TRUIST FINANCIAL CORPORATION Introduction
This MD&A is intended to assist readers in their analysis of the accompanying Consolidated Financial Statements and supplemental financial information. It should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements in this Form 10-Q, other information contained in this document, as well as information contained in theDecember 31, 2019 Form 10-K.
Government Response to COVID-19
Congress , the FRB and the otherU.S. state and federal financial regulatory agencies, 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 onMarch 27, 2020 and subsequently has been amended several times. Among other provisions the CARES Act includes funding for theSmall Business Administration to expand lending, relief from certainU.S. GAAP requirements to allow COVID-19-related loan modifications to not be categorized as troubled debt restructurings and a range of incentives to encourage deferment, forbearance or modification of loans. One of the key CARES Act programs is the PPP, which temporarily expands theSmall Business Administration's business loan guarantee program throughAugust 8, 2020 . PPP loans are available to a broader range of entities than ordinarySmall 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 onMarch 18, 2020 and a 120-day moratorium on initiating eviction proceedings effectiveMarch 27, 2020 . Borrowers of federally backed mortgages have the right under the CARES Act to request up to 360 days of forbearance on their mortgage payments if they experience financial hardship directly or indirectly due to the coronavirus-related public health emergency.FNMA , FHLMC, FHA andVA have extended their moratorium on foreclosures and evictions for single-family federally backed mortgages until at leastAugust 31, 2020 . Also pursuant to the CARES Act, theU.S. Treasury has the authority to provide loans, guarantees and other investments in support of eligible businesses, states and municipalities affected by the economic effects of COVID-19. Some of these funds have been used to support the several FRB programs and facilities described below or additional programs or facilities that are established by the FRB under its Section 13(3) authority and meeting certain criteria.
FRB Actions
The FRB has taken a range of actions to support the flow of credit to households and businesses. For example, onMarch 15, 2020 , the FRB reduced the target range for the federal funds rate to 0 to 0.25% and announced that it would increase its holdings ofU.S. Treasury securities and agency mortgage-backed securities and begin purchasing agency commercial mortgage-backed securities. The FRB has also encouraged depository institutions to borrow from the discount window and has lowered the primary credit rate for such borrowing by 150 basis points while extending the term of such loans up to 90 days. Reserve requirements have been reduced to zero as ofMarch 26, 2020 . In addition, the FRB has established, or has taken steps to establish, a range of facilities and programs to support theU.S. economy andU.S. marketplace participants in response to economic disruptions associated with COVID-19. Through these facilities and programs, the FRB, relying on its authority under Section 13(3) of the Federal Reserve Act, has taken steps to directly or indirectly purchase assets from, or make loans to,U.S. companies, financial institutions, municipalities and other market participants.
FRB facilities and programs established, or in the process of being established, include:
•a 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 sizedU.S. businesses; •a Primary Dealer Credit Facility to provide liquidity to primary dealers through a secured lending facility; •a Commercial Paper Funding Facility to purchase the commercial paper of certainU.S. issuers; 46Truist Financial Corporation -------------------------------------------------------------------------------- •a Primary Market Corporate Credit Facility to purchase corporate bonds directly from, or make loans directly to, eligible participants; •a Secondary Market Corporate Credit Facility to purchase corporate bonds trading in secondary markets, including from exchange-traded funds, that were issued by eligible participants; •a Term Asset-Backed Securities Loan Facility to make loans secured by asset-backed securities; •a Municipal Liquidity Facility to purchase bonds directly fromU.S. state, city and county issuers; and •a Money Market Mutual Fund Liquidity Facility to purchase certain assets from, or make loans to, financial institutions providing financing to eligible money market mutual funds.
These facilities and programs are in various stages of development, and the
Company and
Regulatory Considerations
The regulatory framework applicable to banking organizations is intended primarily for the protection of depositors and the stability of the financial system, rather than for the protection of shareholders and creditors.Truist is subject to banking laws and regulations and various other laws and regulations, which affect the operations and management ofTruist and its ability to make distributions to shareholders.Truist and its subsidiaries are also subject to supervision and examination by multiple regulators. Refer toTruist's Annual Report on Form 10-K for the year endedDecember 31, 2019 for additional disclosures with respect to significant laws and regulations affectingTruist . The descriptions below summarize certain significant updates since the filing of the Annual Report on Form 10-K for the year endedDecember 31, 2019 to state and federal laws to whichTruist is subject. The descriptions are qualified in their entirety by reference to the particular statutory or regulatory provisions summarized. They do not summarize all possible or proposed changes in current laws or regulations and are not intended to be a substitute for the related statues or regulatory provisions.
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 existing capital conservation buffer, which is 2.5% as ofJanuary 1, 2019 . Under the final rule, beginning in the 2020 CCAR cycle,Truist will be required to calculate a stress capital buffer equal to the greater of (i) the difference between its starting and minimum projected CET1 capital ratios under the severely adverse scenario in the supervisory stress test, plus the sum of the dollar amount ofTruist's planned common stock dividends for each of the fourth through seventh quarters of the planning horizon as a percentage of risk-weighted assets, or (ii) 2.5%. The final rule also makes related changes to the capital planning and stress testing process. Among other changes, the revised capital plan rule eliminates the assumption thatTruist's balance sheet assets would increase over the planning horizon. In addition, provided thatTruist is otherwise in compliance with automatic restrictions on distributions under the FRB's capital rules,Truist will no longer be required to seek prior approval to make capital distributions in excess of those included in its capital plan. OnJune 25, 2020 , the FRB providedTruist with a preliminary SCB of 2.7% and will provide the final SCB byAugust 31, 2020 . The SCB will be effective fromOctober 1, 2020 throughSeptember 30, 2021 , at which point a revised SCB will be calculated and provided toTruist .Truist has reviewed the results of the 2020 CCAR supervisory stress test and noted 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. At the same time, the FRB took several actions following its stress tests in light of the uncertainty caused by the COVID-19 pandemic. Specifically, for the third quarter of 2020, the FRB will require certain large banking organizations, includingTruist , to suspend share repurchases, cap dividend payments 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.
These large banking organizations, including
Truist Financial Corporation 47 --------------------------------------------------------------------------------
Revisions to Definition of Eligible Retained Income
TheU.S. banking agencies have adopted an interim final rule altering the definition of eligible retained income in their respective capital rules. Under the new rule, eligible retained income is the greater of a firm's (i) net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (ii) average net income over the preceding four quarters. This definition applies with respect to all ofTruist's capital requirements. The interim final rule became effectiveMarch 20, 2020 .
Current Expected Credit Losses Methodology
TheU.S. banking agencies have adopted an interim final rule that permits banking organizations that implement CECL before the end of 2020 to elect to follow the three-year transition available under the prior rule or a new five-year transition to phase in the effects of CECL on regulatory capital. Under the five-year transition, the banking organization would defer for two years 100% of the day-one effect of adopting CECL and 25% of the cumulative increase in the allowance for credit losses since adoption of CECL. Following the first two years, the electing organization will phase out the aggregate capital effects over the next three years consistent with the transition in the original three-year transition rule. The interim final rule became effectiveMarch 31, 2020 .Truist has elected to use the five-year transition to phase in the impacts of CECL on regulatory capital.
Supplementary Leverage Ratio
In response to the COVID-19 pandemic, the FRB has adopted an interim final rule that temporarily changes the supplementary leverage ratio to excludeU.S. Treasury securities and deposits at Federal Reserve Banks from the calculation of a firm's leverage exposure. The interim final rule applies to BHCs and became effectiveApril 1, 2020 and will remain in effect throughMarch 31, 2021 .
Loan modifications
In response to the COVID-19 pandemic, banking regulators have encouraged
financial institutions to support borrowers impacted by COVID-19. Refer to "Note
1. Basis of Presentation" for
CARES Act
In addition to authorizing several programs to provide loans, guarantees and other investments in support of eligible organizations, states and municipalities affected by the economic effects of the COVID-19 pandemic, the CARES Act also includes several measures that temporarily adjust existing laws or regulations. These include providing theFDIC with additional authority to guarantee the deposits of solvent insured depository institutions held in noninterest-bearing business transaction accounts to a maximum amount specified by theFDIC , reinstating theFDIC's Temporary Liquidity Guarantee Authority to guarantee debt obligations of solvent insured depository institutions or depository institution holding companies, and temporarily allowing theTreasury to fully guarantee money market mutual funds. The CARES Act also provides financial institutions with the option to suspend certain GAAP requirements for coronavirus-related loan modifications that would otherwise constitute troubled debt restructurings and further requires the federal banking agencies to defer to financial institutions' determinations in making such suspensions. Refer to "Note 1. Basis of Presentation" forTruist's policy related to COVID-19 loan modifications. Volcker Rule InJune 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 onTruist's consolidated financial position, results of operations or cash flows. 48Truist Financial Corporation --------------------------------------------------------------------------------
Executive Overview
Overview of Significant Events and Financial Results
Recent Events
EffectiveDecember 6, 2019 , the Company completed the Merger. Reported results forTruist reflect heritage BB&T prior to the completion of the Merger and results from both BB&T and SunTrust from the Merger closing date forward. As such, comparative income statement data in this MD&A for 2019 is only for heritage BB&T. Significant Merger updates include: •InJanuary 2020 ,Truist officially launched the Truist brand and visual identity, andTruist's purpose: "Inspire and build better lives and communities," along with its mission and values. •InMarch 2020 , the purchase of the newCharlotte, NC headquarters building was completed and the building was renamed Truist Center. •Purchase accounting valuations for loans and intangibles were updated during 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$310 million reduction in goodwill. •InJuly 2020 ,Truist completed the previously announced divestiture of 30 branches with$425 million in loans and leases and$2.2 billion in deposits. •During 2020,Truist brandedTruist Securities ,Truist Insurance andTruist Foundation , introduced Advisor Desktop to heritageBB&T Financial Advisors and consolidated social media platform leveraging Truist.com. •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, theU.S. has been operating under a presidential declared emergency sinceMarch 13, 2020 , with various actions by theU.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. •Third largest PPP lender based on gross fundings and the carrying value of PPP loans was$12.0 billion as ofJune 30, 2020 . •Provided accommodations to clients on$21.2 billion of commercial loans,$13.8 billion of consumer loans, and$211 million of credit card loans as ofJune 30, 2020 , representing 11.2% of loans and leases held for investment. •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 toTruist's community partners to support and expand technology initiatives and programs for youth, seniors, small businesses and people to rebuild, restore and create thriving communities. •Provided support for clients through payment relief assistance, including payments deferrals, waiving certain fees and offering additional accommodations. •Implemented multiple strategies to keep our branches operational and clients safe, including lobby access by appointment and the extensive use of drive-thrus.Truist created an online, automated process for the PPP and began to accept applications during the first weekend of the program. Additionally,Truist funded extensive line draws for commercial clients to help them fund liquidity and working capital needs during the onset of the pandemic. The majority of the line draws were repaid during the second quarter as the government programs were implemented and clients better understood their liquidity needs. •Provided support for teammates including additional paid time off, flexibility and family care benefits. Provided teammates who have base pay below$100,000 annually a one-time pre-tax bonus of$1,200 in March to recognize their ongoing commitment to our clients and help alleviate some of the financial pressures caused by the pandemic. Enabled alternative work strategies that allowed more than half of our teammates to work remotely. Offered an additional onsite special pay rate of$6.25 per hour or$50 per day for teammates required to work in offices.Truist has temporarily limited access to certain offices, limited branches to drive-thru and appointment only, suspended some services and the majority of the Company's workforce is working remotely.
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 Financial Corporation 49 --------------------------------------------------------------------------------
•Observed Juneteenth holiday. •Hosted more than 200 "Days of Understanding" sessions to date with 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. •Rolled out unconscious bias training for teammates and executive leadership, with plans to host 50 sessions in the second half of the year. •Hosted more than 100Business 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; the bigotry that came out of COVID-19 toward Asian-Americans; and how to be an ally for our LGBTQ+ teammates. •CEOKelly 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 theTruist 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 ourAfrican American Business Resource Group .Truist has also asked several community partners to help shape and guide its long-term actions.
Executive Leadership Changes
OnJune 30, 2020 ,Truist announced thatKimberly Moore-Wright ,Chief Human Resources Officer, has been named to theTruist Executive Leadership team, effectively immediately. InDecember 2019 , Moore-Wright was namedChief Human Resources Officer. Prior to that, Moore-Wright was the Director of Marketing and Digital Sales betweenJanuary 2016 andNovember 2019 and the Director of Retail and Commercial Marketing Strategy betweenJanuary 2012 andDecember 2015 .
As part of the new reporting structure to elevate the areas of human resources
and inclusion and diversity, both Moore-Wright and
Financial Results
Net income available to common shareholders for the second quarter of 2020 totaled$902 million , up 7.1%, compared with the second quarter last year. On a diluted per common share basis, earnings for the second quarter of 2020 were$0.67 , a decrease of$0.42 compared to the second quarter of 2019.Truist's results of operations for the second quarter of 2020 produced an annualized return on average assets of 0.75% and an annualized return on average common shareholders' equity of 5.90% compared to prior year returns of 1.55% and 11.98%, respectively. Results for the second quarter of 2020 included merger-related and restructuring charges of$209 million ($160 million after-tax), incremental operating expenses related to the merger of$129 million ($99 million after-tax), securities gains of$300 million ($230 million after-tax), and losses from the early extinguishment of long-term debt of$235 million ($180 million after-tax). Results for the second quarter of 2019 included$23 million ($19 million after-tax) of merger-related and restructuring charges and$9 million ($7 million after-tax) of incremental operating expenses related to the Merger.Truist's revenue for the second quarter of 2020 was$5.9 billion . On a TE basis, revenue was also$5.9 billion for the second quarter of 2020, an increase of$2.8 billion compared to the same period in 2019, which reflects an increase of$1.8 billion in TE net interest income and an increase of$1.1 billion in noninterest income. The increase in net interest income was primarily due to the Merger, as average loans and leases increased$174.9 billion and average securities increased$29.0 billion . In addition, average other earning assets increased$39.8 billion due to higher interest bearing balances at theFederal Reserve asTruist increased liquidity in view of economic uncertainty and to increaseTruist's capacity to support clients. NIM was 3.13% for the second quarter of 2020, down 29 basis points compared to the prior year. Average earning assets increased$246.0 billion , while average interest-bearing liabilities increased$182.7 billion and noninterest-bearing deposits increased$61.2 billion . The annualized TE yield on the total loan portfolio for the second quarter of 2020 was 4.19%, down 86 basis points compared to the prior year. The annualized TE yield on the average securities portfolio was 2.37%, down 25 basis points compared to the prior year. 50Truist Financial Corporation -------------------------------------------------------------------------------- The provision for credit losses was$844 million compared to$172 million for the second quarter of 2019. The increase in the provision for credit losses reflects a build to the allowance for credit losses due to increased economic stress associated with the pandemic and specific consideration of its impact on certain industries, 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. Higher net charge-offs also contributed to the increase in the provision for credit losses and primarily reflect increases as a result of the Merger. Net charge-offs were 0.39% of average loans and leases on an annualized basis for the second quarter of 2020, up one basis point compared to the second quarter of 2019. Noninterest income for the second quarter of 2020 increased$1.1 billion compared to the earlier quarter. The current quarter includes$300 million of securities gains from the sale of non-agency mortgage-backed securities. Excluding the securities gains, noninterest income increased$771 million , with nearly all categories of noninterest income being impacted by the Merger. In addition to these impacts, insurance income was a record$581 million and residential mortgage banking income was up due to strong production and refinance activity driven by the declining rate environment, while service charges on deposits were lower due to reduced overdraft incident rates and refunds and waivers to support clients impacted by the COVID-19 pandemic. Noninterest expense for the second quarter of 2020 was up$2.1 billion compared to the earlier quarter. The current quarter was impacted by$235 million of losses on the early extinguishment of long-term debt. Excluding merger-related and restructuring charges, incremental operating expenses related to the Merger and losses on the early extinguishment of long-term debt, noninterest expense was up$1.6 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$115 million of expenses compared to the second quarter of 2019. This was primarily related to additional on-site pay for teammates, net occupancy costs for enhanced cleaning and teammate support expenses. Amortization of intangibles increased$146 million due to the intangibles recognized in the merger. The provision for income taxes was$191 million for the second quarter of 2020, compared to$234 million for the earlier quarter. This produced an effective tax rate for the second quarter of 2020 of 16.6%, compared to 20.9% 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 atJune 30, 2020 were$504.3 billion , an increase of$31.3 billion compared toDecember 31, 2019 . The increase in total assets was primarily driven by an increase of$12.9 billion in total loans and leases primarily due to an increase in commercial and industrial loans as a result of PPP loans and other customer line draws. In addition, interest-bearing deposits with banks increased$21.1 billion reflecting higher balances held at theFederal Reserve .
Total deposits at
Asset quality ratios were relatively stable atJune 30, 2020 , tempered by CARES Act relief. As ofJune 30, 2020 , nonperforming assets were 0.25% of total assets. The allowance for loan and lease loss coverage ratio was 5.24x nonperforming loans and leases held for investment, compared to 3.41x atDecember 31, 2019 . The higher coverage ratio reflects the CECL adoption build of$3.1 billion , as well as$1.1 billion of reserve build in 2020 in connection with COVID-19 and the economic downturn. Commercial credit quality indicators reflect proactive grading changes for the current environment.Truist maintained strong capital and liquidity. As ofJune 30, 2020 , the CET1 ratio was 9.7% and the average LCR was 116%. During the six months endedJune 30, 2020 ,Truist issued$2.6 billion of preferred stock and redeemed$500 million of Series K preferred stock. InAugust 2020 ,Truist issued$925 million of preferred stock. The Company issued$5.8 billion of senior and subordinated long-term debt.Truist declared common dividends of$0.450 per share during the second quarter of 2020. Additionally, inAugust 2020 , the Company issued$750 million of senior notes with an interest rate of 1.125% maturing 2027.The dividend and total payout ratios for the second quarter of 2020 were 67.2%. As previously communicated at the time of the Merger announcement,Truist suspended its share repurchase program until capital ratios return to higher levels. InJuly 2020 ,Truist declared common dividends of$0.450 per share for the third quarter of 2020.Truist Financial Corporation 51 --------------------------------------------------------------------------------
Analysis of Results of Operations
Net Interest Income and NIM
Second Quarter 2020 compared to Second Quarter 2019
Net interest margin was 3.13%, down 29 basis points compared to the earlier quarter. Average earning assets increased$246.0 billion . The increase in average earning assets reflects a$174.9 billion increase in average total loans and leases and a$29.0 billion increase in average securities. Average other earning assets increased$39.8 billion primarily due to higher interest-bearing balances at theFederal Reserve . Average interest-bearing liabilities increased$182.7 billion compared to the earlier quarter. Average interest-bearing deposits increased$149.7 billion , average long-term debt increased$32.3 billion and average short-term borrowings increased$631 million . 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 second quarter of 2020 was 4.19%, down 86 basis points compared to the earlier quarter, reflecting the impact of rate decreases and the deferral of 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 2.37%, down 25 basis points compared to the earlier period primarily due to higher premium amortization. The average cost of total deposits was 0.22%, down 46 basis points compared to the earlier quarter. The average cost of interest-bearing deposits was 0.32%, down 70 basis points compared to the earlier quarter. The average rate on short-term borrowings was 1.24%, down 116 basis points compared to the earlier quarter. The average rate on long-term debt was 1.52%, down 181 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.
Six Months of 2020 compared to Six Months of 2019
The net interest margin was 3.34% for the six months endedJune 30, 2020 , down 13 basis points compared to the earlier period. Average earning assets increased$230.9 billion , which primarily reflects a$166.9 billion increase in average total loans and leases, a$31.0 billion increase in average other earning assets and a$29.0 billion increase in average securities. The increase in average other earning assets primarily reflects higher interest-bearing balances at theFederal Reserve . Average interest-bearing liabilities increased$176.5 billion , driven by an increase of$141.7 billion in average interest-bearing deposits, an increase of$27.8 billion in average long-term debt and an increase of$6.9 billion in average short-term borrowings. 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 six months endedJune 30, 2020 was 4.57%, down 48 basis points compared to the earlier period, reflecting the impact of rate decreases and interest reserves that were recorded to reflect management's best estimate of interest related to loans that had been granted an accommodation in connection with COVID-19 that may prove to be uncollectible, partially offset by purchase accounting accretion from merged loans. The yield on the average securities portfolio for the six months endedJune 30, 2020 was 2.49%, down 12 basis points compared to the earlier period primarily due to higher premium amortization. The average cost of total deposits was 0.35%, down 31 basis points compared to the earlier period. The average cost of interest-bearing deposits was 0.50%, down 49 basis points compared to the earlier period. The average rate on short-term borrowings was 1.60%, down 77 basis points compared to the earlier period. The average rate on long-term debt was 1.90%, down 141 basis points compared to the earlier period. The decrease in rates on deposits was largely attributable to deposit rate cuts consistent with a lower rate environment. As ofJune 30, 2020 , the remaining unamortized fair value marks on the loan and lease portfolio, deposits and long-term debt were$3.1 billion ,$37 million and$262 million , respectively. The remaining unamortized fair value mark on loans and leases consists of$1.4 billion for commercial loans and leases and$1.7 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. 52Truist Financial Corporation -------------------------------------------------------------------------------- Table 1-1: Taxable-Equivalent Net Interest Income and Rate / Volume Analysis (1) Three Months EndedJune 30 , Average Balances (5) Annualized Yield/Rate Income/Expense Incr. Change due to (Dollars in millions) 2020 2019 2020 2019 2020 2019 Rate Volume (Decr.) Assets Total securities, at amortized cost: (2)U.S. Treasury $ 2,237 $ 2,662 1.88 % 2.04 %$ 10 $ 14 $ (4) $ (1) $ (3) GSE 1,844 2,440 2.33 2.25 12 13 (1) - (1) Agency MBS 70,374 40,112 2.35 2.57 413 258 155 (24) 179 States and political subdivisions 505 566 3.57 4.37 4 6 (2) (1) (1) Non-agency MBS 162 302 16.71 13.28 7 10 (3) 2 (5) Other 37 33 2.27 3.85 - 1 (1) (1) - Total securities 75,159 46,115 2.37 2.62 446 302 144 (25) 169 Interest earning trading assets 3,700 1,456 4.19 2.25 39 8 31 11
20
Other earning assets (3) 41,531 1,711 0.28 2.88 28 12 16 (21)
37
Loans and leases, net of unearned income: (4)
Commercial and industrial 152,991 62,563 3.16 4.35 1,204 679 525 (228) 753 CRE 27,804 16,854 3.26 4.97 227 210 17 (88) 105Commercial Construction 6,748 3,894 3.70 5.32 61 50 11 (19) 30 Lease financing 5,922 2,122 4.71 3.29 70 17 53 10 43 Residential mortgage 52,380 32,066 4.65 4.00 608 321 287 59 228 Residential home equity and direct 27,199 11,687 5.78 5.97 391 173 218 (6) 224 Indirect auto 24,721 11,633 6.63 8.71 407 254 153 (73) 226 Indirect other 11,282 6,246 7.18 6.63 201 102 99 9 90 Student 7,633 - 4.55 - 87 - 87 - 87 Credit card 4,949 2,970 9.27 8.94 114 67 47 3 44 PCI - 432 - 21.63 - 24 (24) - (24) Total loans and leases HFI 321,629 150,467 4.21 5.05 3,370 1,897 1,473 (333) 1,806 LHFS 4,806 1,090 3.04 4.17 36 11 25 (4) 29 Total loans and leases
326,435 151,557 4.19 5.05 3,406 1,908 1,498 (337) 1,835 Total earning assets 446,825 200,839 3.52 4.45 3,919 2,230 1,689 (372) 2,061 Nonearning assets 67,895 28,410 Total assets$ 514,720 $ 229,249 Liabilities and Shareholders' Equity Interest-bearing deposits: Interest-checking$ 97,863 $ 27,708 0.23 0.65 55 45 10 (44)
54
Money market and savings 126,071 63,394 0.18 1.03 57 163 (106) (194) 88 Time deposits 33,009 15,730 1.09 1.58 89 63 26 (24) 50 Foreign office deposits - interest-bearing - 379 - 2.43 - 2 (2) -
(2)
Total interest-bearing deposits (6) 256,943 107,211 0.32 1.02 201 273 (72) (262)
190
Short-term borrowings 8,998 8,367 1.24 2.40 28 50 (22) (26) 4 Long-term debt 55,537 23,233 1.52 3.33 211 193 18 (145) 163 Total interest-bearing liabilities 321,478 138,811 0.55 1.49 440 516 (76) (433)
357
Noninterest-bearing deposits (6) 113,875 52,680 Other liabilities 12,504 6,457 Shareholders' equity 66,863 31,301 Total liabilities and shareholders' equity$ 514,720 $ 229,249 Average interest-rate spread 2.97 % 2.96 % NIM/net interest income 3.13 % 3.42 %$ 3,479 $ 1,714 $ 1,765 $ 61 $ 1,704 Taxable-equivalent adjustment$ 31 $ 24 (1) Yields are stated on a TE basis utilizing federal tax rate. The change in interest not solely due to changes in rate or volume has been allocated 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 0.22% and 0.68% for the three months endedJune 30, 2020 and 2019, respectively. Truist Financial Corporation 53 --------------------------------------------------------------------------------
Table 1-2: Taxable-Equivalent Net Interest Income and Rate / Volume Analysis (1)
Six Months EndedJune 30 , Average Balances (5) Annualized Yield/Rate Income/Expense Incr. Change due to (Dollars in millions) 2020 2019 2020 2019 2020 2019 Rate Volume (Decr.) Assets Total securities, at amortized cost: (2)U.S. Treasury $ 2,255 $ 2,980 1.91 % 2.02 %$ 21 $ 30 $ (9) $ (2) $ (7) GSE 1,850 2,429 2.33 2.24 22 27 (5) 1 (6) Agency MBS 70,595 40,078 2.48 2.58 874 516 358 (21) 379 States and political subdivisions 518 593 3.57 4.04 9 12 (3) (1) (2) Non-agency MBS 174 308 16.71 12.89 15 20 (5) 5 (10) Other 38 35 2.65 3.90 - 1 (1) (1) - Total securities 75,430 46,423 2.49 2.61 941 606 335 (19) 354 Interest earning trading assets 5,017 1,031 4.09 2.25 103 12 91 16 75 Other earning assets (3) 32,641 1,653 0.74 5.06 120 41 79 (65) 144
Loans and leases, net of unearned income: (4)
Commercial and industrial 142,367 61,970 3.70 4.34 2,623 1,335 1,288 (222) 1,510 CRE 27,425 16,820 3.75 4.98 514 417 97 (120) 217Commercial Construction 6,578 4,006 4.27 5.33 137 104 33 (24) 57 Lease financing 5,996 2,071 4.49 3.31 135 34 101 16 85 Residential mortgage 52,687 31,720 4.56 4.07 1,202 645 557 86 471 Residential home equity and direct 27,381 11,685 6.19 5.95 843 344 499 14 485 Indirect auto 24,848 11,471 6.76 8.67 835 494 341 (129) 470 Indirect other 11,116 6,138 7.27 6.60 402 200 202 22 180 Student 7,710 - 4.97 - 191 - 191 - 191 Credit card 5,242 2,946 9.49 8.98 247 132 115 8 107 PCI - 444 - 19.77 - 44 (44) - (44) Total loans and leases HFI 311,350 149,271 4.60 5.06 7,129 3,749 3,380 (349) 3,729 LHFS 5,741 910 3.10 4.25 89 19 70 (7) 77 Total loans and leases 317,091 150,181 4.57 5.05 7,218 3,768 3,450 (356) 3,806 Total earning assets 430,179 199,288 3.91 4.47 8,382 4,427 3,955 (424) 4,379 Nonearning assets 65,956 28,133 Total assets$ 496,135 $ 227,421 Liabilities and Shareholders' Equity Interest-bearing deposits: Interest-checking$ 91,435 $ 27,665 0.41 0.62 184 85 99 (38) 137 Money market and savings 123,504 63,360 0.38 0.99 235 313 (78) (263) 185 Time deposits 34,289 16,059 1.19 1.54 203 123 80 (33) 113 Foreign office deposits - interest-bearing - 400 - 2.43 - 5 (5) - (5) Total interest-bearing deposits (6) 249,228 107,484 0.50 0.99 622 526 96 (334) 430 Short-term borrowings 13,949 7,003 1.60 2.37 111 82 29 (33) 62 Long-term debt 51,042 23,240 1.90 3.31 483 385 98 (215) 313 Total interest-bearing liabilities 314,219 137,727 0.78 1.45 1,216 993 223 (582) 805 Noninterest-bearing deposits (6) 103,505 52,484 Other liabilities 12,274 6,287 Shareholders' equity 66,137 30,923 Total liabilities and shareholders' equity$ 496,135 $ 227,421 Average interest-rate spread 3.13 % 3.02 % NIM/net interest income 3.34 % 3.47 %$ 7,166 $ 3,434 $ 3,732 $ 158 $ 3,574 Taxable-equivalent adjustment$ 68 $ 48 (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 0.35% and 0.66% for the six months endedJune 30, 2020 and 2019, respectively. 54Truist Financial Corporation --------------------------------------------------------------------------------
Provision for Credit Losses
Second Quarter 2020 compared to Second Quarter 2019
The provision for credit losses was$844 million , compared to$172 million for the earlier quarter. The increase in the provision for credit losses reflects a build to the allowance for credit losses due to increased economic stress associated with the pandemic and specific consideration of its impact on certain industries, 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 second quarter of 2020 totaled$316 million compared to$142 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 0.39% was up one basis point compared to the second quarter of 2019.
Six Months of 2020 compared to Six Months of 2019
The provision for credit losses was$1.7 billion , compared to$327 million for the earlier period. The increase in the provision for credit losses reflects a build to the allowance for credit losses due to increased economic stress associated with the pandemic and specific consideration of its impact on certain industries, the impact of the Merger, and the effect of applying the CECL methodology in the current period compared to the incurred methodology in the earlier period. Net charge-offs for the six months endedJune 30, 2020 were$588 million , compared to$289 million for the earlier period. Higher net charge-offs also contributed to the increase in the provision for credit losses and primarily reflect increases as a result of the Merger. The net charge-off rate was 0.38% of average loans and leases for the six months endedJune 30, 2020 , compared to 0.39% of average loans and leases for the earlier period.
Noninterest Income
Noninterest income is a significant contributor toTruist's financial results. Management focuses on diversifying its sources of revenue to reduceTruist's reliance on traditional spread-based interest income, as certain fee-based activities are a relatively stable revenue source during periods of changing interest rates. Table 2: Noninterest Income Three Months Ended June 30, Six Months Ended June 30, (Dollars in millions) 2020 2019 % Change 2020 2019 % Change Insurance income$ 581 $ 566 2.7 %$ 1,130 $ 1,076 5.0 % Service charges on deposits 202 181 11.6 507 352 44.0 Wealth management income 289 172 68.0 621 335 85.4 Card and payment related fees 171 139 23.0 358 267
34.1
Residential mortgage income 341 91 NM 586 140
NM
Investment banking and trading income 274 48 NM 392 74 NM Operating lease income 83 35 137.1 160 70 128.6 Income from bank-owned life insurance 45 34 32.4 89 62 43.5 Lending related fees 66 28 135.7 133 53 150.9 Commercial real estate related income 49 22 122.7 93 36 158.3 Securities gains (losses) 300 - NM 298 - NM Other income (loss) 22 36 (38.9) 17 89 (80.9) Total noninterest income$ 2,423 $ 1,352
79.2$ 4,384 $ 2,554 71.7
Second Quarter 2020 compared to Second Quarter 2019
Noninterest income for the second quarter of 2020 increased$1.1 billion compared to the earlier quarter. The current quarter includes$300 million of securities gains from the sale of non-agency mortgage-backed securities. Excluding the securities gains, noninterest income increased$771 million , with nearly all categories of noninterest income being impacted by the Merger. In addition to the impacts from the Merger, residential mortgage banking income was up due to strong production and refinance activity driven by the declining rate environment, while service charges on deposits were lower due to reduced overdraft incident rates and refunds and waivers to support clients impacted by the COVID-19 pandemic.Truist Financial Corporation 55
--------------------------------------------------------------------------------
Six Months of 2020 compared to Six Months of 2019
Noninterest income for the six months endedJune 30, 2020 increased$1.8 billion compared to the earlier period. The current period includes$298 million of net securities gains primarily from the sale of non-agency mortgage-backed securities in the second quarter of 2020. Excluding the net securities gains, noninterest income increased$1.5 billion , with nearly all categories of noninterest income being impacted by the Merger. In addition to the impacts from the Merger, residential mortgage banking income was up due to strong production and refinance activity driven by the declining rate environment. 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. Service charges on deposits were up despite reduced overdraft incident rates and refunds and waivers to support clients impacted by the COVID-19 pandemic. Other income decreased$72 million primarily due to less income from private equity investments and the change in the market value of assets held for certain post-retirement benefits, the latter of which was primarily offset by lower personnel expense.
Noninterest Expense
The following table provides a breakdown of
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in millions) 2020 2019 % Change 2020 2019 % Change
Personnel expense $ 2,008 $ 1,120 79.3 % $ 3,980 $ 2,207 80.3 %
Net occupancy expense 243 116 109.5 464 238 95.0
Professional fees and outside
processing 289 84 NM 536 170 NM
Software expense 216 71 NM 426 143 197.9
Equipment expense 120 68 76.5 236 133 77.4
Marketing and customer development 56 29 93.1 140 56 150.0
Operating lease depreciation 77 29 165.5 148 58 155.2 Loan-related expense 56 30 86.7 118 55 114.5 Amortization of intangibles 178 32 NM 343 64 NM Regulatory costs 30 19 57.9 59 37 59.5 Merger-related and restructuring charges 209 23 NM 316 103
NM
Loss (gain) on early extinguishment of debt 235 - NM 235 - NM Other expense 161 130 23.8 308 255 20.8 Total noninterest expense$ 3,878 $ 1,751
121.5$ 7,309 $ 3,519 107.7
Second Quarter 2020 compared to Second Quarter 2019
Noninterest expense for the second quarter of 2020 was up$2.1 billion compared to the earlier quarter. Merger-related and restructuring charges and other incremental operating expenses related to the Merger increased$186 million and$120 million , respectively. In addition, the current quarter was impacted by$235 million of losses on the early extinguishment of long-term debt. On an adjusted basis, noninterest expense was up$1.6 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$115 million of expenses compared to the second quarter of 2019. This was primarily related to additional on-site pay for teammates, net occupancy costs for enhanced cleaning and teammate support expenses. Amortization of intangibles increased$146 million due to the intangibles recognized in the Merger.
Six Months of 2020 compared to Six Months of 2019
Noninterest expense for the six months endedJune 30, 2020 was up$3.8 billion compared to the earlier period. Merger-related and restructuring charges and other incremental operating expenses related to the Merger increased$213 million and$192 million , respectively. In addition, the current quarter was impacted by$235 million of losses on the early extinguishment of long-term debt. On an adjusted basis, noninterest expense was up$3.2 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$180 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. Amortization of intangibles increased$279 million due to the intangibles recognized in the Merger. 56Truist Financial Corporation --------------------------------------------------------------------------------
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 June 30, 2020 Six Months Ended June 30, 2020
Accrual at Apr 1, Accrual at Jun 30, Accrual at Jan 1, Accrual at Jun 30,
(Dollars in millions) 2020 Expense (1) Utilized 2020 (1) 2020 Expense (1) Utilized 2020 (1)
Severance and personnel-related $ 20 $ 91 $ (27) $ 84 $ 46 $ 135 $ (97) $ 84
Occupancy and equipment - 29 (29) - - 48 (48) -
Professional services 3 81 (81) 3 42 95 (134) 3
Systems conversion and related
costs - 3 (3) - - 3 (3) -
Other adjustments 1 5 (5) 1 1 35 (35) 1
Total $ 24 $ 209 $ (145) $ 88 $ 89 $ 316 $ (317) $ 88
(1) In connection with the Merger, the Company recognized $204 million of
expense for the second quarter of 2020 and $296 million for the six months ended
June 30, 2020 . At June 30, 2020 , the Company had an accrual of $72 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 June 30, Six Months Ended June 30,
(Dollars in millions) 2020 2019 % Change 2020 2019 % Change
Consumer Banking and Wealth $ 705 $ 458 53.9 % $ 1,387 $ 848 63.6 %
Corporate and Commercial Banking 409 409 - 827 840 (1.5)
Insurance Holdings 125 111 12.6 230 199 15.6
Other, Treasury & Corporate (281) (93) NM (423) (204) 107.4
Truist Financial Corporation $ 958 $ 885 8.2 $ 2,021 $ 1,683 20.1
Second Quarter 2020 compared to Second Quarter 2019
Consumer Banking and Wealth
CB&W serves individuals and small business clients by offering a variety of loan and deposit products, payment services, bankcard products and other financial services by connecting clients to a wide range of financial products and services. CB&W includes Dealer Retail Services, which originates loans on an indirect basis to individuals for the purchase of automobiles, boats and recreational vehicles. Additionally, CB&W includes National Consumer Finance & Payments, which provides a comprehensive set of technology-enabled lending solutions to individuals and small businesses through several national channels, as well as merchant services and payment processing solutions to business clients. CB&W also includes Mortgage Banking, which offers residential mortgage products nationally through its retail and correspondent channels, the internet and by telephone. These products are either sold in the secondary market, primarily with servicing rights retained, or held in the Company's loan portfolio. Mortgage Banking also services loans for other investors, in addition to loans held in the Company's loan portfolio. Mortgage Banking also includes Mortgage Warehouse Lending, which provides short-term lending solutions to finance first-lien residential mortgage LHFS by independent mortgage companies. Wealth delivers investment management, financial planning, banking, fiduciary services and related solutions to institutions, affluent and high net worth individuals and families, with financial expertise and industry-specific insights in the medical, legal, sports and entertainment industries. CB&W net income was$705 million for the second quarter of 2020, an increase of$247 million compared to the earlier quarter. Segment net interest income increased$1.1 billion primarily due to the Merger. Noninterest income increased$426 million , due to the Merger and higher residential mortgage income as a result of the lower rate environment driving mortgage production through refinance activity. The allocated provision for credit losses increased$147 million primarily due to the Merger as well as increased economic stress associated with the pandemic. Noninterest expense increased$1.1 billion primarily due to operating expenses and amortization of intangibles related to the Merger and additional on-site pay for teammates and net occupancy costs in the current quarter, primarily related to COVID-19.Truist Financial Corporation 57 -------------------------------------------------------------------------------- CB&W average loans and leases were up$72.0 billion atJune 30, 2020 , compared to the earlier quarter, primarily driven by the Merger. Average total deposits were up$127.1 billion atJune 30, 2020 , compared to the earlier quarter, also primarily due to the Merger, along with reduced consumer spending and inflows from stimulus payments in theRetail 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 $409 million for the second quarter of 2020, flat compared
to the earlier quarter. Segment net interest income increased $654 million
primarily due to the Merger. Noninterest income increased $373 million also
primarily due to the Merger. The allocated provision for credit losses increased
$482 million primarily due to the Merger, as well as increased economic stress
associated with the pandemic and increased losses. Noninterest expense increased
$558 million primarily due to operating expenses and amortization of intangibles
related to the Merger in the current quarter.
C&CB average loans and leases were up $99.2 billion at June 30, 2020 , compared
to the earlier quarter, primarily driven by the Merger coupled with PPP loan
originations. Average total deposits were up $78.0 billion at June 30, 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 $125 million for the second quarter of 2020, an increase of
$14 million compared to the earlier quarter. Noninterest income increased $28
million primarily due to higher production. Noninterest expense increased $5
million primarily due to increased personnel expense, partially offset by lower
travel and marketing expenses.
Other,
Net income in OT&C can vary due to the changing needs of the Corporation, including the size of the investment portfolio, the need for wholesale funding and variability associated with derivatives used to hedge the balance sheet.
OT&C generated a net loss of$281 million in the second quarter of 2020, compared to a net loss of$93 million in the earlier quarter. Segment net interest income decreased$5 million . Noninterest income increased$244 million primarily due to the gain on sale of non-agency mortgage-backed securities in the current quarter. The allocated provision for credit losses increased$39 million primarily due to the provision for unfunded commitments. Noninterest expense increased$493 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 quarter. The benefit for income taxes increased$105 million primarily due to a higher pre-tax loss. 58Truist Financial Corporation --------------------------------------------------------------------------------
Six Months of 2020 compared to Six Months of 2019
Consumer Banking and Wealth
CB&W net income was$1.4 billion for the six months endedJune 30, 2020 , an increase of$539 million compared to the same period of the prior year. Segment net interest income increased$2.3 billion primarily due to the Merger. Noninterest income increased$987 million , due to the Merger and higher residential mortgage income as a result of the lower rate environment driving mortgage production through refinance activity. The allocated provision for credit losses increased$453 million primarily due to the Merger, as well as the recognition of an economic downturn related to COVID-19 and increased losses. Noninterest expense increased$2.2 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 and leases were up$72.9 billion atJune 30, 2020 , compared to the prior year, primarily due to the merged loans. Average total deposits were up$120.2 billion atJune 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$827 million for the six months endedJune 30, 2020 , a decrease of$13 million compared to the same period of the prior year. Segment net interest income increased$1.4 billion primarily due to the Merger. Noninterest income increased$590 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$861 million primarily due to the Merger, as well as increased economic stress associated with the pandemic and increased losses. Noninterest expense increased$1.1 billion primarily due to operating expenses and amortization of intangibles related to the Merger in the current year. C&CB average loans and leases were up$89.2 billion atJune 30, 2020 , compared to the prior year, primarily due to the merged loans and significant growth in commercial and industrial loans in the current year related to COVID-19. Average total deposits were up$67.6 billion atJune 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.
IH net income was$230 million for the six months endedJune 30, 2020 , an increase of$31 million compared to the same period of the prior year. Noninterest income increased$70 million primarily due to higher production. Noninterest expense increased$28 million primarily due to commissions on higher production in the current year.
Other,
OT&C generated a net loss of$423 million in the six months endedJune 30, 2020 , compared to a net loss of$204 million in the same period of the prior year. Segment net interest income increased$18 million . Noninterest income increased$183 million primarily due to the gain on sale of non-agency mortgage-backed securities in the current year, partially offset by lower income related to certain post-employment benefits. The allocated provision for credit losses increased$93 million primarily due to the provision for unfunded commitments. Noninterest expense increased$453 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$126 million primarily due to a higher pre-tax loss.Truist Financial Corporation 59 --------------------------------------------------------------------------------
Analysis of Financial Condition
Investment Activities
The securities portfolio totaled$77.8 billion atJune 30, 2020 , compared to$74.7 billion atDecember 31, 2019 . The increase was due primarily to a$3.5 billion increase in Agency MBS, offset partially by a$368 million decrease in Non-agency MBS. During the second quarter of 2020, the Company sold Non-agency MBS generating a gain of$300 million . InJuly 2020 , the Company sold and reinvested approximately$3.2 billion in residential Agency MBS generating a gain of approximately$110 million . As ofJune 30, 2020 , approximately 3.1% of the securities portfolio was variable rate, compared to 3.6% as ofDecember 31, 2019 . The effective duration of the securities portfolio was 3.5 years atJune 30, 2020 , compared to 4.7 years atDecember 31, 2019 .
Lending Activities
The following tables summarize the loans and leases HFI portfolio for each of the last five quarters: Table 6: Loans and Leases as of Period End (Dollars in millions) Jun 30, 2020 Mar
31, 2020
$ 147,141 $
149,161
27,963 27,532 26,832 17,080 16,976
Commercial construction 6,891 6,630 6,205 3,804 3,746
Lease financing 5,783 5,984 6,122 2,356 2,203
Consumer:
Residential mortgage 51,671 53,096 52,071 28,297 32,607
Residential home equity and direct 26,935 27,629 27,044 11,646 11,675
Indirect auto 24,509 25,146 24,442 11,871 11,756
Indirect other 11,592 10,980 11,100 6,590 6,453
Student 7,484 7,771 6,743 - -
Credit card 4,856 5,300 5,619 3,058 3,056
PCI - - 3,484 387 421
Total loans and leases HFI $ 314,825 $ 319,229 $ 299,842 $ 149,413 $ 152,586
Total loans and leases held for investment were $314.8 billion at June 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 significant 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 quarter of 2020 as the government
programs were implemented in response to the pandemic and clients better
understood their liquidity needs.
60 Truist Financial Corporation
--------------------------------------------------------------------------------
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) Jun 30, 2020 Mar
31, 2020
$ 152,991 $
131,743
27,804 27,046 19,896 17,042 16,854
Commercial construction 6,748 6,409 4,506 3,725 3,894
Lease financing 5,922 6,070 3,357 2,260 2,122
Consumer:
Residential mortgage 52,380 52,993 34,824 28,410 32,066
Residential home equity and direct 27,199 27,564 15,810 11,650 11,687
Indirect auto 24,721 24,975 15,390 11,810 11,633
Indirect other 11,282 10,950 7,772 6,552 6,246
Student 7,633 7,787 1,825 - -
Credit card 4,949 5,534 3,788 3,036 2,970
PCI - - 1,220 411 432
Total average loans and leases HFI $ 321,629 $
301,071
Average loans and leases held for investment for the second quarter of 2020 were
The growth in the commercial portfolio was primarily in commercial and industrial loans and reflects an increase in revolver usage late in the prior quarter coupled with PPP loan originations in the current quarter.Truist is the third largest lender of PPP loans based on gross fundings and the carrying value of PPP loans was$12.0 billion as ofJune 30, 2020 . Within the commercial and industrial portfolio,Truist also experienced growth in loans from mortgage warehouse lending due to the decline in rates and increased refinance activity, which was partially offset by a decline in dealer floor plan lending. Average consumer loans decreased$1.1 billion , primarily due to a decrease in residential mortgages due to refinance activity, underwriting changes and overall decreased demand for consumer lending products. This was partially offset by an increase in indirect other loans due to demand for loans to finance recreational and power sports equipment.
Average credit card loans decreased due to lower business and consumer spending as a result of COVID-19.
COVID-19 Lending Activities The CARES Act includes provisions that were designed to encourage financial institutions to support borrowers impacted by COVID-19. These modifications are generally not considered a TDR as disclosed in "Note 1. Basis of Presentation."Truist payment relief assistance includes forbearance, deferrals, extension and re-aging programs, along with certain other modification strategies. ThroughJune 30, 2020 ,Truist provided the following client accommodations in response to COVID-19: Table 8: Client Accommodations June 30, 2020 Number of Outstanding Percentage of (Dollars in millions) Accommodations Balance Loans HFI Types of Accommodations Clients may elect to defer loan or lease Commercial 32,254$ 21,204 6.7 % payments for up to 90 days without late fees being incurred but with finance charges continuing to accrue. Clients may elect to defer loan payments for Consumer 515,777 13,817 4.4 time periods that range 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 Credit card 39,805 211 0.1 with financing charges accruing. In addition, Truist provided credit card clients with 5% cash back on qualifying card purchases for certain important basic needs. Total 587,836$ 35,232 11.2 %
The CARES Act also created the PPP, which temporarily expands the
Truist Financial Corporation 61
--------------------------------------------------------------------------------
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 9.6% of loans held for investment at June 30, 2020 .
Truist is actively managing these portfolios and will continue to make
underwriting or risk acceptance adjustments as appropriate. In addition,
management is closely monitoring its leveraged lending and small secured real
estate portfolios which comprised 3.0% and 1.5% of loans held for investment at
June 30, 2020 , respectfully. Certain leveraged lending loans and small secured
real estate loans would also be included in the selected industry credit
exposures.
Table 9: Selected Credit Exposures
June 30, 2020 Outstanding Percentage of Loans
(Dollars in billions) Balance HFI
Hotels, Resorts & Cruise Lines $ 7.7 2.4 %
Senior Care 6.0 1.9
Oil & Gas Portfolio 5.8 1.9
Acute Care Facilities 4.6 1.5
Restaurants 3.2 1.0
Sensitive Retail 2.8 0.9
Total $ 30.1 9.6 %
Additional exposures (inclusive of above industries):
Leveraged lending $9.5 3.0 %
Small secured real estate 4.8 1.5
62 Truist Financial Corporation
--------------------------------------------------------------------------------Asset Quality
The following tables summarize asset quality information for each of the last five quarters: Table 10: Asset Quality (Dollars in millions) Jun 30, 2020 Mar 31, 2020 Dec 31, 2019 Sep 30, 2019 Jun 30, 2019 NPAs: NPLs: Commercial and industrial$ 428 $ 443 $ 212 $ 172 $ 193 CRE 42 18 10 27 31 Commercial construction 13 2 - 2 2 Lease financing 56 27 8 2 2 Residential mortgage 198 248 55 106 104 Residential home equity and direct 192 170 67 56 54 Indirect auto 155 125 100 81 74 Indirect other 3 1 2 1 1 Total NPLs HFI 1,087 1,034 454 447 461 Loans held for sale 102 41 107 - - Total nonaccrual loans and leases 1,189 1,075 561 447 461 Foreclosed real estate 43 63 82 33 36 Other foreclosed property 20 39 41 29 26 Total nonperforming assets$ 1,252 $ 1,177 $ 684 $ 509 $ 523 TDRs: Performing TDRs: Commercial and industrial$ 57 $ 65 $ 47 $ 69 $ 84 CRE 22 7 6 6 7 Commercial construction 36 36 37 1 1 Lease financing 1 1 - - - Residential mortgage 533 513 470 570 581 Residential home equity and direct 71 66 51 54 53 Indirect auto 342 350 333 324 311 Indirect other 4 5 5 4 4 Student 4 1 - - - Credit card 37 35 31 29 29 Total performing TDRs$ 1,107 $ 1,079 $ 980 $ 1,057 $ 1,070 Nonperforming TDRs 111 121 82 115 135 Total TDRs$ 1,218 $ 1,200 $ 1,062 $ 1,172 $ 1,205 Loans 90 days or more past due and still accruing: (1) Commercial and industrial $ 9 $ 5 $ 1 $ - $ - CRE 3 1 - - - Lease financing 1 - - - - Residential mortgage 521 610 543 347 350 Residential home equity and direct 9 10 9 8 11 Indirect auto 10 11 11 9 7 Indirect other 3 2 2 - - Student 478 1,068 188 - - Credit card 38 41 22 15 13 PCI - - 1,218 24 26 Total loans 90 days or more past due and still accruing$ 1,072 $ 1,748 $ 1,994 $ 403 $ 407 Loans 30-89 days past due and still accruing: (1) Commercial and industrial$ 282 $ 262 $ 94 $ 34 $ 32 CRE 6 8 5 1 3 Commercial construction 1 16 1 - - Lease financing 10 8 2 1 5 Residential mortgage 703 679 498 432 480 Residential home equity and direct 108 156 122 56 60 Indirect auto 265 521 560 380 354 Indirect other 50 74 85 43 39 Student 442 593 650 - - Credit card 34 57 56 29 26 PCI - - 140 16 17 Total loans 30-89 days past due and still accruing$ 1,901 $ 2,374 $ 2,213 $ 992 $ 1,016
(1) The past due status of loans that received a deferral under the CARES Act is generally frozen during the deferral period.
Truist Financial Corporation 63 --------------------------------------------------------------------------------
Overall asset quality ratios were relatively stable at
Nonperforming assets totaled$1.3 billion atJune 30, 2020 , up$75 million compared toMarch 31, 2020 . Nonperforming loans and leases held for investment represented 0.35% of loans and leases held for investment, up 3 basis points compared toMarch 31, 2020 . The increase in nonperforming loans was primarily in the commercial real estate, commercial construction and leasing portfolios. Within the consumer portfolio, residential mortgage nonaccruals were down due to certain loans being identified and moved to the held for sale portfolio, while indirect automobile nonaccruals increased as a result of the moratorium on repossessions under the CARES Act. Performing TDRs were up$28 million during the second quarter, primarily in residential mortgage loans and commercial real estate. Loans 90 days or more past due and still accruing totaled$1.1 billion atJune 30, 2020 , down$676 million compared to the prior quarter. The decline was primarily due to a decrease in government guaranteed student loans due to forbearance programs that were put in place by the servicer of the loans implemented in connection with the CARES Act. The ratio of loans 90 days or more past due and still accruing as a percentage of loans and leases was 0.34% atJune 30, 2020 , down 21 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% atJune 30, 2020 , down one basis point from 0.04% atMarch 31, 2020 . Loans 30-89 days past due and still accruing totaled$1.9 billion atJune 30, 2020 , down$473 million compared to the prior quarter. The decline is primarily due to a decrease in indirect automobile and government guaranteed student loans due to deferral and forbearance programs implemented in connection with CARES Act. The ratio of loans 30-89 days or more past due and still accruing as a percentage of loans and leases was 0.60% atJune 30, 2020 , down 14 basis point 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 10. 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 11: Asset Quality Ratios As of / For the Three Months Ended Jun 30, 2020 Mar
31, 2020
0.60 % 0.74 % 0.74 % 0.66 % 0.67 %
Loans 90 days or more past due and still accruing
as a percentage of loans and leases HFI 0.34 0.55 0.66 0.27 0.27
NPLs as a percentage of loans and leases HFI 0.35 0.32 0.15 0.30 0.30
Nonperforming loans and leases as a percentage of
loans and leases (1) 0.37 0.33 0.18 0.30 0.30
NPAs as a percentage of:
Total assets (1) 0.25 0.23 0.14 0.22 0.23
Loans and leases HFI plus foreclosed property 0.37 0.36 0.19 0.34 0.34
Net charge-offs as a percentage of average loans
and leases HFI 0.39 0.36 0.40 0.41 0.38
ALLL as a percentage of loans and leases HFI 1.81 1.63 0.52 1.05 1.05
Ratio of ALLL to:
Net charge-offs 4.49x 4.76x 2.03x 2.59x 2.80x
NPLs 5.24x 5.04x 3.41x 3.52x 3.46x
Loans 90 days or more past due and still accruing
as a percentage of loans and leases HFI excluding
government guaranteed and PCI loans(2) 0.03 % 0.04 % 0.03 % 0.04 % 0.04 %
Applicable ratios are annualized.
(1) Includes LHFS.
(2) This asset quality ratio has been adjusted to remove the impact of
government guaranteed mortgage and student loans and PCI, as applicable.
Management believes the inclusion of such assets in this asset quality ratio
results in distortion of this ratio such that it might not be reflective of
asset collectability or might not be comparable to other periods presented or to
other portfolios that do not have government guarantees or were not impacted by
PCI accounting requirements.
64 Truist Financial Corporation
--------------------------------------------------------------------------------The following table presents activity related to NPAs:
Table 12: Rollforward of NPAs
(Dollars in millions) 2020 2019
Balance, January 1 $ 684 $ 585
New NPAs (1) 1,710 600
Advances and principal increases 172 107
Disposals of foreclosed assets (2) (248) (235)
Disposals of NPLs (3) (269) (78)
Charge-offs and losses (322) (141)
Payments (318) (237)
Transfers to performing status (177) (78)
Other, net 20 -
Ending balance, June 30 $ 1,252 $ 523
(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 $73 million and $106
million for the six months ended June 30, 2020 and 2019, respectively.
(3) Includes charge-offs and losses recorded upon sale of $54 million and $17
million for the six months ended June 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 13: Rollforward of Performing TDRs
(Dollars in millions) 2020 2019
Balance, January 1 $ 980 $ 1,119
Inflows 331 283
Payments and payoffs (57) (90)
Charge-offs (27) (31)
Transfers to nonperforming TDRs (27) (36)
Removal due to the passage of time (6) (15)
Non-concessionary re-modifications (1) (7)
Transferred to LHFS and/or sold (86) (153)
Balance, June 30 $ 1,107 $ 1,070
Truist Financial Corporation 65
--------------------------------------------------------------------------------
The following table provides further details regarding the payment status of
TDRs outstanding at June 30, 2020 :
Table 14: Payment Status of TDRs (1)
June 30, 2020 Past Due 90 Days Or
(Dollars in millions) Current Past Due 30-89 Days More Total
Performing TDRs:
Commercial:
Commercial and industrial $ 50 87.7 % $ 7 12.3 % $ - - % $ 57
CRE 22 100.0 - - - - 22
Commercial construction 36 100.0 - - - - 36
Lease financing 1 100.0 - - - - 1
Consumer:
Residential mortgage 268 50.2 84 15.8 181 34.0 533
Residential home equity and direct 70 98.6 1 1.4 - - 71
Indirect auto 320 93.6 22 6.4 - - 342
Indirect other 4 100.0 - - - - 4
Student 4 100.0 - - - - 4
Credit card 32 86.5 3 8.1 2 5.4 37
Total performing TDRs 807 72.9 117 10.6 183 16.5 1,107
Nonperforming TDRs 59 53.2 8 7.2 44 39.6 111
Total TDRs $ 866 71.1 $ 125 10.3 $ 227 18.6 $ 1,218 (1)Past due performing TDRs are included in past due disclosures and nonperforming TDRs are included in NPL disclosures.
66Truist Financial Corporation --------------------------------------------------------------------------------
ACL
Activity related to the ACL is presented in the following tables:
Table 15: Activity in ACL
For the Three Months Ended For the Six Months Ended
Quarters ended
(Dollars in millions)
2020 2019
Balance, beginning of period
1,653$ 1,689 $ 1,659 $ 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 844 893 171 117 172 1,737
327
Charge-offs:
Commercial and industrial (123) (39) (23) (28) (22) (162) (39) CRE (14) (1) (5) (2) (18) (15) (26) Commercial construction - (3) - - - (3) - Lease financing (4) (2) (9) (1) - (6) (1) Residential mortgage (35) (11) (8) (3) (5) (46) (10) Residential home equity and direct (65) (68) (25) (24) (24) (133) (44) Indirect auto (80) (142) (107) (92) (79) (222) (171) Indirect other (20) (18) (19) (14) (12) (38) (29) Student (6) (8) - - - (14) - Credit card (50) (53) (37) (25) (23) (103) (47) Total charge-offs (397) (345) (233) (189) (183) (742) (367) Recoveries: Commercial and industrial 21 17 6 5 8 38 14 CRE 4 - - 3 2 4 2 Commercial construction 7 1 1 - 1 8 2 Lease financing - - - 1 - - - Residential mortgage 2 2 1 - - 4 1 Residential home equity and direct 15 15 10 6 8 30 14 Indirect auto 18 23 13 12 14 41 27 Indirect other 7 7 5 3 5 14 9 Student 1 - - - - 1 - Credit card 6 8 5 6 3 14 9 Total recoveries 81 73 41 36 41 154 78 Net charge-offs (316) (272) (192) (153) (142) (588) (289) Other (6) (39) 257 - - (45) -
Balance, end of period
1,889$ 1,653 $ 1,689 $ 6,133 $ 1,689 ALLL (excluding PCD / PCI loans)$ 5,408 $ 4,880 $ 1,541 $ 1,565 $ 1,587 ALLL for PCD / PCI loans 294 331 8 8 8 RUFC 431 400 340 80 94 Total ACL$ 6,133 $ 5,611 $ 1,889 $ 1,653 $ 1,689 The ACL totaled$6.1 billion atJune 30, 2020 , compared to$1.9 billion atDecember 31, 2019 . The increase in the allowance for credit losses was primarily due the adoption of CECL. Upon adoption, the Company recorded a$3.1 billion increase in the allowance for credit losses, including$2.8 billion that was charged to retained earnings before tax, and$378 million related to the gross up for PCD loans. The remaining increase in the allowance for credit losses primarily reflects deteriorated economic conditions. As ofJune 30, 2020 , the allowance for loan and lease losses was 1.81% of loans and leases held for investment. The allowance for credit losses includes$5.7 billion for loans and leases and$431 million for the reserve for unfunded commitments. The allowance for loan and lease losses was 5.24 times nonperforming loans and leases held for investment atJune 30, 2020 , compared to 5.04 times atMarch 31, 2020 . AtJune 30, 2020 , the allowance for loan and lease losses was 4.49 times annualized net charge-offs, compared to 4.76 times atMarch 31, 2020 . Truist Financial Corporation 67 -------------------------------------------------------------------------------- Net charge-offs during the second quarter totaled$316 million , up$44 million compared to the prior quarter. As a percentage of average loans and leases, annualized net charge-offs were 0.39%, up three basis points compared to the prior quarter. For the six months endedJune 30, 2020 , net charge-offs were$588 million compared to$289 million for the same period of the prior year. The net charge-off rate was 0.38% of average loans and leases for the six months endedJune 30, 2020 , compared to 0.39% of average loans and leases for the earlier period. The increases in net charge-offs were primarily due to the merger. The following table presents an allocation of the ALLL. The entire amount of the allowance is available to absorb losses occurring in any category of loans and leases. Table 16: Allocation of ALLL by Category June 30, 2020 December 31, 2019 % ALLL in % Loans in % ALLL in % Loans in (Dollars in millions) Amount Each Category Each Category Amount Each Category Each Category Commercial and industrial$ 2,137 37.4 % 46.7 %$ 560 36.1 % 43.4 % CRE 391 6.9 8.9 150 9.7 8.9 Commercial construction 134 2.4 2.2 52 3.4 2.1 Lease financing 59 1.0 1.8 10 0.6 2.0 Residential mortgage 431 7.6 16.4 176 11.4 17.4 Residential home equity and direct 697 12.2 8.6 107 6.9 9.0 Indirect auto 1,190 20.9 7.8 304 19.6 8.2 Indirect other 213 3.7 3.7 60 3.9 3.7 Student 123 2.2 2.4 - - 2.2 Credit card 327 5.7 1.5 122 7.9 1.9 PCI - - - 8 0.5 1.2 Total ALLL 5,702 100.0 % 100.0 % 1,549 100.0 % 100.0 % RUFC 431 340 Total ACL$ 6,133 $ 1,889 Truist monitors the performance of its home equity loans and lines secured by second liens similarly to other consumer loans and utilizes assumptions specific to these loans in determining the necessary ALLL.Truist also receives notification when the first lien holder, whetherTruist or another financial institution, has initiated foreclosure proceedings against the borrower. When notified that the first lien is in the process of foreclosure,Truist obtains valuations to determine if any additional charge-offs or reserves are warranted. These valuations are updated at least annually thereafter.Truist has limited ability to monitor the delinquency status of the first lien, unless the first lien is held or serviced byTruist . As a result, using migration assumptions that are based on historical experience and adjusted for current trends,Truist estimates the volume of second lien positions where the first lien is delinquent and adjusts the ALLL to reflect the increased risk of loss on these credits. Finally,Truist also provides additional reserves for second lien positions when the estimated combined current loan to value ratio for the credit exceeds 100%. As ofJune 30, 2020 ,Truist held or serviced the first lien on 31.0% of its second lien positions. 68Truist Financial Corporation --------------------------------------------------------------------------------
Other Assets
The components of other assets are presented in the following table: Table 17: Other Assets as of Period End (Dollars in millions) June 30, 2020 December 31, 2019 Bank-owned life insurance$ 6,430 $ 6,383 Tax credit and other private equity investments 5,470 5,448 Prepaid pension assets 3,946 3,579 Accounts receivable 2,524 2,418 Derivative assets 4,214 2,053 Lease assets - leased assets and related assets 1,953 1,897 ROU assets 1,724 1,823 Accrued income 1,933 1,807 Prepaid expenses 1,242 1,254 Structured real estate 686 987 Equity securities at fair value 642 817 FHLB stock 229 764 Other 749 2,602 Total other assets$ 31,742 $ 31,832 Funding Activities Deposits
The following table presents deposits for each of the last five quarters: Table 18: Deposits as of Period End (Dollars in millions)
Jun 30, 2020
$ 122,694 $ 97,618 $ 92,405 $ 52,667 $ 52,458 Interest checking 99,005 92,950 85,492 27,723 28,021 Money market and savings 123,974 124,072 120,934 64,454 63,972 Time deposits 30,562 35,539 35,896 16,526 15,070 Foreign office deposits - interest-bearing - - - 910 - Total deposits$ 376,235 $ 350,179 $ 334,727 $ 162,280 $ 159,521 Deposits totaled$376.2 billion atJune 30, 2020 , an increase of$41.5 billion fromDecember 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. The following table presents average deposits for each of the last five quarters: Table 19: Average Deposits Three Months Ended (Dollars in millions) Jun 30, 2020
$ 113,875 $ 93,135 $ 64,485 $ 52,500 $ 52,680 Interest checking 97,863 85,008 43,246 27,664 27,708 Money market and savings 126,071 120,936 79,903 64,920 63,394 Time deposits 33,009 35,570 23,058 16,643 15,730 Foreign office deposits - interest-bearing - - 24 265
379
Total average deposits$ 370,818 $ 334,649 $ 210,716 $ 161,992 $ 159,891 Average deposits for the second quarter of 2020 were$370.8 billion , an increase of$36.2 billion compared to the prior quarter. Average deposit growth was strong for the second quarter of 2020 due to a continuation of the flight to quality and government stimulus programs. Average time deposits decreased primarily due to maturity of wholesale negotiable certificates of deposit and higher-cost personal accounts that were replaced by strong growth in non-time deposit products. Average noninterest-bearing deposits represented 30.7% of total deposits for the second quarter of 2020. The cost of average total deposits was 0.22% for the second quarter, down 29 basis points compared to the prior quarter. The cost of average interest-bearing deposits was 0.32% for the second quarter, down 38 basis points compared to the prior quarter. Truist Financial Corporation 69 --------------------------------------------------------------------------------
Borrowings
AtJune 30, 2020 , short-term borrowings totaled$5.7 billion , a decrease of$12.5 billion compared toDecember 31, 2019 , due primarily to a decrease of$11.1 billion in short-term FHLB advances. Average short-term borrowings were$9.0 billion , or 2.1% of total funding for the second quarter 2020, as compared to$8.4 billion , or 4.4% 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 byTruist andTruist Bank . Long-term debt totaled$42.1 billion atJune 30, 2020 , an increase of$794 million compared toDecember 31, 2019 . The increase included issuances of$4.0 billion of senior notes with interest rates from 1.20% 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 increases were partially offset by the redemption of$3.7 billion of senior notes during the first half of 2020 and a decrease of$1.5 billion in long-term FHLB advances. The average cost of long-term debt was 1.90% for the six months endedJune 30, 2020 , down 141 basis points compared to the same period in 2019. FHLB advances represented 6.3% of total outstanding long-term debt atJune 30, 2020 , compared to 10.0% atDecember 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
Shareholders' Equity
Total shareholders' equity was$68.9 billion atJune 30, 2020 , an increase of$2.3 billion fromDecember 31, 2019 . This increase includes the issuance of$2.6 billion of preferred stock during the second quarter of 2020,$2.0 billion in net income available to common shareholders and an increase of$1.7 billion in AOCI, which was partially offset by$2.1 billion related to the adoption of CECL and$1.3 billion for common and preferred dividends. In addition,Truist redeemed$500 million of its Series K preferred stock during the first quarter of 2020.Truist's book value per common share atJune 30, 2020 was$45.74 , compared to$45.66 atDecember 31, 2019 .
Refer to "Note 10. Shareholders' Equity" for additional disclosures related to preferred stock issuances.
Risk ManagementTruist maintains a comprehensive risk management framework supported by people, processes and systems to identify, measure, monitor, manage and report significant risks arising from its exposures and business activities. Effective risk management involves appropriately managing risk to optimize risk and return, and operate in a safe and sound manner while ensuring compliance with applicable laws and regulations. The Company's risk management framework is designed to ensure that business strategies and objectives are executed in alignment with its risk appetite.
Compensation decisions take into account a teammate's adherence to, and successful implementation of,Truist's risk values and associated policies and procedures. The Company's compensation structure supports its core values and sound risk management practices in an effort to promote judicious risk-taking behavior.Truist employs a comprehensive change management program to manage the risks associated with integrating heritage BB&T and heritage SunTrust. The Board and Executive Leadership oversee the change management program, which is designed to ensure key decisions are reviewed and that there is appropriate oversight of integration activities.
Refer to
70Truist Financial Corporation --------------------------------------------------------------------------------
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 achievingTruist's strategic financial objectives.Truist's most significant market risk exposure is to interest rate risk in its balance sheet; however, market risk also results from underlying product liquidity risk, price risk and volatility risk inTruist's BUs. Interest rate risk results from differences between the timing of rate changes and the timing of cash flows associated with assets and liabilities (re-pricing risk); from changing rate relationships among different yield curves affecting bank activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest-related options inherently embedded in bank products (options risk). The primary objectives of effective market risk management are to minimize adverse effects from changes in market risk factors on net interest income, net income and capital and to offset the risk of price changes for certain assets and liabilities recorded at fair value. AtTruist , market risk management also includes the enterprise-wide IPV function.
Interest rate market risk (other than trading)
As a financial institution,Truist is exposed to interest rate risk both on its assets and on its liabilities. Since interest rate changes are out of the control of any private sector institution,Truist actively manages its interest rate risk exposure through the strategic repricing of its assets and liabilities, taking into account the volumes, maturities and mix, with the goal of keeping net interest margin as stable as possible.Truist primarily uses three methods to measure and monitor its interest rate risk: (i) simulations of possible changes to net interest income over the next two years based on gradual changes in interest rates; (ii) analysis of interest rate shock scenarios; and (iii) analysis of economic value of equity based on changes in interest rates. The Company's simulation model takes into account assumptions related to prepayment trends, using a combination of market data and internal historical experiences for deposits and loans, as well as scheduled maturities and payments and the expected outlook for the economy and interest rates. These assumptions are reviewed and adjusted monthly to reflect changes in current interest rates compared to the rates applicable toTruist's assets and liabilities. The model also considersTruist's current and prospective liquidity position, current balance sheet volumes and projected growth and/or contractions, accessibility of funds for short-term needs and capital maintenance. Deposit betas are an important assumption in the interest rate risk modeling process.Truist applies an average deposit beta (the sensitivity of deposit rate changes relative to market rate changes) of approximately 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 they could have on the Company's interest rate risk position. The predictive value of the simulation model depends upon the accuracy of the assumptions, but management believes that it provides helpful information for the management of interest rate risk.
The following table shows the effect that the indicated changes in interest rates would have on net interest income as projected for the next 12 months assuming a gradual change in interest rates as described below. Table 20: Interest Sensitivity Simulation Analysis
Annualized
Interest Rate Scenario Hypothetical
Prime Rate Percentage Change in
Linear Change in Net Interest Income
Prime Rate (bps) Jun 30, 2020 Jun 30, 2019 Jun 30, 2020 Jun 30, 2019
Up 100 4.25 % 6.50 % 2.39 % 0.73 %
Up 50 3.75 6.00 1.84 0.57
No Change 3.25 5.50 - -
Down 25 (1) 3.00 5.25 (1.24) (0.87)
Down 50 (1) 2.75 5.00 (1.44) (2.02)
(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.
Truist Financial Corporation 71
--------------------------------------------------------------------------------
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 21: EVE Simulation Analysis
Change in Interest Hypothetical Percentage Change in EVE
Rates (bps) Jun 30, 2020 Jun 30, 2019
Up 100 6.6 % 4.4 %
No Change - -
Down 100 (7.3) (16.3)
Truist uses financial instruments including derivatives to manage interest rate
risk related to securities, commercial loans, MSRs and mortgage banking
operations, long-term debt and other funding sources. Truist also uses
derivatives to facilitate transactions on behalf of its clients and as part of
associated hedging activities. As of June 30, 2020 , Truist had derivative
financial instruments outstanding with notional amounts totaling $321.8 billion ,
with an associated net fair value of $3.8 billion . See "Note 16. Derivative
Financial Instruments" for additional disclosures.
LIBOR in its current form may no longer be available after 2021. Truist has
LIBOR-based contracts that extend beyond 2021. To prepare for the possible
transition to an alternative reference rate, management has formed a
cross-functional project team to address the LIBOR transition. The project team
has performed an assessment to identify the potential risks related to the
transition from LIBOR to a new index. The project team provides regular reports
to the Board.
The project team is reviewing contract fallback language for loans and leases
and noted that certain contracts will need updated provisions for the
transition, and the team is coordinating with impacted lines of business to
update LIBOR fallback language generally consistent with the ARRC
recommendation. Truist is continuing to evaluate the impact on these contracts
and other financial instruments, systems implications, hedging strategies, and
other related operational and market risks. Market risks associated with this
change are dependent on the alternative reference rates available and market
conditions at transition. For a further discussion of the various risks
associated with the potential cessation of LIBOR and the transition to
alternative reference rates, refer to the section titled "Item 1A. Risk Factors"
in the Form 10-K for the year ended December 31, 2019 .
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 withTruist's risk appetite.
Covered trading positions Covered positions subject to the Market Risk Rule include trading assets and liabilities, specifically those held for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements, or to lock in arbitrage profits.Truist's trading portfolio of covered positions results primarily from market making and underwriting services for our clients, as well as associated risk mitigating hedging activity. The trading portfolio, measured in terms of VaR, consists primarily of four sub-portfolios of covered positions: (i) credit trading, (ii) fixed income securities, (iii) interest rate derivatives and (iv) equity derivatives. As a market maker across different asset classes,Truist's trading portfolio also contains other sub-portfolios, including foreign exchange, loan trading, and commodity derivatives; however, these portfolios do not generate material trading risk exposures. Valuation policies, procedures, and methodologies exist for all covered positions. Additionally, trading positions are subject to independent price verification. See "Note 16. Derivative Financial Instruments," "Note 15. Fair Value Disclosures," and "Critical Accounting Policies" herein for discussion of valuation policies, procedures and methodologies. 72Truist Financial Corporation --------------------------------------------------------------------------------
Securitizations
As ofJune 30, 2020 , the aggregate market value of on-balance sheet securitization positions subject to the Market Risk Rule was less than$1 million , all of which were non-agency asset backed securities positions. Consistent with the Market Risk Rule requirements, the Company performs pre-purchase due diligence on each securitization position to identify the characteristics including, but not limited to, deal structure and the asset quality of the underlying assets, that materially affect valuation and performance. Securitization positions are subject toTruist's comprehensive risk management framework, which includes daily monitoring against a suite of limits. There were no off-balance sheet securitization positions during the reporting period. Correlation trading positions
The trading portfolio of covered positions did not contain any correlation
trading positions as of
VaR-based measures
VaR measures the 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. Following the Merger,Truist elected to migrate all covered positions to the heritage SunTrust VaR system and methodology. For an interim period, however, VaR for a subset of heritage BB&T positions, specifically those covered positions held inBB&T Securities , will be calculated using the heritage BB&T VaR system and methodology. As such, pending full integration,Truist will operate two historical VaR models and aggregate company-wide VaR across the systems will be determined additively with no benefit of diversification. For risk management purposes, the VaR calculation is based on a historical simulation approach and measures the potential trading losses using a one-day holding period at a one-tail, 99% confidence level. For Market Risk Rule purposes, the Company calculates VaR using a 10-day holding period and a 99% confidence level. Due to inherent limitations of the VaR methodology, such as the assumption that past market behavior is indicative of future market performance, VaR is only one of several tools used to measure and manage market risk. Other tools used to actively manage market risk include stress testing, profit and loss attribution, and stop loss limits. The trading portfolio's VaR profile is influenced by a variety of factors, including the size and composition of the portfolio, market volatility and the correlation between different positions. A portfolio of trading positions is typically less risky than the sum of risk from each of the individual sub-portfolios. As such, risk within each category partially offsets the exposure to other risk categories thereby creating portfolio diversification benefit. The following table summarizes certain VaR-based measures for both the three and six months endedJune 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 other stressed measures of risk based on risk factors observed during the 2008/2009 financial crisis. Table 22: VaR-based Measures Three Months EndedJune 30 , Six Months EndedJune 30, 2020 2019 2020 2019 10-Day Holding 1-Day Holding 10-Day Holding 1-Day Holding 10-Day Holding 1-Day Holding 10-Day Holding (Dollars in millions) Period Period Period Period Period Period Period 1-Day Holding Period VaR-based Measures: Maximum$ 65 $ 9 $ 2 $ 1 $ 65 $ 10 $ 2 $ 1 Average 29 6 1 - 20 4 1 - Minimum 13 3 1 - 3 1 - - Period-end 17 3 1 - 17 3 1 - VaR by Risk Class: Interest Rate Risk 3 - 3 - Credit Spread Risk 4 - 4 - Equity Price Risk 1 - 1 - Foreign Exchange Risk - - - - Portfolio Diversification (6) - (6) - Period-end 3 - 3 -
Stressed VaR-based measures
Truist Financial Corporation 73
--------------------------------------------------------------------------------
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 23: Stressed VaR-based Measures - 10 Day Holding Period
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in millions) 2020 2019 2020 2019
Maximum $ 65 $ 6 $ 65 $ 6
Average 29 4 31 4
Minimum 13 3 13 3
Period-end 17 3 17 3
The increase from the prior year in stressed VaR-based measures was due to the integration of heritage SunTrust trading business after the Merger.
Specific risk measures
Specific risk is a measure of idiosyncratic risk that could result from risk factors other than broad market movements (e.g. default, event risks). The Market Risk Rule provides fixed risk weights under a standardized measurement method while also allowing a model-based approach, subject to regulatory approval.Truist utilizes the standardized measurement method to calculate the specific risk component of market risk regulatory capital. As such, incremental risk capital 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 nine company-wide VaR backtesting exceptions during the twelve months endedJune 30, 2020 , primarily driven by the COVID-19 pandemic which led to a sudden and significant repricing of financial markets, amid an increase in market volatility and deterioration in overall market liquidity. In accordance with established policy and procedure, all company-wide VaR backtesting exceptions are thoroughly reviewed in the context of VaR model use and performance. Following such reviews, it was determined that the VaR model performed in line with expectations. However, the extreme moves in underlying market risk factors caused by the COVID-19 pandemic would not typically have been captured within the 1-day VaR measure. [[Image Removed: tfc-20200630_g3.jpg]] 74Truist Financial Corporation --------------------------------------------------------------------------------
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
The Company uses a comprehensive range of stress testing techniques to help monitor risks across trading desks and to augment standard daily VaR and other risk limits reporting. The stress testing framework is designed to quantify the impact of extreme, but plausible, stress scenarios that could lead to large unexpected losses. Stress tests include simulations for historical repeats and hypothetical risk factor shocks. All trading positions within each applicable market risk category (interest rate risk, equity risk, foreign exchange rate risk, credit spread risk, and commodity price risk) are included in the Company's comprehensive stress testing framework. Management reviews stress testing scenarios on an ongoing basis and makes updates, as necessary, to ensure that both current and emerging risks are captured appropriately. Management also utilizes stress analyses to support the Company's capital adequacy assessment standards. See the "Capital" section of this MD&A for additional discussion of capital adequacy. Liquidity Liquidity represents the continuing ability to meet funding needs, including deposit withdrawals, repayment of borrowings and other liabilities, and funding of loan commitments. In addition to the level of liquid assets, such as cash, cash equivalents and AFS securities, other factors affect the ability to meet liquidity needs, including access to a variety of funding sources, maintaining borrowing capacity, growing core deposits, loan repayment and the ability to securitize or package loans for sale.Truist monitors the ability to meet client demand for funds under both normal and stressed market conditions. In considering its liquidity position, management evaluatesTruist's funding mix based on client core funding, client rate-sensitive funding and national markets funding. In addition, management evaluates exposure to rate-sensitive funding sources that mature in one year or less. Management also measures liquidity needs against 30 days of stressed cash outflows forTruist andTruist Bank . To ensure a strong liquidity position, and compliance with regulatory requirements, management maintains a liquid asset buffer of cash on hand and highly liquid unencumbered securities. As ofJune 30, 2020 andDecember 31, 2019 ,Truist's liquid asset buffer, as a percent of total assets, was 17.8% and 16.5%, respectively. The LCR rule directs largeU.S. banking organizations to hold unencumbered high-quality liquid assets sufficient to withstand projected 30-day total net cash outflows, each as defined under the LCR rule. As ofJanuary 1, 2020 ,Truist is subject to the Category III reduced LCR requirements (85% of the full requirements).Truist's average LCR was 116% for the three months endedJune 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 andTruist Bank's credit quality, liquidity, capital and earnings. Management meets with the rating agencies on a regular basis to discuss current outlooks. InApril 2020 , DBRS revised its outlook forTruist andTruist Bank from "positive" to "stable," citing economic deterioration related to COVID-19. DBRS affirmed all other ratings forTruist andTruist Bank . Additionally, Fitch revised its outlook forTruist andTruist Bank from "stable" to "negative," also citing pandemic-related economic deterioration. Fitch downgradedTruist's subordinated debt to A-, and upgradedTruist's preferred stock to BBB, in order to align these ratings to its recently revised bank rating methodology. InJuly 2020 , Fitch completed the implementation of its revised bank rating methodology. As a result, Fitch downgradedTruist's senior unsecured debt to A and affirmedTruist Bank's senior unsecured and subordinated debt ratings. The rating actions taken by Fitch were solely a function of implementing its revised bank rating methodology and did not reflect a change in Fitch's current or expected view ofTruist's orTruist Bank's credit fundamentals. See "Liquidity" section of the MD&A of the Annual Report on Form 10-K for the year endedDecember 31, 2019 for additional information regarding credit ratings.
Parent Company
The Parent Company serves as the primary source of capital for the operating subsidiaries.The Parent Company's assets consist primarily of cash on deposit withTruist Bank , equity investments in subsidiaries, advances to subsidiaries, and accounts receivable from subsidiaries. The principal obligations of the Parent Company are payments on long-term debt. The main sources of funds for the Parent Company are dividends and management fees from subsidiaries, repayments of advances to subsidiaries, and proceeds from the issuance of equity and long-term debt. The primary uses of funds by the Parent Company are investments in subsidiaries, advances to subsidiaries, dividend payments to common and preferred shareholders, retirement of common stock, and payments on long-term debt.Truist Financial Corporation 75
-------------------------------------------------------------------------------- See "Note 22. Parent Company Financial Information" of the Annual Report on Form 10-K for the year endedDecember 31, 2019 for additional information regarding dividends from subsidiaries and debt transactions. Access to funding at the Parent Company is more sensitive to market disruptions. Therefore,Truist prudently manages cash levels at the Parent Company to cover a minimum of one year of projected cash outflows which includes unfunded external commitments, debt service, common and preferred dividends and scheduled debt maturities, without the benefit of any new cash inflows.Truist maintains a significant buffer above the projected one year of cash outflows. In determining the buffer,Truist considers cash requirements for common and preferred dividends, unfunded commitments to affiliates, serving as a source of strength toTruist Bank , and being able to withstand sustained market disruptions that could limit access to the capital markets. AtJune 30, 2020 andDecember 31, 2019 , the Parent Company had 41 months and 29 months, respectively, of cash on hand to satisfy projected cash outflows, and 21 months and 20 months, respectively, when including the payment of common stock dividends.
Truist carefully manages liquidity risk atTruist Bank .Truist Bank's primary source of funding is client deposits. Continued access to client deposits is highly dependent on public confidence in the stability ofTruist Bank and its ability to return funds to clients when requested.Truist Bank maintains a number of diverse funding sources to meet its liquidity requirements. These sources include unsecured borrowings from the capital markets through the issuance of senior or subordinated bank notes, institutional CDs, overnight and term Federal funds markets, and retail brokered CDs.Truist Bank also maintains access to secured borrowing sources including FHLB advances, repurchase agreements, and the FRB discount window. AtJune 30, 2020 ,Truist Bank had approximately$166.1 billion of available secured borrowing capacity, which represents approximately 4.3 times the amount of one-year wholesale funding maturities. In addition to secured borrowing sources,Truist had excess eligible cash at theFederal Reserve Bank of$35.8 billion atJune 30, 2020 .
Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements
Refer toTruist's Annual Report on Form 10-K for the year endedDecember 31, 2019 for discussion with respect toTruist's quantitative and qualitative disclosures about its fixed and determinable contractual obligations.Truist's commitments include investments in affordable housing projects throughout its market area, renewable energy credits, private equity funds, derivative contracts to manage various financial risks, as well as other commitments. Refer to "Note 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 supportTruist's risk profile consistent with the Board-approved risk appetite, provide financial flexibility to support future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, achieve optimal credit ratings forTruist and its subsidiaries and provide a competitive return to shareholders. Risk-based capital ratios, which include CET1 capital, Tier 1 capital and Total capital are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets. 76Truist Financial Corporation --------------------------------------------------------------------------------Truist regularly performs stress testing on its capital levels and is required to periodically submit the Company's capital plans and stress testing results to the banking regulators. Management regularly monitors the capital position ofTruist on both a consolidated and bank-level basis. In this regard, management's overriding policy is to maintain capital at levels that are in excess of internal capital targets, which are above the regulatory "well capitalized" minimums. Management has implemented stressed capital ratio minimum targets to evaluate whether capital ratios calculated after the effect of alternative capital actions are likely to remain above minimums specified by the FRB for the annual CCAR process. Breaches of stressed minimum targets prompt a review of the planned capital actions included inTruist's capital plan. Table 24: Capital Requirements and Targets Minimum Well Capitalized 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)TheTruist targets are subject to revision based on finalization of pending regulatory guidance and other strategic factors. (2)Truist's goal is to maintain capital levels above all regulatory minimums. (3)The current capital conservation buffer of 250 basis points will be replaced by the stress capital buffer effectiveOctober 1, 2020 . During the first quarter of 2020, as market conditions evolved,Truist received Board approval to establish new interim operating targets that provide for sufficient capital levels while allowing the company to support clients through the economic downturn. These interim operating targets will be evaluated as economic conditions evolve. While nonrecurring events or management decisions may result in the Company temporarily falling below its operating minimum guidelines for one or more of these ratios, it is management's intent to return to these targeted operating minimums within a reasonable period of time through capital planning. Such temporary decreases below the operating minimums shown above are not considered an infringement ofTruist's overall capital policy, provided a return above the minimums is forecasted to occur within a reasonable time period. InJune 2020 , theFederal Reserve informedTruist of its preliminary SCB of 270 basis points for risk-based capital ratios. This buffer, which is determined based on stress testing results developed by theFederal Reserve , is 20 basis points above the existing Capital Conservation Buffer. TheFederal Reserve will provideTruist its final SCB byAugust 31, 2020 . The SCB will be effective fromOctober 1, 2020 throughSeptember 30, 2021 , at which point a revised SCB will be calculated and provided toTruist . Consistent with theFederal Reserve's mandate across the industry,Truist will be required to update and resubmit its capital plan later this year to reflect changes in financial markets and the macroeconomic outlook.Truist has reviewed the results of the 2020 CCAR supervisory stress test and noted 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 Financial Corporation 77 --------------------------------------------------------------------------------
(Dollars in millions, except per share data, shares in thousands)
Jun 30, 2020 Dec 31, 2019 Risk-based:
(preliminary)
CET1 capital to risk-weighted assets 9.7 % 9.5 % Tier 1 capital to risk-weighted assets 11.5 10.8 Total capital to risk-weighted assets 13.9 12.6 Leverage ratio 9.0 14.7 Supplementary leverage ratio 8.5 NA Non-GAAP capital measure (1): Tangible common equity per common share$ 26.38 $ 25.93 Calculation of tangible common equity (1): Total shareholders' equity$ 68,883 $ 66,558 Less: Preferred stock 7,143 5,102 Noncontrolling interests 106 174 Goodwill and intangible assets, net of deferred taxes 26,083 26,482 Tangible common equity$ 35,551 $ 34,800 Risk-weighted assets$ 383,430 $ 376,056 Common shares outstanding at end of period 1,347,609 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 atJune 30, 2020 .Truist's other capital measures also improved asTruist issued various capital instruments to strengthen its capital position.Truist issued$2.6 billion of preferred stock and redeemed$500 million of Series K preferred stock during the first six months of 2020. InAugust 2020 ,Truist issued$925 million of preferred stock. In addition,Truist issued$1.3 billion of subordinated debt.Truist declared common dividends of$0.450 per share during the second quarter of 2020. The dividend and total payout ratios for the second quarter of 2020 were 67.2%. As previously communicated at the time of the Merger announcement,Truist suspended its share repurchase program until capital ratios return to higher levels. Share Repurchase Activity Table 26: Share Repurchase Activity Maximum Remaining Dollar Value of Shares Average Price Total Shares Repurchased Available for (Dollars in millions, except per share Total Shares Paid Per Share Pursuant to Repurchase Pursuant to data, shares in thousands) Repurchased (1) (2) Publicly-Announced Plan Publicly-Announced Plan April 2020 2$ 36.11 - $ - May 2020 - - - - June 2020 - - - - Total 2 36.11 -
(1)Includes shares exchanged or surrendered in connection with the exercise of equity-based awards under equity-based compensation plans. (2)Excludes commissions.
78Truist Financial Corporation --------------------------------------------------------------------------------
Critical Accounting Policies
The accounting and reporting policies ofTruist are in accordance with GAAP and conform to the accounting and reporting guidelines prescribed by bank regulatory authorities.Truist's financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues and expenses. Different assumptions in the application of these policies could result in material changes in the consolidated financial position and/or consolidated results of operations and related disclosures. The more critical policies include accounting for the ACL, determining fair value of financial instruments, intangible assets, income taxes and costs and benefit obligations associated with pension and postretirement benefit plans. UnderstandingTruist's accounting policies is fundamental to understanding the consolidated financial position and consolidated results of operations. The critical accounting policies are discussed in MD&A inTruist's Annual Report on Form 10-K for the year endedDecember 31, 2019 . Significant accounting policies and changes in accounting principles and effects of new accounting pronouncements are discussed in "Note 1. Basis of Presentation" in Form 10-K for the year endedDecember 31, 2019 . Additional disclosures regarding the effects of new accounting pronouncements are included in the "Note 1. Basis of Presentation" included herein. Except for the items noted below, there have been no changes to the significant accounting policies during 2020. Intangible Assets The severe economic disruption and related financial effects of the COVID-19 pandemic have impactedTruist's businesses.Truist's commercial clients have experienced varying levels of disruptions to business activity, supply chains and demand for products and services. Additionally, many consumer clients have experienced interrupted income or unemployment. The pandemic also has resulted in continuing volatility to the global andU.S. financial markets, although intensive relief actions by theU.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 forTruist and the banking sector, in comparison to the prior quarter. 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 second quarter of 2020 to determine whether it was more-likely-than-not 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, andTruist specific performance indicators, including any changes from when the Merger closed inDecember 2019 . Despite the adverse economic and still uncertain environment caused by the pandemic,Truist's second quarter 2020 results reflected profitable performance across each of its reporting units; strong capital and liquidity levels that have facilitated swift actions in support of clients, teammates and communities; andTruist's affirmation that it remains committed to achieving its Merger value proposition, including targeted net cost saves. Based on the qualitative assessment performed,Truist concluded that it was not more-likely-than-not that the fair value of one or more of its reporting units is below its respective carrying amount as ofJune 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 ofTruist's reporting units falls below its respective carrying amount, which would require a quantitative goodwill impairment test.
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 an historical average 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 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 whichTruist conducts business.Truist Financial Corporation 79 -------------------------------------------------------------------------------- Loans and leases that do not share similar risk characteristics and significant loans that are considered collateral-dependent are individually evaluated. For these loans, the ALLL is determined through review of data specific to the borrower and related collateral, if any. For TDRs, default expectations and estimated prepayment speeds that are specific to each of the restructured loan populations are incorporated in the determination of the ALLL. The methodology used to determine an estimate for the RUFC is inherently similar to that used to determine the funded component of the ALLL and is measured over the period there is a contractual obligation to extend credit that is not unconditionally cancellable. The RUFC is adjusted for factors specific to binding commitments, including the probability of funding and exposure at default. A detailed discussion of the methodology used in determining the ACL is included in "Note 1. Basis of Presentation."
© Edgar Online, source
