pet sitters and housekeepers. Additionally, eligible
teammates will be eligible to receive a child care reimbursement of $50/day for
a limited timeframe.
See Part II, Item 1A, "Risk Factors," in this Form 10-Q for additional
information regarding risks related to the effects of COVID-19.
Truist is committed to addressing racial and social inequity and has taken a
number of actions to expand efforts towards advancing equity, economic
empowerment and education for clients, communities and teammates, including:
•Truist's various foundations provided a donation of $40 million to help
establish CornerSquare Community Capital, formed to support community
development financial institutions focused on providing funding to racially and
ethnically diverse small business owners, women and individuals in low- and
moderate-income communities, with a particular focus on African American-owned
small businesses. The $40 million contribution to CornerSquare Community Capital
consisted of two $20 million contributions made through the Truist Foundation,
Inc. and the Truist Charitable Fund. These amounts did not impact Truist
Financial Corporation's earnings.
•Implemented a Truist Bank Community Benefits Plan under which the Company will
lend or invest $60 billion to low- and moderate-income borrowers and in low- and
moderate-income communities over a three-year period.
•As part of the Corporate Social Responsibility report, Truist announced its
commitment to increasing the number of racially and ethnically diverse employees
among senior leadership positions from approximately 12% to at least 15% in
three years. Truist also committed to ensuring regular, ongoing pay equity
reviews for teammates.
•Hosted more than 260 "Days of Understanding" sessions to date touching over
24,500 teammates, with more scheduled this year, that are designed to encourage
bold dialogue on real-world topics in an open, trusting environment.
•Scheduled virtual town hall meetings and discussion forums for teammates to
share candid, personal experiences.
•Began hosting unconscious bias training with Executive Leadership, Executive
Leadership's directs and other leaders. A total 22 sessions have been completed
or scheduled with over 300 leaders being trained.
•Hosted more than 100 Business Resource Group events to date this year to bring
teammates together and discuss a broad range of cultural topics to create
awareness and understanding of different communities. Many of these events are
celebrations of inclusion months, but we also host executive panels on pertinent
topics to lead with empathy, including the racial injustices that have occurred.
•CEO Kelly King signed the pledge with CEO Action for Diversity & Inclusion, the
largest CEO-driven business commitment to advance diversity and inclusion in the
workplace.
•The entire Executive Leadership Team is part of the Truist Executive Inclusion
and Diversity Council, which provides oversight and accountability.
•To advance equity in a meaningful way, Truist launched a working group led by
two members of our Executive Leadership Team and leaders of our African American
Business Resource Group. Truist has also asked several community partners to
help shape and guide its long-term actions.
•Observed Juneteenth holiday.
Executive Leadership Changes
On June 30, 2020, Truist announced that Kimberly Moore-Wright, Chief Human
Resources Officer, has been named to the Truist Executive Leadership team,
effectively immediately. In December 2019, Moore-Wright was named Chief Human
Resources Officer. Prior to that, Moore-Wright was the Director of Marketing and
Digital Sales between January 2016 and November 2019 and the Director of Retail
and Commercial Marketing Strategy between January 2012 and December 2015.
As part of the new reporting structure to elevate the areas of human resources
and inclusion and diversity, both Moore-Wright and Ellen Fitzsimmons, Chief
Legal Officer and Head of Enterprise Diversity, will report directly to the
Chairman and CEO, Kelly King.
50 Truist Financial Corporation
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Financial Results
Net income available to common shareholders for the third quarter of 2020
totaled $1.1 billion, up 45.3%, compared with the third quarter last year. On a
diluted per common share basis, earnings for the third quarter of 2020 were
$0.79, a decrease of $0.16 compared to the third quarter of 2019. Truist's
results of operations for the third quarter of 2020 produced an annualized
return on average assets of 0.91% and an annualized return on average common
shareholders' equity of 6.87% compared to prior year returns of 1.41% and
10.04%, respectively. Results for the third quarter of 2020 included
merger-related and restructuring charges of $236 million ($181 million
after-tax), incremental operating expenses related to the Merger of $152 million
($115 million after-tax), securities gains of $104 million ($80 million
after-tax) and a charitable contribution of $50 million ($38 million after-tax).
Results for the third quarter of 2019 included $34 million ($26 million
after-tax) of merger-related and restructuring charges, and $52 million ($40
million after-tax) of incremental operating expenses related to the Merger and
an after-tax reduction in net income available to common shareholders of $46
million from the redemption of preferred stock.
Truist's revenue for the third quarter of 2020 was $5.6 billion. On a TE basis,
revenue was also $5.6 billion for the third quarter of 2020, an increase of $2.6
billion compared to the same period in 2019, reflecting an increase of $1.7
billion in TE net interest income and an increase of $907 million in noninterest
income. The increase in revenue was primarily due to the Merger.
NIM was 3.10% for the third quarter of 2020, down 27 basis points compared to
the prior year. Average earning assets increased $232.0 billion, as average
loans and leases increased $163.6 billion and average securities increased $30.9
billion. In addition, average other earning assets increased $34.0 billion
primarily due to higher interest bearing balances at the Federal Reserve.
Average interest-bearing liabilities increased $155.0 billion and
noninterest-bearing deposits increased $71.5 billion. The annualized TE yield on
the total loan portfolio for the third quarter of 2020 was 4.04%, down 94 basis
points compared to the prior year. The annualized TE yield on the average
securities portfolio was 1.97%, down 63 basis points compared to the prior year.
The average costs of interest-bearing liabilities was 0.35%, down 112 basis
points compared to the prior year.
The provision for credit losses was $421 million compared to $117 million for
the third quarter of 2019. The increase in the provision for credit losses
reflects a modest build to the allowance for credit losses primarily due to
monitoring of clients' financial position and associated re-grading actions, as
well as uncertainty related to performance after the expiration of relief
packages and COVID-19, the impact of the Merger, and the effect of applying the
CECL methodology in the current quarter compared to the incurred methodology in
the prior year. Net charge-offs for the third quarter of 2020 totaled $326
million compared to $153 million in the prior year. 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 0.42% of average loans and leases was up one basis point
compared to the third quarter of 2019.
Noninterest income for the third quarter of 2020 increased $907 million compared
to the earlier quarter. The current quarter includes $104 million of securities
gains. Excluding the securities gains, noninterest income increased $803
million, with nearly all categories of noninterest income being impacted by the
Merger. In addition to these impacts, insurance income increased $31 million due
to strong production and premium growth and residential mortgage banking income
was up due to strong production and refinance activity driven by the lower rate
environment, partially offset by lower valuations of mortgage servicing rights.
Service charges on deposits partially rebounded during the third quarter due to
increased overdraft incident rates and reduced refunds and waivers to
accommodate clients impacted by the COVID-19 pandemic.
Noninterest expense for the third quarter of 2020 was up $1.9 billion compared
to the earlier quarter. Merger-related and restructuring charges and other
incremental operating expenses related to the Merger increased $202 million and
$100 million, respectively. In addition, the current quarter was impacted by a
$50 million charitable contribution to the Truist Charitable Fund. Excluding the
items mentioned above and the impact of an increase of $141 million of
amortization expense for intangibles, adjusted noninterest expense was up $1.4
billion primarily reflecting the impact of the Merger. In addition to the
impacts of the Merger, operating costs were elevated due to COVID-19, which
resulted in an additional $26 million of expenses compared to the third quarter
of 2019. This was primarily related to net occupancy costs for enhanced
cleaning.
The provision for income taxes was $255 million for the third quarter of 2020,
compared to $218 million for the earlier quarter. This produced an effective tax
rate for the third quarter of 2020 of 18.3%, compared to 20.8% for the earlier
quarter. The lower effective tax rate is primarily due to higher favorable
permanent tax items and income tax credits earned in the current year.
Truist's total assets at September 30, 2020 were $499.2 billion, an increase of
$26.1 billion compared to December 31, 2019. The increase in total assets was
primarily driven by an increase of $17.9 billion in interest-bearing deposits
with banks reflecting higher balances held at the Federal Reserve, an increase
of $11.4 billion in AFS securities and a $3.9 billion increase in total loans
and leases. These increases were partially offset by a $4.3 billion increase in
the ALLL and a $1.1 billion decrease in trading assets.
Truist Financial Corporation 51
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Total deposits at September 30, 2020 were $370.7 billion, an increase of $36.0
billion compared to December 31, 2019. The growth in deposits reflects solid
growth in all non-time deposit products due to a flight to quality and the
government stimulus programs, partially offset by a decline in time deposits
primarily due to maturities of wholesale negotiable certificates of deposit and
higher-cost personal and business accounts.
Asset quality ratios were relatively stable at September 30, 2020. As of
September 30, 2020, nonperforming assets were 0.26% of total assets. The
allowance for loan and lease loss coverage ratio was 5.22x nonperforming loans
and leases held for investment, compared to 3.41x at December 31, 2019. The
higher coverage ratio reflects the CECL adoption build, as well as a reserve
build in 2020 in connection with COVID-19 and the economic downturn.
Truist maintained strong capital and liquidity. As of September 30, 2020, the
CET1 ratio was 10.0% and the average LCR was 117%. During the nine months ended
September 30, 2020, Truist issued $3.5 billion of preferred stock and redeemed
$500 million of Series K preferred stock. The Company also issued $6.5 billion
of senior and subordinated long-term debt. Truist declared common dividends of
$0.450 per share during the third quarter of 2020. The dividend and total payout
ratios for the third quarter of 2020 were 56.8%. In October 2020, Truist
declared common dividends of $0.450 per share for the fourth quarter of 2020.
52 Truist Financial Corporation
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Analysis of Results of Operations
Net Interest Income and NIM
Third Quarter 2020 compared to Third Quarter 2019
Net interest margin was 3.10%, down 27 basis points compared to the earlier
quarter. Average earning assets increased $232.0 billion. The increase in
average earning assets reflects a $163.6 billion increase in average total loans
and leases and a $30.9 billion increase in average securities. Average other
earning assets increased $34.0 billion primarily due to higher interest-earning
balances at the Federal Reserve. Average interest-bearing liabilities increased
$155.0 billion compared to the earlier quarter. Average interest-bearing
deposits increased $138.8 billion, average long-term debt increased $18.3
billion and average short-term borrowings decreased $2.1 billion. The
significant increases in earning assets and liabilities are primarily due to the
Merger, as well as impacts from the COVID-19 pandemic and the resulting
government stimulus programs.
The yield on the total loan portfolio for the third quarter of 2020 was 4.04%,
down 94 basis points compared to the earlier quarter, reflecting the impact of
rate decreases and deferred interest for loans granted an accommodation in
connection with COVID-19, partially offset by purchase accounting accretion from
merged loans. The yield on the average securities portfolio was 1.97%, down 63
basis points compared to the earlier quarter primarily due to lower yields on
new purchases and higher premium amortization.
The average cost of total deposits was 0.10%, down 57 basis points compared to
the earlier quarter, and the average cost of interest-bearing deposits was
0.15%, down 84 basis points compared to the earlier quarter. The average rate on
short-term borrowings was 0.85%, down 170 basis points compared to the earlier
quarter. The average rate on long-term debt was 1.48%, down 194 basis points
compared to the earlier quarter. The lower rates on interest-bearing liabilities
reflect the lower rate environment. The lower rates on long-term debt also
reflect the amortization of the fair value mark on the assumed debt and the
issuance of new long-term debt.
Nine Months of 2020 compared to Nine Months of 2019
The net interest margin was 3.26% for the nine months ended September 30, 2020,
down 17 basis points compared to the earlier period. Average earning assets
increased $231.3 billion, which primarily reflects a $165.8 billion increase in
average total loans and leases, a $32.0 billion increase in average other
earning assets, a $29.6 billion increase in average securities and a $3.8
billion increase in interest earning trading assets. The increase in average
other earning assets primarily reflects higher interest-bearing balances at the
Federal Reserve. Average interest-bearing liabilities increased $169.3 billion.
Average interest-bearing deposits increased $140.7 billion, average long-term
debt increased $24.6 billion and average short-term borrowings increased $3.9
billion. The significant increases in earnings assets and liabilities are
primarily due to the Merger, as well as impacts from the COVID-19 pandemic and
the resulting government stimulus programs.
The yield on the total loan portfolio for the nine months ended September 30,
2020 was 4.39%, down 64 basis points compared to the earlier period, reflecting
the impact of rate decreases and deferred interest for loans granted an
accommodation in connection with COVID-19, partially offset by purchase
accounting accretion from merged loans. The yield on the average securities
portfolio for the nine months ended September 30, 2020 was 2.31%, down 30 basis
points compared to the earlier period primarily due lower yields on new
purchases and higher premium amortization.
The average cost of total deposits was 0.27%, down 39 basis points compared to
the earlier period. The average cost of interest-bearing deposits was 0.39%,
down 60 basis points compared to the earlier period. The average rate on
short-term borrowings was 1.46%, down 98 basis points compared to the earlier
period. The average rate on long-term debt was 1.78%, down 157 basis points
compared to the earlier period. The lower rates on interest-bearing liabilities
reflect the lower rate environment. The lower rates on long-term debt also
reflect the amortization of the fair value mark on the assumed debt and the
issuance of new long-term debt.
As of September 30, 2020, the remaining unamortized fair value marks on the loan
and lease portfolio, deposits and long-term debt were $2.7 billion, $26 million
and $238 million, respectively. The remaining unamortized fair value mark on
loans and leases consists of $1.2 billion for commercial loans and leases and
$1.5 billion for consumer loans and leases. These amounts will be recognized
over the remaining contractual lives of the underlying instruments or as
prepayments occur.
The major components of net interest income and the related annualized yields as
well as the variances between the periods caused by changes in interest rates
versus changes in volumes are summarized below.
Truist Financial Corporation 53
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Table 1-1: Taxable-Equivalent Net Interest Income and Rate / Volume Analysis (1)
Three Months Ended September 30, Average Balances (5) Annualized Yield/Rate Income/Expense Incr. Change due to
(Dollars in millions) 2020 2019 2020 2019 2020 2019 (Decr.) Rate Volume
Assets
Total securities, at amortized cost: (2)
U.S.Treasury$ 2,218$ 2,240 1.78 % 2.04 % $ 10$ 11$ (1)$ (1) $ -
GSE 1,842 2,449 2.33 2.25 10 14 (4) - (4)
Agency MBS 75,232 43,415 1.95 2.57 366 279 87 (80) 167
States and political subdivisions 499 566 5.03 3.44 7 5 2 3 (1)
Non-agency MBS - 198 - 18.77 - 9 (9) (5) (4)
Other 37 32 1.99 3.67 1 - 1 1 -
Total securities 79,828 48,900 1.97 2.60 394 318 76 (82) 158
Interest earning trading assets 4,056 668 3.23 2.02 32 3 29 3 26
Other earning assets (3) 35,819 1,798 0.26 2.92 24 14 10 (22) 32
Loans and leases, net of unearned income: (4)
Commercial and industrial 143,452 63,768 3.02 4.18 1,087 671 416 (229) 645
CRE 27,761 17,042 2.88 4.83 203 209 (6) (104) 98
Commercial Construction 6,861 3,725 3.26 5.11 55 47 8 (22) 30
Lease financing 5,626 2,260 3.71 3.17 52 18 34 4 30
Residential mortgage 51,500 28,410 4.47 4.02 576 285 291 35 256
Residential home equity and direct 26,726 11,650 5.86 5.92 394 173 221 (2) 223
Indirect auto 24,732 11,810 6.51 8.84 405 262 143 (84) 227
Indirect other 11,530 6,552 7.05 6.61 204 110 94 8 86
Student 7,446 - 4.30 - 80 - 80 - 80
Credit card 4,810 3,036 9.03 9.18 109 71 38 (1) 39
PCI - 411 - 24.23 - 25 (25) - (25)
Total loans and leases HFI 310,444 148,664 4.06 5.00 3,165 1,871 1,294 (395) 1,689
LHFS 5,247 3,378 2.78 4.16 37 35 2 (14) 16
Total loans and leases 315,691 152,042 4.04 4.98 3,202 1,906 1,296 (409) 1,705
Total earning assets 435,394 203,408 3.34 4.38 3,652 2,241 1,411 (510) 1,921
Nonearning assets 65,432 29,012
Total assets $ 500,826$ 232,420
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-checking $ 96,707$ 27,664 0.06 0.67 15 47 (32) (71) 39
Money market and savings 123,598 64,920 0.06 0.95 19 156 (137) (213) 76
Time deposits 27,940 16,643 0.89 1.62 62 67 (5) (39) 34
Foreign office deposits - interest-bearing - 265 - 2.13 - 1 (1) - (1)
Total interest-bearing deposits (6) 248,245 109,492 0.15 0.99 96 271 (175) (323) 148
Short-term borrowings 6,209 8,307 0.85 2.55 13 54 (41) (30) (11)
Long-term debt 40,919 22,608 1.48 3.42 152 193 (41) (146) 105
Total interest-bearing liabilities 295,373 140,407 0.35 1.47 261 518 (257) (499) 242
Noninterest-bearing deposits (6) 123,966 52,500
Other liabilities 11,853 6,769
Shareholders' equity 69,634 32,744
Total liabilities and shareholders' equity $ 500,826$ 232,420
Average interest-rate spread
2.99 % 2.91 %
NIM/net interest income 3.10 % 3.37 % $ 3,391 $
1,723 $ 1,668$ (11)$ 1,679
Taxable-equivalent adjustment
$ 29 $
23
(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 based on
the pro-rata absolute dollar amount of each. Interest income includes certain
fees, deferred costs and dividends.
(2) Total securities include AFS and HTM securities.
(3) Includes cash equivalents, interest-bearing deposits with banks, FHLB stock
and other earning assets.
(4) 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 0.10% and 0.67% for the three months ended
September 30, 2020 and 2019, respectively.
54 Truist Financial Corporation
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Table 1-2: Taxable-Equivalent Net Interest Income and Rate / Volume Analysis (1)
Nine Months Ended September 30, Average Balances (5) Annualized Yield/Rate Income/Expense Incr. Change due to
(Dollars in millions) 2020 2019 2020 2019 (Decr.) 2020 2019 Rate Volume
Assets
Total securities, at amortized cost: (2)
U.S.Treasury$ 2,243$ 2,731 1.86 % 2.03 % $ 31$ 41$ (10)$ (3)$ (7)
GSE 1,847 2,436 2.33 2.25 32 41 (9) 1 (10)
Agency MBS 72,152 41,202 2.29 2.57 1,240 795 445 (95) 540
States and political subdivisions 512 583 4.04 3.85 16 17 (1) 1 (2)
Non-agency MBS 115 271 16.78 14.34 15 29 (14) 4 (18)
Other 37 34 2.44 3.83 1 1 - - -
Total securities 76,906 47,257 2.31 2.61 1,335 924 411 (92) 503
Interest earning trading assets 4,695 910 3.85 2.20 135 15 120 18 102
Other earning assets (3) 33,708 1,702 0.57 4.30 144 55 89 (87) 176
Loans and leases, net of unearned income: (4)
Commercial and industrial 142,731 62,576 3.47 4.28 3,710 2,006 1,704 (442) 2,146
CRE 27,538 16,894 3.46 4.93 717 626 91 (223) 314
Commercial Construction 6,673 3,912 3.92 5.26 192 151 41 (47) 88
Lease financing 5,872 2,135 4.24 3.26 187 52 135 20 115
Residential mortgage 52,288 30,604 4.53 4.05 1,778 930 848 121 727
Residential home equity and direct 27,161 11,673 6.08 5.94 1,237 517 720 13 707
Indirect auto 24,809 11,586 6.68 8.73 1,240 756 484 (212) 696
Indirect other 11,255 6,277 7.19 6.60 606 310 296 30 266
Student 7,622 - 4.75 - 271 - 271 - 271
Credit card 5,097 2,976 9.34 9.05 356 203 153 7 146
PCI - 433 - 21.20 - 69 (69) - (69)
Total loans and leases HFI 311,046 149,066 4.42 5.04 10,294 5,620 4,674 (733) 5,407
LHFS 5,575 1,742 3.00 4.17 126 54 72 (19) 91
Total loans and leases 316,621 150,808 4.39 5.03 10,420 5,674 4,746 (752) 5,498
Total earning assets 431,930 200,677 3.72 4.44 12,034 6,668 5,366 (913) 6,279
Nonearning assets 65,780 28,429
Total assets $ 497,710$ 229,106
Liabilities and Shareholders' Equity
Interest-bearing deposits:
Interest-checking $ 93,205$ 27,665 0.28 0.64 199 132 67 (106) 173
Money market and savings 123,536 63,885 0.27 0.98 254 469 (215) (475) 260
Time deposits 32,157 16,256 1.10 1.57 265 190 75 (70) 145
Foreign office deposits - interest-bearing - 355 - 2.36 - 6 (6) - (6)
Total interest-bearing deposits (6) 248,898 108,161 0.39 0.99 718 797 (79) (651) 572
Short-term borrowings 11,350 7,443 1.46 2.44 124 136 (12) (67) 55
Long-term debt 47,643 23,027 1.78 3.35 635 578 57 (359) 416
Total interest-bearing liabilities 307,891 138,631 0.64 1.46 1,477 1,511 (34) (1,077) 1,043
Noninterest-bearing deposits (6) 110,375 52,489
Other liabilities 12,133 6,449
Shareholders' equity 67,311 31,537
Total liabilities and shareholders' equity $ 497,710$ 229,106
Average interest-rate spread 3.08 % 2.98 %
NIM/net interest income 3.26 % 3.43 % $ 10,557$ 5,157$ 5,400$ 164$ 5,236
Taxable-equivalent adjustment $ 97$ 71
(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 based on
the pro-rata absolute dollar amount of each. Interest income includes certain
fees, deferred costs and dividends.
(2) Total securities include AFS and HTM securities.
(3) Includes cash equivalents, interest-bearing deposits with banks, FHLB stock
and other earning assets.
(4) 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 0.27% and 0.66% for the nine months ended September
30, 2020 and 2019, respectively.
Truist Financial Corporation 55
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Provision for Credit Losses
Third Quarter 2020 compared to Third Quarter 2019
The provision for credit losses was $421 million, compared to $117 million for
the earlier quarter. The increase in the provision for credit losses reflects a
modest build to the allowance for credit losses primarily due to monitoring of
clients' financial position and associated re-grading actions, as well as
uncertainty related to performance after the expiration of relief packages and
COVID-19, the impact of the Merger, and the effect of applying the CECL
methodology in the current quarter compared to the incurred loss methodology in
the earlier quarter. Net charge-offs for the third quarter of 2020 totaled $326
million compared to $153 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 0.42% was up one basis point compared to the third
quarter of 2019.
Nine Months of 2020 compared to Nine Months of 2019
The provision for credit losses was $2.2 billion, compared to $444 million for
the earlier period. The increase in the provision for credit losses
for the first nine months of 2020 reflects the significant builds to the
allowance for credit losses in the first and second quarters of the year due to
increased economic stress associated with the pandemic and specific
consideration of its impact on certain industries, as well as uncertainty
related to performance after the expiration of relief packages and COVID-19, the
impact of the Merger, and the effect of applying the CECL methodology in the
current period compared to the incurred loss methodology in the earlier period.
Net charge-offs for the nine months ended September 30, 2020 were $914 million,
compared to $442 million for the earlier period. 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 of 0.39%
for the nine months ended September 30, 2020 was down one basis point compared
to the earlier period.
Noninterest Income
Noninterest income is a significant contributor to Truist's financial results.
Management focuses on diversifying its sources of revenue to reduce Truist'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
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in millions) 2020 2019 % Change 2020 2019 % Change
Insurance income $ 518$ 487 6.4 % $ 1,648$ 1,563 5.4 %
Service charges on deposits 247 188 31.4 754 540 39.6
Wealth management income 324 175 85.1 945 509 85.7
Card and payment related fees 200 132 51.5 558 399 39.8
Residential mortgage income 221 80 176.3 807 220 NM
Investment banking and trading income 244 60 NM 636 135 NM
Operating lease income 72 36 100.0 232 106 118.9
Income from bank-owned life insurance 46 29 58.6 135 91 48.4
Lending related fees 77 24 NM 210 77 172.7
Commercial real estate related income 55 32 71.9 148 68 117.6
Securities gains (losses) 104 - NM 402 - NM
Other income (loss) 102 60 70.0 119 149 (20.1)
Total noninterest income $ 2,210$ 1,303 69.6 $ 6,594$ 3,857 71.0
Third Quarter 2020 compared to Third Quarter 2019
Noninterest income for the third quarter of 2020 increased $907 million compared
to the earlier quarter. The current quarter includes $104 million of securities
gains. Excluding the securities gains, noninterest income increased $803
million, with nearly all categories of noninterest income being impacted by the
Merger. In addition to the impacts from the Merger, insurance income increased
$31 million due to strong production and premium growth and residential mortgage
banking income was up due to strong production and refinance activity driven by
the lower rate environment, partially offset by lower valuations of the mortgage
servicing rights. Service charges on deposits partially rebounded during the
third quarter due to increased overdraft incident rates and reduced refunds and
waivers to accommodate clients impacted by the COVID-19 pandemic.
56 Truist Financial Corporation
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Nine Months of 2020 compared to Nine Months of 2019
Noninterest income for the nine months ended September 30, 2020 increased $2.7
billion compared to the earlier period. The current period includes $402 million
of net securities gains primarily from the sale of non-agency mortgage-backed
securities in the second quarter of 2020 and agency mortgage-backed securities
in the third quarter of 2020. Excluding the net securities gains, noninterest
income increased $2.3 billion, with nearly all categories of noninterest income
being impacted by the Merger. In addition to the impacts from the Merger,
insurance income increased $85 million due to strong production and premium
growth and residential mortgage banking income was up due to strong production
and refinance activity driven by the lower rate environment, partially offset by
lower valuations of the mortgage servicing rights. Service charges on deposits
were up despite reduced overdraft incident rates and refunds and waivers to
support clients impacted by the COVID-19 pandemic. Additionally, investment
banking and trading income was up, but was negatively impacted by credit
valuation adjustments on the derivatives portfolio primarily related to the
decline in interest rates and widening of credit spreads. Other income decreased
$30 million primarily due to less income from private equity investments.
Noninterest Expense
The following table provides a breakdown of Truist's noninterest expense:
Table 3: Noninterest Expense
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in millions) 2020 2019 % Change 2020 2019 % Change
Personnel expense $ 2,058$ 1,161 77.3 % $ 6,038$ 3,368 79.3 %
Net occupancy expense 233 122 91.0 697 360 93.6
Professional fees and outside processing 323 102 NM 859 272 NM
Software expense 221 77 187.0 647 220 194.1
Equipment expense 127 64 98.4 363 197 84.3
Marketing and customer development 75 36 108.3 215 92 133.7
Operating lease depreciation 56 35 60.0 204 93 119.4
Loan-related expense 59 26 126.9 177 81 118.5
Amortization of intangibles 170 29 NM 513 93 NM
Regulatory costs 34 20 70.0 93 57 63.2
Merger-related and restructuring charges 236 34 NM 552 137 NM
Loss (gain) on early extinguishment of
debt - - - 235 - NM
Other expense 163 134 21.6 471 389 21.1
Total noninterest expense $ 3,755$ 1,840 104.1 $ 11,064$ 5,359 106.5
Third Quarter 2020 compared to Third Quarter 2019
Noninterest expense for the third quarter of 2020 was up $1.9 billion compared
to the earlier quarter. Merger-related and restructuring charges and other
incremental operating expenses related to the Merger increased $202 million and
$100 million, respectively. In addition, the current quarter was impacted by a
$50 million charitable contribution to the Truist Charitable Fund. Excluding the
items mentioned above and the impact of an increase of $141 million of
amortization expense for intangibles, adjusted noninterest expense was up $1.4
billion primarily reflecting the impact of the Merger. In addition to the
impacts of the Merger, operating costs were elevated due to COVID-19, which
resulted in an additional $26 million of expenses compared to the third quarter
of 2019. This was primarily related to net occupancy costs for enhanced
cleaning.
Nine Months of 2020 compared to Nine Months of 2019
Noninterest expense for the nine months ended September 30, 2020 was up $5.7
billion compared to the earlier period. Merger-related and restructuring charges
and other incremental operating expenses related to the Merger increased $415
million and $292 million, respectively. In addition, the current period was
impacted by $235 million of losses on the early extinguishment of long-term debt
and a $50 million charitable contribution to the Truist Charitable Fund.
Excluding the items mentioned above and the impact of an increase of $420
million of amortization expense for intangibles, noninterest expense was up $4.3
billion, primarily reflecting the impact of the Merger. In addition to the
impacts of the Merger, operating costs were elevated due to COVID-19, which
resulted in an additional $206 million of expenses compared to the earlier
period. This was primarily related to additional on-site pay and bonuses for
certain teammates, net occupancy costs for enhanced cleaning and teammate
support expenses.
Truist Financial Corporation 57
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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
Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020
Accrual at Accrual at Sep Accrual at Accrual at Sep
(Dollars in millions) Jul 1, 2020 Expense Utilized 30, 2020 Jan 1, 2020 Expense Utilized 30, 2020
Severance and
personnel-related $ 84$ 37$ (84) $ 37 $ 46$ 172$ (181) $ 37
Occupancy and equipment - 78 (78) - - 126 (126) -
Professional services 3 96 (97) 2 42 191 (231) 2
Systems conversion and related
costs - 16 (16) - - 19 (19) -
Other adjustments 1 9 4 14 1 44 (31) 14
Total (1) $ 88$ 236$ (271) $ 53 $ 89$ 552$ (588) $ 53
(1) In connection with the Merger, the Company recognized $229 million of
expense for the third quarter of 2020 and $525 million for the nine months ended
September 30, 2020. At September 30, 2020, the Company had an accrual of $42
million related to the Merger. The remaining expense and accrual relate to
activities other than the Merger.
Segment Results
See "Note 18. 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
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in millions) 2020 2019 % Change 2020 2019 %
Change
Consumer Banking and Wealth $ 817$ 465 75.7 % $ 2,207$ 1,322 66.9 %
Corporate and Commercial Banking 583 441 32.2 1,400 1,274 9.9
Insurance Holdings 77 61 26.2 308 259 18.9
Other, Treasury & Corporate (336) (139) 141.7 (753) (344)
118.9
Truist Financial Corporation $ 1,141$ 828 37.8 $ 3,162$ 2,511 25.9
Third Quarter 2020 compared to Third 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 Retail Community Bank, which serves retail, premier and
small business clients, delivering on the banking needs of all clients through a
network of branches, ATMs and contact centers. 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.
58 Truist Financial Corporation
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CB&W net income was $817 million for the third quarter of 2020, an increase of
$352 million compared to the earlier quarter. Segment net interest income
increased $1.1 billion primarily due to the Merger. Noninterest income increased
$414 million due to the Merger and higher residential mortgage production income
as a result of the lower rate environment driving mortgage production through
refinance activity, partially offset by lower residential mortgage servicing
income driven by higher prepayment as a result of the lower rate environment and
an MSR fair value adjustment in the current quarter. The allocated provision for
credit losses increased $66 million primarily due to the Merger as well as
increased economic stress associated with the pandemic. Noninterest expense
increased $1.0 billion primarily due to operating expenses and amortization of
intangibles related to the Merger.
CB&W average loans held for investment were up $73.9 billion for the third
quarter of 2020 compared to the earlier quarter, primarily driven by the Merger.
Average total deposits were up $132.0 billion for the third quarter of 2020
compared to the earlier quarter, primarily due to the Merger, along with reduced
consumer spending and inflows from stimulus payments in the Retail Community
Bank 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 ("CIB"), 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 includes Commercial
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 includes Grandbridge
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 $583 million for the third quarter of 2020, an increase of
$142 million compared to the earlier quarter. Segment net interest income
increased $636 million primarily due to the Merger. Noninterest income increased
$338 million also primarily due to the Merger. The allocated provision for
credit losses increased $297 million primarily due to the Merger as well as
increased economic stress associated with the pandemic. Noninterest expense
increased $505 million primarily due to operating expenses and amortization of
intangibles related to the Merger in the current quarter.
C&CB average loans held for investment were up $87.7 billion for the third
quarter of 2020 compared to the earlier quarter, primarily driven by the Merger
coupled with PPP loan originations. Average total deposits were up $76.8 billion
for the third quarter of 2020 compared to the earlier quarter, primarily due to
the Merger, along with deposit inflows related to PPP loans, line draws and
reduced spending from commercial clients.
Insurance Holdings
Truist's IH segment is one of the largest insurance brokers 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 provides premium financing
for property and casualty insurance.
IH net income was $77 million for the third quarter of 2020, an increase of $16
million compared to the earlier quarter. Noninterest income increased $33
million primarily due to higher production. Noninterest expense increased $11
million primarily due to increased personnel expense, partially offset by lower
travel and marketing expenses.
Other, Treasury & Corporate
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 $336 million in the third quarter of 2020, compared
to a net loss of $139 million in the earlier quarter. Segment net interest
income decreased $80 million. Noninterest income increased $122 million
primarily due to the gain on sale of securities in the current quarter. The
allocated provision for credit losses decreased $57 million primarily due to a
reduction in the provision for unfunded commitments. Noninterest expense
increased $396 million primarily due to operating expenses related to the Merger
and higher Merger-related charges in the current quarter. The benefit for income
taxes increased $100 million primarily due to a higher pre-tax loss.
Truist Financial Corporation 59
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Nine Months of 2020 compared to Nine Months of 2019
Consumer Banking and Wealth
CB&W net income was $2.2 billion for the nine months ended September 30, 2020,
an increase of $885 million compared to the same period of the prior year.
Segment net interest income increased $3.4 billion primarily due to the Merger.
Noninterest income increased $1.4 billion due to the Merger and higher
residential mortgage income as a result of the lower rate environment driving
mortgage production through refinance activity, partially offset by lower
residential mortgage servicing income driven by higher prepayment as a result of
the lower rate environment and an MSR fair value adjustment in the current year.
The allocated provision for credit losses increased $520 million primarily due
to the Merger, as well as increased economic stress associated with the
pandemic. Noninterest expense increased $3.2 billion primarily due to operating
expenses and amortization of intangibles related to the Merger and impacts from
COVID-19 in the current year.
CB&W average loans held for investment were up $73.3 billion for the nine months
ended September 30, 2020, compared to the prior year primarily due to the merged
loans. Average total deposits were up $124.2 billion for the nine months ended
September 30, 2020, compared to the prior year, primarily due to the merged
deposits and reduced consumer spending in the current year related to COVID-19.
Corporate and Commercial Banking
C&CB net income was $1.4 billion for the nine months ended September 30, 2020,
an increase of $126 million compared to the same period of the prior year.
Segment net interest income increased $2.0 billion primarily due to the Merger.
Noninterest income increased $931 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
$1.2 billion primarily due to the Merger, as well as increased economic stress
associated with the pandemic and increased losses. Noninterest expense increased
$1.6 billion primarily due to operating expenses and amortization of intangibles
related to the Merger in the current year.
C&CB average loans held for investment were up $88.7 billion for the nine months
ended September 30, 2020, compared to the prior year primarily due to the merged
loans and growth in commercial and industrial loans in the current year related
to COVID-19. Average total deposits were up $70.7 billion for the nine months
ended September 30, 2020, compared to the prior year, primarily due to the
merged deposits, deposit inflows related to PPP loans, line draws and reduced
spending from commercial clients.
Insurance Holdings
IH net income was $308 million for the nine months ended September 30, 2020, an
increase of $49 million compared to the same period of the prior year.
Noninterest income increased $103 million primarily due to higher production.
Noninterest expense increased $38 million primarily due to commissions on higher
production in the current year.
Other, Treasury and Corporate
OT&C generated a net loss of $753 million in the nine months ended September 30,
2020, compared to a net loss of $344 million in the same period of the prior
year. Segment net interest income decreased $55 million. Noninterest income
increased $306 million primarily due to the gain on sale of securities in the
current year, partially offset by lower income related to certain
post-employment benefits. The allocated provision for credit losses increased
$35 million primarily due to the provision for unfunded commitments. Noninterest
expense increased $847 million primarily due to the loss on early extinguishment
of long-term debt, operating expenses related to the Merger, and higher
Merger-related charges in the current year. The benefit for income taxes
increased $222 million primarily due to a higher pre-tax loss.
60 Truist Financial Corporation
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Analysis of Financial Condition
Investment Activities
The securities portfolio totaled $86.1 billion at September 30, 2020, compared
to $74.7 billion at December 31, 2019. The increase was due primarily to an
$11.8 billion increase in Agency MBS, offset partially by a $368 million
decrease in Non-agency MBS. The increase in the Agency MBS portfolio includes
the redeployment of approximately $5 billion of excess reserves at the Federal
Reserve. During the second quarter of 2020, the Company sold Non-agency MBS and
during the third quarter of 2020, the Company sold and reinvested $3.2 billion
in residential Agency MBS. These sales were the primary drivers for the gains of
$402 million for the nine months ended September 30, 2020.
As of September 30, 2020, approximately 3.0% of the securities portfolio was
variable rate, compared to 3.6% as of December 31, 2019. The effective duration
of the securities portfolio was 3.2 years at September 30, 2020, compared to 4.7
years at December 31, 2019.
U.S.Treasury, GSE and Agency MBS represented 99.3% of the total securities
portfolio as of September 30, 2020, compared to 98.7% as of the prior year end.
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) Sep 30, 2020 Jun 30, 2020 Mar 31, 2020 Dec 31, 2019 Sep 30,
2019
Commercial:
Commercial and industrial $ 140,874 $
147,141 $ 149,161$ 130,180$ 64,324
CRE
27,474 27,963 27,532 26,832 17,080
Commercial construction 6,772 6,891 6,630 6,205 3,804
Lease financing 5,493 5,783 5,984 6,122 2,356
Consumer:
Residential mortgage 50,379 51,671 53,096 52,071 28,297
Residential home equity and direct 26,558 26,935 27,629 27,044 11,646
Indirect auto 25,269 24,509 25,146 24,442 11,871
Indirect other 11,527 11,592 10,980 11,100 6,590
Student 7,480 7,484 7,771 6,743 -
Credit card 4,801 4,856 5,300 5,619 3,058
PCI - - - 3,484 387
Total loans and leases HFI $ 306,627$ 314,825$ 319,229$ 299,842$ 149,413
Total loans and leases held for investment were $306.6 billion at September 30,
2020, compared to $299.8 billion at December 31, 2019. In connection with the
adoption of CECL, all loans previously in the PCI portfolio transitioned to PCD
loans and were transferred to their respective portfolios. The growth in the
commercial and industrial portfolio was primarily due to PPP loans. During the
first quarter of 2020 many commercial clients drew down lines of credit, but the
majority of those were repaid in the second and third quarter of 2020 as the
government programs were implemented in response to the pandemic and clients
better understood their liquidity needs.
Truist Financial Corporation 61
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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) Sep 30, 2020 Jun 30, 2020 Mar 31, 2020 Dec 31, 2019 Sep 30,
2019
Commercial:
Commercial and industrial $ 143,452 $
152,991 $ 131,743$ 81,853$ 63,768
CRE
27,761 27,804 27,046 19,896 17,042
Commercial construction 6,861 6,748 6,409 4,506 3,725
Lease financing 5,626 5,922 6,070 3,357 2,260
Consumer:
Residential mortgage 51,500 52,380 52,993 34,824 28,410
Residential home equity and direct 26,726 27,199 27,564 15,810 11,650
Indirect auto 24,732 24,721 24,975 15,390 11,810
Indirect other 11,530 11,282 10,950 7,772 6,552
Student 7,446 7,633 7,787 1,825 -
Credit card 4,810 4,949 5,534 3,788 3,036
PCI - - - 1,220 411
Total average loans and leases HFI $ 310,444$ 321,629$ 301,071$ 190,241$ 148,664
Average loans and leases held for investment for the third quarter of 2020 were
$310.4 billion, down $11.2 billion compared to the second quarter of 2020
primarily due to a decline in the commercial portfolio.
The decline in the commercial portfolio was primarily in commercial and
industrial loans and reflects the repayment of revolver usage. Within the
commercial and industrial portfolio, Truist experienced growth in loans from
mortgage warehouse lending due to the decline in rates and increased refinance
activity, as well as growth in premium finance lending and equipment finance
lending. Growth in these portfolios was partially offset by a decline in dealer
floor plan lending.
Average consumer loans decreased $1.3 billion primarily due to refinance
activity resulting in a decline in residential mortgages and residential home
equity and direct loans. This was partially offset by an increase in indirect
other loans due to demand for loans for recreational and power sports equipment.
COVID-19 Lending Activities
The CARES Act includes provisions that were designed to encourage financial
institutions to support borrowers impacted by COVID-19. These modifications are
generally not considered a TDR as disclosed in "Note 1. Basis of Presentation."
Truist payment relief assistance includes forbearance, deferrals, extension and
re-aging programs, along with certain other modification strategies. The
following table provides a summary of accommodations as of September 30, 2020:
Table 8: Client Accommodations (1)
Active Accommodations Exited Accommodations
September 30, 2020
(Dollars in Outstanding Outstanding % Paid-off or
millions) Total Count Balance Balance Current (2) Types of Accommodations
Clients may elect to defer loan or
lease payments for up to 90 days
Commercial 1,056 $ 692 $ 21,479 98.0 % without late fees being incurred but
with finance charges continuing to
accrue.
Clients may elect to defer loan
payments for time periods that range
Consumer 164,303 6,113 6,062 94.3 from 30 to 90 days without late fees
being incurred but with finance charges
generally continuing to accrue.
Clients may elect to defer payments for
up to 90 days without late fees being
incurred but with financing charges
Credit card 9,998 53 165 95.5 accruing. In addition, Truist provided
credit card clients with 5% cash back
on qualifying card purchases for
certain important basic needs.
Total 175,357 $ 6,858$ 27,706
(1) Excludes approximately 64,000 of active accommodations related to government
guaranteed loans totaling approximately $3 billion.
(2) Calculated based on accommodation count.
62 Truist Financial Corporation
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The CARES Act also created the PPP, which temporarily expands the Small Business
Administration's business loan guarantee program. Truist served as the fourth
largest PPP lender based on gross fundings and carrying value of PPP loans was
$12.2 billion as of September 30, 2020.
The following table provides a summary of the Company's exposure related to
loans that have exited accommodations:
Table 9: Accommodations Exposure
September 30, 2020
(Dollars in billions) Exposure
Current $ 27,273
Past due and still accruing 229
Nonperforming 204
Total $ 27,706
The following table provides a summary of exposure to industries that management
believes are most vulnerable in the current economic environment. These selected
industry exposures represent 9.1% of loans held for investment at September 30,
2020. Of the $27.9 billion in selected industry exposures, $1.5 billion are PPP
loans. Truist is actively managing these portfolios and will continue to make
underwriting or risk acceptance adjustments as appropriate. These exposures
decreased $2.2 billion, or 7.3% during the third quarter, primarily in Hotels,
Resorts and Cruise Lines, as well as the Oil and Gas Portfolio. In addition,
management is closely monitoring its leveraged lending and small secured real
estate portfolios which comprised 2.8% and 1.5% of loans held for investment at
September 30, 2020, respectfully. Leveraged loans and small secured real estate
loans, which totaled $1.5 billion and $0.2 billion, respectively, as of
September 30, 2020, are also included in the selected industry credit exposures.
Leveraged lending loans decreased 9.5% during the third quarter.
Table 10: Selected Credit Exposures
September 30, 2020 Outstanding Percentage of Loans
(Dollars in billions) Balance HFI
Hotels, Resorts & Cruise Lines $ 6.8 2.2 %
Senior Care 6.0 2.0
Oil & Gas Portfolio 5.2 1.7
Acute Care Facilities 4.7 1.5
Restaurants 2.9 1.0
Sensitive Retail 2.3 0.7
Total $ 27.9 9.1 %
Additional exposures (inclusive of above industries):
Leveraged lending $ 8.6 2.8 %
Small secured real estate 4.6 1.5
Truist Financial Corporation 63
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Asset Quality
The following tables summarize asset quality information for each of the last
five quarters:
Table 11: Asset Quality
(Dollars in millions) Sep 30, 2020 Jun 30, 2020 Mar 31, 2020 Dec 31, 2019 Sep 30, 2019
NPAs:
NPLs:
Commercial and industrial $ 507 $ 428 $ 443 $ 212 $ 172
CRE 52 42 18 10 27
Commercial construction 7 13 2 - 2
Lease financing 32 56 27 8 2
Residential mortgage 205 198 248 55 106
Residential home equity and direct 180 192 170 67 56
Indirect auto 137 155 125 100 81
Indirect other 4 3 1 2 1
Total NPLs HFI 1,124 1,087 1,034 454 447
Loans held for sale 130 102 41 107 -
Total nonaccrual loans and leases 1,254 1,189 1,075 561 447
Foreclosed real estate 30 43 63 82 33
Other foreclosed property 30 20 39 41 29
Total nonperforming assets $ 1,314$ 1,252$ 1,177 $ 684 $ 509
TDRs:
Performing TDRs:
Commercial and industrial $ 84 $ 57 $ 65 $ 47 $ 69
CRE 36 22 7 6 6
Commercial construction 1 36 36 37 1
Lease financing 1 1 1 - -
Residential mortgage 640 533 513 470 570
Residential home equity and direct 71 71 66 51 54
Indirect auto 336 342 350 333 324
Indirect other 5 4 5 5 4
Student 5 4 1 - -
Credit card 38 37 35 31 29
Total performing TDRs $ 1,217$ 1,107$ 1,079 $ 980 $ 1,057
Nonperforming TDRs 140 111 121 82 115
Total TDRs $ 1,357$ 1,218$ 1,200$ 1,062$ 1,172
Loans 90 days or more past due and still accruing:
(1)
Commercial and industrial $ 6 $ 9 $ 5 $ 1 $ -
CRE 8 3 1 - -
Lease financing - 1 - - -
Residential mortgage 573 521 610 543 347
Residential home equity and direct 5 9 10 9 8
Indirect auto 8 10 11 11 9
Indirect other 3 3 2 2 -
Student 570 478 1,068 188 -
Credit card 24 38 41 22 15
PCI - - - 1,218 24
Total loans 90 days or more past due and still
accruing $ 1,197
$ 1,072$ 1,748$ 1,994 $
403
Loans 30-89 days past due and still accruing: (1)
Commercial and industrial $ 155 $ 282 $ 262 $ 94 $ 34
CRE 7 6 8 5 1
Commercial construction - 1 16 1 -
Lease financing 9 10 8 2 1
Residential mortgage 796 703 679 498 432
Residential home equity and direct 103 108 156 122 56
Indirect auto 321 265 521 560 380
Indirect other 52 50 74 85 43
Student 666 442 593 650 -
Credit card 39 34 57 56 29
PCI - - - 140 16
Total loans 30-89 days past due and still accruing $ 2,148
$ 1,901$ 2,374$ 2,213 $
992
(1) The past due status of loans that received a deferral under the CARES Act
is generally frozen during the deferral period.
64 Truist Financial Corporation
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Overall asset quality ratios were relatively stable at September 30, 2020
compared to June 30, 2020.
Nonperforming assets totaled $1.3 billion at September 30, 2020, up $62 million
compared to June 30, 2020. Nonperforming loans and leases held for investment
represented 0.37% of loans and leases held for investment, up 2 basis points
compared to June 30, 2020. The increase in nonperforming loans held for
investment is primarily in commercial and industrial loans, which was partially
offset by a decline in commercial leases due to a charge-off on a PCD loan
related to the implementation of CECL. Within the consumer portfolio, indirect
automobile nonaccrual loans declined as some states lifted the moratorium on
repossessions. Performing TDRs were up $110 million during the third quarter
primarily in residential mortgage loans.
Loans 90 days or more past due and still accruing totaled $1.2 billion at
September 30, 2020, up $125 million compared to the prior quarter. The increase
was primarily in government guaranteed student loans as forbearance programs in
connection with the CARES Act have ended. In addition, residential mortgage
loans 90 days or more past due increased primarily due to the repurchase of
delinquent government guaranteed loans. The ratio of loans 90 days or more past
due and still accruing as a percentage of loans and leases was 0.39% at
September 30, 2020, up five basis points from the prior quarter. Excluding
government guaranteed loans, the ratio of loans 90 days or more past due and
still accruing as a percentage of loans and leases was 0.03% at September 30,
2020, down one basis point from June 30, 2020.
Loans 30-89 days past due and still accruing totaled $2.1 billion at
September 30, 2020, up $247 million compared to the prior quarter. Student loans
30-89 days past due increased $224 million, which almost entirely relates to
government guaranteed loans as forbearance programs in connection with the CARES
Act have ended. In addition, residential mortgage loans and indirect automobile
loans increased, while commercial and industrial loans declined. The ratio of
loans 30-89 days past due and still accruing as a percentage of loans and leases
was 0.70% at September 30, 2020, up 10 basis points 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 11. 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 12: Asset Quality Ratios
As of / For the Three Months Ended Sep 30, 2020 Jun
30, 2020 Mar 31, 2020Dec 31, 2019Sep 30, 2019
Loans 30-89 days past due and still accruing as a
percentage of loans and leases HFI
0.70 % 0.60 % 0.74 % 0.74 % 0.66 %
Loans 90 days or more past due and still accruing
as a percentage of loans and leases HFI 0.39 0.34 0.55 0.66 0.27
NPLs as a percentage of loans and leases HFI 0.37 0.35 0.32 0.15 0.30
Nonperforming loans and leases as a percentage of
loans and leases (1) 0.40 0.37 0.33 0.18 0.30
NPAs as a percentage of:
Total assets (1) 0.26 0.25 0.23 0.14 0.22
Loans and leases HFI plus foreclosed property 0.39 0.37 0.36 0.19 0.34
Net charge-offs as a percentage of average loans
and leases HFI 0.42 0.39 0.36 0.40 0.41
ALLL as a percentage of loans and leases HFI 1.91 1.81 1.63 0.52 1.05
Ratio of ALLL to:
Net charge-offs 4.52x 4.49x 4.76x 2.03x 2.59x
NPLs 5.22x 5.24x 5.04x 3.41x 3.52x
Loans 90 days or more past due and still accruing
as a percentage of loans and leases HFI excluding
PPP, other government guaranteed and PCI loans(2) 0.03 % 0.04 % 0.04 % 0.03 % 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 65
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The following table presents activity related to NPAs:
Table 13: Rollforward of NPAs
(Dollars in millions) 2020 2019
Balance, January 1 $ 684$ 585
New NPAs (1) 2,467 904
Advances and principal increases 255 127
Disposals of foreclosed assets (2) (333) (354)
Disposals of NPLs (3) (521) (120)
Charge-offs and losses (443) (215)
Payments (553) (312)
Transfers to performing status (258) (106)
Other, net 16 -
Ending balance, September 30 $ 1,314$ 509
(1) For 2020, includes approximately $500 million of loans previously
classified as PCI that would have otherwise been nonperforming as of December
31, 2019.
(2) Includes charge-offs and losses recorded upon sale of $99 million and $165
million for the nine months ended September 30, 2020 and 2019, respectively.
(3) Includes charge-offs and losses recorded upon sale of $126 million and $20
million for the nine months ended September 30, 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
generally not considered TDRs at the time of modification 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 14: Rollforward of Performing TDRs
(Dollars in millions) 2020 2019
Balance, January 1 $ 980$ 1,119
Inflows 646 404
Payments and payoffs (167) (144)
Charge-offs (34) (48)
Transfers to nonperforming TDRs (65) (57)
Removal due to the passage of time (6) (17)
Non-concessionary re-modifications (2) (8)
Transferred to LHFS and/or sold (135) (192)
Balance, September 30 $ 1,217$ 1,057
66 Truist Financial Corporation
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The following table provides further details regarding the payment status of
TDRs outstanding at September 30, 2020:
Table 15: Payment Status of TDRs (1)
September 30, 2020
(Dollars in millions) Current Past Due 30-89 Days Past Due 90 Days Or More Total
Performing TDRs:
Commercial:
Commercial and industrial $ 84 100.0 % $ - - % $ - - % $ 84
CRE 36 100.0 - - - - 36
Commercial construction 1 100.0 - - - - 1
Lease financing 1 100.0 - - - - 1
Consumer:
Residential mortgage 376 58.8 114 17.8 150 23.4 640
Residential home equity and direct 68 95.8 3 4.2 - - 71
Indirect auto 306 91.1 30 8.9 - - 336
Indirect other 5 100.0 - - - - 5
Student 5 100.0 - - - - 5
Credit card 34 89.5 3 7.9 1 2.6 38
Total performing TDRs 916 75.3 150 12.3 151 12.4 1,217
Nonperforming TDRs 72 51.5 23 16.4 45 32.1 140
Total TDRs $ 988 72.9 $ 173 12.7 $ 196 14.4 $ 1,357
(1)Past due performing TDRs are included in past due disclosures and
nonperforming TDRs are included in NPL disclosures.
Truist Financial Corporation 67
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ACL
Activity related to the ACL is presented in the following tables:
Table 16: Activity in ACL
For the Three Months Ended For the Nine Months Ended
Quarters ended
(Dollars in millions) Sep 30, 2020 Jun 30, 2020 Mar 31, 2020 Dec 31, 2019 Sep 30, 2019 2020 2019
Balance, beginning of period $ 6,133$ 5,611$ 1,889$ 1,653$ 1,689 $
1,889 $ 1,651
CECL adoption - impact to
retained earnings before tax - - 2,762 - - 2,762 -
CECL adoption - reserves on
PCD assets - - 378 - - 378 -
Provision for credit losses 421 844 893 171 117 2,158 444
Charge-offs:
Commercial and industrial (112) (123) (39) (23) (28) (274) (67)
CRE (44) (14) (1) (5) (2) (59) (28)
Commercial construction (19) - (3) - - (22) -
Lease financing (44) (4) (2) (9) (1) (50) (2)
Residential mortgage (4) (35) (11) (8) (3) (50) (13)
Residential home equity and
direct (52) (65) (68) (25) (24) (185) (68)
Indirect auto (72) (80) (142) (107) (92) (294) (263)
Indirect other (8) (20) (18) (19) (14) (46) (43)
Student (6) (6) (8) - - (20) -
Credit card (44) (50) (53) (37) (25) (147) (72)
Total charge-offs (405) (397) (345) (233) (189) (1,147) (556)
Recoveries:
Commercial and industrial 20 21 17 6 5 58 19
CRE - 4 - - 3 4 5
Commercial construction 2 7 1 1 - 10 2
Lease financing 4 - - - 1 4 1
Residential mortgage 3 2 2 1 - 7 1
Residential home equity and
direct 16 15 15 10 6 46 20
Indirect auto 22 18 23 13 12 63 39
Indirect other 4 7 7 5 3 18 12
Student - 1 - - - 1 -
Credit card 8 6 8 5 6 22 15
Total recoveries 79 81 73 41 36 233 114
Net charge-offs (326) (316) (272) (192) (153) (914) (442)
Other 1 (6) (39) 257 - (44) -
Balance, end of period $ 6,229$ 6,133$ 5,611$ 1,889$ 1,653$ 6,229$ 1,653
ALLL (excluding PCD / PCI
loans) $ 5,675$ 5,408$ 4,880$ 1,541$ 1,565
ALLL for PCD / PCI loans 188 294 331 8 8
RUFC 366 431 400 340 80
Total ACL $ 6,229$ 6,133$ 5,611$ 1,889$ 1,653
The ACL totaled $6.2 billion at September 30, 2020, compared to $1.9 billion at
December 31, 2019. The increase in the allowance for credit losses was primarily
due to 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 of September 30, 2020,
the allowance for loan and lease losses was 1.91% of loans and leases held for
investment. The allowance for credit losses includes $5.9 billion for loans and
leases and $366 million for the reserve for unfunded commitments.
At September 30, 2020, the allowance for loan and lease losses was 5.22 times
nonperforming loans and leases held for investment, compared to 5.24 times at
June 30, 2020. At September 30, 2020, the allowance for loan and lease losses
was 4.52 times annualized net charge-offs, compared to 4.49 times at June 30,
2020.
68 Truist Financial Corporation
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Net charge-offs during the third quarter totaled $326 million, up $10 million
compared to the prior quarter. As a percentage of average loans and leases,
annualized net charge-offs were 0.42%, up three basis points compared to the
prior quarter. Current quarter net charge-offs includes $97 million of
charge-offs related to the implementation of CECL, which required a gross-up of
loan carrying values in connection with the establishment of an allowance on PCD
loans. Management performed a comprehensive review of PCD assets during the
third quarter and concluded in certain situations that a charge-off was
required. Excluding these additional charge-offs, net charge-offs would have
been an annualized 0.29% of average loans and leases for the third quarter of
2020, down 10 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 17: Allocation of ALLL by Category
September 30, 2020 December 31, 2019
% ALLL in Each % Loans in % ALLL in Each % Loans in
(Dollars in millions) Amount Category Each Category Amount Category Each Category
Commercial and industrial $ 2,185 37.2 % 45.9 % $ 560 36.1 % 43.4 %
CRE 502 8.6 9.0 150 9.7 8.9
Commercial construction 134 2.3 2.2 52 3.4 2.1
Lease financing 53 0.9 1.8 10 0.6 2.0
Residential mortgage 424 7.2 16.4 176 11.4 17.4
Residential home equity and direct 704 12.0 8.7 107 6.9 9.0
Indirect auto 1,189 20.3 8.2 304 19.6 8.2
Indirect other 222 3.8 3.8 60 3.9 3.7
Student 130 2.2 2.4 - - 2.2
Credit card 320 5.5 1.6 122 7.9 1.9
PCI - - - 8 0.5 1.2
Total ALLL 5,863 100.0 % 100.0 % 1,549 100.0 % 100.0 %
RUFC 366 340
Total ACL $ 6,229$ 1,889Truist 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, whether Truist 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 by Truist. 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 of September 30, 2020, Truist held or serviced
the first lien on 30.8% of its second lien positions.
Truist Financial Corporation 69
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Other Assets
The components of other assets are presented in the following table:
Table 18: Other Assets as of Period End
September 30, December 31,
(Dollars in millions) 2020 2019
Bank-owned life insurance $ 6,461$ 6,383
Tax credit and other private equity investments 5,615 5,448
Prepaid pension assets 3,996 3,579
Accounts receivable 1,832 2,418
Derivative assets 4,049 2,053
Leased assets and related assets 1,808 1,897
ROU assets 1,547 1,823
Accrued income 1,938 1,807
Prepaid expenses 1,194 1,254
Structured real estate 836 987
Equity securities at fair value 865 817
FHLB stock 165 764
Other 713 2,602
Total other assets $ 31,019$ 31,832
Funding Activities
Deposits
The following table presents deposits for each of the last five quarters:
Table 19: Deposits as of Period End
(Dollars in millions)
Sep 30, 2020 Jun 30, 2020 Mar 31, 2020 Dec 31, 2019 Sep 30, 2019
Noninterest-bearing deposits $ 124,297$ 122,694$ 97,618$ 92,405$ 52,667
Interest checking 98,694 99,005 92,950 85,492 27,723
Money market and savings 121,856 123,974 124,072 120,934 64,454
Time deposits 25,900 30,562 35,539 35,896 16,526
Foreign office deposits - interest-bearing - - - - 910
Total deposits $ 370,747$ 376,235$ 350,179$ 334,727$ 162,280
Deposits totaled $370.7 billion at September 30, 2020, an increase of $36.0
billion from December 31, 2019. The growth in deposits reflects solid growth in
all non-time deposit products due to a flight to quality and the government
stimulus programs. Time deposits decreased primarily due to maturities of
wholesale negotiable certificates of deposit and higher-cost personal and
business accounts.
The following table presents average deposits for each of the last five
quarters:
Table 20: Average Deposits
Three Months Ended
(Dollars in millions) Sep 30, 2020 Jun 30, 2020 Mar 31, 2020 Dec 31, 2019 Sep 30, 2019
Noninterest-bearing deposits $ 123,966$ 113,875$ 93,135$ 64,485$ 52,500
Interest checking 96,707 97,863 85,008 43,246 27,664
Money market and savings 123,598 126,071 120,936 79,903 64,920
Time deposits 27,940 33,009 35,570 23,058 16,643
Foreign office deposits - interest-bearing - - - 24
265
Total average deposits $ 372,211$ 370,818$ 334,649$ 210,716$ 161,992
Average deposits for the third quarter of 2020 were $372.2 billion, an increase
of $1.4 billion compared to the prior quarter. Average noninterest-bearing
deposit growth was strong for the third quarter of 2020 due to a continuation of
the flight to quality and the government stimulus programs. Average time
deposits decreased primarily due to maturities of wholesale negotiable
certificates of deposit and higher-cost personal and business accounts.
70 Truist Financial Corporation
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Average noninterest-bearing deposits represented 33.3% of total deposits for the
third quarter of 2020, compared to 30.7% for the prior quarter. The cost of
average total deposits was 0.10% for the third quarter, down 12 basis points
compared to the prior quarter. The cost of average interest-bearing deposits was
0.15% for the third quarter, down 17 basis points compared to the prior quarter.
In September 2020, the FDIC published data from the Annual Summary of Deposits
as of June 30, 2020. Truist is the 6th largest commercial bank in the United
States based on deposits and maintained a first or second market position in
thirteen of the company's Top 20 MSAs.
Borrowings
At September 30, 2020, short-term borrowings totaled $6.2 billion, a decrease of
$12.0 billion compared to December 31, 2019, due primarily to a decrease of
$10.8 billion in short-term FHLB advances. These borrowing sources were replaced
with strong deposit growth.
Average short-term borrowings were $6.2 billion, or 1.5% of total funding for
the third quarter 2020, as compared to $8.3 billion, or 4.3% for the prior year
quarter as these funding sources were largely replaced by the strong deposit
growth.
Long-term debt provides funding and, to a lesser extent, regulatory capital, and
primarily consists of senior and subordinated notes issued by Truist and Truist
Bank. Long-term debt totaled $41.0 billion at September 30, 2020, a decrease of
$331 million compared to December 31, 2019. During 2020, the Company issued $4.8
billion of senior notes with interest rates from 1.125% to 1.95% maturing in
2023 to 2030, $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 issuances were partially offset by the redemption of $3.7 billion of
senior notes during 2020 and a decrease of $3.3 billion in long-term FHLB
advances. The average cost of long-term debt was 1.78% for the nine months ended
September 30, 2020, down 157 basis points compared to the same period in 2019.
FHLB advances represented 2.1% of total outstanding long-term debt at
September 30, 2020, compared to 10.0% at December 31, 2019. Truist entered into
$20 billion of FHLB advances during the first quarter of 2020 to build liquidity
and ensure the Company was able to meet the funding needs of its clients. As
market conditions stabilized and deposits increased, these advances were
redeemed during the second quarter of 2020 and the Company recognized a loss of
$235 million on the early extinguishment of debt. The redemption of these
advances will improve net interest income, the net interest margin and the
leverage ratios.
In October 2020, Truist redeemed $300 million of floating rate senior bank notes
due October 2021 and $600 million fixed-to-floating rate senior bank notes due
October 2021.
Shareholders' Equity
Total shareholders' equity was $70.0 billion at September 30, 2020, an increase
of $3.4 billion from December 31, 2019. This increase includes the issuance of
$3.5 billion of preferred stock during the year, $3.2 billion in net income
available to common shareholders and an increase of $1.3 billion in AOCI, which
was partially offset by $2.1 billion related to the adoption of CECL and $2.0
billion for common and preferred dividends. In addition, Truist redeemed $500
million of its Series K preferred stock during 2020. Truist's book value per
common share at September 30, 2020 was $45.86, compared to $45.66 at
December 31, 2019.
Refer to "Note 10. Shareholders' Equity" for additional disclosures related to
preferred stock issuances.
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.
Truist is committed to fostering a culture that supports transparency and
escalation of risks across the organization. All teammates are responsible for
upholding the Company's purpose, mission, and values, and are encouraged to
speak up if there is any activity or behavior that is inconsistent with the
Company's culture. The Truist code of ethics guides the Company's decision
making and informs teammates on how to act in the absence of specific guidance.
Truist seeks an appropriate return for the risk taken in its business
operations. Risk-taking activities are evaluated and prioritized to identify
those that present attractive risk-adjusted returns, while preserving asset
value and capital.
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.
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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 Truist's Annual Report on Form 10-K for the year ended December 31,
2019 for additional disclosures under the section titled "Risk Management."
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.
Effective management of market risk is essential to achieving Truist'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 in Truist'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. At Truist, 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 to Truist's assets and liabilities. The model
also considers Truist'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 50% 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 these variables 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.
72 Truist Financial Corporation
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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 21: Interest Sensitivity Simulation Analysis
Interest Rate Scenario Annualized Hypothetical Percentage Change in Net
Linear Change in Prime Rate Interest Income
Prime Rate (bps) Sep 30, 2020 Sep 30, 2019 Sep 30, 2020 Sep 30, 2019
Up 100 4.25 % 6.00 % 3.43 % (0.56) %
Up 50 3.75 5.50 2.68 (0.14)
No Change 3.25 5.00 - -
Down 25 (1) 3.00 4.75 (1.62) (0.22)
Down 50 (1) 2.75 4.50 (1.94) (0.55)
(1) The Down 25 and 50 rates are floored at one basis point and may not reflect
Down 25 and 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.
Management considers how the interest rate risk position could be impacted by
changes in balance sheet mix. Liquidity in the banking industry has been very
strong during the current economic cycle. Much of this liquidity increase has
resulted in growth in noninterest-bearing demand deposits. Consistent with the
industry, Truist has seen a significant increase in this funding source. The
behavior of these deposits is one of the most important assumptions used in
determining the interest rate risk position of Truist. A loss of these deposits
in the future would reduce the asset sensitivity of Truist's balance sheet as
the Company would increase interest-bearing funds to offset the loss of this
advantageous funding source.
The following table shows the results of Truist's interest-rate sensitivity
position assuming the loss of demand deposits and an associated increase in
managed rate deposits under various scenarios. For purposes of this analysis,
Truist modeled the incremental beta of managed rate deposits for the replacement
of the demand deposits at 100%.
Table 22: Deposit Mix Sensitivity Analysis
Linear Change in Rates Base Scenario at Results Assuming a $10 Billion Decrease in
(bps) September,30,2020 (1) Noninterest-Bearing Demand Deposits
Up 100 3.43 % 3.02 %
Up 50 2.68 2.38
(1) The base scenario is equal to the annualized hypothetical percentage change
in net interest income at September 30, 2020 as presented in the preceding
table.
If rates increased 100 basis points, Truist could absorb the loss of $82.8
billion, or 66.6%, of noninterest-bearing deposit balances and replace them with
managed rate deposits with a beta of 100% before becoming neutral to interest
rate changes.
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 allows Truist 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 23: EVE Simulation Analysis
Hypothetical Percentage Change
Change in Interest Rates in EVE
(bps) Sep 30, 2020 Sep 30, 2019
Up 100 7.4 % 3.2 %
No Change - -
Down 100 (6.8) (13.2)
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. During October 2020,
Truist initiated a new investment securities fair value hedging program, whereby
pay fixed interest rate swaps are utilized. Truist also uses derivatives to
facilitate transactions on behalf of its clients and as part of associated
hedging activities. As of September 30, 2020, Truist had derivative financial
instruments outstanding with notional amounts totaling $303.6 billion, with an
associated net fair value of $3.6 billion. See "Note 16. Derivative Financial
Instruments" for additional disclosures.
Truist Financial Corporation 73
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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 team provides updates to
management and 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 ended December 31, 2019. In October 2020, Truist
began offering SOFR-based lending solutions to wholesale and retail clients.
Truist expects SOFR to become a more commonly-used pricing benchmark across the
industry. Truist continues to evaluate SOFR for additional product offerings and
other alternative reference rates as replacements for LIBOR.
Market risk from trading activities
As a financial intermediary, Truist provides its clients access to derivatives,
foreign exchange and securities markets, which generate market risks. 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 the
trading desk level and at the aggregate portfolio level to ensure exposures are
in line with Truist's risk appetite.
Truist is subject to risk-based capital guidelines for market risk under the
Market Risk Rule.
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 16. Derivative Financial Instruments," "Note 15. Fair
Value Disclosures," and "Critical Accounting Policies" herein for discussion of
valuation policies, procedures and methodologies.
Securitizations
As of September 30, 2020, the aggregate market value of on-balance sheet
securitization positions subject to the Market Risk Rule was $5 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 to Truist'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 September 30, 2020.
74 Truist Financial Corporation
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VaR-based measures
VaR measures the potential loss of a given position or portfolio of positions at
a specified confidence level and time horizon. Truist utilizes a historical VaR
methodology to measure and aggregate risks across its covered trading positions.
Prior to the integration of the two institutional broker dealer businesses to
form Truist Securities in the third quarter of 2020, Truist operated two
historical VaR models and the aggregate company-wide VaR across the systems was
determined additively with no benefit of diversification. The heritage BB&T VaR
model was retired following the formation of Truist Securities. Following the
formation of Truist Securities, VaR is calculated on a consolidated basis using
the Truist VaR engine. 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 a portfolio diversification
benefit. The following table summarizes certain VaR-based measures for both the
three and nine months ended September 30, 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 the COVID-19 pandemic. As illustrated
in the table below, the inclusion of volatility levels observed in March and
April in the 12 month VaR historic look back window led to a convergence between
VaR and Stressed VaR measures.
Table 24: VaR-based Measures
Three Months Ended September 30,
Nine Months Ended September 30,
2020 2019 2020 2019
10-Day 10-Day
Holding 1-Day Holding 10-Day Holding 1-Day Holding Holding 1-Day
Holding 10-Day Holding 1-Day Holding
(Dollars in millions)
Period Period Period Period Period Period Period Period
VaR-based Measures:
Maximum $ 65$ 11 $ 1 $ 1 $ 65$ 11 $ 2 $ 1
Average 31 6 1 - 23 5 1 -
Minimum 13 3 - - 3 1 - -
Period-end 46 8 1 - 46 8 1 -
VaR by Risk Class:
Interest Rate Risk 1 - 1 -
Credit Spread Risk 10 - 10 -
Equity Price Risk 2 - 2 -
Foreign Exchange Risk - - - -
Portfolio Diversification (6) - (6) -
Period-end 8 - 8 -
Stressed VaR-based measures
Stressed VaR, another component of market risk capital, is calculated using the
same internal models as used for the VaR-based measure. Stressed VaR is
calculated over a ten-day holding period at a one-tail, 99% confidence level and
employs a historical simulation approach based on a continuous twelve-month
historical window selected to reflect a period of significant financial stress
for our trading portfolio. The following table summarizes Stressed VaR-based
measures:
Table 25: Stressed VaR-based Measures - 10 Day Holding Period
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in millions) 2020 2019 2020 2019
Maximum $ 65 $ 4 $ 65 $ 6
Average 31 3 31 4
Minimum 14 2 13 2
Period-end 46 2 46 2
The increase from the prior year in stressed VaR-based measures was due to the
integration of heritage SunTrust trading business after the Merger and the
market volatility due to the COVID-19 pandemic.
Truist Financial Corporation 75
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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 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 eight company-wide VaR backtesting exceptions during the twelve
months ended September 30, 2020, primarily driven by the COVID-19 pandemic which
led to a sudden and significant repricing of financial markets during the first
and second quarter of 2020, 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-20200930_g1.jpg]]
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, which incorporates 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
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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 evaluates Truist'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 for Truist and Truist 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 of
September 30, 2020 and December 31, 2019, Truist's liquid asset buffer, as a
percent of total assets, was 18.6% and 16.5%, respectively.
The LCR rule directs large U.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 of January 1, 2020, Truist
is subject to the Category III reduced LCR requirements. Truist's average LCR
was 117% for the three months ended September 30, 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 and Truist Bank's credit quality,
liquidity, capital and earnings. Management meets with the rating agencies on a
regular basis to discuss current outlooks. In April 2020, DBRS revised its
outlook for Truist and Truist Bank from "positive" to "stable," citing economic
deterioration related to COVID-19. DBRS affirmed all other ratings for Truist
and Truist Bank. Additionally, Fitch revised its outlook for Truist and Truist
Bank from "stable" to "negative," also citing pandemic-related economic
deterioration. Fitch downgraded Truist's subordinated debt to A-, and upgraded
Truist's preferred stock to BBB, in order to align these ratings to its recently
revised bank rating methodology.
In July 2020, Fitch completed the implementation of its revised bank rating
methodology. As a result, Fitch downgraded Truist's senior unsecured debt to A
and affirmed Truist Bank's senior unsecured and subordinated debt ratings. This
rating action taken by Fitch was solely a function of implementing its revised
bank rating methodology and did not reflect a change in Fitch's current or
expected view of Truist's or Truist Bank's credit fundamentals.
See "Liquidity" section of the MD&A of the Annual Report on Form 10-K for the
year ended December 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
with Truist 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 ended December 31, 2019 for additional information regarding
dividends from subsidiaries and debt transactions.
Truist Financial Corporation 77
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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
to Truist Bank, and being able to withstand sustained market disruptions that
could limit access to the capital markets. At September 30, 2020 and
December 31, 2019, the Parent Company had 46 months and 29 months, respectively,
of cash on hand to satisfy projected cash outflows, and 22 months and 20 months,
respectively, when including the payment of common stock dividends.
Truist Bank
Truist carefully manages liquidity risk at Truist 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 of Truist 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. At September 30, 2020,
Truist Bank had approximately $169.5 billion of available secured borrowing
capacity, which represents approximately 8.3 times the amount of one-year
wholesale funding maturities. In addition to secured borrowing sources, Truist
had excess eligible cash at the Federal Reserve Bank of $32.6 billion at
September 30, 2020.
Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance
Sheet Arrangements
Refer to Truist's Annual Report on Form 10-K for the year ended December 31,
2019 for discussion with respect to Truist'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 14. Commitments and Contingencies," "Note 15. Fair Value Disclosures"
and "Note 16. 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 support Truist'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 for
Truist 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 of
Truist 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 in Truist's capital plan.
Table 26: Capital Requirements and Targets
Well Capitalized Minimum Capital Plus Truist Targets (1)
Capital Conservation Interim Operating
Minimum Capital Truist Truist Bank Buffer (3) (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 NA 7.5 7.0
Supplementary leverage ratio 3.0 NA NA NA 6.5 6.0
(1)The Truist 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.
(3)The current capital conservation buffer of 250 basis points was replaced by
the SCB of 270 basis points effective October 1, 2020.
78 Truist Financial Corporation
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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 of Truist's overall capital policy, provided a return above the
minimums is forecasted to occur within a reasonable time period.
In August 2020, the Federal Reserve informed Truist of its final SCB of 270
basis points for risk-based capital ratios. This buffer, which was determined
based on stress testing results developed by the Federal Reserve, is 20 basis
points above the Capital Conservation Buffer. The SCB will be effective from
October 1, 2020 through September 30, 2021, at which point a revised SCB will be
calculated and provided to Truist. Consistent with the Federal Reserve's mandate
across the industry, Truist will update and resubmit its capital plan in early
November 2020 to reflect changes in financial markets and the macroeconomic
outlook. Truist's review of the results of the 2020 CCAR supervisory stress test
notes that the modeled outcomes shown by the FRB differ from those calculated by
the Company. Truist believes those differences are attributable to the
application of purchase accounting associated with the Merger. Purchase
accounting adjustments could result in a reduction in provision expense and an
increase in pre-provision net revenue. These differences could result in higher
capital ratios than were reflected in the CCAR results.
Truist's capital ratios are presented in the following table:
Table 27: Capital Ratios - Truist Financial Corporation
(Dollars in millions, except per share data, shares in thousands)
Sep 30, 2020Dec 31, 2019
Risk-based:
(preliminary)
CET1 capital to risk-weighted assets 10.0 % 9.5 %
Tier 1 capital to risk-weighted assets 12.2 10.8
Total capital to risk-weighted assets 14.6 12.6
Leverage ratio 9.6 14.7
Supplementary leverage ratio 8.9 NA
Non-GAAP capital measure (1):
Tangible common equity per common share $ 26.63$ 25.93
Calculation of tangible common equity (1):
Total shareholders' equity $ 69,973$ 66,558
Less:
Preferred stock 8,048 5,102
Noncontrolling interests 106 174
Goodwill and intangible assets, net of deferred taxes 25,923 26,482
Tangible common equity $ 35,896$ 34,800
Risk-weighted assets $ 377,045$ 376,056
Common shares outstanding at end of period 1,348,118 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. These capital measures are not necessarily
comparable to similar capital measures that may be presented by other companies.
Capital ratios improved compared to year-end 2019, due to growth in CET1
capital, partially offset by higher risk-weighted assets. Truist's capital
levels remain strong compared to the regulatory levels for well capitalized
banks at September 30, 2020. Truist's other capital measures also improved as
Truist issued various capital instruments to strengthen its capital position.
Truist issued $3.5 billion of preferred stock and redeemed $500 million of
Series K preferred stock during the first nine months of 2020. In addition,
Truist issued $1.3 billion of subordinated debt. Truist declared common
dividends of $0.450 per share during the third quarter of 2020. The dividend and
total payout ratios for the third quarter of 2020 were 56.8%.
Truist Financial Corporation 79
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Share Repurchase Activity
Table 28: Share Repurchase Activity
Maximum Remaining
Dollar Value of
Shares Available for
Average
Price Total Shares Repurchased Repurchase Pursuant
(Dollars in millions, except per share Total Shares
Paid Per Share Pursuant to to Publicly-Announced
data, shares in thousands) Repurchased (1) (2) Publicly-Announced Plan Plan
July 2020 1 $ 36.42 - $ -
August 2020 - - - -
September 2020 - - - -
Total 1 36.42 -
(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 of Truist 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. Understanding Truist'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 in Truist's Annual Report on Form 10-K for the year ended
December 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 ended December 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 impacted Truist'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 has resulted
in continuing volatility to the global and U.S. financial markets, although
intensive relief actions by the U.S. Congress and regulatory agencies intended
to mitigate the extent of adverse economic effects have stabilized financial
markets and liquidity, including with respect to equity prices and corporate
credit spreads for Truist and the banking sector, in comparison to earlier in
the year.
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 third quarter of 2020 to determine whether it was more-likely-than-not
that the fair value of one or more of its reporting units was below its
respective carrying amount as of period-end. In performing this assessment,
Truist considered macroeconomic and market factors, industry and banking sector
events, a sensitivity analysis on management's forecast and assumptions, and
Truist specific performance indicators, including any changes from when the
Merger closed in December 2019. Despite the adverse economic and still uncertain
environment caused by the pandemic, Truist's third 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; and Truist'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 of September 30, 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 of
Truist's reporting units falls below its respective carrying amount, which would
require a quantitative goodwill impairment test.
80 Truist Financial Corporation
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ACL
Truist's policy is to maintain an ACL, 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 long-term historical
loss conditions over a one year period. Expected losses are 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, including
qualitative adjustments in circumstances where the model output is inconsistent
with management's expectations with respect to expected credit losses. This
allowance is used to adjust for limitations in modeled results related to the
current economic conditions and 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 Truist conducts business.
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 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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