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 leastDecember 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. 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 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. These descriptions do not summarize all possible or proposed changes in current laws or regulations and are not intended to be a substitute for the related statues or regulatory provisions.
Stress Capital Buffer and CCAR
The FRB has adopted a final rule that integrates its annual capital planning and stress testing requirements with existing regulatory capital requirements. For risk-based capital requirements, the stress capital buffer replaces the capital conservation buffer, which was 2.5% throughSeptember 30, 2020 . Under the final rule, beginning in the 2020 CCAR cycle, the FRB will notifyTruist of its SCB requirements, which is equal to the greater of (i) the difference between its starting and minimum projected CET1 capital ratios under the severely adverse scenario in the supervisory stress test, plus the sum of the dollar amount 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. The FRB assignedTruist a SCB of 2.7%, which is effective fromOctober 1, 2020 throughSeptember 30, 2021 . Consistent with the FRB's mandate across the industry,Truist will update and resubmit its capital plan in earlyNovember 2020 to reflect changes in financial markets and the macroeconomic outlook, and the FRB will conduct additional analysis each quarter to determine if adjustments to this response are appropriate. The FRB also took several actions following its stress tests in light of the uncertainty caused by the COVID-19 pandemic. Specifically, for the third and fourth quarter of 2020, the FRB is requiring certain large banking organizations, includingTruist , to suspend share repurchases, cap common dividends per share to the amount paid in the second quarter, and further limit dividends according to a formula based on recent income. The FRB is also requiring banks to re-evaluate their longer-term capital plans.
Revisions to Definition of Eligible Retained Income
TheU.S. banking agencies have adopted a final rule altering the definition of eligible retained income in their respective capital rules. Under the new rule, eligible retained income is the greater of a firm's (i) net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (ii) average net income over the preceding four quarters. This definition applies with respect to all ofTruist's capital requirements.
Current Expected Credit Losses Methodology
TheU.S. banking agencies have adopted a final rule that permits banking organizations that implement CECL before the end of 2020 to elect to follow the three-year transition available under the prior rule or a new five-year transition to phase in the effects of CECL on regulatory capital. Under the five-year transition, the banking organization would defer for two years 100% of the day-one effect of adopting CECL and 25% of the cumulative increase in the allowance for credit losses since adoption of CECL. Following the first two years, the electing organization will phase out the aggregate capital effects over the next three years consistent with the transition in the original three-year transition rule.Truist has elected to use the five-year transition to phase in the impacts of CECL on regulatory capital.Truist Financial Corporation 47 --------------------------------------------------------------------------------
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, 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.
NSFR Rule
TheU.S. banking agencies have finalized a rule to implement the NSFR inthe United States . The NSFR rule requires each ofTruist andTruist Bank to maintain an amount of available stable funding, which is a weighted measure of a company's funding sources over a one-year time horizon, calculated by applying standardized weightings to the company's equity and liabilities based on their expected stability, that is no less than the amount of required stable funding, which is calculated by applying standardized weightings to assets, derivatives exposures and certain other items based on their liquidity characteristics. As a Category III banking organization,Truist andTruist Bank are subject to an NSFR requirement equal to 85% of the full requirement. These requirements will become effective as ofJuly 1, 2021 . 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$322 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. •Completed the first major brand milestone in the client-facing conversion ofTruist Securities . •Recently announcedTruist Ventures , which is about building strategic partnerships and making investments in innovative companies and solutions. •Launched the "blended branch" pilot program, which is a key step towards closing branches that are very close to one another while continuing to take care of clients. •Truist remains committed to achieving$1.6 billion in net cost saves on a run rate basis by the fourth quarter of 2022, excluding changes in net pension costs for 2021 and 2022. The Company is closely monitoring the COVID-19 pandemic and its effects on clients, counterparties and the financial markets in which the Company conducts business. The Company expects the effects of this health crisis, which include disruptions or restrictions in clients' supply chains, closures of clients' facilities or decreases in demand for clients' products and services, to continue to adversely impact economic conditions. Also related to the health crisis, 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. •Truist funded extensive line draws for commercial clients to help them fund liquidity and working capital needs during the onset of the pandemic. Additionally,Truist created an online, automated process for the PPP and began to accept applications during the first weekend of the program. Truist Served as the fourth largest PPP lender based on gross fundings. The carrying value of PPP loans was$12.2 billion as ofSeptember 30, 2020 . •Provided accommodations to commercial and consumer clients. Of clients that have exited accommodation programs, 98.0% of commercial clients, and 94.5% of consumer and credit card clients, respectively, are current on or have paid-off their loans. •Pledged$50 million in philanthropic support through the Truist Cares initiative that is providing aid for basic needs, medical supplies and financial hardship across the nation, as well as grants 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 teammates and clients safe, including temporarily limiting branch lobby access and the extensive use of drive-thrus. Approximately 90% of branches are open and unlocked, or open with controlled access.Truist continues to follow appropriate COVID-19 safety protocols, including proper social distancing. Additionally, alternative work assignments for certain teammates currently working remotely have been extended untilJanuary 31, 2021 . •Provided support for teammates including additional paid time off, flexibility and family care benefits. Provided teammates who have base pay below$100,000 annually a one-time pre-tax bonus of$1,200 in March to recognize their ongoing commitment to our clients and help alleviate some of the financial pressures caused by the pandemic. Enabled alternative work strategies that allowed more than half of our teammates to work remotely. Temporarily paid an additional onsite special pay rate of$6.25 per hour or$50 per day for teammates required to work in offices.Truist Financial Corporation 49 -------------------------------------------------------------------------------- •From mid-October to the end of 2020,Truist is providing teammates search tools for their in-home needs at no cost, including caregiver search tools, virtual academic support, child care priority and discounts, nanny placement services, elder care resources, and pet sitters and housekeepers. Additionally, eligible teammates will be eligible to receive a child care reimbursement of$50 /day for a limited timeframe.
See Part II, Item 1A, "Risk Factors," in this Form 10-Q for additional information regarding risks related to the effects of COVID-19.
•Truist's various foundations provided a donation of$40 million to help establishCornerSquare Community Capital , formed to support community development financial institutions focused on providing funding to racially and ethnically diverse small business owners, women and individuals in low- and moderate-income communities, with a particular focus onAfrican American -owned small businesses. The$40 million contribution toCornerSquare Community Capital consisted of two$20 million contributions made through theTruist Foundation, Inc. and theTruist Charitable Fund . These amounts did not impactTruist Financial Corporation's earnings. •Implemented a Truist Bank Community Benefits Plan under which the Company will lend or invest$60 billion to low- and moderate-income borrowers and in low- and moderate-income communities over a three-year period. •As part of the Corporate Social Responsibility report,Truist announced its commitment to increasing the number of racially and ethnically diverse employees among senior leadership positions from approximately 12% to at least 15% in three years.Truist also committed to ensuring regular, ongoing pay equity reviews for teammates. •Hosted more than 260 "Days of Understanding" sessions to date touching over 24,500 teammates, with more scheduled this year, that are designed to encourage bold dialogue on real-world topics in an open, trusting environment. •Scheduled virtual town hall meetings and discussion forums for teammates to share candid, personal experiences. •Began hosting unconscious bias training with Executive Leadership, Executive Leadership's directs and other leaders. A total 22 sessions have been completed or scheduled with over 300 leaders being trained. •Hosted more than 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. •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. •Observed Juneteenth holiday.
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 andEllen Fitzsimmons , Chief Legal Officer and Head of Enterprise Diversity, will report directly to the Chairman and CEO,Kelly King . 50Truist Financial Corporation --------------------------------------------------------------------------------
Financial Results
Net income available to common shareholders for the third quarter of 2020 totaled$1.1 billion , up 45.3%, compared with the third quarter last year. On a diluted per common share basis, earnings for the third quarter of 2020 were$0.79 , a decrease of$0.16 compared to the third quarter of 2019.Truist's results of operations for the third quarter of 2020 produced an annualized return on average assets of 0.91% and an annualized return on average common shareholders' equity of 6.87% compared to prior year returns of 1.41% and 10.04%, respectively. Results for the third quarter of 2020 included merger-related and restructuring charges of$236 million ($181 million after-tax), incremental operating expenses related to the Merger of$152 million ($115 million after-tax), securities gains of$104 million ($80 million after-tax) and a charitable contribution of$50 million ($38 million after-tax). Results for the third quarter of 2019 included$34 million ($26 million after-tax) of merger-related and restructuring charges, and$52 million ($40 million after-tax) of incremental operating expenses related to the Merger and an after-tax reduction in net income available to common shareholders of$46 million from the redemption of preferred stock.Truist's revenue for the third quarter of 2020 was$5.6 billion . On a TE basis, revenue was also$5.6 billion for the third quarter of 2020, an increase of$2.6 billion compared to the same period in 2019, reflecting an increase of$1.7 billion in TE net interest income and an increase of$907 million in noninterest income. The increase in revenue was primarily due to the Merger. NIM was 3.10% for the third quarter of 2020, down 27 basis points compared to the prior year. Average earning assets increased$232.0 billion , as average loans and leases increased$163.6 billion and average securities increased$30.9 billion . In addition, average other earning assets increased$34.0 billion primarily due to higher interest bearing balances at theFederal Reserve . Average interest-bearing liabilities increased$155.0 billion and noninterest-bearing deposits increased$71.5 billion . The annualized TE yield on the total loan portfolio for the third quarter of 2020 was 4.04%, down 94 basis points compared to the prior year. The annualized TE yield on the average securities portfolio was 1.97%, down 63 basis points compared to the prior year. The average costs of interest-bearing liabilities was 0.35%, down 112 basis points compared to the prior year. The provision for credit losses was$421 million compared to$117 million for the third quarter of 2019. The increase in the provision for credit losses reflects a modest build to the allowance for credit losses primarily due to monitoring of clients' financial position and associated re-grading actions, as well as uncertainty related to performance after the expiration of relief packages and COVID-19, the impact of the Merger, and the effect of applying the CECL methodology in the current quarter compared to the incurred methodology in the prior year. Net charge-offs for the third quarter of 2020 totaled$326 million compared to$153 million in the prior year. Higher net charge-offs also contributed to the increase in the provision for credit losses and primarily reflect increases as a result of the Merger. The net charge-off rate for the current quarter of 0.42% of average loans and leases was up one basis point compared to the third quarter of 2019. Noninterest income for the third quarter of 2020 increased$907 million compared to the earlier quarter. The current quarter includes$104 million of securities gains. Excluding the securities gains, noninterest income increased$803 million , with nearly all categories of noninterest income being impacted by the Merger. In addition to these impacts, insurance income increased$31 million due to strong production and premium growth and residential mortgage banking income was up due to strong production and refinance activity driven by the lower rate environment, partially offset by lower valuations of mortgage servicing rights. Service charges on deposits partially rebounded during the third quarter due to increased overdraft incident rates and reduced refunds and waivers to accommodate clients impacted by the COVID-19 pandemic. Noninterest expense for the third quarter of 2020 was up$1.9 billion compared to the earlier quarter. Merger-related and restructuring charges and other incremental operating expenses related to the Merger increased$202 million and$100 million , respectively. In addition, the current quarter was impacted by a$50 million charitable contribution to theTruist Charitable Fund . Excluding the items mentioned above and the impact of an increase of$141 million of amortization expense for intangibles, adjusted noninterest expense was up$1.4 billion primarily reflecting the impact of the Merger. In addition to the impacts of the Merger, operating costs were elevated due to COVID-19, which resulted in an additional$26 million of expenses compared to the third quarter of 2019. This was primarily related to net occupancy costs for enhanced cleaning. The provision for income taxes was$255 million for the third quarter of 2020, compared to$218 million for the earlier quarter. This produced an effective tax rate for the third quarter of 2020 of 18.3%, compared to 20.8% for the earlier quarter. The lower effective tax rate is primarily due to higher favorable permanent tax items and income tax credits earned in the current year.Truist's total assets atSeptember 30, 2020 were$499.2 billion , an increase of$26.1 billion compared toDecember 31, 2019 . The increase in total assets was primarily driven by an increase of$17.9 billion in interest-bearing deposits with banks reflecting higher balances held at theFederal Reserve , an increase of$11.4 billion in AFS securities and a$3.9 billion increase in total loans and leases. These increases were partially offset by a$4.3 billion increase in the ALLL and a$1.1 billion decrease in trading assets.Truist Financial Corporation 51 -------------------------------------------------------------------------------- Total deposits atSeptember 30, 2020 were$370.7 billion , an increase of$36.0 billion compared toDecember 31, 2019 . The growth in deposits reflects solid growth in all non-time deposit products due to a flight to quality and the government stimulus programs, partially offset by a decline in time deposits primarily due to maturities of wholesale negotiable certificates of deposit and higher-cost personal and business accounts. Asset quality ratios were relatively stable atSeptember 30, 2020 . As ofSeptember 30, 2020 , nonperforming assets were 0.26% of total assets. The allowance for loan and lease loss coverage ratio was 5.22x nonperforming loans and leases held for investment, compared to 3.41x atDecember 31, 2019 . The higher coverage ratio reflects the CECL adoption build, as well as a reserve build in 2020 in connection with COVID-19 and the economic downturn.Truist maintained strong capital and liquidity. As ofSeptember 30, 2020 , the CET1 ratio was 10.0% and the average LCR was 117%. During the nine months endedSeptember 30, 2020 ,Truist issued$3.5 billion of preferred stock and redeemed$500 million of Series K preferred stock. The Company also issued$6.5 billion of senior and subordinated long-term debt.Truist declared common dividends of$0.450 per share during the third quarter of 2020. The dividend and total payout ratios for the third quarter of 2020 were 56.8%. InOctober 2020 ,Truist declared common dividends of$0.450 per share for the fourth quarter of 2020. 52Truist Financial Corporation --------------------------------------------------------------------------------
Analysis of Results of Operations
Net Interest Income and NIM
Third Quarter 2020 compared to Third Quarter 2019
Net interest margin was 3.10%, down 27 basis points compared to the earlier quarter. Average earning assets increased$232.0 billion . The increase in average earning assets reflects a$163.6 billion increase in average total loans and leases and a$30.9 billion increase in average securities. Average other earning assets increased$34.0 billion primarily due to higher interest-earning balances at theFederal Reserve . Average interest-bearing liabilities increased$155.0 billion compared to the earlier quarter. Average interest-bearing deposits increased$138.8 billion , average long-term debt increased$18.3 billion and average short-term borrowings decreased$2.1 billion . The significant increases in earning assets and liabilities are primarily due to the Merger, as well as impacts from the COVID-19 pandemic and the resulting government stimulus programs. The yield on the total loan portfolio for the third quarter of 2020 was 4.04%, down 94 basis points compared to the earlier quarter, reflecting the impact of rate decreases and deferred interest for loans granted an accommodation in connection with COVID-19, partially offset by purchase accounting accretion from merged loans. The yield on the average securities portfolio was 1.97%, down 63 basis points compared to the earlier quarter primarily due to lower yields on new purchases and higher premium amortization. The average cost of total deposits was 0.10%, down 57 basis points compared to the earlier quarter, and the average cost of interest-bearing deposits was 0.15%, down 84 basis points compared to the earlier quarter. The average rate on short-term borrowings was 0.85%, down 170 basis points compared to the earlier quarter. The average rate on long-term debt was 1.48%, down 194 basis points compared to the earlier quarter. The lower rates on interest-bearing liabilities reflect the lower rate environment. The lower rates on long-term debt also reflect the amortization of the fair value mark on the assumed debt and the issuance of new long-term debt.
Nine Months of 2020 compared to Nine Months of 2019
The net interest margin was 3.26% for the nine months endedSeptember 30, 2020 , down 17 basis points compared to the earlier period. Average earning assets increased$231.3 billion , which primarily reflects a$165.8 billion increase in average total loans and leases, a$32.0 billion increase in average other earning assets, a$29.6 billion increase in average securities and a$3.8 billion increase in interest earning trading assets. The increase in average other earning assets primarily reflects higher interest-bearing balances at theFederal Reserve . Average interest-bearing liabilities increased$169.3 billion . Average interest-bearing deposits increased$140.7 billion , average long-term debt increased$24.6 billion and average short-term borrowings increased$3.9 billion . The significant increases in earnings assets and liabilities are primarily due to the Merger, as well as impacts from the COVID-19 pandemic and the resulting government stimulus programs. The yield on the total loan portfolio for the nine months endedSeptember 30, 2020 was 4.39%, down 64 basis points compared to the earlier period, reflecting the impact of rate decreases and deferred interest for loans granted an accommodation in connection with COVID-19, partially offset by purchase accounting accretion from merged loans. The yield on the average securities portfolio for the nine months endedSeptember 30, 2020 was 2.31%, down 30 basis points compared to the earlier period primarily due lower yields on new purchases and higher premium amortization. The average cost of total deposits was 0.27%, down 39 basis points compared to the earlier period. The average cost of interest-bearing deposits was 0.39%, down 60 basis points compared to the earlier period. The average rate on short-term borrowings was 1.46%, down 98 basis points compared to the earlier period. The average rate on long-term debt was 1.78%, down 157 basis points compared to the earlier period. The lower rates on interest-bearing liabilities reflect the lower rate environment. The lower rates on long-term debt also reflect the amortization of the fair value mark on the assumed debt and the issuance of new long-term debt. As ofSeptember 30, 2020 , the remaining unamortized fair value marks on the loan and lease portfolio, deposits and long-term debt were$2.7 billion ,$26 million and$238 million , respectively. The remaining unamortized fair value mark on loans and leases consists of$1.2 billion for commercial loans and leases and$1.5 billion for consumer loans and leases. These amounts will be recognized over the remaining contractual lives of the underlying instruments or as prepayments occur. The major components of net interest income and the related annualized yields as well as the variances between the periods caused by changes in interest rates versus changes in volumes are summarized below.Truist Financial Corporation 53 --------------------------------------------------------------------------------
Table 1-1: Taxable-Equivalent Net Interest Income and Rate / Volume Analysis (1)
Three Months Ended September 30, Average Balances (5) Annualized Yield/Rate Income/Expense Incr. Change due to (Dollars in millions) 2020 2019 2020 2019 2020 2019 (Decr.) Rate Volume Assets Total securities, at amortized cost: (2)U.S. Treasury $ 2,218 $ 2,240 1.78 % 2.04 %$ 10 $ 11 $ (1) $ (1) $ - GSE 1,842 2,449 2.33 2.25 10 14 (4) - (4) Agency MBS 75,232 43,415 1.95 2.57 366 279 87 (80) 167 States and political subdivisions 499 566 5.03 3.44 7 5 2 3 (1) Non-agency MBS - 198 - 18.77 - 9 (9) (5) (4) Other 37 32 1.99 3.67 1 - 1 1 - Total securities 79,828 48,900 1.97 2.60 394 318 76 (82) 158 Interest earning trading assets 4,056 668 3.23 2.02 32 3 29 3 26 Other earning assets (3) 35,819 1,798 0.26 2.92 24 14 10 (22) 32
Loans and leases, net of unearned income: (4)
Commercial and industrial 143,452 63,768 3.02 4.18 1,087 671 416 (229) 645 CRE 27,761 17,042 2.88 4.83 203 209 (6) (104) 98Commercial Construction 6,861 3,725 3.26 5.11 55 47 8 (22) 30 Lease financing 5,626 2,260 3.71 3.17 52 18 34 4 30 Residential mortgage 51,500 28,410 4.47 4.02 576 285 291 35 256 Residential home equity and direct 26,726 11,650 5.86 5.92 394 173 221 (2) 223 Indirect auto 24,732 11,810 6.51 8.84 405 262 143 (84) 227 Indirect other 11,530 6,552 7.05 6.61 204 110 94 8 86 Student 7,446 - 4.30 - 80 - 80 - 80 Credit card 4,810 3,036 9.03 9.18 109 71 38 (1) 39 PCI - 411 - 24.23 - 25 (25) - (25) Total loans and leases HFI 310,444 148,664 4.06 5.00 3,165 1,871 1,294 (395) 1,689 LHFS 5,247 3,378 2.78 4.16 37 35 2 (14) 16 Total loans and leases 315,691 152,042 4.04 4.98 3,202 1,906 1,296 (409) 1,705 Total earning assets 435,394 203,408 3.34 4.38 3,652 2,241 1,411 (510) 1,921 Nonearning assets 65,432 29,012 Total assets$ 500,826 $ 232,420 Liabilities and Shareholders' Equity Interest-bearing deposits: Interest-checking$ 96,707 $ 27,664 0.06 0.67 15 47 (32) (71) 39 Money market and savings 123,598 64,920 0.06 0.95 19 156 (137) (213) 76 Time deposits 27,940 16,643 0.89 1.62 62 67 (5) (39) 34 Foreign office deposits - interest-bearing - 265 - 2.13 - 1 (1) - (1) Total interest-bearing deposits (6) 248,245 109,492 0.15 0.99 96 271 (175) (323) 148 Short-term borrowings 6,209 8,307 0.85 2.55 13 54 (41) (30) (11) Long-term debt 40,919 22,608 1.48 3.42 152 193 (41) (146) 105 Total interest-bearing liabilities 295,373 140,407 0.35 1.47 261 518 (257) (499) 242 Noninterest-bearing deposits (6) 123,966 52,500 Other liabilities 11,853 6,769 Shareholders' equity 69,634 32,744
Total liabilities and shareholders' equity
2.99 % 2.91 %
NIM/net interest income 3.10 % 3.37 % $ 3,391 $
1,723
$ 29 $
23
(1) Yields are stated on a TE basis utilizing federal tax rate. The change in interest not solely due to changes in rate or volume has been allocated based on the pro-rata absolute dollar amount of each. Interest income includes certain fees, deferred costs and dividends. (2) Total securities include AFS and HTM securities. (3) Includes cash equivalents, interest-bearing deposits with banks, FHLB stock and other earning assets. (4) Fees, which are not material for any of the periods shown, are included for rate calculation purposes. NPLs are included in the average balances. (5) Excludes basis adjustments for fair value hedges. (6) Total deposit costs were 0.10% and 0.67% for the three months endedSeptember 30, 2020 and 2019, respectively. 54Truist Financial Corporation --------------------------------------------------------------------------------
Table 1-2: Taxable-Equivalent Net Interest Income and Rate / Volume Analysis (1)
Nine Months EndedSeptember 30 , Average Balances (5) Annualized Yield/Rate Income/Expense Incr. Change due to (Dollars in millions) 2020 2019 2020 2019 (Decr.) 2020 2019 Rate Volume
Assets
Total securities, at amortized cost: (2)U.S. Treasury $ 2,243 $ 2,731 1.86 % 2.03 %$ 31 $ 41 $ (10) $ (3) $ (7) GSE 1,847 2,436 2.33 2.25 32 41 (9) 1 (10) Agency MBS 72,152 41,202 2.29 2.57 1,240 795 445 (95) 540 States and political subdivisions 512 583 4.04 3.85 16 17 (1) 1 (2) Non-agency MBS 115 271 16.78 14.34 15 29 (14) 4 (18) Other 37 34 2.44 3.83 1 1 - - - Total securities 76,906 47,257 2.31 2.61 1,335 924 411 (92) 503 Interest earning trading assets 4,695 910 3.85 2.20 135 15 120 18 102 Other earning assets (3) 33,708 1,702 0.57 4.30 144 55 89 (87) 176
Loans and leases, net of unearned income: (4)
Commercial and industrial 142,731 62,576 3.47 4.28 3,710 2,006 1,704 (442) 2,146 CRE 27,538 16,894 3.46 4.93 717 626 91 (223) 314Commercial Construction 6,673 3,912 3.92 5.26 192 151 41 (47) 88 Lease financing 5,872 2,135 4.24 3.26 187 52 135 20 115 Residential mortgage 52,288 30,604 4.53 4.05 1,778 930 848 121 727 Residential home equity and direct 27,161 11,673 6.08 5.94 1,237 517 720 13 707 Indirect auto 24,809 11,586 6.68 8.73 1,240 756 484 (212) 696 Indirect other 11,255 6,277 7.19 6.60 606 310 296 30 266 Student 7,622 - 4.75 - 271 - 271 - 271 Credit card 5,097 2,976 9.34 9.05 356 203 153 7 146 PCI - 433 - 21.20 - 69 (69) - (69) Total loans and leases HFI 311,046 149,066 4.42 5.04 10,294 5,620 4,674 (733) 5,407 LHFS 5,575 1,742 3.00 4.17 126 54 72 (19) 91 Total loans and leases 316,621 150,808 4.39 5.03 10,420 5,674 4,746 (752) 5,498 Total earning assets 431,930 200,677 3.72 4.44 12,034 6,668 5,366 (913) 6,279 Nonearning assets 65,780 28,429 Total assets$ 497,710 $ 229,106 Liabilities and Shareholders' Equity Interest-bearing deposits: Interest-checking$ 93,205 $ 27,665 0.28 0.64 199 132 67 (106) 173 Money market and savings 123,536 63,885 0.27 0.98 254 469 (215) (475) 260 Time deposits 32,157 16,256 1.10 1.57 265 190 75 (70) 145 Foreign office deposits - interest-bearing - 355 - 2.36 - 6 (6) - (6) Total interest-bearing deposits (6) 248,898 108,161 0.39 0.99 718 797 (79) (651) 572 Short-term borrowings 11,350 7,443 1.46 2.44 124 136 (12) (67) 55 Long-term debt 47,643 23,027 1.78 3.35 635 578 57 (359) 416 Total interest-bearing liabilities 307,891 138,631 0.64 1.46 1,477 1,511 (34) (1,077) 1,043 Noninterest-bearing deposits (6) 110,375 52,489 Other liabilities 12,133 6,449 Shareholders' equity 67,311 31,537 Total liabilities and shareholders' equity$ 497,710 $ 229,106 Average interest-rate spread 3.08 % 2.98 % NIM/net interest income 3.26 % 3.43 %$ 10,557 $ 5,157 $ 5,400 $ 164 $ 5,236 Taxable-equivalent adjustment$ 97 $ 71 (1) Yields are stated on a TE basis utilizing federal tax rate. The change in interest not solely due to changes in rate or volume has been allocated based on the pro-rata absolute dollar amount of each. Interest income includes certain fees, deferred costs and dividends. (2) Total securities include AFS and HTM securities. (3) Includes cash equivalents, interest-bearing deposits with banks, FHLB stock and other earning assets. (4) Fees, which are not material for any of the periods shown, are included for rate calculation purposes. NPLs are included in the average balances. (5) Excludes basis adjustments for fair value hedges. (6) Total deposit costs were 0.27% and 0.66% for the nine months endedSeptember 30, 2020 and 2019, respectively. Truist Financial Corporation 55 --------------------------------------------------------------------------------
Provision for Credit Losses
Third Quarter 2020 compared to Third Quarter 2019
The provision for credit losses was$421 million , compared to$117 million for the earlier quarter. The increase in the provision for credit losses reflects a modest build to the allowance for credit losses primarily due to monitoring of clients' financial position and associated re-grading actions, as well as uncertainty related to performance after the expiration of relief packages and COVID-19, the impact of the Merger, and the effect of applying the CECL methodology in the current quarter compared to the incurred loss methodology in the earlier quarter. Net charge-offs for the third quarter of 2020 totaled$326 million compared to$153 million in the earlier quarter. Higher net charge-offs also contributed to the increase in the provision for credit losses and primarily reflect increases as a result of the Merger. The net charge-off rate for the current quarter of 0.42% was up one basis point compared to the third quarter of 2019.
Nine Months of 2020 compared to Nine Months of 2019
The provision for credit losses was$2.2 billion , compared to$444 million for the earlier period. The increase in the provision for credit losses for the first nine months of 2020 reflects the significant builds to the allowance for credit losses in the first and second quarters of the year due to increased economic stress associated with the pandemic and specific consideration of its impact on certain industries, as well as uncertainty related to performance after the expiration of relief packages and COVID-19, the impact of the Merger, and the effect of applying the CECL methodology in the current period compared to the incurred loss methodology in the earlier period. Net charge-offs for the nine months endedSeptember 30, 2020 were$914 million , compared to$442 million for the earlier period. Higher net charge-offs also contributed to the increase in the provision for credit losses and primarily reflect increases as a result of the Merger. The net charge-off rate of 0.39% for the nine months endedSeptember 30, 2020 was down one basis point compared to the earlier period. Noninterest Income Noninterest income is a significant contributor toTruist's financial results. Management focuses on diversifying its sources of revenue to reduceTruist's reliance on traditional spread-based interest income, as certain fee-based activities are a relatively stable revenue source during periods of changing interest rates. Table 2: Noninterest Income Three Months Ended September 30, Nine Months Ended September 30, (Dollars in millions) 2020 2019 % Change 2020 2019 % Change Insurance income$ 518 $ 487 6.4 %$ 1,648 $ 1,563 5.4 % Service charges on deposits 247 188 31.4 754 540 39.6 Wealth management income 324 175 85.1 945 509 85.7 Card and payment related fees 200 132 51.5 558 399 39.8 Residential mortgage income 221 80 176.3 807 220 NM Investment banking and trading income 244 60 NM 636 135 NM Operating lease income 72 36 100.0 232 106 118.9 Income from bank-owned life insurance 46 29 58.6 135 91 48.4 Lending related fees 77 24 NM 210 77 172.7 Commercial real estate related income 55 32 71.9 148 68 117.6 Securities gains (losses) 104 - NM 402 - NM Other income (loss) 102 60 70.0 119 149 (20.1) Total noninterest income$ 2,210 $ 1,303 69.6$ 6,594 $ 3,857 71.0
Third Quarter 2020 compared to Third Quarter 2019
Noninterest income for the third quarter of 2020 increased$907 million compared to the earlier quarter. The current quarter includes$104 million of securities gains. Excluding the securities gains, noninterest income increased$803 million , with nearly all categories of noninterest income being impacted by the Merger. In addition to the impacts from the Merger, insurance income increased$31 million due to strong production and premium growth and residential mortgage banking income was up due to strong production and refinance activity driven by the lower rate environment, partially offset by lower valuations of the mortgage servicing rights. Service charges on deposits partially rebounded during the third quarter due to increased overdraft incident rates and reduced refunds and waivers to accommodate clients impacted by the COVID-19 pandemic. 56Truist Financial Corporation --------------------------------------------------------------------------------
Nine Months of 2020 compared to Nine Months of 2019
Noninterest income for the nine months endedSeptember 30, 2020 increased$2.7 billion compared to the earlier period. The current period includes$402 million of net securities gains primarily from the sale of non-agency mortgage-backed securities in the second quarter of 2020 and agency mortgage-backed securities in the third quarter of 2020. Excluding the net securities gains, noninterest income increased$2.3 billion , with nearly all categories of noninterest income being impacted by the Merger. In addition to the impacts from the Merger, insurance income increased$85 million due to strong production and premium growth and residential mortgage banking income was up due to strong production and refinance activity driven by the lower rate environment, partially offset by lower valuations of the mortgage servicing rights. Service charges on deposits were up despite reduced overdraft incident rates and refunds and waivers to support clients impacted by the COVID-19 pandemic. Additionally, investment banking and trading income was up, but was negatively impacted by credit valuation adjustments on the derivatives portfolio primarily related to the decline in interest rates and widening of credit spreads. Other income decreased$30 million primarily due to less income from private equity investments.
Noninterest Expense
The following table provides a breakdown of
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in millions) 2020 2019 % Change 2020 2019 % Change
Personnel expense $ 2,058 $ 1,161 77.3 % $ 6,038 $ 3,368 79.3 %
Net occupancy expense 233 122 91.0 697 360 93.6
Professional fees and outside processing 323 102 NM 859 272 NM
Software expense 221 77 187.0 647 220 194.1
Equipment expense 127 64 98.4 363 197 84.3
Marketing and customer development 75 36 108.3 215 92 133.7
Operating lease depreciation 56 35 60.0 204 93 119.4
Loan-related expense 59 26 126.9 177 81 118.5
Amortization of intangibles 170 29 NM 513 93 NM
Regulatory costs 34 20 70.0 93 57 63.2
Merger-related and restructuring charges 236 34 NM 552 137 NM
Loss (gain) on early extinguishment of
debt - - - 235 - NM
Other expense 163 134 21.6 471 389 21.1
Total noninterest expense $ 3,755 $ 1,840 104.1 $ 11,064 $ 5,359 106.5
Third Quarter 2020 compared to Third Quarter 2019
Noninterest expense for the third quarter of 2020 was up$1.9 billion compared to the earlier quarter. Merger-related and restructuring charges and other incremental operating expenses related to the Merger increased$202 million and$100 million , respectively. In addition, the current quarter was impacted by a$50 million charitable contribution to theTruist Charitable Fund . Excluding the items mentioned above and the impact of an increase of$141 million of amortization expense for intangibles, adjusted noninterest expense was up$1.4 billion primarily reflecting the impact of the Merger. In addition to the impacts of the Merger, operating costs were elevated due to COVID-19, which resulted in an additional$26 million of expenses compared to the third quarter of 2019. This was primarily related to net occupancy costs for enhanced cleaning.
Nine Months of 2020 compared to Nine Months of 2019
Noninterest expense for the nine months endedSeptember 30, 2020 was up$5.7 billion compared to the earlier period. Merger-related and restructuring charges and other incremental operating expenses related to the Merger increased$415 million and$292 million , respectively. In addition, the current period was impacted by$235 million of losses on the early extinguishment of long-term debt and a$50 million charitable contribution to theTruist Charitable Fund . Excluding the items mentioned above and the impact of an increase of$420 million of amortization expense for intangibles, noninterest expense was up$4.3 billion , primarily reflecting the impact of the Merger. In addition to the impacts of the Merger, operating costs were elevated due to COVID-19, which resulted in an additional$206 million of expenses compared to the earlier period. This was primarily related to additional on-site pay and bonuses for certain teammates, net occupancy costs for enhanced cleaning and teammate support expenses.Truist Financial Corporation 57 --------------------------------------------------------------------------------
Merger-Related and Restructuring Charges
The following table presents a summary of merger-related and restructuring charges and the related accruals: Table 4: Merger-Related and Restructuring Accrual Activity
Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020
Accrual at Accrual at Sep Accrual at Accrual at Sep
(Dollars in millions) Jul 1, 2020 Expense Utilized 30, 2020 Jan 1, 2020 Expense Utilized 30, 2020
Severance and
personnel-related $ 84 $ 37 $ (84) $ 37 $ 46 $ 172 $ (181) $ 37
Occupancy and equipment - 78 (78) - - 126 (126) -
Professional services 3 96 (97) 2 42 191 (231) 2
Systems conversion and related
costs - 16 (16) - - 19 (19) -
Other adjustments 1 9 4 14 1 44 (31) 14
Total (1) $ 88 $ 236 $ (271) $ 53 $ 89 $ 552 $ (588) $ 53
(1) In connection with the Merger, the Company recognized $229 million of
expense for the third quarter of 2020 and $525 million for the nine months ended
September 30, 2020 . At September 30, 2020 , the Company had an accrual of $42
million related to the Merger. The remaining expense and accrual relate to
activities other than the Merger.
Segment Results
See "Note 18. Operating Segments" herein, and "Note 21. Operating Segments" inTruist's Annual Report on Form 10-K for the year endedDecember 31, 2019 , for additional disclosures related toTruist's reportable business segments, including additional details related to results of operations. Fluctuations in noninterest income and noninterest expense are more fully discussed in the Noninterest Income and Noninterest Expense sections above.
Table 5: Net Income by Reportable Segment
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in millions) 2020 2019 % Change 2020 2019 % Change
Consumer Banking and Wealth$ 817 $ 465 75.7 %$ 2,207 $ 1,322 66.9 % Corporate and Commercial Banking 583 441 32.2 1,400 1,274 9.9 Insurance Holdings 77 61 26.2 308 259 18.9 Other, Treasury & Corporate (336) (139) 141.7 (753) (344)
118.9
Truist Financial Corporation$ 1,141 $ 828 37.8$ 3,162 $ 2,511 25.9
Third Quarter 2020 compared to Third Quarter 2019
Consumer Banking and Wealth
CB&W serves individuals and small business clients by offering a variety of loan and deposit products, payment services, bankcard products and other financial services by connecting clients to a wide range of financial products and services. CB&W includesRetail Community Bank , which serves retail, premier and small business clients, delivering on the banking needs of all clients through a network of branches, ATMs and contact centers. CB&W includes Dealer Retail Services, which originates loans on an indirect basis to individuals for the purchase of automobiles, boats and recreational vehicles. Additionally, CB&W includes National Consumer Finance & Payments, which provides a comprehensive set of technology-enabled lending solutions to individuals and small businesses through several national channels, as well as merchant services and payment processing solutions to business clients. CB&W also includes Mortgage Banking, which offers residential mortgage products nationally through its retail and correspondent channels, the internet and by telephone. These products are either sold in the secondary market, primarily with servicing rights retained, or held in the Company's loan portfolio. Mortgage Banking also services loans for other investors, in addition to loans held in the Company's loan portfolio. Mortgage Banking also includes Mortgage Warehouse Lending, which provides short-term lending solutions to finance first-lien residential mortgage LHFS by independent mortgage companies. Wealth delivers investment management, financial planning, banking, fiduciary services and related solutions to institutions, affluent and high net worth individuals and families, with financial expertise and industry-specific insights in the medical, legal, sports and entertainment industries. 58Truist Financial Corporation -------------------------------------------------------------------------------- CB&W net income was$817 million for the third quarter of 2020, an increase of$352 million compared to the earlier quarter. Segment net interest income increased$1.1 billion primarily due to the Merger. Noninterest income increased$414 million due to the Merger and higher residential mortgage production income as a result of the lower rate environment driving mortgage production through refinance activity, partially offset by lower residential mortgage servicing income driven by higher prepayment as a result of the lower rate environment and an MSR fair value adjustment in the current quarter. The allocated provision for credit losses increased$66 million primarily due to the Merger as well as increased economic stress associated with the pandemic. Noninterest expense increased$1.0 billion primarily due to operating expenses and amortization of intangibles related to the Merger. CB&W average loans held for investment were up$73.9 billion for the third quarter of 2020 compared to the earlier quarter, primarily driven by the Merger. Average total deposits were up$132.0 billion for the third quarter of 2020 compared to the earlier quarter, primarily due to the Merger, along with reduced consumer spending and inflows from stimulus payments in 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 $583 million for the third quarter of 2020, an increase of
$142 million compared to the earlier quarter. Segment net interest income
increased $636 million primarily due to the Merger. Noninterest income increased
$338 million also primarily due to the Merger. The allocated provision for
credit losses increased $297 million primarily due to the Merger as well as
increased economic stress associated with the pandemic. Noninterest expense
increased $505 million primarily due to operating expenses and amortization of
intangibles related to the Merger in the current quarter.
C&CB average loans held for investment were up $87.7 billion for the third
quarter of 2020 compared to the earlier quarter, primarily driven by the Merger
coupled with PPP loan originations. Average total deposits were up $76.8 billion
for the third quarter of 2020 compared to the earlier quarter, primarily due to
the Merger, along with deposit inflows related to PPP loans, line draws and
reduced spending from commercial clients.
Truist's IH segment is one of the largest insurance brokers in the world, providing property and casualty, employee benefits and life insurance to businesses and individuals. It also provides small business and corporate services, such as workers compensation and professional liability, as well as surety coverage and title insurance. In addition, IH provides premium financing for property and casualty insurance. IH net income was$77 million for the third quarter of 2020, an increase of$16 million compared to the earlier quarter. Noninterest income increased$33 million primarily due to higher production. Noninterest expense increased$11 million primarily due to increased personnel expense, partially offset by lower travel and marketing expenses.
Other,
Net income in OT&C can vary due to the changing needs of the Corporation, including the size of the investment portfolio, the need for wholesale funding and variability associated with derivatives used to hedge the balance sheet.
OT&C generated a net loss of$336 million in the third quarter of 2020, compared to a net loss of$139 million in the earlier quarter. Segment net interest income decreased$80 million . Noninterest income increased$122 million primarily due to the gain on sale of securities in the current quarter. The allocated provision for credit losses decreased$57 million primarily due to a reduction in the provision for unfunded commitments. Noninterest expense increased$396 million primarily due to operating expenses related to the Merger and higher Merger-related charges in the current quarter. The benefit for income taxes increased$100 million primarily due to a higher pre-tax loss.Truist Financial Corporation 59 --------------------------------------------------------------------------------
Nine Months of 2020 compared to Nine Months of 2019
Consumer Banking and Wealth
CB&W net income was$2.2 billion for the nine months endedSeptember 30, 2020 , an increase of$885 million compared to the same period of the prior year. Segment net interest income increased$3.4 billion primarily due to the Merger. Noninterest income increased$1.4 billion due to the Merger and higher residential mortgage income as a result of the lower rate environment driving mortgage production through refinance activity, partially offset by lower residential mortgage servicing income driven by higher prepayment as a result of the lower rate environment and an MSR fair value adjustment in the current year. The allocated provision for credit losses increased$520 million primarily due to the Merger, as well as increased economic stress associated with the pandemic. Noninterest expense increased$3.2 billion primarily due to operating expenses and amortization of intangibles related to the Merger and impacts from COVID-19 in the current year. CB&W average loans held for investment were up$73.3 billion for the nine months endedSeptember 30, 2020 , compared to the prior year primarily due to the merged loans. Average total deposits were up$124.2 billion for the nine months endedSeptember 30, 2020 , compared to the prior year, primarily due to the merged deposits and reduced consumer spending in the current year related to COVID-19.
Corporate and Commercial Banking
C&CB net income was$1.4 billion for the nine months endedSeptember 30, 2020 , an increase of$126 million compared to the same period of the prior year. Segment net interest income increased$2.0 billion primarily due to the Merger. Noninterest income increased$931 million due to the Merger, partially offset by losses in trading income primarily related to the decline in interest rates and widening of credit spreads. The allocated provision for credit losses increased$1.2 billion primarily due to the Merger, as well as increased economic stress associated with the pandemic and increased losses. Noninterest expense increased$1.6 billion primarily due to operating expenses and amortization of intangibles related to the Merger in the current year. C&CB average loans held for investment were up$88.7 billion for the nine months endedSeptember 30, 2020 , compared to the prior year primarily due to the merged loans and growth in commercial and industrial loans in the current year related to COVID-19. Average total deposits were up$70.7 billion for the nine months endedSeptember 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$308 million for the nine months endedSeptember 30, 2020 , an increase of$49 million compared to the same period of the prior year. Noninterest income increased$103 million primarily due to higher production. Noninterest expense increased$38 million primarily due to commissions on higher production in the current year.
Other,
OT&C generated a net loss of$753 million in the nine months endedSeptember 30, 2020 , compared to a net loss of$344 million in the same period of the prior year. Segment net interest income decreased$55 million . Noninterest income increased$306 million primarily due to the gain on sale of securities in the current year, partially offset by lower income related to certain post-employment benefits. The allocated provision for credit losses increased$35 million primarily due to the provision for unfunded commitments. Noninterest expense increased$847 million primarily due to the loss on early extinguishment of long-term debt, operating expenses related to the Merger, and higher Merger-related charges in the current year. The benefit for income taxes increased$222 million primarily due to a higher pre-tax loss. 60Truist Financial Corporation --------------------------------------------------------------------------------
Analysis of Financial Condition
Investment Activities
The securities portfolio totaled$86.1 billion atSeptember 30, 2020 , compared to$74.7 billion atDecember 31, 2019 . The increase was due primarily to an$11.8 billion increase in Agency MBS, offset partially by a$368 million decrease in Non-agency MBS. The increase in the Agency MBS portfolio includes the redeployment of approximately$5 billion of excess reserves at theFederal Reserve . During the second quarter of 2020, the Company sold Non-agency MBS and during the third quarter of 2020, the Company sold and reinvested$3.2 billion in residential Agency MBS. These sales were the primary drivers for the gains of$402 million for the nine months endedSeptember 30, 2020 . As ofSeptember 30, 2020 , approximately 3.0% of the securities portfolio was variable rate, compared to 3.6% as ofDecember 31, 2019 . The effective duration of the securities portfolio was 3.2 years atSeptember 30, 2020 , compared to 4.7 years atDecember 31, 2019 .
Lending Activities
The following tables summarize the loans and leases HFI portfolio for each of the last five quarters: Table 6: Loans and Leases as of Period End (Dollars in millions) Sep 30, 2020 Jun 30, 2020 Mar 31, 2020 Dec 31, 2019 Sep 30,
2019
Commercial:
Commercial and industrial$ 140,874 $
147,141
27,474 27,963 27,532 26,832 17,080
Commercial construction 6,772 6,891 6,630 6,205 3,804
Lease financing 5,493 5,783 5,984 6,122 2,356
Consumer:
Residential mortgage 50,379 51,671 53,096 52,071 28,297
Residential home equity and direct 26,558 26,935 27,629 27,044 11,646
Indirect auto 25,269 24,509 25,146 24,442 11,871
Indirect other 11,527 11,592 10,980 11,100 6,590
Student 7,480 7,484 7,771 6,743 -
Credit card 4,801 4,856 5,300 5,619 3,058
PCI - - - 3,484 387
Total loans and leases HFI $ 306,627 $ 314,825 $ 319,229 $ 299,842 $ 149,413
Total loans and leases held for investment were $306.6 billion at September 30,
2020 , compared to $299.8 billion at December 31, 2019 . In connection with the
adoption of CECL, all loans previously in the PCI portfolio transitioned to PCD
loans and were transferred to their respective portfolios. The growth in the
commercial and industrial portfolio was primarily due to PPP loans. During the
first quarter of 2020 many commercial clients drew down lines of credit, but the
majority of those were repaid in the second and third quarter of 2020 as the
government programs were implemented in response to the pandemic and clients
better understood their liquidity needs.
Truist Financial Corporation 61
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The following table presents the composition of average loans and leases for
each of the last five quarters:
Table 7: Average Loans and Leases
For the Three Months Ended
(Dollars in millions) Sep 30, 2020 Jun 30, 2020 Mar 31, 2020 Dec 31, 2019 Sep 30, 2019
Commercial:
Commercial and industrial$ 143,452 $
152,991
27,761 27,804 27,046 19,896 17,042
Commercial construction 6,861 6,748 6,409 4,506 3,725
Lease financing 5,626 5,922 6,070 3,357 2,260
Consumer:
Residential mortgage 51,500 52,380 52,993 34,824 28,410
Residential home equity and direct 26,726 27,199 27,564 15,810 11,650
Indirect auto 24,732 24,721 24,975 15,390 11,810
Indirect other 11,530 11,282 10,950 7,772 6,552
Student 7,446 7,633 7,787 1,825 -
Credit card 4,810 4,949 5,534 3,788 3,036
PCI - - - 1,220 411
Total average loans and leases HFI $ 310,444 $ 321,629 $ 301,071 $ 190,241 $ 148,664 Average loans and leases held for investment for the third quarter of 2020 were
The decline in the commercial portfolio was primarily in commercial and industrial loans and reflects the repayment of revolver usage. Within the commercial and industrial portfolio,Truist experienced growth in loans from mortgage warehouse lending due to the decline in rates and increased refinance activity, as well as growth in premium finance lending and equipment finance lending. Growth in these portfolios was partially offset by a decline in dealer floor plan lending. Average consumer loans decreased$1.3 billion primarily due to refinance activity resulting in a decline in residential mortgages and residential home equity and direct loans. This was partially offset by an increase in indirect other loans due to demand for loans for recreational and power sports equipment.
COVID-19 Lending Activities
The CARES Act includes provisions that were designed to encourage financial institutions to support borrowers impacted by COVID-19. These modifications are generally not considered a TDR as disclosed in "Note 1. Basis of Presentation."Truist payment relief assistance includes forbearance, deferrals, extension and re-aging programs, along with certain other modification strategies. The following table provides a summary of accommodations as ofSeptember 30, 2020 : Table 8: Client Accommodations (1) Active Accommodations Exited AccommodationsSeptember 30, 2020 (Dollars in Outstanding Outstanding % Paid-off or millions) Total Count Balance Balance Current (2) Types of Accommodations Clients may elect to defer loan or lease payments for up to 90 days Commercial 1,056 $ 692$ 21,479 98.0 % without late fees being incurred but with finance charges continuing to accrue. Clients may elect to defer loan payments for time periods that range Consumer 164,303 6,113 6,062 94.3 from 30 to 90 days without late fees being incurred but with finance charges generally continuing to accrue. Clients may elect to defer payments for up to 90 days without late fees being incurred but with financing charges Credit card 9,998 53 165 95.5 accruing. In addition, Truist provided credit card clients with 5% cash back on qualifying card purchases for certain important basic needs. Total 175,357$ 6,858 $ 27,706
(1) Excludes approximately 64,000 of active accommodations related to government
guaranteed loans totaling approximately
62Truist Financial Corporation -------------------------------------------------------------------------------- The CARES Act also created the PPP, which temporarily expands theSmall Business Administration's business loan guarantee program.Truist served as the fourth largest PPP lender based on gross fundings and carrying value of PPP loans was$12.2 billion as ofSeptember 30, 2020 .
The following table provides a summary of the Company's exposure related to loans that have exited accommodations:
Table 9: Accommodations Exposure
September 30, 2020
(Dollars in billions) Exposure
Current $ 27,273
Past due and still accruing 229
Nonperforming 204
Total $ 27,706
The following table provides a summary of exposure to industries that management
believes are most vulnerable in the current economic environment. These selected
industry exposures represent 9.1% of loans held for investment at September 30,
2020 . Of the $27.9 billion in selected industry exposures, $1.5 billion are PPP
loans. Truist is actively managing these portfolios and will continue to make
underwriting or risk acceptance adjustments as appropriate. These exposures
decreased $2.2 billion , or 7.3% during the third quarter, primarily in Hotels,
Resorts and Cruise Lines, as well as the Oil and Gas Portfolio. In addition,
management is closely monitoring its leveraged lending and small secured real
estate portfolios which comprised 2.8% and 1.5% of loans held for investment at
September 30, 2020 , respectfully. Leveraged loans and small secured real estate
loans, which totaled $1.5 billion and $0.2 billion , respectively, as of
September 30, 2020 , are also included in the selected industry credit exposures.
Leveraged lending loans decreased 9.5% during the third quarter.
Table 10: Selected Credit Exposures
September 30, 2020 Outstanding Percentage of Loans
(Dollars in billions) Balance HFI
Hotels, Resorts & Cruise Lines $ 6.8 2.2 %
Senior Care 6.0 2.0
Oil & Gas Portfolio 5.2 1.7
Acute Care Facilities 4.7 1.5
Restaurants 2.9 1.0
Sensitive Retail 2.3 0.7
Total $ 27.9 9.1 %
Additional exposures (inclusive of above industries):
Leveraged lending $ 8.6 2.8 %
Small secured real estate 4.6 1.5
Truist Financial Corporation 63--------------------------------------------------------------------------------
Asset Quality
The following tables summarize asset quality information for each of the last five quarters: Table 11: Asset Quality (Dollars in millions) Sep 30, 2020 Jun 30, 2020 Mar 31, 2020 Dec 31, 2019 Sep 30, 2019 NPAs: NPLs: Commercial and industrial $ 507 $ 428 $ 443 $ 212 $ 172 CRE 52 42 18 10 27 Commercial construction 7 13 2 - 2 Lease financing 32 56 27 8 2 Residential mortgage 205 198 248 55 106 Residential home equity and direct 180 192 170 67 56 Indirect auto 137 155 125 100 81 Indirect other 4 3 1 2 1 Total NPLs HFI 1,124 1,087 1,034 454 447 Loans held for sale 130 102 41 107 - Total nonaccrual loans and leases 1,254 1,189 1,075 561 447 Foreclosed real estate 30 43 63 82 33 Other foreclosed property 30 20 39 41 29 Total nonperforming assets$ 1,314 $ 1,252 $ 1,177 $ 684 $ 509 TDRs: Performing TDRs: Commercial and industrial $ 84 $ 57 $ 65 $ 47 $ 69 CRE 36 22 7 6 6 Commercial construction 1 36 36 37 1 Lease financing 1 1 1 - - Residential mortgage 640 533 513 470 570 Residential home equity and direct 71 71 66 51 54 Indirect auto 336 342 350 333 324 Indirect other 5 4 5 5 4 Student 5 4 1 - - Credit card 38 37 35 31 29 Total performing TDRs$ 1,217 $ 1,107 $ 1,079 $ 980$ 1,057 Nonperforming TDRs 140 111 121 82 115 Total TDRs$ 1,357 $ 1,218 $ 1,200 $ 1,062 $ 1,172 Loans 90 days or more past due and still accruing: (1) Commercial and industrial $ 6 $ 9 $ 5 $ 1 $ - CRE 8 3 1 - - Lease financing - 1 - - - Residential mortgage 573 521 610 543 347 Residential home equity and direct 5 9 10 9 8 Indirect auto 8 10 11 11 9 Indirect other 3 3 2 2 - Student 570 478 1,068 188 - Credit card 24 38 41 22 15 PCI - - - 1,218 24 Total loans 90 days or more past due and still accruing$ 1,197
403
Loans 30-89 days past due and still accruing: (1) Commercial and industrial $ 155 $ 282 $ 262 $ 94 $ 34 CRE 7 6 8 5 1 Commercial construction - 1 16 1 - Lease financing 9 10 8 2 1 Residential mortgage 796 703 679 498 432 Residential home equity and direct 103 108 156 122 56 Indirect auto 321 265 521 560 380 Indirect other 52 50 74 85 43 Student 666 442 593 650 - Credit card 39 34 57 56 29 PCI - - - 140 16
Total loans 30-89 days past due and still accruing
992
(1) The past due status of loans that received a deferral under the CARES Act is generally frozen during the deferral period. 64Truist Financial Corporation --------------------------------------------------------------------------------
Overall asset quality ratios were relatively stable at
Nonperforming assets totaled$1.3 billion atSeptember 30, 2020 , up$62 million compared toJune 30, 2020 . Nonperforming loans and leases held for investment represented 0.37% of loans and leases held for investment, up 2 basis points compared toJune 30, 2020 . The increase in nonperforming loans held for investment is primarily in commercial and industrial loans, which was partially offset by a decline in commercial leases due to a charge-off on a PCD loan related to the implementation of CECL. Within the consumer portfolio, indirect automobile nonaccrual loans declined as some states lifted the moratorium on repossessions. Performing TDRs were up$110 million during the third quarter primarily in residential mortgage loans. Loans 90 days or more past due and still accruing totaled$1.2 billion atSeptember 30, 2020 , up$125 million compared to the prior quarter. The increase was primarily in government guaranteed student loans as forbearance programs in connection with the CARES Act have ended. In addition, residential mortgage loans 90 days or more past due increased primarily due to the repurchase of delinquent government guaranteed loans. The ratio of loans 90 days or more past due and still accruing as a percentage of loans and leases was 0.39% atSeptember 30, 2020 , up five basis points from the prior quarter. Excluding government guaranteed loans, the ratio of loans 90 days or more past due and still accruing as a percentage of loans and leases was 0.03% atSeptember 30, 2020 , down one basis point fromJune 30, 2020 . Loans 30-89 days past due and still accruing totaled$2.1 billion atSeptember 30, 2020 , up$247 million compared to the prior quarter. Student loans 30-89 days past due increased$224 million , which almost entirely relates to government guaranteed loans as forbearance programs in connection with the CARES Act have ended. In addition, residential mortgage loans and indirect automobile loans increased, while commercial and industrial loans declined. The ratio of loans 30-89 days past due and still accruing as a percentage of loans and leases was 0.70% atSeptember 30, 2020 , up 10 basis points from the prior quarter. Problem loans include NPLs and loans that are 90 days or more past due and still accruing as disclosed in Table 11. In addition, for the commercial portfolio segment, loans that are rated special mention or substandard performing are closely monitored by management as potential problem loans. Refer to "Note 5. Loans and ACL" for additional disclosures related to these potential problem loans. Table 12: Asset Quality Ratios As of / For the Three Months Ended Sep 30, 2020 Jun
30, 2020
0.70 % 0.60 % 0.74 % 0.74 % 0.66 %
Loans 90 days or more past due and still accruing
as a percentage of loans and leases HFI 0.39 0.34 0.55 0.66 0.27
NPLs as a percentage of loans and leases HFI 0.37 0.35 0.32 0.15 0.30
Nonperforming loans and leases as a percentage of
loans and leases (1) 0.40 0.37 0.33 0.18 0.30
NPAs as a percentage of:
Total assets (1) 0.26 0.25 0.23 0.14 0.22
Loans and leases HFI plus foreclosed property 0.39 0.37 0.36 0.19 0.34
Net charge-offs as a percentage of average loans
and leases HFI 0.42 0.39 0.36 0.40 0.41
ALLL as a percentage of loans and leases HFI 1.91 1.81 1.63 0.52 1.05
Ratio of ALLL to:
Net charge-offs 4.52x 4.49x 4.76x 2.03x 2.59x
NPLs 5.22x 5.24x 5.04x 3.41x 3.52x
Loans 90 days or more past due and still accruing
as a percentage of loans and leases HFI excluding
PPP, other government guaranteed and PCI loans(2) 0.03 % 0.04 % 0.04 % 0.03 % 0.04 %
Applicable ratios are annualized.
(1) Includes LHFS.
(2) This asset quality ratio has been adjusted to remove the impact of
government guaranteed mortgage and student loans and PCI, as applicable.
Management believes the inclusion of such assets in this asset quality ratio
results in distortion of this ratio such that it might not be reflective of
asset collectability or might not be comparable to other periods presented or to
other portfolios that do not have government guarantees or were not impacted by
PCI accounting requirements.
Truist Financial Corporation 65--------------------------------------------------------------------------------
The following table presents activity related to NPAs:
Table 13: Rollforward of NPAs
(Dollars in millions) 2020 2019
Balance, January 1 $ 684 $ 585
New NPAs (1) 2,467 904
Advances and principal increases 255 127
Disposals of foreclosed assets (2) (333) (354)
Disposals of NPLs (3) (521) (120)
Charge-offs and losses (443) (215)
Payments (553) (312)
Transfers to performing status (258) (106)
Other, net 16 -
Ending balance, September 30 $ 1,314 $ 509
(1) For 2020, includes approximately $500 million of loans previously
classified as PCI that would have otherwise been nonperforming as of December
31, 2019 .
(2) Includes charge-offs and losses recorded upon sale of $99 million and $165
million for the nine months ended September 30, 2020 and 2019, respectively.
(3) Includes charge-offs and losses recorded upon sale of $126 million and $20
million for the nine months ended September 30, 2020 and 2019, respectively.
TDRs occur when a borrower is experiencing, or is expected to experience,
financial difficulties in the near term and a concession has been granted to the
borrower. As a result, Truist works with borrowers to prevent further
difficulties and to improve the likelihood of recovery on the loan. To
facilitate this process, a concessionary modification that would not otherwise
be considered may be granted, resulting in classification of the loan as a TDR.
In accordance with the CARES Act, Truist implemented loan modification programs
in response to the COVID-19 pandemic in order to provide borrowers with
flexibility with respect to repayment terms. These loan modifications are
generally not considered TDRs at the time of modification to the extent that the
borrower was impacted by the COVID-19 pandemic and was less than 30 days past
due at December 31, 2019 , or in certain circumstances, at the time that the
COVID-19 loan modification program was implemented, unless the loan was
previously classified as a TDR.
TDRs identified by SunTrust prior to the Merger date are not included in
Truist's TDR disclosure because all such loans were recorded at fair value and a
new accounting basis was established as of the Merger date. Subsequent
modifications will be evaluated for potential treatment as TDRs in accordance
with Truist's accounting policies.
The following table provides a summary of performing TDR activity:
Table 14: Rollforward of Performing TDRs
(Dollars in millions) 2020 2019
Balance, January 1 $ 980 $ 1,119
Inflows 646 404
Payments and payoffs (167) (144)
Charge-offs (34) (48)
Transfers to nonperforming TDRs (65) (57)
Removal due to the passage of time (6) (17)
Non-concessionary re-modifications (2) (8)
Transferred to LHFS and/or sold (135) (192)
Balance, September 30 $ 1,217 $ 1,057
66 Truist Financial Corporation
--------------------------------------------------------------------------------
The following table provides further details regarding the payment status of
TDRs outstanding at September 30, 2020 :
Table 15: Payment Status of TDRs (1)
September 30, 2020
(Dollars in millions) Current Past Due 30-89 Days Past Due 90 Days Or More Total
Performing TDRs:
Commercial:
Commercial and industrial $ 84 100.0 % $ - - % $ - - % $ 84
CRE 36 100.0 - - - - 36
Commercial construction 1 100.0 - - - - 1
Lease financing 1 100.0 - - - - 1
Consumer:
Residential mortgage 376 58.8 114 17.8 150 23.4 640
Residential home equity and direct 68 95.8 3 4.2 - - 71
Indirect auto 306 91.1 30 8.9 - - 336
Indirect other 5 100.0 - - - - 5
Student 5 100.0 - - - - 5
Credit card 34 89.5 3 7.9 1 2.6 38
Total performing TDRs 916 75.3 150 12.3 151 12.4 1,217
Nonperforming TDRs 72 51.5 23 16.4 45 32.1 140
Total TDRs $ 988 72.9 $ 173 12.7 $ 196 14.4 $ 1,357 (1)Past due performing TDRs are included in past due disclosures and nonperforming TDRs are included in NPL disclosures.
Truist Financial Corporation 67 --------------------------------------------------------------------------------
ACL
Activity related to the ACL is presented in the following tables:
Table 16: Activity in ACL
For the Three Months Ended For the Nine Months Ended
Quarters ended
(Dollars in millions) Sep 30, 2020 Jun 30, 2020 Mar 31, 2020 Dec 31, 2019 Sep 30, 2019 2020 2019
Balance, beginning of period
1,889 $ 1,651
CECL adoption - impact to
retained earnings before tax - - 2,762 - - 2,762 -
CECL adoption - reserves on
PCD assets - - 378 - - 378 -
Provision for credit losses 421 844 893 171 117 2,158 444
Charge-offs:
Commercial and industrial (112) (123) (39) (23) (28) (274) (67)
CRE (44) (14) (1) (5) (2) (59) (28)
Commercial construction (19) - (3) - - (22) -
Lease financing (44) (4) (2) (9) (1) (50) (2)
Residential mortgage (4) (35) (11) (8) (3) (50) (13)
Residential home equity and
direct (52) (65) (68) (25) (24) (185) (68)
Indirect auto (72) (80) (142) (107) (92) (294) (263)
Indirect other (8) (20) (18) (19) (14) (46) (43)
Student (6) (6) (8) - - (20) -
Credit card (44) (50) (53) (37) (25) (147) (72)
Total charge-offs (405) (397) (345) (233) (189) (1,147) (556)
Recoveries:
Commercial and industrial 20 21 17 6 5 58 19
CRE - 4 - - 3 4 5
Commercial construction 2 7 1 1 - 10 2
Lease financing 4 - - - 1 4 1
Residential mortgage 3 2 2 1 - 7 1
Residential home equity and
direct 16 15 15 10 6 46 20
Indirect auto 22 18 23 13 12 63 39
Indirect other 4 7 7 5 3 18 12
Student - 1 - - - 1 -
Credit card 8 6 8 5 6 22 15
Total recoveries 79 81 73 41 36 233 114
Net charge-offs (326) (316) (272) (192) (153) (914) (442)
Other 1 (6) (39) 257 - (44) -
Balance, end of period $ 6,229 $ 6,133 $ 5,611 $ 1,889 $ 1,653 $ 6,229 $ 1,653
ALLL (excluding PCD / PCI
loans) $ 5,675 $ 5,408 $ 4,880 $ 1,541 $ 1,565
ALLL for PCD / PCI loans 188 294 331 8 8
RUFC 366 431 400 340 80
Total ACL $ 6,229 $ 6,133 $ 5,611 $ 1,889 $ 1,653
The ACL totaled $6.2 billion at September 30, 2020 , compared to $1.9 billion at
December 31, 2019 . The increase in the allowance for credit losses was primarily
due to the adoption of CECL. Upon adoption, the Company recorded a $3.1 billion
increase in the allowance for credit losses, including $2.8 billion that was
charged to retained earnings before tax, and $378 million related to the gross
up for PCD loans. The remaining increase in the allowance for credit losses
primarily reflects deteriorated economic conditions. As of September 30, 2020 ,
the allowance for loan and lease losses was 1.91% of loans and leases held for
investment. The allowance for credit losses includes $5.9 billion for loans and
leases and $366 million for the reserve for unfunded commitments.
At September 30, 2020 , the allowance for loan and lease losses was 5.22 times
nonperforming loans and leases held for investment, compared to 5.24 times at
June 30, 2020 . At September 30, 2020 , the allowance for loan and lease losses
was 4.52 times annualized net charge-offs, compared to 4.49 times at June 30,
2020 .
68 Truist Financial Corporation
--------------------------------------------------------------------------------
Net charge-offs during the third quarter totaled $326 million , up $10 million
compared to the prior quarter. As a percentage of average loans and leases,
annualized net charge-offs were 0.42%, up three basis points compared to the
prior quarter. Current quarter net charge-offs includes $97 million of
charge-offs related to the implementation of CECL, which required a gross-up of
loan carrying values in connection with the establishment of an allowance on PCD
loans. Management performed a comprehensive review of PCD assets during the
third quarter and concluded in certain situations that a charge-off was
required. Excluding these additional charge-offs, net charge-offs would have
been an annualized 0.29% of average loans and leases for the third quarter of
2020, down 10 basis points compared to the prior quarter.
The following table presents an allocation of the ALLL. The entire amount of the
allowance is available to absorb losses occurring in any category of loans and
leases.
Table 17: Allocation of ALLL by Category
September 30, 2020 December 31, 2019
% ALLL in Each % Loans in % ALLL in Each % Loans in
(Dollars in millions) Amount Category Each Category Amount Category Each Category
Commercial and industrial $ 2,185 37.2 % 45.9 % $ 560 36.1 % 43.4 %
CRE 502 8.6 9.0 150 9.7 8.9
Commercial construction 134 2.3 2.2 52 3.4 2.1
Lease financing 53 0.9 1.8 10 0.6 2.0
Residential mortgage 424 7.2 16.4 176 11.4 17.4
Residential home equity and direct 704 12.0 8.7 107 6.9 9.0
Indirect auto 1,189 20.3 8.2 304 19.6 8.2
Indirect other 222 3.8 3.8 60 3.9 3.7
Student 130 2.2 2.4 - - 2.2
Credit card 320 5.5 1.6 122 7.9 1.9
PCI - - - 8 0.5 1.2
Total ALLL 5,863 100.0 % 100.0 % 1,549 100.0 % 100.0 %
RUFC 366 340
Total ACL $ 6,229 $ 1,889
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, whether Truist or another financial
institution, has initiated foreclosure proceedings against the borrower. When
notified that the first lien is in the process of foreclosure, Truist obtains
valuations to determine if any additional charge-offs or reserves are warranted.
These valuations are updated at least annually thereafter.
Truist has limited ability to monitor the delinquency status of the first lien,
unless the first lien is held or serviced by Truist . As a result, using
migration assumptions that are based on historical experience and adjusted for
current trends, Truist estimates the volume of second lien positions where the
first lien is delinquent and adjusts the ALLL to reflect the increased risk of
loss on these credits. Finally, Truist also provides additional reserves for
second lien positions when the estimated combined current loan to value ratio
for the credit exceeds 100%. As of September 30, 2020 , Truist held or serviced
the first lien on 30.8% of its second lien positions.
Truist Financial Corporation 69
--------------------------------------------------------------------------------Other Assets
The components of other assets are presented in the following table: Table 18: Other Assets as of Period End
September 30, December 31,
(Dollars in millions) 2020 2019
Bank-owned life insurance $ 6,461 $ 6,383
Tax credit and other private equity investments 5,615 5,448
Prepaid pension assets 3,996 3,579
Accounts receivable 1,832 2,418
Derivative assets 4,049 2,053
Leased assets and related assets 1,808 1,897
ROU assets 1,547 1,823
Accrued income 1,938 1,807
Prepaid expenses 1,194 1,254
Structured real estate 836 987
Equity securities at fair value 865 817
FHLB stock 165 764
Other 713 2,602
Total other assets $ 31,019 $ 31,832
Funding Activities
Deposits
The following table presents deposits for each of the last five quarters: Table 19: Deposits as of Period End (Dollars in millions)
Sep 30, 2020 Jun 30, 2020 Mar 31, 2020 Dec 31, 2019 Sep 30, 2019
Noninterest-bearing deposits $ 124,297 $ 122,694 $ 97,618 $ 92,405 $ 52,667
Interest checking 98,694 99,005 92,950 85,492 27,723
Money market and savings 121,856 123,974 124,072 120,934 64,454
Time deposits 25,900 30,562 35,539 35,896 16,526
Foreign office deposits - interest-bearing - - - - 910
Total deposits $ 370,747 $ 376,235 $ 350,179 $ 334,727 $ 162,280 Deposits totaled
The following table presents average deposits for each of the last five quarters: Table 20: Average Deposits Three Months Ended (Dollars in millions) Sep 30, 2020 Jun 30, 2020 Mar 31, 2020 Dec 31, 2019 Sep 30, 2019 Noninterest-bearing deposits$ 123,966 $ 113,875 $ 93,135 $ 64,485 $ 52,500 Interest checking 96,707 97,863 85,008 43,246 27,664 Money market and savings 123,598 126,071 120,936 79,903 64,920 Time deposits 27,940 33,009 35,570 23,058 16,643 Foreign office deposits - interest-bearing - - - 24
265
Total average deposits$ 372,211 $ 370,818 $ 334,649 $ 210,716 $ 161,992 Average deposits for the third quarter of 2020 were$372.2 billion , an increase of$1.4 billion compared to the prior quarter. Average noninterest-bearing deposit growth was strong for the third quarter of 2020 due to a continuation of the flight to quality and the government stimulus programs. Average time deposits decreased primarily due to maturities of wholesale negotiable certificates of deposit and higher-cost personal and business accounts. 70Truist Financial Corporation -------------------------------------------------------------------------------- Average noninterest-bearing deposits represented 33.3% of total deposits for the third quarter of 2020, compared to 30.7% for the prior quarter. The cost of average total deposits was 0.10% for the third quarter, down 12 basis points compared to the prior quarter. The cost of average interest-bearing deposits was 0.15% for the third quarter, down 17 basis points compared to the prior quarter. InSeptember 2020 , theFDIC published data from the Annual Summary of Deposits as ofJune 30, 2020 .Truist is the 6th largest commercial bank inthe United States based on deposits and maintained a first or second market position in thirteen of the company's Top 20 MSAs.
Borrowings
AtSeptember 30, 2020 , short-term borrowings totaled$6.2 billion , a decrease of$12.0 billion compared toDecember 31, 2019 , due primarily to a decrease of$10.8 billion in short-term FHLB advances. These borrowing sources were replaced with strong deposit growth. Average short-term borrowings were$6.2 billion , or 1.5% of total funding for the third quarter 2020, as compared to$8.3 billion , or 4.3% for the prior year quarter as these funding sources were largely replaced by the strong deposit growth. Long-term debt provides funding and, to a lesser extent, regulatory capital, and primarily consists of senior and subordinated notes issued byTruist andTruist Bank . Long-term debt totaled$41.0 billion atSeptember 30, 2020 , a decrease of$331 million compared toDecember 31, 2019 . During 2020, the Company issued$4.8 billion of senior notes with interest rates from 1.125% to 1.95% maturing in 2023 to 2030,$500 million in floating rate senior notes maturing in 2023 and$1.3 billion of subordinated notes with an interest rate of 2.25% maturing in 2030. These issuances were partially offset by the redemption of$3.7 billion of senior notes during 2020 and a decrease of$3.3 billion in long-term FHLB advances. The average cost of long-term debt was 1.78% for the nine months endedSeptember 30, 2020 , down 157 basis points compared to the same period in 2019. FHLB advances represented 2.1% of total outstanding long-term debt atSeptember 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. InOctober 2020 ,Truist redeemed$300 million of floating rate senior bank notes dueOctober 2021 and$600 million fixed-to-floating rate senior bank notes dueOctober 2021 . Shareholders' Equity Total shareholders' equity was$70.0 billion atSeptember 30, 2020 , an increase of$3.4 billion fromDecember 31, 2019 . This increase includes the issuance of$3.5 billion of preferred stock during the year,$3.2 billion in net income available to common shareholders and an increase of$1.3 billion in AOCI, which was partially offset by$2.1 billion related to the adoption of CECL and$2.0 billion for common and preferred dividends. In addition,Truist redeemed$500 million of its Series K preferred stock during 2020.Truist's book value per common share atSeptember 30, 2020 was$45.86 , 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 Financial Corporation 71 --------------------------------------------------------------------------------Truist employs a comprehensive change management program to manage the risks associated with integrating heritage BB&T and heritage SunTrust. The Board and Executive Leadership oversee the change management program, which is designed to ensure key decisions are reviewed and that there is appropriate oversight of integration activities.
Refer to
Market risk management
Market risk is the risk to current or anticipated earnings, capital or economic value arising from changes in the market value of portfolios, securities, or other financial instruments. Market risk results from changes in the level, volatility or correlations among financial market risk factors or prices, including interest rates, credit spreads, foreign exchange rates, equity, and commodity prices. 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 these variables could have on the Company's interest rate risk position. The predictive value of the simulation model depends upon the accuracy of the assumptions, but management believes that it provides helpful information for the management of interest rate risk. 72Truist Financial Corporation --------------------------------------------------------------------------------
The following table shows the effect that the indicated changes in interest rates would have on net interest income as projected for the next 12 months assuming a gradual change in interest rates as described below. Table 21: Interest Sensitivity Simulation Analysis
Interest Rate Scenario Annualized Hypothetical Percentage Change in Net
Linear Change in Prime Rate Interest Income
Prime Rate (bps) Sep 30, 2020 Sep 30, 2019 Sep 30, 2020 Sep 30, 2019
Up 100 4.25 % 6.00 % 3.43 % (0.56) %
Up 50 3.75 5.50 2.68 (0.14)
No Change 3.25 5.00 - -
Down 25 (1) 3.00 4.75 (1.62) (0.22)
Down 50 (1) 2.75 4.50 (1.94) (0.55)
(1) The Down 25 and 50 rates are floored at one basis point and may not reflect Down 25 and 50 basis points for all rate indices.
Rate sensitivity increased compared to the prior periods, primarily driven by loan and deposit mix changes related to the Merger and recent activity, increased fixed rate funding, and increased noninterest-bearing deposits.
Management considers how the interest rate risk position could be impacted by changes in balance sheet mix. Liquidity in the banking industry has been very strong during the current economic cycle. Much of this liquidity increase has resulted in growth in noninterest-bearing demand deposits. Consistent with the industry,Truist has seen a significant increase in this funding source. The behavior of these deposits is one of the most important assumptions used in determining the interest rate risk position ofTruist . A loss of these deposits in the future would reduce the asset sensitivity ofTruist's balance sheet as the Company would increase interest-bearing funds to offset the loss of this advantageous funding source. The following table shows the results ofTruist's interest-rate sensitivity position assuming the loss of demand deposits and an associated increase in managed rate deposits under various scenarios. For purposes of this analysis,Truist modeled the incremental beta of managed rate deposits for the replacement of the demand deposits at 100%. Table 22: Deposit Mix Sensitivity Analysis Linear Change in Rates Base Scenario at Results Assuming a$10 Billion Decrease in (bps) September,30,2020 (1) Noninterest-Bearing Demand Deposits Up 100 3.43 % 3.02 % Up 50 2.68 2.38
(1) The base scenario is equal to the annualized hypothetical percentage change
in net interest income at
If rates increased 100 basis points,Truist could absorb the loss of$82.8 billion , or 66.6%, of noninterest-bearing deposit balances and replace them with managed rate deposits with a beta of 100% before becoming neutral to interest rate changes.Truist also uses an EVE analysis to focus on longer-term projected changes in asset and liability values given potential changes in interest rates. This measure allowsTruist to analyze interest rate risk that falls outside the net interest income simulation period. The EVE model is a discounted cash flow of the portfolio of assets, liabilities and derivative instruments. The difference in the present value of assets minus the present value of liabilities is defined as EVE.
The following table shows the effect that the indicated changes in interest rates would have on EVE: Table 23: EVE Simulation Analysis
Hypothetical Percentage Change
Change in Interest Rates in EVE
(bps) Sep 30, 2020 Sep 30, 2019
Up 100 7.4 % 3.2 %
No Change - -
Down 100 (6.8) (13.2)
Truist uses financial instruments including derivatives to manage interest rate
risk related to securities, commercial loans, MSRs and mortgage banking
operations, long-term debt and other funding sources. During October 2020 ,
Truist initiated a new investment securities fair value hedging program, whereby
pay fixed interest rate swaps are utilized. Truist also uses derivatives to
facilitate transactions on behalf of its clients and as part of associated
hedging activities. As of September 30, 2020 , Truist had derivative financial
instruments outstanding with notional amounts totaling $303.6 billion , with an
associated net fair value of $3.6 billion . See "Note 16. Derivative Financial
Instruments" for additional disclosures.
Truist Financial Corporation 73
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LIBOR in its current form may no longer be available after 2021.
The project team is reviewing contract fallback language for loans and leases and noted that certain contracts will need updated provisions for the transition, and the team is coordinating with impacted lines of business to update LIBOR fallback language generally consistent with the ARRC recommendation.Truist is continuing to evaluate the impact on these contracts and other financial instruments, systems implications, hedging strategies, and other related operational and market risks. Market risks associated with this change are dependent on the alternative reference rates available and market conditions at transition. For a further discussion of the various risks associated with the potential cessation of LIBOR and the transition to alternative reference rates, refer to the section titled "Item 1A. Risk Factors" in the Form 10-K for the year endedDecember 31, 2019 . InOctober 2020 ,Truist began offering SOFR-based lending solutions to wholesale and retail clients.Truist expects SOFR to become a more commonly-used pricing benchmark across the industry.Truist continues to evaluate SOFR for additional product offerings and other alternative reference rates as replacements for LIBOR.
Market risk from trading activities
As a financial intermediary,Truist provides its clients access to derivatives, foreign exchange and securities markets, which generate market risks. Trading market risk is managed using a comprehensive risk management approach, which includes measuring risk using VaR, stress testing and sensitivity analysis. Risk metrics are monitored against a suite of limits on a daily basis at both the trading desk level and at the aggregate portfolio level to ensure exposures are in line 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.
Securitizations
As ofSeptember 30, 2020 , the aggregate market value of on-balance sheet securitization positions subject to the Market Risk Rule was$5 million , all of which were non-agency asset backed securities positions. Consistent with the Market Risk Rule requirements, the Company performs pre-purchase due diligence on each securitization position to identify the characteristics including, but not limited to, deal structure and the asset quality of the underlying assets, that materially affect valuation and performance. Securitization positions are subject 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
74Truist Financial Corporation --------------------------------------------------------------------------------
VaR-based measures
VaR measures the potential loss of a given position or portfolio of positions at a specified confidence level and time horizon.Truist utilizes a historical VaR methodology to measure and aggregate risks across its covered trading positions. Prior to the integration of the two institutional broker dealer businesses to formTruist Securities in the third quarter of 2020,Truist operated two historical VaR models and the aggregate company-wide VaR across the systems was determined additively with no benefit of diversification. The heritage BB&T VaR model was retired following the formation ofTruist Securities . Following the formation ofTruist Securities , VaR is calculated on a consolidated basis using the Truist VaR engine. For risk management purposes, the VaR calculation is based on a historical simulation approach and measures the potential trading losses using a one-day holding period at a one-tail, 99% confidence level. For Market Risk Rule purposes, the Company calculates VaR using a 10-day holding period and a 99% confidence level. Due to inherent limitations of the VaR methodology, such as the assumption that past market behavior is indicative of future market performance, VaR is only one of several tools used to measure and manage market risk. Other tools used to actively manage market risk include stress testing, profit and loss attribution, and stop loss limits. The trading portfolio's VaR profile is influenced by a variety of factors, including the size and composition of the portfolio, market volatility and the correlation between different positions. A portfolio of trading positions is typically less risky than the sum of risk from each of the individual sub-portfolios. As such, risk within each category partially offsets the exposure to other risk categories thereby creating a portfolio diversification benefit. The following table summarizes certain VaR-based measures for both the three and nine months endedSeptember 30, 2020 and 2019. The increase from the prior year was mainly due to the integration of the heritage SunTrust trading business and the market volatility due to the COVID-19 pandemic. As illustrated in the table below, the inclusion of volatility levels observed in March and April in the 12 month VaR historic look back window led to a convergence between VaR and Stressed VaR measures. Table 24: VaR-based Measures Three Months EndedSeptember 30 ,
Nine Months Ended
2020 2019 2020 2019
10-Day 10-Day
Holding 1-Day Holding 10-Day Holding 1-Day Holding Holding 1-Day
Holding 10-
Period Period Period Period Period Period Period Period
VaR-based Measures:
Maximum $ 65 $ 11 $ 1 $ 1 $ 65 $ 11 $ 2 $ 1
Average 31 6 1 - 23 5 1 -
Minimum 13 3 - - 3 1 - -
Period-end 46 8 1 - 46 8 1 -
VaR by Risk Class:
Interest Rate Risk 1 - 1 -
Credit Spread Risk 10 - 10 -
Equity Price Risk 2 - 2 -
Foreign Exchange Risk - - - -
Portfolio Diversification (6) - (6) -
Period-end 8 - 8 -
Stressed VaR-based measures
Stressed VaR, another component of market risk capital, is calculated using the
same internal models as used for the VaR-based measure. Stressed VaR is
calculated over a ten-day holding period at a one-tail, 99% confidence level and
employs a historical simulation approach based on a continuous twelve-month
historical window selected to reflect a period of significant financial stress
for our trading portfolio. The following table summarizes Stressed VaR-based
measures:
Table 25: Stressed VaR-based Measures - 10 Day Holding Period
Three Months Ended September 30, Nine Months Ended September 30,
(Dollars in millions) 2020 2019 2020 2019
Maximum $ 65 $ 4 $ 65 $ 6
Average 31 3 31 4
Minimum 14 2 13 2
Period-end 46 2 46 2
The increase from the prior year in stressed VaR-based measures was due to the integration of heritage SunTrust trading business after the Merger and the market volatility due to the COVID-19 pandemic.
Truist Financial Corporation 75 --------------------------------------------------------------------------------
Specific risk measures
Specific risk is a measure of idiosyncratic risk that could result from risk factors other than broad market movements (e.g. default, event risks). The Market Risk Rule provides fixed risk weights under a standardized measurement method while also allowing a model-based approach, subject to regulatory approval.Truist utilizes the standardized measurement method to calculate the specific risk component of market risk regulatory capital. As such, incremental risk capital requirements do not apply.
VaR model backtesting
In accordance with the Market Risk Rule, the Company evaluates the accuracy of its VaR model through daily backtesting by comparing aggregate daily trading gains and losses (excluding fees, commissions, reserves, net interest income, and intraday trading) from covered positions with the corresponding daily VaR-based measures generated by the model. There were eight company-wide VaR backtesting exceptions during the twelve months endedSeptember 30, 2020 , primarily driven by the COVID-19 pandemic which led to a sudden and significant repricing of financial markets during the first and second quarter of 2020, amid an increase in market volatility and deterioration in overall market liquidity. In accordance with established policy and procedure, all company-wide VaR backtesting exceptions are thoroughly reviewed in the context of VaR model use and performance. Following such reviews, it was determined that the VaR model performed in line with expectations. However, the extreme moves in underlying market risk factors caused by the COVID-19 pandemic would not typically have been captured within the 1-day VaR measure. [[Image Removed: tfc-20200930_g1.jpg]]
Model risk management
MRM is responsible for the independent model validation of all decision tools and models including trading market risk models. The validation activities are conducted in accordance with MRM policy, which incorporates regulatory guidance related to the evaluation of model conceptual soundness, ongoing monitoring and outcomes analysis. As part of ongoing monitoring efforts, the performance of all trading risk models are reviewed regularly to preemptively address emerging developments in financial markets, assess evolving modeling approaches, and to identify potential model enhancement.
Stress testing
76Truist Financial Corporation -------------------------------------------------------------------------------- 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 ofSeptember 30, 2020 andDecember 31, 2019 ,Truist's liquid asset buffer, as a percent of total assets, was 18.6% and 16.5%, respectively. The LCR rule directs largeU.S. banking organizations to hold unencumbered high-quality liquid assets sufficient to withstand projected 30-day total net cash outflows, each as defined under the LCR rule. As ofJanuary 1, 2020 ,Truist is subject to the Category III reduced LCR requirements.Truist's average LCR was 117% for the three months endedSeptember 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. This rating action taken by Fitch was solely a function of implementing its revised bank rating methodology and did not reflect a change in Fitch's current or expected view 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 ended
Parent Company
The Parent Company serves as the primary source of capital for the operating subsidiaries.The Parent Company's assets consist primarily of cash on deposit withTruist Bank , equity investments in subsidiaries, advances to subsidiaries, and accounts receivable from subsidiaries. The principal obligations of the Parent Company are payments on long-term debt. The main sources of funds for the Parent Company are dividends and management fees from subsidiaries, repayments of advances to subsidiaries, and proceeds from the issuance of equity and long-term debt. The primary uses of funds by the Parent Company are investments in subsidiaries, advances to subsidiaries, dividend payments to common and preferred shareholders, retirement of common stock, and payments on long-term debt. See "Note 22. Parent Company Financial Information" of the Annual Report on Form 10-K for the year endedDecember 31, 2019 for additional information regarding dividends from subsidiaries and debt transactions.Truist Financial Corporation 77 -------------------------------------------------------------------------------- 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. AtSeptember 30, 2020 andDecember 31, 2019 , the Parent Company had 46 months and 29 months, respectively, of cash on hand to satisfy projected cash outflows, and 22 months and 20 months, respectively, when including the payment of common stock dividends.
Truist 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. AtSeptember 30, 2020 ,Truist Bank had approximately$169.5 billion of available secured borrowing capacity, which represents approximately 8.3 times the amount of one-year wholesale funding maturities. In addition to secured borrowing sources,Truist had excess eligible cash at theFederal Reserve Bank of$32.6 billion atSeptember 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.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 26: Capital Requirements and Targets Well Capitalized Minimum Capital Plus Truist Targets (1) Capital Conservation Interim Operating Minimum Capital Truist Truist Bank Buffer (3) (2) Stressed CET1 4.5 % NA 6.5 % 7.0 % 8.0 % 7.0 % Tier 1 capital 6.0 6.0 8.0 8.5 9.3 8.5 Total capital 8.0 10.0 10.0 10.5 11.3 10.5 Leverage ratio 4.0 NA 5.0 NA 7.5 7.0 Supplementary leverage ratio 3.0 NA NA NA 6.5 6.0 (1)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 was replaced by the SCB of 270 basis points effectiveOctober 1, 2020 . 78Truist Financial Corporation -------------------------------------------------------------------------------- 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. InAugust 2020 , theFederal Reserve informedTruist of its final SCB of 270 basis points for risk-based capital ratios. This buffer, which was determined based on stress testing results developed by theFederal Reserve , is 20 basis points above the Capital Conservation Buffer. 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 update and resubmit its capital plan in earlyNovember 2020 to reflect changes in financial markets and the macroeconomic outlook.Truist's review of the results of the 2020 CCAR supervisory stress test notes that the modeled outcomes shown by the FRB differ from those calculated by the Company.Truist believes those differences are attributable to the application of purchase accounting associated with the Merger. Purchase accounting adjustments could result in a reduction in provision expense and an increase in pre-provision net revenue. These differences could result in higher capital ratios than were reflected in the CCAR results.
(Dollars in millions, except per share data, shares in thousands)
Sep 30, 2020 Dec 31, 2019 Risk-based:
(preliminary)
CET1 capital to risk-weighted assets 10.0 % 9.5 % Tier 1 capital to risk-weighted assets 12.2 10.8 Total capital to risk-weighted assets 14.6 12.6 Leverage ratio 9.6 14.7 Supplementary leverage ratio 8.9 NA Non-GAAP capital measure (1): Tangible common equity per common share$ 26.63 $ 25.93 Calculation of tangible common equity (1): Total shareholders' equity$ 69,973 $ 66,558 Less: Preferred stock 8,048 5,102 Noncontrolling interests 106 174 Goodwill and intangible assets, net of deferred taxes 25,923 26,482 Tangible common equity$ 35,896 $ 34,800 Risk-weighted assets$ 377,045 $ 376,056 Common shares outstanding at end of period 1,348,118 1,342,166 (1)Tangible common equity and related measures are non-GAAP measures that exclude the impact of intangible assets, net of deferred taxes, and their related amortization. These measures are useful for evaluating the performance of a business consistently, whether acquired or developed internally.Truist's management uses these measures to assess the quality of capital and returns relative to balance sheet risk. These capital measures are not necessarily comparable to similar capital measures that may be presented by other companies. Capital ratios improved compared to year-end 2019, due to growth in CET1 capital, partially offset by higher risk-weighted assets.Truist's capital levels remain strong compared to the regulatory levels for well capitalized banks atSeptember 30, 2020 .Truist's other capital measures also improved asTruist issued various capital instruments to strengthen its capital position.Truist issued$3.5 billion of preferred stock and redeemed$500 million of Series K preferred stock during the first nine months of 2020. In addition,Truist issued$1.3 billion of subordinated debt.Truist declared common dividends of$0.450 per share during the third quarter of 2020. The dividend and total payout ratios for the third quarter of 2020 were 56.8%. Truist Financial Corporation 79 -------------------------------------------------------------------------------- Share Repurchase Activity Table 28: Share Repurchase Activity Maximum Remaining Dollar Value of Shares Available for Average
Price Total Shares Repurchased Repurchase Pursuant (Dollars in millions, except per share Total Shares
Paid Per Share Pursuant to to Publicly-Announced
data, shares in thousands) Repurchased (1) (2) Publicly-Announced Plan Plan
July 2020 1 $ 36.42 - $ -
August 2020 - - - -
September 2020 - - - -
Total 1 36.42 -
(1)Includes shares exchanged or surrendered in connection with the exercise of equity-based awards under equity-based compensation plans. (2)Excludes commissions.
Critical Accounting Policies
The accounting and reporting policies 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 earlier in the year. As a result of these considerations,Truist performed a qualitative assessment of the goodwill carried by the CB&W, C&CB and IH reporting units for impairment in the third quarter of 2020 to determine whether it was more-likely-than-not that the fair value of one or more of its reporting units was below its respective carrying amount as of period-end. In performing this assessment,Truist considered macroeconomic and market factors, industry and banking sector events, a sensitivity analysis on management's forecast and assumptions, 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 third quarter 2020 results reflected profitable performance across each of its reporting units; strong capital and liquidity levels that have facilitated swift actions in support of clients, teammates and communities; 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 ofSeptember 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. 80Truist Financial Corporation --------------------------------------------------------------------------------
ACL
Truist's policy is to maintain an ACL, which represents management's best estimate of expected future credit losses related to the loan and lease portfolios and off-balance sheet lending commitments at the balance sheet date. Estimates of expected future loan and lease losses are determined by using statistical models and management's judgement. The models are designed to forecast probability of default, exposure at default and loss given default by correlating certain macroeconomic variables to historical experience. The models are generally applied at the portfolio level to pools of loans with similar risk characteristics. The macroeconomic data used in the models is based on forecasted variables for the reasonable and supportable period of two years. Beyond this forecast period the models gradually revert to long-term historical loss conditions over a one year period. Expected losses are estimated through contractual maturity, giving appropriate consideration to expected prepayments unless the borrower has a right to renew that is not cancellable or it is reasonably expected that the loan will be modified as a TDR. A qualitative allowance which incorporates management's judgement is also included in the estimation of expected future loan and lease losses, including qualitative adjustments in circumstances where the model output is inconsistent with management's expectations with respect to expected credit losses. This allowance is used to adjust for limitations in modeled results related to the current economic conditions and capture risks in the portfolio such as considerations with respect to the impact of current economic events, the outcomes of which are uncertain. These events may include, but are not limited to, political conditions, legislation that may directly or indirectly affect the banking industry and economic conditions affecting specific geographical areas and industries in whichTruist conducts business. Loans and leases that do not share similar risk characteristics and significant loans that are considered collateral-dependent are individually evaluated. For these loans, the ALLL is determined through review of data specific to the borrower and related collateral, if any. For TDRs, default expectations and estimated prepayment speeds that are specific to each of the restructured loan populations are incorporated in the determination of the ALLL. The methodology used to determine an estimate for the RUFC is similar to that used to determine the funded component of the ALLL and is measured over the period there is a contractual obligation to extend credit that is not unconditionally cancellable. The RUFC is adjusted for factors specific to binding commitments, including the probability of funding and exposure at default. A detailed discussion of the methodology used in determining the ACL is included in "Note 1. Basis of Presentation."
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