This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, regarding the financial condition, results of operations, business plans and the future performance of BB&T that are based on the beliefs and assumptions of the management of BB&T and the information available to management at the time that these disclosures were prepared.Truist. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "plans," "projects," "may," "will," "should," "could,"would," "could" and other similar expressions are intended to identify these forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report, and should also consider the risks and uncertainties described elsewhere in this report, including under the "Risk Factors" section. Actual results may differ materially from those expressed in or implied by any forward-looking statement.they are made. Except to the extent required by applicable law or regulation, BB&TTruist undertakes no obligation to revise or update publicly any forward-looking statements for any reason. Readers should, however, consult any further disclosures of a forward-looking nature BB&T may make in any subsequent Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q, or Current Reports on Form 8‑K.statements.
ITEM 1. BUSINESS
Refer to "Note 19. Operating Segments" for disclosures related to BB&T’s operating segments.
Market Area
The following table reflects BB&T’sTruist's deposit market share and branch locations by state:
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Table 2: Deposit Market Share and Branch Locations by State |
| | % of Truist’s Deposits (2) | | Deposit Market Share Rank (2) | | Number of Branches (3) |
Florida | | 23 | % | | 3rd | | 637 |
Georgia | | 16 | | | 1st | | 325 |
Virginia | | 15 | | | 2nd | | 406 |
North Carolina (1) | | 15 | | | 1st | | 371 |
Maryland | | 7 | | | 3rd | | 232 |
Tennessee | | 5 | | | 4th | | 145 |
Pennsylvania | | 5 | | | 8th | | 180 |
South Carolina | | 4 | | | 3rd | | 128 |
Texas | | 2 | | | 17th | | 103 |
West Virginia | | 2 | | | 1st | | 52 |
Kentucky | | 2 | | | 4th | | 73 |
Washington, D.C. | | 2 | | | 4th | | 28 |
Alabama | | 1 | | | 6th | | 70 |
New Jersey | | 1 | | | 19th | | 23 |
Other states | | NA | | NA | | 8 |
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Table 1 |
BB&T Deposit Market Share and Branch Locations by State |
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| | % of BB&T's Deposits (2) | | Deposit Market Share Rank (2) | | Number of Branches (3) |
North Carolina (1) | | 21 | % | | 2nd | | 328 |
Virginia | | 16 |
| | 4th | | 319 |
Florida | | 13 |
| | 7th | | 298 |
Pennsylvania | | 10 |
| | 6th | | 246 |
Georgia | | 8 |
| | 5th | | 144 |
Maryland | | 7 |
| | 6th | | 158 |
South Carolina | | 6 |
| | 3rd | | 102 |
Texas | | 4 |
| | 14th | | 117 |
Kentucky | | 4 |
| | 4th | | 99 |
West Virginia | | 4 |
| | 1st | | 68 |
Alabama | | 3 |
| | 6th | | 77 |
Tennessee | | 2 |
| | 8th | | 46 |
New Jersey | | 1 |
| | 16th | | 30 |
Washington, D.C. | | 1 |
| | 9th | | 12 |
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(1) | Excludes home office deposits. |
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(2) | Source: S&P Global Market Intelligence-data as of December 28, 2017. |
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(3) | As of December 31, 2017. Excludes three branches in Ohio and two in Indiana. |
(1)Excludes home office deposits.
(2)Source: FDIC.gov data as of June 30, 2020.
BB&T operates in markets that have a diverse employment base covering numerous industries. (3)As of December 31, 2020.
Management strongly believes that BB&T’sTruist's community bank approach to providing client service is a competitive advantage that strengthens the Company’sCompany's ability to effectively provide financial products and services to businesses and individuals in its markets. Furthermore, BB&TIn addition, management has made significant investments in recent years to develop its digital platform and believes that its current market area will support growthmobile and online applications are highly competitive in assets and deposits in the future.meeting clients' expectations.
Competition
The financial services industry is highlyintensely competitive and constantly evolving. BB&T’sLegislative, regulatory, economic, and technological changes as well as continued consolidation within the industry could result in competition from new and existing market participants. Truist's subsidiaries compete actively with national, regional and local financial services providers, including banks, thrifts, securities dealers, mortgage bankers, finance companies, financial technology companies and insurance companies. In recent years, competitionThe ability of non-banking entities, including financial technology companies, to provide services previously limited to commercial banks has increased from institutionscompetition. Non-banking entities are not subject to the same regulatory restrictionsframework as domestic banks and BHCs. Consumers haveBHCs, and therefore, can often operate with greater flexibility and lower costs. In addition, the opportunityability to select fromaccess and use technology is an increasingly significant competitive factor in the financial services industry. Having the right technology is a variety of traditionalcritically important component to client satisfaction because it affects the Company’s ability to deliver the products and nontraditional alternatives. The industry frequently sees merger activity, which affects competition by eliminating some regionalservices that clients desire in a manner that they find convenient and local institutions, while strengtheningattractive. Management believes that the franchises of acquirers.Company is well positioned to compete and that its continued focus on touch and technology will engender trust among its current and future clients. For additional information concerning markets, BB&T’sTruist's competitive position and business strategies, and recent government interventions, see "Market Area" above and "General Business Development" below.in the discussion that follows.
General Business Development
BB&T is a regional FHCTruist seeks to satisfy all of its clients' financial needs, enabling the Company to grow and has maintained a long-term focus on a strategy that includes expansion of asset size and diversification in terms of revenues anddiversify its sources of revenue and profitability. ThisTruist's long-term strategy encompasses both organic and inorganic growth, andincluding mergers or acquisitions of complementary banks andcomplimentary financial institutions or other businesses.
Merger and Acquisition Strategy
BB&T’sTruist's merger and acquisition strategy focuses on meeting the following criteria:
•the organization must be a good fit with Truist's culture;
•the merger or acquisition must be strategically attractive;
•associated risks must be identified and mitigation plans put in place, such that any residual risks fall within Truist's risk appetite; and
•the transaction must meet Truist's financial criteria.
6 Truist Financial Corporation
Truist's growth in business, profitability and market share has historically been enhanced by strategic mergers and acquisitions. BB&T is not currently pursuing significant mergers or acquisitions, butTruist will assess future opportunities, primarily within or contiguous to BB&T’s existing footprint, based on geography and market conditions and may, among other possibilities, pursue economically advantageous acquisitions of insurance agencies, specializedcertain lending businesses and fee income generating financial services businesses. BB&T’s acquisition strategy will focus on meeting the following criteria:
the organization must be a good fit with BB&T’s culture;
the acquisition must be strategically attractive;
any risks must be identified and mitigation plans put in place to ensure any risks fall within BB&T’s risk appetite; and
the transaction must meet BB&T’s financial criteria.
Regulatory actions, such as the orders more fully discussed in the "BSA/AML and Suspicious Activity" section below, can limit BB&T’s and Branch Bank’s ability to pursue mergers and acquisitions for a period of time and require new or additional regulatory approvals before engaging in certain other business activities.
During 2016, BB&T acquired National Penn and Swett & Crawford. During 2015, BB&T completed the purchases of Susquehanna Bancshares, Inc. and The Bank of Kentucky Financial Corporation. BB&T also acquired 41 retail branches in Texas from Citigroup.
Regulatory Considerations
The extensive regulatory framework applicable to financial institutionsbanking organizations is intended primarily for the protection of depositors the DIF and the stability of the U.S. financial system, rather than for the protection of shareholders and creditors. In addition to banking laws and regulations, and regulatory agencies, BB&TTruist is subject to various other laws regulations, supervision and examination by other regulatory agencies,regulations, all of which directly or indirectly affect the operations and management of BB&TTruist and its ability to make distributions to shareholders. Truist and its subsidiaries are also subject to supervision and examination by multiple regulators.
Banking and other financial services statutes regulations and policies are continually under review by Congress, state legislatures, and federal and state regulatory agencies. In addition to laws and regulations, state and federal bank regulatory agencies may issue policy statements, interpretive letters and similar written guidance applicable to Truist and its subsidiaries. Any change in the statutes, regulations or regulatory policies applicable to Truist, including changes in their interpretation or implementation, could have a material effect on its business or organization.
The current administration and membersscope of Congress have publicly disclosed proposals to change certain laws and regulations. Proposals to change the laws and regulations, are frequently introduced at bothand the intensity of the supervision to which Truist is subject have increased in recent years, initially in response to the financial crisis, and more recently in light of other factors such as technological and market changes. Regulatory enforcement and fines have also increased across the banking and financial services sector. Truist expects that its business will remain subject to extensive regulation and supervision.
The descriptions below summarize certain significant federal and state levels. The likelihood and timing of any such changes and the impact such changes may have on BB&T is impossible to determine with any certainty.
The description below summarizes the significant state and federal laws to which BB&T currentlyTruist is subject. The descriptions are qualified in their entirety by reference to the particular statutory or regulatory provisions summarized. The descriptions belowThey do not summarize all possible or proposed changes in current laws or regulations.regulations and are not intended to be a substitute for the related statues or regulatory provisions.
General
Financial Regulatory Oversight
U.S. financial services firms, including BB&T, are subject to significant regulatory oversight. The Dodd-Frank Act is extensive, complex and comprehensive legislation that impacts practically all aspects of a banking organization. The Dodd-Frank Act has led to numerous and far-reaching changes that affect financial institutions.
Certain provisions of the Dodd-Frank Act and other laws are subject to further rulemaking, guidance and interpretation by the applicable federal regulators. BB&T will continue to evaluate the impact of any new regulations so promulgated, including changes in regulatory costs and fees, modifications to consumer products or disclosures required by the CFPB and the requirements of the enhanced supervision provisions, among others.
As a BHC, and a FHC under federal law, BB&TTruist is subject to regulation under the BHCA and theto regulation, examination and reporting requirements ofsupervision by the FRB. BranchTruist Bank, a North Carolina state-chartered commercial bank that is not a member of the Federal Reserve System, is subject to regulation, supervision and examination by the NCCOB the FDIC and the CFPB.
In August 2017, the FRB proposed a new rating system that will applyFDIC. Truist Bank and its affiliates are also subject to all BHCs with total consolidated assets of $50 billion or more. Under the new rating system, component ratings would be assigned for capital planning and positions, liquidity risk management and positions, and governance and controls; however, a standalone composite rating would not be assigned. To be considered “well managed" under the proposed rating system, a firm must be rated “Satisfactory” or “Satisfactory Watch” for each of its three component ratings. Initial ratings would be assigned during 2018 under the proposal.
State and federal law govern the activities in which Branch Bank engages, the investments it makes, and the aggregate amount of loans that may be granted to one borrower. Various consumer and compliance laws and regulations also affect its operations. Branch Bank is also affectedexamination by the actions of the FRB as it implements monetary policy.CFPB for compliance with most federal consumer financial protection laws.
In addition to federal and state banking laws and regulations, BB&TTruist and certain of its subsidiaries and affiliates, including those that engage in derivatives transactions, securities underwriting, dealing,market making, brokerage, investment advisory and insurance activities, are subject to other federal and state laws and regulations, as well as supervision and examination by other federal and state regulatory agencies and other regulatory authorities, including the SEC, CFTC, FINRA and the NYSE. Truist Bank is also subject to additional state and federal laws, as well as various compliance regulations, that govern its activities, the investments it makes, and the aggregate amount of loans that may be granted to one borrower.
Examinations by Truist's regulators consider not only compliance with applicable laws, regulations and supervisory policies of the agency, but also capital levels, asset quality, risk management effectiveness, the ability and performance of management and the board of directors, the effectiveness of internal controls, earnings, liquidity and various other factors. Following those examinations, Truist and Truist Bank are assigned supervisory ratings. This supervisory framework, including the examination reports and supervisory ratings, which are considered confidential supervisory information, could materially impact the conduct, growth and profitability of Truist's operations.
Under the FRB's Large Financial Institution Rating System, component ratings are assigned for capital planning, liquidity risk management, and governance and controls. To be considered "well managed" under this rating system, a firm must be rated "broadly meets expectations" or "conditionally meets expectations" for each of its three component ratings.
The results of examinations by any of Truist's federal bank regulators potentially can result in the imposition of significant limitations on Truist's activities and growth. These regulatory agencies generally have broad enforcement authority and discretion to impose restrictions and limitations on the operations of a regulated entity, including the imposition of substantial monetary penalties and nonmonetary requirements against a regulated entity where the relevant agency determines that the operations of the regulated entity or any of its subsidiaries fail to comply with applicable law or regulations, are conducted in an unsafe or unsound manner, or represent an unfair or deceptive act or practice.
Truist Financial Corporation 7
FHC Regulation
Under current federal law, as a BHC, BB&TTruist has elected to becomebe treated as a FHC, which allows it to offer customers virtually any typeengage in a broader range of serviceactivities than would otherwise be permissible for a BHC, including activities that isare financial in nature or incidental thereto, including banking and activities closely related thereto,such as securities underwriting insurance andor merchant banking. In order to maintain its status as a FHC, BB&TTruist and all of its affiliated IDIsIDI must be well-capitalized and well-managed and Truist Bank must have at least a satisfactory CRA rating. The FRB has responsibility for overseeing compliance with these requirements. If the FRB determines that a FHC is not well-capitalized or well-managed, the FHC has a period of time to comply, but during the period of noncompliance, the FRB can place any limitationsmay impose corrective capital and managerial requirements on the FHC, and may place limitations on its ability to conduct certain business activities that it believesFHCs are generally permitted to conduct and its ability to make certain acquisitions. If the failure to meet these standards persists, a FHC may be appropriate.required to divest its IDI subsidiaries, or cease all activities other than those activities that may be conducted by BHCs that are not FHCs. Furthermore, if the FRB determines thatan IDI subsidiary of a FHC has not maintained a satisfactory CRA rating, the FHC would not be able to commence any new financial activities or acquire a company that engages in such activities, although the FHC would still be allowed to engage in activities closely related to banking and make investments in the ordinary course of conducting banking activities.
MostEnhanced Prudential Standards and Regulatory Tailoring Rules
Certain U.S. BHCs, including Truist, are subject to enhanced prudential standards. As such, Truist is subject to more stringent liquidity and capital requirements, leverage limits, stress testing, resolution planning and risk management standards than those applicable to smaller institutions. Certain larger banking organizations are subject to additional enhanced prudential standards. Truist became subject to the FRB's single-counterparty credit limit rule as of July 1, 2020, and is subject to a limit of 25% of Tier 1 capital for aggregate net credit exposures, including exposure resulting from, among other transactions, extensions of credit, repurchase and reverse repurchase transactions, investments in securities and derivative transactions, to any other unaffiliated counterparty.
Under the financial activities that are permissible for FHCs also are permissible for a bank’s "financial subsidiary," except for insurance underwriting, insurance company portfolio investments, real estate investments and development, and merchantTailoring Rules, Truist is subject to the standards applicable to Category III banking organizations, which must be conducted by a FHC. In order for a financial subsidiary of agenerally include bank to engageholding companies with greater than $250 billion, but less than $700 billion, in permissible financial activities, federal law requires the parent bank (and its sister-bank affiliates) to be well-capitalized and well-managed; the aggregatetotal consolidated assets of all of that bank’s financial subsidiaries may not exceed the lesser of 45% of its consolidated total assets or $50 billion; the bank must have at least a satisfactory CRA rating; and if that bank is one of the 100 largest national banks, it must meet certain financial rating or other comparable requirements.
Current federal law also establishes a system of functional regulation under which the FRB is the umbrella regulator for BHCs, but BHC affiliates are principally regulated by functional regulators such as the FDIC for state nonmember bank affiliates, the SEC for securities affiliates and state insurance regulators for insurance affiliates. Certain specific activities, including traditional bank trust and fiduciary activities, may be conducted in the bank without the bank being deemed a "broker" or a "dealer" in securities for purposes of functional regulation. Although states generally must regulate bank insurance activities in a nondiscriminatory manner, states may continue to adopt and enforce rules that specifically regulate bank insurance activitiesless than $75 billion in certain identifiable areas.risk-related exposures.
Resolution Planning
FRBAs a Category III banking organization, Truist will be required to submit a resolution plan every three years, with the first resolution plan under the new rule to be submitted by September 29, 2021. Later resolution plans under this rule will alternate between full resolution plans and FDIC regulations require "covered companies" such as BB&T and systemically important financial institutions such as Branch Bank to file, maintain and update plans for a rapid and orderlytargeted resolution in the event of material financial distress or failure (a "living will"). Both theplans. The FRB and the FDIC must review and evaluate BB&T’sTruist's resolution plan. The FRB and Branch Bank’s living wills andFDIC are authorized to impose restrictions on growth and activities or operations if deemed necessary. The public portionsthe agencies determine that a resolution plan is not credible or would not facilitate a rapid and orderly resolution of the company under the U.S. Bankruptcy Code, and could require the banking organization to divest assets or take other actions if it did not submit an acceptable resolution plan within two years after any such restrictions were imposed.
In addition, Truist Bank is required by an FDIC regulation to file a separate bank level resolution plan. In April 2019, the FDIC issued an advanced notice of proposed rulemaking that would modify the content and frequency of resolution planning requirements for systemically important IDIs. While this proposal did not include specific details regarding the content or frequency of future bank level resolution planning requirements, the FDIC indicated that the revised approach would establish tiered resolution planning requirements based on the size, complexity and other factors of applicable IDIs. On January 19, 2021 the FDIC lifted a moratorium from November 2018 that delayed the next round of submissions of resolution plans for IDIs until this rulemaking process has been completed. The FDIC has indicated that firms will not be required to submit a resolution plan without at least 12 months advance notice. As Truist Bank has not received any written notice regarding its next resolution plan submission it does not currently have an anticipated submission date for a resolution plan.
Capital Requirements
Truist and Truist Bank are availablesubject to certain risk-based capital and leverage ratio requirements established by the FRB, for Truist, and by the FDIC, for Truist Bank. These requirements are based on the capital framework developed by the BCBS for strengthening the regulation, supervision and risk management of banks under Basel III rules, as well as certain provisions of the Dodd-Frank Act. These quantitative calculations are minimums, and the FRB and FDIC may determine that a banking organization, based on its size, complexity, or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner. Failure to be well capitalized or to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on Truist's operations or financial condition. Failure to be well capitalized or to meet minimum capital requirements could also result in restrictions on Truist's or Truist Bank's ability to pay dividends or otherwise distribute capital or to receive regulatory approval of applications.
8 Truist Financial Corporation
In October 2019, the federal banking regulators adopted rules that revised the criteria for determining the applicability of regulatory capital and liquidity requirements for large United States banking organizations, including Truist and Truist Bank, and that tailored the application of the FRB's enhanced prudential standards to large banking organizations. Under these rules, Truist and Truist Bank are subject to the standards applicable to "Category III" banking organizations.
Under the regulatory capital rules, Truist's and Truist Bank's assets, exposures, and certain off-balance sheet items are subject to risk weights used to determine the institutions' risk-weighted assets. These risk-weighted assets are used to calculate the following minimum capital ratios for Truist and Truist Bank:
•CET1 Risk-Based Capital Ratio, equal to the ratio of CET1 capital to risk-weighted assets. CET1 capital primarily includes common shareholders' equity subject to certain regulatory adjustments and deductions, including with respect to goodwill, intangible assets, certain deferred tax assets, and AOCI.
•Tier 1 Risk-Based Capital Ratio, equal to the ratio of Tier 1 capital to risk-weighted assets. Tier 1 capital is primarily comprised of CET1 capital, perpetual preferred stock and certain qualifying capital instruments.
•Total Risk-Based Capital Ratio, equal to the ratio of total capital, including CET1 capital, Tier 1 capital, and Tier 2 capital, to risk-weighted assets. Tier 2 capital primarily includes qualifying subordinated debt and qualifying ALLL. Tier 2 capital also includes, among other things, certain trust preferred securities.
In March 2020, the FRB adopted a final rule that integrates its annual capital planning and stress testing requirements with existing regulatory capital requirements. For risk-based capital requirements for certain large BHCs, including Truist, the SCB replaced the capital conservation buffer, which was required in order to avoid limitations on capital distributions, including dividends and repurchases of any Tier 1 capital instrument, such as common and qualifying preferred stock, and certain discretionary incentive compensation payments. The capital conservation buffer was 2.5% through September 30, 2020. Beginning in the Additional Disclosures2020 CCAR cycle, the FRB will notify Truist of its SCB requirements, which is equal to the greater of (i) the difference between its starting and minimum projected CET1 capital ratios under the severely adverse scenario in the supervisory stress test, plus the sum of the dollar amount of Truist's planned common stock dividends for each of the fourth through seventh quarters of the planning horizon as a percentage of risk-weighted assets, or (ii) 2.5%. The FRB assigned Truist an SCB of 2.7%, which is effective from October 1, 2020 through September 30, 2021. Although the final rule continues to require that the firm describe its planned capital distributions in its CCAR capital plan, Truist is no longer required to seek prior approval if it makes capital distributions in excess of those included in its CCAR capital plan. Instead, Truist is subject to automatic distribution limitations if its capital ratios fall below its buffer requirements, which include the SCB.
For certain large banking organizations, the SCB could be supplemented by a countercyclical capital buffer of up to an additional 2.5% of risk-weighted assets. This buffer is currently set at zero. An FRB policy statement establishes the framework and factors the FRB would use in setting and adjusting the amount of the countercyclical capital buffer. Covered banking organizations would generally have 12 months after the announcement of any increase in the countercyclical capital buffer to meet the increased buffer requirement, unless the FRB determines to establish an earlier effective date. If the full countercyclical buffer amount is implemented, Truist would be required to maintain a CET1 capital ratio of at least 9.7%, a Tier 1 capital ratio of at least 11.2%, and a Total capital ratio of at least 13.2%, and Truist Bank would be required to maintain a CET1 capital ratio of at least 9.5%, a Tier 1 capital ratio of at least 11%, and a Total capital ratio of at least 13%, to avoid limitations on capital distributions and certain discretionary incentive compensation payments.
Certain large banking organizations with trading assets and liabilities above certain thresholds, including Truist, are subject to the Market Risk Rule and must adjust their risk-based capital ratios to reflect the market risk of their trading activities. Refer to the "Market Risk" section of the Investor Relations siteMD&A for additional disclosures related to market risk management.
In addition, Truist and Truist Bank are subject to a Tier 1 leverage ratio, equal to the ratio of Tier 1 capital to quarterly average assets, net of goodwill, certain other intangible assets, and certain other deductions. Category III banking organizations are also subject to a minimum 3.0% supplementary leverage ratio. The supplementary leverage ratio is calculated by dividing Tier 1 capital by total leverage exposure, which takes into account on-balance sheet assets as well as certain off-balance sheet items, including loan commitments and potential future exposure of derivative contracts.
In response to the COVID-19 pandemic, the FRB adopted an interim final rule that temporarily changes the supplementary leverage ratio to exclude U.S. Treasury securities and deposits at bbt.investorroom.com/additional-disclosures.Federal Reserve Banks from the calculation of a firm's leverage exposure. The interim final rule applies to BHCs. The interim final rule became effective April 1, 2020 and will remain in effect through March 31, 2021. While a similar rule providing relief to IDIs was issued, Truist Bank has elected not to take advantage of this provision for Truist Bank.
Truist Financial Corporation 9
The total minimum regulatory capital ratios and well-capitalized minimum ratios applicable to Category III banking organizations are reflected in the table below. The FRB has not yet revised the well-capitalized standard for BHCs to reflect the higher capital requirements imposed under the Basel III Rules. For purposes of certain FRB rules, including determining whether a BHC meets the requirements to be a FHC, BHCs, such as Truist, must maintain a Tier 1 Risk-Based Capital Ratio of 6.0% or greater and a Total Risk-Based Capital Ratio of 10.0% or greater. The FRB may require BHCs, including Truist, to maintain capital ratios substantially in excess of mandated minimum levels, depending upon general economic conditions and a BHC's particular condition, risk profile, and growth plans.
The following table presents the minimum regulatory capital ratios, well-capitalized minimums, and minimum ratio plus the SCB or capital conservation buffer, as applicable:
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Table 3: Capital Requirements Under Basel III Rules |
| Minimum Capital | | Well Capitalized (1) | | Minimum Capital Plus Applicable Buffer (2) |
CET1 risk-based capital ratio: | | | | | |
Truist | 4.5 | % | | NA | | 7.2 | % |
Truist Bank | 4.5 | | | 6.5 | % | | 7.0 | |
Tier 1 risk-based capital ratio: | | | | | |
Truist | 6.0 | | | 6.0 | | | 8.7 | |
Truist Bank | 6.0 | | | 8.0 | | | 8.5 | |
Total risk-based capital ratio: | | | | | |
Truist | 8.0 | | | 10.0 | | | 10.7 | |
Truist Bank | 8.0 | | | 10.0 | | | 10.5 | |
Leverage ratio: | | | | | |
Truist | 4.0 | | | NA | | NA |
Truist Bank | 4.0 | | | 5.0 | | | NA |
Supplementary leverage ratio: | | | | | |
Truist | 3.0 | | | NA | | NA |
Truist Bank | 3.0 | | | NA | | NA |
(1)Reflects the well-capitalized standard applicable to Truist under FRB regulations and the well-capitalized standard applicable to Truist Bank.
(2)Reflects a SCB of 270 basis points for Truist and a capital conservation buffer of 250 basis points for Truist Bank.
In 2020, the U.S. banking agencies 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.
The U.S. banking agencies have adopted a final rule altering the definition of eligible retained income. Under the final rule, eligible retained income is the greater of a firm's (i) net income for the four preceding calendar quarters, net of any distributions and associated tax effects not already reflected in net income, and (ii) average net income over the preceding four quarters. This definition applies with respect to all of Truist's capital requirements.
Capital Planning and Stress Testing Requirements
In addition to the regulatory capital requirements, under the FRB's CCAR process, Truist must submit an annual capital plan to the FRB that reflects its projected financial performance under hypothetical macro-economic scenarios, including a supervisory severely adverse scenario provided by the FRB.
The FRB's CCAR framework and the Dodd-Frank Act stress testing framework also require BHCs subject to Category III standards, such as Truist, to conduct company-run stress tests and subject them to supervisory stress tests conducted by the FRB. The company-run stress tests employ stress scenarios provided by the FRB and incorporate the Dodd-Frank Act capital actions, which are intended to normalize capital distribution assumptions across large U.S. BHCs. In addition, Truist is required to conduct annual stress tests using internally-developed scenarios intended to stress the unique risk profile of the institution. The FRB also conducts CCAR and Stress Test RequirementsDodd-Frank Act supervisory stress tests employing internal supervisory models on the supervisory stress scenarios. As a Category III banking organization, Truist is subject to supervisory stress testing on an annual basis and company-run stress testing on a biennial basis.
10 Truist Financial Corporation
Starting in the third quarter of 2020, following the release of its annual stress testing and due to the ongoing economic uncertainty resulting from the COVID-19 pandemic, the FRB rules require BB&Trequired certain large banking organizations, including Truist, to submit annualsuspend 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 also required all large banks to resubmit and update their capital plans based on pre-definedinstructions and scenarios provided by the FRB. In December 2020, following a second round of stress scenarios. BB&Ttesting based on the required capital plan resubmissions, the FRB modified these restrictions for the first quarter of 2021 to permit share repurchases and dividends according to a formula based on the average of the firm's net income for the four preceding calendar quarters. The FRB has not yet announced whether they intend to return to the SCB framework for purposes of capital distributions beginning in second quarter of 2021.
Truist is also required to collectsubmit its next capital plan and report certain related data on a monthly and quarterly basisthe results of its own stress tests to allow the FRB by April 5, 2021. The FRB is required to monitor progress againstannounce the annual capital plan. BB&T may pay dividends and repurchase stock only in accordance with a capital plan that has been reviewedresults of its supervisory stress tests by the FRB and that has not received any objections from the FRB. A capital distribution can only occur if, after giving effectJune 30, 2021.
In addition to the distribution, allCCAR stress testing for Truist, Truist Bank conducts annual company-run stress tests.
Liquidity Requirements
Certain BHCs and their bank subsidiaries, including Truist and Truist Bank, are subject to a minimum regulatory capital ratios will be maintained, includingLCR. The LCR is designed to ensure that BHCs have sufficient high-quality liquid assets to survive a post-stress Basel III CET1 ratiosignificant liquidity stress event lasting for 30 calendar days.
Truist also is subject to FRB rules that require certain large BHCs to conduct internal liquidity stress tests over a range of at least 4.5%. See Table 32 for additional information about Basel III requirements. The FRB did not objecttime horizons, maintain a buffer of highly liquid assets sufficient to BB&T’s 2017 capital plan.
The FRB conducts an annual supervisorymeet projected net outflows under the BHC's 30-day liquidity stress test, and requiresmaintain a contingency funding plan that BB&T conductmeets certain requirements.
Effective July 2021, Truist will be subject to final rules implementing the NSFR, which is designed to ensure that banking organizations maintain a separate mid-cycle stress test, filestable, long-term funding profile in relation to their asset composition and off-balance sheet activities. The NSFR, calculated as the resultsratio of such test withavailable stable funding to required stable funding, must exceed 1.0x. Available stable funding represents a weighted measure of a company's funding sources over a one-year time horizon, calculated by applying standardized weightings to the FRBcompany's equity and publicly disclose detailsliabilities based on their expected stability. Required Stable Funding is calculated by applying standardized weightings to assets, derivatives exposures and certain other items based on their liquidity characteristics. As a Category III banking organization, Truist and Truist Bank are subject to an NSFR requirement equal to 85% of the scenariofull requirement.
Payment of Dividends
The Parent Company is a legal entity separate and the impact ondistinct from its capital. The FDIC requires Branchsubsidiaries, and it depends in part upon dividends received from its direct and indirect subsidiaries, including Truist Bank, to conduct annual company-run stress tests. BB&T’s annual and mid-cycle stress test results are available onfund its website at bbt.investorroom.com/additional-disclosures.
The start date of the annual stress test cycle is January 1 of the following calendar year. The capital plan period starts July 1 of the following calendar year. A BHC can onlyactivities, including its ability to make capital distributions, such as provided for in itspaying dividends or repurchasing shares. Under federal law, there are various limitations on the extent to which Truist Bank can declare and pay dividends to the Parent Company, including those related to regulatory capital plan.
FRB rulesrequirements, general regulatory oversight to prevent unsafe or unsound practices, and federal banking law requirements concerning the payment of dividends out of net profits, surplus, and available earnings. Certain contractual restrictions also may limit the amountability of capital thatTruist Bank to pay dividends to the Parent Company. No assurances can be distributedgiven that Truist Bank will, in any circumstances, pay dividends to the Parent Company.
The Parent Company's ability to declare and pay dividends is similarly limited by CCAR banksfederal banking law and FRB regulations and policy. The FRB has authority to shareholders outsideprohibit BHCs from making capital distributions if they would be deemed to be an unsafe or unsound practice. The FRB has indicated generally that it may be an unsafe or unsound practice for BHCs to pay dividends unless a BHC's net income is sufficient to fund the dividends and the expected rate of an approvedearnings retention is consistent with the organization's capital plan without seeking prior approval fromneeds, asset quality and overall financial condition. In addition, the FRB. Additionally, the FRB rules contain a blackout period in the second quarter of each year during which a firm cannot change itsParent Company's ability to make capital distribution plan. BB&Tdistributions, including paying dividends and repurchasing capital securities, is not subject to the FRB's automatic restrictions on capital distributions under the FRB's capital rules. Truist's risk-based capital and leverage ratio requirements are discussed below in the "U.S. Basel III Capital Rules" section.
North Carolina law provides that, as long as a bank does not make distributions that reduce its capital below its applicable required capital, the board of directors of a bank chartered under the laws of North Carolina may declare such distributions as the directors deem proper.
For additional information regarding limitations on dividends resulting from the 2020 CCAR process, refer to "Capital Planning and Stress Testing Requirements" above.
Truist Financial Corporation 11
Prompt Corrective Action
The federal banking agencies are required to take "prompt corrective action" with respect to financial institutions that do not meet minimum capital requirements. The law establishes five categories for this purpose: "well-capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." To be considered "well-capitalized," an IDI must maintain minimum capital ratios and must not be subject to any order or written directive to meet and maintain a specific capital level for any capital measure. An institution that fails to remain well-capitalized becomes subject to a series of restrictions that increase in severity as its capital condition weakens. Such restrictions may include a prohibition on capital distributions, restrictions on asset growth or restrictions on the ability to receive regulatory approval of applications. The regulations apply only to banks and not to BHCs. However, the FRB is authorized to take appropriate action at the holding company level, based on the undercapitalized status of the holding company's subsidiary banking institutions. In certain instances relating to an undercapitalized banking institution, the BHC would be required to guarantee the performance of the undercapitalized subsidiary's capital restoration plan and could be liable for civil money damages for failure to fulfill those guarantee commitments.
In addition, failure to meet capital requirements may cause an institution to be directed to raise additional capital. Federal law further mandates that the agencies adopt safety and soundness standards generally relating to operations and management, asset quality and executive compensation, and authorizes administrative action against an institution that fails to meet such standards. Failure to meet capital guidelines may subject a banking organization to a variety of other enforcement remedies, including additional substantial restrictions on its operations and activities, termination of deposit insurance by the FDIC and, under certain conditions, the appointment of a conservator or receiver.
Transactions with Affiliates
There are various legal restrictions on the extent to which Truist and its non-bank subsidiaries may borrow or otherwise engage in certain types of transactions with Truist Bank. Under the Federal Reserve Act and FRB regulations, Truist Bank and its subsidiaries are subject to quantitative and qualitative assessmentlimits on extensions of CCAR for BHCs as BB&T's total consolidatedcredit, purchases of assets, and certain other transactions involving its non-bank affiliates. In addition, transactions between Truist Bank and its non-bank affiliates are between $50 billionrequired to be on arm's length terms and $250 billion. BB&T has maintainedmust be consistent with standards of safety and intends to maintain the processes and infrastructure to facilitate future compliance.soundness.
Acquisitions
BB&T complies withTruist is subject to numerous laws related to its acquisition activity. Underthat may require regulatory approval for acquisitions. For example, under the BHCA, a BHC may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any BHC or bank or merge or consolidate with another BHC without the prior approval of the FRB. The BHCA and other federal laws enumerate the factors the FRB must consider when reviewing the merger of BHCs, the acquisition of banks or the acquisition of voting securities of a bank or BHC. These factors include the competitive effects of the proposal in the relevant geographic markets; the financial and managerial resources and future prospects of the companies and banks involved in the transaction; the effect of the transaction on the financial stability of the United States; the organizations' compliance with anti-money laundering laws and regulations; the convenience and needs of the communities to be served; and the records of performance under the CRA of the IDIs involved in the transaction.
Current federalFederal law authorizes interstate acquisitions of banks and BHCs without geographic limitation, and a bank headquartered in one state is authorized to merge with a bank headquartered in another state, subject to market share limitations, regulatory approvals and any state requirement that the target bank shall have been in existence and operating for a minimum period of time. The market share limitations impose conditions that the acquiring BHC, after and as a result of the acquisition, control no more than 10% of the total amount of deposits of IDIs in the U.S. and no more than 30%, or such lesser or greater percentage established by state law, of such deposits in applicable states. FRB rules also prohibit a FHC from combining with another company if the ratio of the resulting company's liabilities exceeds 10% of the aggregate consolidated liabilities of all financial companies.
After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable federal or state law. These regulatory considerations are applicable to privately negotiated acquisition transactions.
FRB rules prohibit a financial company from combining with another company if the ratio of the resulting company's liabilities exceeds 10% of the aggregate consolidated liabilities of all financial companies.
Other Safety and Soundness Regulations
The FRB has supervisory and enforcement powers over BHCs and their nonbanking subsidiaries. The FRB has authority to prohibit activities that represent unsafe or unsound practices or constitute violations of law, rule, regulation, administrative order or written agreement with a federal regulator. These powers may be exercised through the issuance of confidential supervisory actions, cease and desist orders, civil moneymonetary penalties or other actions.
12 Truist Financial Corporation
There also are a number of obligations and restrictions imposed on BHCs and their IDI subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to depositors and the FDIC insurance fundDIF in the event the IDI is insolvent or is in danger of becoming insolvent. For example, the FRB requires a BHC to serve as a source of financial strength to its subsidiary IDIs and to commit financial resources to support such institutions in circumstances where it might not do so otherwise. In addition, the "cross-guarantee" provisions of federal law require IDIs under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the DIF as a result of the insolvency or potential failure of commonly controlled IDIs. The FDIC’s claim for reimbursement under the cross-guarantee provisions is superior to claims of shareholders of the IDI or its holding company but is subordinate to claims of depositors, secured creditors and nonaffiliated holders of subordinated debt.
Banking regulators also have broad supervisory and enforcement powers over BranchTruist Bank, including the power to impose confidential supervisory actions, fines and other civil and criminal penalties, and to appoint a receiver in order to conserve the assets of BranchTruist Bank for the benefit of depositors and other creditors. The NCCOB also has the authority to take possession of a North Carolina state bank in certain circumstances, including among other things, when it appears that such bank has violated its charter or any applicable laws, is conducting its business in an unauthorized or unsafe manner, is in an unsafe or unsound condition to transact its business or has an impairment of its capital stock.
PaymentDIF Assessments
Truist Bank's deposits are insured by the FDIC up to the applicable limits, which is currently $250,000 per account ownership type. The FDIC imposes a risk-based deposit premium assessment system that determines assessment rates for an IDI based on an assessment rate calculator, which is based on a number of Dividends; Capital Requirements
elements to measure the risk each IDI poses to the DIF. The Parent Companyassessment rate is a legal entity separate and distinctapplied to total average assets less tangible equity, as defined under the Dodd-Frank Act. The assessment rate schedule can change from its subsidiaries. The majoritytime to time at the discretion of the Parent Company’s revenueFDIC, subject to certain limits. Under the current system, premiums are assessed quarterly.
As of June 30, 2020, the DIF reserve ratio fell to 1.30% due to significant growth in industry deposits during the first half of 2020. The FDIC, as required under the Federal Deposit Insurance Act, established a plan on September 15, 2020, to restore the DIF reserve ratio to meet or exceed 1.35% within eight years. The FDIC's restoration plan projects the reserve ratio to exceed 1.35% without increasing the deposit insurance assessment rate, subject to ongoing monitoring over the next eight years. The FDIC could increase the deposit insurance assessments for certain insured depository institutions, including Truist Bank, if the DIF reserve ratio is from dividends paid by Branchnot restored as projected.
Consumer Protection Laws and Regulations
In connection with its lending and leasing activities, Truist Bank which are limited byis subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. The CFPB examines Truist and Truist Bank for compliance with a broad range of federal consumer financial laws and regulations. In addition, BB&Tregulations, including the laws and Branch Bankregulations that relate to deposit products, credit card, mortgage, automobile, student and other consumer loans, and other consumer financial products and services offered. The federal consumer financial protection laws that are subject to various regulatory restrictionsthe CFPB's supervision and enforcement powers include, among others, the Truth in Lending Act, Truth in Savings Act, HMDA, Fair Credit Reporting Act, Electronic Funds Transfer Act, Real Estate Settlement Procedures Act, Fair Debt Collections Practices Act, Equal Credit Opportunity Act and Fair Housing Act. The CFPB also has authority to take enforcement actions to prevent and remedy acts and practices relating to consumer financial products and services that it deems to be unfair, deceptive or abusive, and to impose new disclosure requirements for any consumer financial product or service.
The CFPB may issue regulations that impact products and services offered by Truist or Truist Bank. The regulations could reduce the paymentfees that Truist receives, alter the way Truist provides its products and services, or expose Truist to greater risk of dividends, includingprivate litigation or regulatory capital minimumsenforcement action.
During November 2019, SunTrust Bank entered into a consent order with the FRB, relating to certain identified legacy compliance issues, and providing certain remediation actions and the requirementverification of such actions regarding the identified issues. Truist Bank, as successor to remain "well-capitalized" underSunTrust Bank, has committed to comply with the prompt corrective actionobligations in the order. Compliance with the order's obligations is currently being assessed by the FDIC.
Patriot Act
The Patriot Act is intended to strengthen the ability of U.S. law enforcement agencies and intelligence communities to cooperate in the prevention, detection and prosecution of international money laundering and the financing of terrorism. The Patriot Act contains anti-money laundering measures affecting IDIs, broker-dealers and certain other financial institutions. The Patriot Act includes the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which requires such financial institutions to implement policies and procedures to combat money laundering and the financing of terrorism and grants the Secretary of the U.S. Treasury broad authority to establish regulations summarized elsewhereand to impose requirements and restrictions on financial institutions' operations. The Patriot Act imposes substantial obligations on financial institutions to maintain appropriate policies, procedures and processes to detect, prevent and report money laundering, terrorist financing and other financial crimes. Failure to comply with these regulations may result in this section. Banking regulators have indicatedfines, penalties, lawsuits, regulatory sanctions, reputation damage, or restrictions on business. In addition, the Patriot Act requires the federal bank regulatory agencies to consider the effectiveness of a financial institution's anti-money laundering activities when reviewing bank mergers and BHC acquisitions.
Truist Financial Corporation 13
BSA/AML and Sanctions
Truist is subject to a number of anti-money laundering laws and regulations as a result of being a financial company headquartered in the United States. AML requirements are primarily derived from the Bank Secrecy Act, as amended by the Patriot Act. These laws and regulations are designed to prevent the financial system from being used by criminals to hide illicit proceeds and to impede terrorists' ability to access and move funds used in support of terrorist activities. Among other things, BSA/AML laws and regulations require financial institutions to establish AML programs that dividends should generally onlymeet certain standards, including, in some instances, expanded reporting, particularly in the area of suspicious transactions, and enhanced information gathering and recordkeeping requirements. Financial institutions are also required to verify their customers' identity, verify the identity of beneficial owners of legal entity customers, conduct customer due diligence, report on suspicious activity, file reports of transactions in currency, and conduct enhanced due diligence on certain accounts. Failure to comply with applicable laws and regulations or maintain adequate AML related controls can lead to significant monetary penalties and reputational damage.
The U.S. Treasury's OFAC rules prohibit U.S. persons from engaging in financial transactions with certain individuals, entities, or countries, identified as "Specially Designated Nationals," such as terrorists and narcotics traffickers. These rules require the blocking of assets held by, and prohibit transfers of property to such individuals, entities or countries. Blocked assets, such as property or bank deposits, cannot be paid if (1) net incomeout, withdrawn, set off or transferred in any manner without a license from OFAC. Truist maintains an OFAC program designed to ensure compliance with OFAC requirements. Failure to comply with such requirements could subject Truist to serious legal and reputational consequences, including criminal penalties.
On January 1, 2021, the U.S. Congress enacted the Anti-Money Laundering Act of 2020, which seeks to modernize the anti-money laundering and countering the financing of terrorism framework in the United States, by enhancing analytical capabilities of and improving coordination among law enforcement agencies. The act also seeks to streamline the currency transaction report and suspicious activity report requirements of the Bank Secrecy Act. The act directs the Financial Crimes Enforcement Network, a bureau of the U.S. Treasury, to establish a national beneficial ownership reporting framework that requires non-exempt U.S. companies and companies doing business in the U.S. to disclose information about their beneficial ownership at the time of incorporation and subsequently when changes occur. In addition to being available to common shareholders overlaw enforcement, information maintained in the past year hasdatabase would be available to financial institutions in support of their customer due diligence requirements. The act will be implemented through various regulations, reports, and assessments by the various financial regulators, which have not yet been sufficient to fully fund the dividends and (2) the prospective rateproposed. The impact of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. BB&T’s future capital actionssuch regulations on Truist will depend on the FRB’s reviewfinal requirements.
Privacy and Cyber Security
The FRB, FDIC and other bank regulatory agencies have adopted guidelines for safeguarding confidential, personal customer information. These guidelines require each financial institution, under the supervision and ongoing oversight of BB&T’s annual capital plans.
North Carolina law states that, provided a bank does not make distributions that reduce its capital below its applicable required capital, the board of directors of a bank chartered under the laws of North Carolina may declare such distributions as the directors deem proper.
The federal banking agencies are requiredor an appropriate committee thereof, to take "prompt corrective action" in respect of financial institutions that do not meet minimum capital requirements. The law establishes five categories for this purpose: "well-capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized." To be considered "well-capitalized," an IDI must maintain minimum capital ratios and must not be subject to any order or written directive to meetcreate, implement and maintain a specific capital level forcomprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any capital measure. Additionally, failureanticipated threats or hazards to meet capitalthe security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. In addition, various U.S. regulators, including the FRB and the SEC, have increased their focus on cyber security through guidance, examinations and regulations.
The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties. In general, the statute requires explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information and, except as otherwise required by law, prohibits disclosing such information except as provided in the banking subsidiary's policies and procedures.
States are also increasingly proposing or enacting legislation that relates to data privacy and data protection such as the California Consumer Privacy Act which went into effect on January 1, 2020. Truist has undertaken significant efforts to comply with these laws and continues to assess their requirements and applicability to Truist. These laws and proposed legislation are still subject to revision or formal guidance and they may causebe interpreted or applied in a manner inconsistent with the Company's understanding. California voters also recently passed the California Privacy Rights Act, which will take effect on January 1, 2023, and significantly modifies the California Consumer Privacy Act, including by imposing additional obligations on covered companies and expanding California consumers' rights with respect to certain sensitive personal information, potentially resulting in further uncertainty and requiring Truist to incur additional costs and expenses in an institutioneffort to be directed to raise additional capital. Federal law further mandates that the agencies adopt safety and soundness standards generally relating to operations and management, asset quality and executive compensation, and authorizes administrative action against an institution that fails to meet such standards.comply.
In addition, failurethe promulgation in 2017 of the New York Department of Financial Services Cybersecurity Regulation and the National Association of Insurance Commissioners Insurance Data Security Model Law are driving significant cybersecurity compliance activities for Truist. Both of these regulations include phased compliance periods as well as attestation of compliance by Truist.
14 Truist Financial Corporation
Like other lenders, Truist Bank uses credit bureau data in its underwriting activities. The Fair Credit Reporting Act regulates reporting information to meet capital guidelinescredit bureaus, prescreening individuals for credit offers, sharing of information between affiliates, and using affiliate data for marketing purposes. Similar state laws may subjectimpose additional requirements on Truist Bank.
In addition, in December 2020, the FRB, OCC and FDIC issued a notice of proposed rulemaking that, among other things, would require a banking organization to notify its primary federal regulators within 36 hours after identifying a variety of other enforcement remedies, including additional substantial restrictions on"computer-security incident" that the banking organization believes in good faith could materially disrupt, degrade or impair its business or operations and activities, termination of deposit insurance by the FDIC and, under certain conditions, the appointment ofin a conservator or receiver.
In October 2017, the federal banking agencies proposed revisionsmanner that would, simplify compliance with certain aspects of capital rules. A majority of the proposed simplifications would apply solely to banking organizations that are not subject to the advanced approaches capital rule. The proposed rules simplify application of regulatory capital treatment for mortgage servicing assets, certain deferred tax assets arising from temporary differences, investments in the capital of unconsolidated financial institutions, and capital issued by a consolidated subsidiary of a banking organization and held by third parties (minority interest), and; revisions to the treatment of certain acquisition, development, or construction exposures. In addition, the federal banking agencies have deferred the final phase-in and increased risk-weighting associated with CET1 deductions indefinitely for non-advanced approaches banks.
Basel III
The U.S. capital requirements follow the accord of the BCBS. The Company currently qualifies as a standardized approach banking organization under the FRB's Basel III capital framework rules. The rules stipulate the risk-based capital requirements applicable to BHCs and IDIs define the components of capital and address other areas affecting banking institutions' regulatory capital ratios. The rules also address risk weights and other items affecting the denominator in banking institutions' regulatory capital ratios, and the rules use a more risk-sensitive approach than the pre-Basel III rules.
Institutions with greater than $250 billion in assets or $10 billion in foreign assets are considered advanced approaches banking organizations, which results in a more complex calculation of risk-weighted assets that includes an assessment of the impact of operational risk, among other differences. In addition, advanced approaches institutions have additional reporting requirements and must calculate capital under both the standardized approach and the advanced approaches and use the more conservative result. BB&T would become subject to these requirements upon exceeding either of the asset thresholds.
The Basel III rules, among other things, (1) includejeopardize the viability of its operations, result in customers being unable to access their deposit and other accounts, result in a capital measure referred to as CET1; (2) specify that Tier 1 capital consistsmaterial loss of Tier 1 common equity and additional Tier 1 capital instruments meeting specified requirements; (3) define Tier 1 common equity narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to Tier 1 common equity and notrevenue, profit or franchise value, or pose a threat to the other components of capital; and (4) expand the scopefinancial stability of the deductions/adjustments from capital as compared to prior regulations.U.S.
CRA
The Basel III rules prescribeCRA requires Truist Bank's primary federal bank regulatory agency, the FDIC, to assess the bank's record in meeting the credit needs of the communities served by the bank, including low- and moderate-income neighborhoods and persons. Institutions are assigned one of four ratings: "Outstanding," "Satisfactory," "Needs to Improve" or "Substantial Noncompliance." This assessment is considered for any bank that applies to merge or consolidate with or acquire the assets or assume the liabilities of an IDI, or to open or relocate a standardized approachbranch office. The CRA record of each subsidiary bank of a FHC also is assessed by the FRB in connection with reviewing any proposed acquisition or merger application.
Automated Overdraft Payment Regulation
There are federal consumer protection laws related to automated overdraft payment programs offered by financial institutions. The CFPB prohibits financial institutions from charging consumers fees for risk weightings that generally range from 0% for U.S. government securitiespaying overdrafts on automated teller machine and one-time debit card transactions, unless a consumer consents, or opts in, to 600% for certain equity exposures,the overdraft service. Financial institutions must also provide consumers with a maximum risk weight classification of 1,250% for certain securitizations. This results in higher risk weights for a variety of asset categories.notice that explains the financial institution's overdraft services, including the associated fees and the consumer's choices. In addition, the rules provideFDIC-supervised institutions must monitor overdraft payment programs for "excessive or chronic" client use and undertake "meaningful and effective" follow-up action with clients that overdraw their accounts more advantageous risk weights for derivatives and repurchase-style transactions cleared throughthan six times during a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.
The Basel III rulesrolling 12-month period. Financial institutions must also establish more conservative ratio levels for well-capitalized status. In addition to the minimum risk-based capital requirements, all banks must hold additional capital, referred to as the capital conservation buffer (which is in the form of common equity), to avoid being subject toimpose daily limits on capital distributionsoverdraft charges, review and certain discretionary bonus payments to officers. The required amount of the capital conservation buffer is being phased-in annually over four years, through January 1, 2019. The capital conservation buffer requirements do not currently result in any limitations on distributions or discretionary bonuses for Branch Bank.modify check-clearing procedures, prominently distinguish account balances from available overdraft coverage amounts and ensure board and management oversight regarding overdraft payment programs.
See the "Liquidity" section in "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information about BB&T's liquidity requirements.
See the "Capital" section in "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information about BB&T's capital requirements.
HMDA Regulations
The CFPB has issued final rules changing the reporting requirements for lenders under the HMDA. The new rules expand the range of transactions subject to these requirements to include most securitized residential mortgage loans and credit lines. The rules also increase the overall amount of data required to be collected and submitted, including additional data points about the applicable loans and expanded data about the borrowers. BB&T is required to begin collecting the expanded data on January 1, 2018.
Tax Cuts and Jobs Act
During 2017, the Tax Cuts and Jobs Act was signed into law. Among other changes, the Tax Cuts and Jobs Act significantly changes corporate income tax law by reducing the corporate income tax rate from 35% to 21%, creating a territorial tax system, allowing for immediate capital expensing of certain qualified property, and eliminating the deductibility of DIF assessments. The tax laws are generally effective for the 2018 tax year. However, BB&T recognized certain effects of changes in tax laws in 2017, which was when the new legislation was enacted. Refer to "Note 11. Income Taxes" for additional disclosures regarding the impact of the Tax Cuts and Jobs Act.
Volcker RuleAutomated Overdraft Payment Regulation
The Volcker Rule prohibits IDIs and their affiliates from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options for their own account. The rule provides certain exemptions and also clarifies that certain activitiesThere are not prohibited, including acting as agent, broker, or custodian. Banking entities were required to conform proprietary trading activities to the final rule by July 21, 2015.
The rule also imposes limits on certain relationships with hedge funds or private equity funds. The rule became effective on July 21, 2017 for purposes of conforming investments in and relationships with certain funds that were in place prior to December 31, 2013. These requirements did not have a material impact on BB&T's consolidated financial position, results of operations or cash flows.
DIF Assessments
Branch Bank’s deposits are insured by the DIF of the FDIC up to the limits set forth under applicable law. The FDIC imposes a risk-based deposit premium assessment system that determines assessment rates for an IDI based on an assessment rate calculator, which is based on a number of elements to measure the risk each IDI poses to the DIF. The assessment rate is applied to total average assets less tangible equity, as defined under the Dodd-Frank Act. The assessment rate schedule can change from time to time at the discretion of the FDIC, subject to certain limits. Under the current system, premiums are assessed quarterly.
The FDIC adopted a final rule that imposes a surcharge of 4.5 cents per $100 of the assessment base, after making certain adjustments, for banks with total assets of at least $10 billion. The surcharge became effective July 1, 2016 and will last for a period currently estimated by the FDIC to be two years but ending no later than December 31, 2018. If the DIF has not reached the required level at that time, then the FDIC will impose a special assessment on institutions with assets greater than $10 billion. The net effect of the new surcharge increased BB&T's total annual assessment by $84 million for 2017.
Consumer Protection Laws and Regulations
In connection with its lending and leasing activities, Branch Bank is subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, and their respective state law counterparts.
CFPB
The CFPB has broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the laws referenced above, fair lending laws and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with $10 billion or more in assets, their service providers and certain non-depository entities such as debt collectors and consumer reporting agencies. The CFPB has authority to prevent unfair, deceptive or abusive practices in connection with the offering of consumer financial products.
The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys generalrelated to enforce compliance with both the state and federal laws and regulations.
The CFPB has concentrated much of its rulemaking efforts on a variety of mortgage-related topics required under the Dodd-Frank Act, including mortgage origination disclosures, minimum underwriting standards and ability to repay, high-cost mortgage lending, and servicing practices.
Patriot Act
The Patriot Act is intended to strengthen the ability of U.S. law enforcement agencies and intelligence communities to cooperate in the prevention, detection and prosecution of international money laundering and the financing of terrorism. The Patriot Act contains anti-money laundering measures affecting IDIs, broker-dealers and certain otherautomated overdraft payment programs offered by financial institutions. The Patriot Act includes the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which requires suchCFPB prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machine and one-time debit card transactions, unless a consumer consents, or opts in, to implement policies and procedures to combat money launderingthe overdraft service. Financial institutions must also provide consumers with a notice that explains the financial institution's overdraft services, including the associated fees and the financing of terrorism and grants the Secretary of the U.S. Treasury broad authority to establish regulations and to impose requirements and restrictions on financial institutions’ operations. The Patriot Act imposes substantial obligations on financial institutions to maintain appropriate policies, procedures and processes to detect, prevent and report money laundering, terrorist financing and other financial crimes. Failure to comply with these regulations may result in fines, penalties, lawsuits, regulatory sanctions, reputation damage, or restrictions on business.consumer's choices. In addition, the Patriot Act requires the federal bank regulatory agencies to consider the effectiveness ofFDIC-supervised institutions must monitor overdraft payment programs for "excessive or chronic" client use and undertake "meaningful and effective" follow-up action with clients that overdraw their accounts more than six times during a financial institution’s anti-money laundering activities when reviewing bank mergersrolling 12-month period. Financial institutions must also impose daily limits on overdraft charges, review and BHC acquisitions.modify check-clearing procedures, prominently distinguish account balances from available overdraft coverage amounts and ensure board and management oversight regarding overdraft payment programs.
BSA/AML and Suspicious Activity
BB&T is subject to a number of anti-money laundering laws and regulations as a result of being a financial company headquartered in the United States. AML requirements are primarily derived from the Bank Secrecy Act, as amended by the USA Patriot Act. These laws and regulations are designed to prevent the financial system from being used by criminals to hide illicit proceeds and to impede terrorists’ ability to access and move funds used in support of terrorist activities. Among other things, BSA/AML laws and regulations require financial institutions to establish AML programs that meet certain standards, including, in some instances, expanded reporting, particularly in the area of suspicious transactions, and enhanced information gathering and recordkeeping requirements. Failure to comply with applicable laws and regulations or maintain adequate AML related controls can lead to significant monetary penalties and reputational damage.
BB&T has established and continues to maintain an AML program designed to ensure that, at a minimum, BB&T is in compliance with all applicable laws, rules and regulations related to AML and anti-terrorist financing initiatives. The AML program provides for a system of internal controls to ensure that appropriate due diligence and, when necessary, enhanced due diligence, including obtaining and maintaining appropriate documentation, is conducted at account opening and updated, as necessary, through the course of the client relationship. The AML program is also designed to ensure there are appropriate methods of monitoring transactions and account relationships to identify potentially suspicious activity and report suspicious activity to governmental authorities in accordance with applicable laws, rules and regulations. In addition, the AML program requires the training of appropriate personnel with regard to AML and anti-terrorist financing issues and provides for independent testing to ensure that the AML program is in compliance with all applicable laws and regulations. Non-compliance with BSA/AML laws or failure to maintain adequate policies and procedures can lead to significant monetary penalties and reputational damage, and federal regulators evaluate the effectiveness of an applicant in combating money laundering when determining whether to approve a bank merger, BHC acquisitions or other expansionary activity.
During December 2016, Branch Bank entered into a consent order with the FDIC and the NCCOB and in January 2017, BB&T entered into a cease and desist order with the FRB and NCCOB. These orders call for corrective actions and enhancements to address certain internal control deficiencies within the BSA/AML Compliance Program. No criminal activity has been identified as the result of such deficiencies, and no financial penalty was levied. During 2017, BB&T made significant progress in addressing matters identified in the consent order, as well as the cease and desist order. BB&T continues to devote significant resources to its BSA/AML program.
By May 11, 2018, BB&T must comply with new provisions of the Bank Secrecy Act: “Customer Due Diligence Requirements for Financial Institutions.” These new requirements, among other things, will require BB&T to collect information on the beneficial ownership and controlling person of legal entity clients and then verify their identity.
The U.S. Treasury's OFAC rules prohibit U.S. persons from engaging in financial transactions with certain individuals, entities, or countries, identified as “Specially Designated Nationals,” such as terrorists and narcotics traffickers. These rules require the blocking of assets held by, and prohibit transfers of property to such individuals, entities or countries. Blocked assets, such as property or bank deposits, cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. BB&T maintains an OFAC program designed to ensure compliance with OFAC requirements. Failure to comply with such requirements could subject BB&T to serious legal and reputational consequences, including criminal penalties.
Privacy
Federal law contains extensive customer privacy protection provisions, including those provided under the Financial Services Modernization Act of 1999 (commonly known as the Gramm-Leach-Bliley Act). Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. The privacy provisions include an exception under which if a financial institution meets certain conditions, it is not required to provide annual privacy notices to customers. In August 2017, the CFPB finalized a rule implementing this provision, with an effective date of October 1, 2018.
An institution may not provide customers’ nonpublic personal financial information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. Federal law makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information by fraudulent or deceptive means.
CRA
The CRA requires Branch Bank’s primary federal bank regulatory agency, the FDIC, to assess the bank’s record in meeting the credit needs of the communities served by the bank, including low- and moderate-income neighborhoods and persons. Institutions are assigned one of four ratings: "Outstanding," "Satisfactory," "Needs to Improve" or "Substantial Noncompliance." This assessment is reviewed for any bank that applies to merge or consolidate with or acquire the assets or assume the liabilities of an IDI, or to open or relocate a branch office. The CRA record of each subsidiary bank of a FHC also is assessed by the FRB in connection with any acquisition or merger application.
Automated Overdraft Payment Regulation
There are federal consumer protection laws related to automated overdraft payment programs offered by financial institutions. The FRBCFPB prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machine and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service. Financial institutions must also provide consumers with a notice that explains the financial institution’sinstitution's overdraft services, including the associated fees and the consumer’sconsumer's choices. In addition, FDIC-supervised institutions must monitor overdraft payment programs for "excessive or chronic" customerclient use and undertake "meaningful and effective" follow-up action with customersclients that overdraw their accounts more than six times during a rolling 12-month period. Financial institutions must also impose daily limits on overdraft charges, review and modify check-clearing procedures, prominently distinguish account balances from available overdraft coverage amounts and ensure board and management oversight regarding overdraft payment programs.
Pay Ratio DisclosureVolcker Rule
Truist is prohibited under the Volcker Rule from (i) engaging in proprietary trading activities, and (ii) having certain ownership interests in and relationships with covered private funds. The fundamental prohibitions of the Volcker Rule apply to banking entities of any size, including Truist and its affiliates. The Volcker Rule regulations contain exemptions or exclusions for market-making, hedging, underwriting, trading in U.S. government and agency obligations and also permit certain ownership interests in certain types of funds to be retained. They also permit the offering and sponsoring of funds under certain conditions. The Volcker Rule regulations impose significant compliance obligations on banking entities. Truist has put in place the compliance programs required by the Volcker Rule and has either divested or received extensions for any holdings in illiquid funds.
In June 2020, the regulatory agencies charged with implementing the Volcker Rule finalized amendments to the Volcker Rule's restrictions on ownership interests in and relationships with covered funds. Among other things, these amendments permit banking entities to have relationships with and offer additional financial services to additional types of funds and investment vehicles. These requirements are not expected to have a material impact on Truist's consolidated financial position, results of operations or cash flows.
Regulatory Regime for Swaps
The SEC has adopted amendments to requireDodd-Frank Act established a comprehensive regulatory regime for the disclosure of: (1)OTC swaps market, aimed at increasing transparency and reducing systemic risk in the median compensation amountderivatives markets, including requirements for central clearing, exchange trading, capital adequacy, margin, reporting, and recordkeeping. The Dodd-Frank Act requires that certain swap dealers and security-based swap dealers register with one or both of the annual total compensation of all employees of a registrant (excludingSEC and CFTC, depending on the CEO), (2) the annual total compensation of that registrant's CEO and (3) the rationature of the median of the annual total compensation of all employees (excluding the CEO) to the annual total compensation of the CEO. This information for the year ended December 31, 2017 will be included in the Company's Proxy Statement for the 2018 Meeting of Shareholders.
DOL Fiduciary Rule
During April 2016, the DOL issued a final rule related to fiduciary standards in regards to the investing of clients' retirement assets. The final rule expands the definition of a fiduciary under the Employee Retirement Income Security Act of 1974. Those who provide investment advice to plans, plan sponsors, fiduciaries, plan participants, beneficiaries and IRAs and IRA owners must either avoid payments that create conflicts of interest or complyswaps business. Truist Bank provisionally registered with the protective terms of an exemption issued by the DOL. Under new exemptions adopted with the rule, financial institutions will be obligatedCFTC as a swap dealer, subjecting Truist Bank to acknowledge their status and the status of their individual advisers as "fiduciaries." Firms and advisers will be required to make prudent investment recommendations without regard to their own interests, or the interests of those other than the customer; charge only reasonable compensation; and make no misrepresentations to their customers regarding recommended investments. Additionally, the new rule requires certain disclosures to be made to the investor, and ongoing compliance must be monitored and documented.
During 2017, the DOL issued extensions on implementation of certain aspects of the final rule to allow additional time to evaluate the impacts of the rule and extend the phase in period. Thus, the requirements under the ruleCFTC's regulatory regime, including trade reporting and record keeping requirements, margin requirements, business conduct requirements (including daily valuations, disclosure of material risks associated with swaps and disclosure of material incentives and conflicts of interest), and mandatory clearing and exchange trading requirements for certain standardized swaps designated by the CFTC. Truist Bank expects to register with the SEC as a security-based swap dealer in 2021. Such registration will subject Truist Bank's security-based swaps business to requirements that are being phasedsimilar to the CFTC rules applicable to swap dealers, including trade reporting, business conduct standards, recordkeeping, margin, and potentially mandatory clearing and exchange trading requirements.
Truist Financial Corporation 15
Truist Bank's uncleared swaps and security-based swaps are subject to variation margin and initial margin requirements. The variation margin requirements are currently in through Julyeffect and the initial margin requirements are phasing in over a period of six years and will be fully phased-in on September 1, 2019. The impact2022, depending on BB&Tthe level of derivatives activity of the implementationswap dealer and the relevant counterparty. Truist Bank's derivatives business involving uncleared swaps is expected to become subject to initial margin requirements established by the U.S. prudential regulators, which may subject Truist Bank to initial margin requirements that exceed current market practice.
Broker-Dealer and Investment Adviser Regulation
Truist's broker-dealer and investment adviser subsidiaries are subject to regulation by the SEC. FINRA is the primary self-regulatory organization for Truist's registered broker-dealer and investment adviser subsidiaries. Truist's broker-dealer and investment adviser subsidiaries also are subject to additional regulation by states or local jurisdictions. The SEC and FINRA have active enforcement functions that oversee broker-dealers and investment advisers and can bring actions that result in fines, restitution, a limitation on permitted activities, disqualification to continue to conduct certain activities and an inability to rely on certain favorable exemptions. Certain types of infractions and violations also can affect Truist's ability to expeditiously issue new securities into the capital markets. In addition, certain changes in the activities of a broker-dealer require approval from FINRA, and FINRA takes into account a variety of considerations in acting upon applications for such approval, including internal controls, capital levels, management experience and quality, prior enforcement and disciplinary history and supervisory concerns.
In June 2019, the SEC finalized Regulation Best Interest, which imposes a new standard of conduct on SEC-registered broker-dealers when making recommendations to retail customers. In addition, the SEC finalized a new summary disclosure form that broker-dealers and investment advisers must provide to retail customers. Truist's broker-dealer and investment adviser subsidiaries were required to comply with these requirements, for 2017 was not significant.as applicable, as of June 2020.
FDIC Recordkeeping Requirements
The FDIC has released a final rule toTo facilitate prompt payment of FDIC-insured deposits when large IDIs fail. The rule requiresfail, FDIC rules require IDIs with two million or more deposit accounts to maintain complete and accurate data on each depositor's ownership interest by right and capacity and to develop the capability to calculate the insured and uninsured amounts for each deposit owner by ownership right and capacity. Compliance with the rule iswas originally required by April 1, 2020. This rule is expectedIn July 2019, the FDIC amended the rules related to result in additional costsrecordkeeping requirements and timely deposit insurance determination to BB&T; however, the amount has not been quantified.
Cybersecurity
The CISA is intended to improve cybersecurity in the U.S. by enhanced sharing of information about security threats among the U.S. government and private sector entities, including financial institutions. The CISA also authorizes companies to monitor their own systems notwithstanding any other provision of law, and allows companies to carry out defensive measures on their own systems from cyber attacks. The law includes liability protections for companies that share cyber threat information with third parties so long as such sharing activity is conducted in accordance with CISA.
Incentive-Based Compensation Arrangements
During May 2016, several financial regulators jointly issued a proposed rule designed to prohibit incentive-based compensation arrangements that could encourage inappropriate risks by providing excessive compensation or that could lead to a material financial loss. The proposed rule would require the applicable compensation arrangements to be considered against a number of factors, including a requirement that the arrangements contain both financial and non-financial measures of performance. In addition, the requirements would differ based on the sizeallow covered IDIs an optional one-year extension, which Truist elected, of the institution, and institutions with assets exceeding $50 billion would be subjectoriginal compliance deadline to mandatory deferral, forfeiture/adjustment and clawback requirements for employees subject to the rule.April 1, 2021.
Other Regulatory Matters
BB&TTruist is subject to examinations by federal and state banking regulators, as well as the SEC, theCFTC, FINRA, the NYSE, various taxing authorities and various state insurance and securities regulators. BB&TTruist periodically receives requests for information from regulatory authorities in various states, including state insurance commissions and state attorneys general, securities regulators and other regulatory authorities, concerning BB&T’sTruist's business and accounting practices. Such requests are considered incidental to the normal conduct of business.
EmployeesGovernment Response to COVID-19
Congress, the FRB and the other U.S. state and federal financial regulatory agencies, as well as state legislatures and officials, have taken actions to mitigate disruptions to economic activity and financial stability resulting from COVID-19 and may continue to evolve such approaches and requirements in ways that further impact the business of the Company. The descriptions below summarize certain significant government actions taken in response to the COVID-19 pandemic. The descriptions are qualified in their entirety by reference to the particular statutory or regulatory provisions or government programs summarized.
The CARES Act
The CARES Act was signed into law on March 27, 2020 and subsequently has been amended several times, including by the Consolidated Appropriations Act, 2021. Among other provisions the CARES Act includes funding for the Small Business Administration to expand lending, relief from certain U.S. GAAP requirements to allow COVID-19-related loan modifications to not be categorized as troubled debt restructurings and a range of incentives to encourage deferment, forbearance or modification of loans. One of the key CARES Act programs is the PPP. PPP loans are available to a broader range of entities than ordinary Small Business Administration loans, require deferral of principal and interest repayment, and the loan may be forgiven. The PPP was recently expanded to permit a second round of funding, including for certain borrowers who have already received a PPP loan, subject to certain conditions. On February 22, 2021, changes were made to the PPP program to establish a 14-day exclusive application period beginning on February 24, 2021, for businesses and nonprofits with fewer than 20 employees. This is intended to give lenders and community partners more time to work with the smallest businesses, while also ensuring that larger PPP-eligible businesses still have time to apply and receive support prior to the program expiration on March 31, 2021.
16 Truist Financial Corporation
The CARES Act contains additional protections for homeowners and renters of properties with federally backed mortgages, including a 60-day moratorium on the initiation of foreclosure proceedings beginning on March 18, 2020 and a 120-day moratorium on initiating eviction proceedings effective March 27, 2020. Borrowers of federally backed mortgages have the right under the CARES Act to request up to 360 days of forbearance on their mortgage payments if they experience financial hardship directly or indirectly due to the coronavirus-related public health emergency. FNMA, FHLMC, FHA and VA have continued to extend their moratorium on foreclosures and evictions for single-family federally backed mortgages well into 2021.
Also pursuant to the CARES Act, the U.S. Treasury has the authority to provide loans, guarantees and other investments in support of eligible businesses, states and municipalities affected by the economic effects of COVID-19. Some of these funds have been used to support the several FRB programs and facilities described below or additional programs or facilities that are established by the FRB under its Section 13(3) authority and meeting certain criteria.
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. The CARES Act also provides financial institutions with the option to suspend certain GAAP requirements for coronavirus-related loan modifications that would otherwise constitute troubled debt restructurings and further requires the federal banking agencies to defer to financial institutions' determinations in making such suspensions. Refer to "Note 1. Basis of Presentation" for Truist's policy related to COVID-19 loan modifications.
FRB Actions
The FRB took a range of actions to support the flow of credit to households and businesses. For example, on March 15, 2020, the quarter endedFRB reduced the target range for the federal funds rate to 0 to 0.25% and announced that it would increase its holdings of U.S. Treasury securities and agency mortgage-backed securities and begin purchasing agency commercial mortgage-backed securities. The FRB also encouraged depository institutions to borrow from the discount window and lowered the primary credit rate for such borrowing by 150 basis points and extended the term of such loans up to 90 days. Reserve requirements have been reduced to zero as of March 26, 2020.
In addition, the FRB established a range of facilities and programs to support the U.S. economy and U.S. marketplace participants in response to economic disruptions associated with COVID-19. Through these facilities and programs, the FRB took 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 that remain active include:
•a PPP Liquidity Facility to provide financing related to PPP loans made by banks;
•a Primary Dealer Credit Facility to provide liquidity to primary dealers through a secured lending facility;
•a Commercial Paper Funding Facility to purchase the commercial paper of certain U.S. issuers; 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.
FRB facilities and programs that expired as of December 31, 2017, BB&T had 36,484 full-time equivalent employees, compared2020 included:
•three Main Street Loan Facilities to 37,481 full-time equivalent employeespurchase loan participations, under specified conditions, from banks lending to small and medium sized U.S. businesses;
•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; and
•a Municipal Liquidity Facility to purchase bonds directly from U.S. state, city and county issuers
Human Capital
Truist believes it is crucial to attract and retain top talent who can further Truist's purpose, mission and values. To facilitate talent attraction and retention, Truist aims to provide teammates a diverse, inclusive and safe workplace that affords them opportunities to grow and develop in their careers.
Truist's Compensation and Human Capital Committee provides input on talent management strategy for Truist and oversees the quarter endeddesign and administration of material incentive compensation arrangements, as well as other human capital matters, including teammate diversity and inclusion, teammate engagement, and well-being initiatives.
Truist Financial Corporation 17
Truist's Enterprise Ethics Risk Office partners with a broad group of internal stakeholders to set standards for teammate conduct and facilitate the timely intake and routing of teammate concerns for review. As part of that effort, the team seeks to identify trends reflecting on organizational culture and/or operational challenges and to develop solutions. The results of these efforts are regularly shared with Truist's Executive-Level Ethics, Business Practices, and Conduct Committee and its Board of Directors.
The following table presents a summary of teammates as of December 31, 2016.2020:
| | | | | | | | | | | |
Table 4: Teammate Summary |
| # of Teammates | | % of Population |
Full-Time | 52,294 | | 95.1 | % |
Part-Time | 2,688 | | 4.9 | |
Total | 54,982 | | 100.0 | % |
Leveraging a skilled contingent workforce is an important part of Truist's overall workforce strategy. It has enabled Truist the ability to drive process and system integrations during the Merger period while continuing to deliver on Truist's core purpose.
Diversity, Equity & Inclusion
Truist's commitment to DEI is deeply rooted in the Company's purpose to inspire and build better lives and communities. Ensuring Truist attracts, develops, and retains diverse, talented, and caring people in the industry is critical to the Company's overall success. To deliver on Truist's DEI goals, Truist created a dedicated DEI Office, specifically focused on attracting and advancing diverse representation at key levels of the Company, embedding DEI in all Truist's business strategies and hiring and investing in diverse communities. The DEI Office partners with groups across Truist to develop tools, resources, and programs to positively influence the societal impact of clients, teammates, communities and stakeholders.
Truist recognizes that ethnically diverse talent have historically been underrepresented in leadership positions at financial services companies. To emphasize Truist's commitment to advancing diversity, the Company committed to increasing its racially and ethnically diverse teammates among senior leadership positions to 15%.
The following tables presents a summary of diversity statistics as of December 31, 2019:
| | | | | | | | | | | |
Table 5: Teammate Diversity (1) |
| Women | | People of Color |
Board of Directors | 31.8 | % | | 18.2 | % |
Executive Leadership & senior leaders | 22.1 | | | 11.8 | |
First / mid-level managers | 54.1 | | | 24.7 | |
Professionals | 50.4 | | | 33.2 | |
All others | 76.9 | | | 40.9 | |
All teammates | 64.4 | | | 35.6 | |
(1)Source: EEO-1 data as of December 31, 2019. All others is a combination of sales workers and administrative support EEO-1 job categories.
Talent Development
Truist teammates have access to extensive programs and benefits for career advancement. Teammates can partner with a certified coach to help them focus, create clear goals and stay accountable to achieving those goals. Truist also provides tuition assistance so teammates can continue formal education by seeking degrees that align with career goals.
In addition to career development opportunities, Truist provides a differentiated learning experience to new and existing teammates, including formal onboarding training to prepare new teammates through learning content libraries for individual development needs. Truist provides a wide range of forums for learning that include relevant current trends and emerging skills in the marketplace.
Truist also has a Leadership Institute, a uniquely qualified leadership development center that creates dynamic leaders and increases teammate retention. Truist strives to succeed in maximizing the potential in every individual and instilling values and behaviors that create a strong culture of leadership. The Truist Leadership Institute combines expert psychological insight with lessons learned throughout its 60-year history of leadership development. This foundation has allowed Truist to provide teammates throughout the Company with the knowledge and skills to maximize performance.
18 Truist Financial Corporation
Health, Safety, and Wellness and COVID-19
The health and safety of teammates are paramount and they have guided Truist's responses to the COVID-19 crisis. In a shift of operations, Truist enabled the majority of its workforce to work remotely, moved call centers to work-from-home status, provided teammates with the technology and resources to continue working, and enhanced cybersecurity. For teammates who needed to work in branches and offices, Truist implemented new cleaning routines, social distancing procedures, and wellness and hygiene measures. In 2020 Truist provided all teammates with resources to support their physical and mental well-being during this time.
Website Access to BB&T’sTruist's Filings with the SEC
BB&T’sTruist's electronic filings with the SEC, including the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Sections 13(a) or 15(d) of the Exchange Act, as amended, are made available at no cost inon the Company's Investor Relations section of the Company’s website, BBT.comIR.Truist.com, as soon as reasonably practicable after BB&TTruist files such material with, or furnishes it to, the SEC. BB&T’sTruist's SEC filings are also available through the SEC’sSEC's website at sec.gov.sec.gov.
Corporate Governance
Information with respect to BB&T’sTruist's Board of Directors, Executive Officers and corporate governance policies and principles is presented on BB&T’sTruist's Investor Relations website, BBT.com.IR.Truist.com. Specifically, the Company makes available on its Investor Relations website, under the heading "Governance & Responsibility" (i) its codes of ethics for the Board, senior financial officers, and teammates, (ii) its Corporate Governance Guidelines, and (iii) the charters of the Company's Board committees. If the Company makes changes in, or provides waivers from, the provisions of any of its codes of ethics that the SEC requires it to disclose, the Company intends to disclose these events in the "Governance & Responsibility" section of its Investor Relations website.
Truist Financial Corporation 19
Executive Officers
| | | | | | | | | | | | | | | | | | | | |
Executive Officer | | Recent Work Experience | | Years of Service | | Age |
Kelly S. King | | Chairman since January 2010. Chief Executive Officer since January 2009. | | 48 | | 72 |
Chairman and Chief Executive Officer | | | | |
William H. Rogers, Jr. | | President and Chief Operating Officer since December 2019. Previously SunTrust Chairman and Chief Executive Officer since January 2012. | | 40* | | 63 |
President and Chief Operating Officer | | | | | |
Daryl N. Bible | | Chief Financial Officer since January 2009. | | 13 | | 59 |
Senior Executive Vice President and Chief Financial Officer | | | | |
Scott Case | | Chief Information Officer since December 2019. Previously SunTrust Chief Information Officer since February 2018. Chief Information Officer at Ciox Health from 2017 to 2018. Chief Technology Officer of SunTrust Consumer Segment from 2015 to 2017. | | 5* | | 50 |
Senior Executive Vice President and Chief Information Officer | | | | | |
Hugh S. (Beau) Cummins, III | | Head of the Corporate and Institutional Group since December 2019. Previously SunTrust Co-Chief Operating Officer and Wholesale Segment Executive since February 2018. SunTrust Corporate Executive Vice President and Wholesale Segment Executive from 2017 to February 2018. SunTrust Commercial and Business Banking Executive from 2013 to 2017. | | 15* | | 58 |
Senior Executive Vice President and Head of the Corporate and Institutional Group | | | | | |
Ellen M. Fitzsimmons | | Chief Legal Officer and Head of Enterprise Diversity since December 2019. Previously SunTrust General Counsel and Corporate Secretary since January 2018. General Counsel and Corporate Secretary of CSX Corporation from 2003 to 2017. | | 3* | | 60 |
Senior Executive Vice President and Chief Legal Officer and Head of Enterprise Diversity | | | | | |
Christopher L. Henson | | Head of Banking and Insurance since December 2019. President from December 2016 to December 2019 and Chief Operating Officer from January 2009 to December 2019. | | 36 | | 59 |
Senior Executive Vice President and Head of Banking and Insurance | | | | |
Michael B. Maguire | | Head of National Consumer Finance and Payments since December 2019. Previously SunTrust Enterprise Partnerships and Investments Executive. | | 18* | | 42 |
Senior Executive Vice President and Head of National Consumer Finance & Payments | | | | | |
Kimberly Moore-Wright, | | Chief Human Resources Officer since December 2019. Director of Marketing and Digital Sales from January 2016 to November 2019. Director of Retail and Commercial Marketing Strategy from January 2012 to December 2015. | | 25 | | 47 |
Senior Executive Vice President and Chief Human Resources Officer | | | | | |
Brant J. Standridge | | Head of Retail Community Banking since December 2019. President, Retail Banking since January 2018. Lending Group Manager from August 2016 to December 2017. Regional President in Texas from January 2015 to August 2016. | | 22 | | 45 |
Senior Executive Vice President and President, Retail Banking | | | | | |
Clarke R. Starnes III | | Chief Risk Officer since July 2009. | | 38 | | 61 |
Senior Executive Vice President and Chief Risk Officer | | | | |
Joseph M. Thompson | | Head of Truist Wealth since December 2019. Previously SunTrust Head of Private Wealth Management since August 2014. | | 27* | | 54 |
Senior Executive Vice President and Head of Truist Wealth | | | | | |
David H. Weaver | | Head of Commercial Community Banking since December 2019. President, Community Banking since December 2016. Community Banking Group Executive from 2010 to December 2016. | | 25 | | 54 |
Senior Executive Vice President and Head of Commercial Community Banking | | | | | |
Dontá L. Wilson | | Chief Digital and Client Experience Officer since November 2018. Chief Client Experience Officer since August 2016. Regional President in Georgia from December 2014 to July 2016. | | 22 | | 44 |
Senior Executive Vice President and Chief Digital and Client Experience Officer | | | | | |
*Reflects combined years of services at Truist and SunTrust.
20 Truist Financial Corporation
|
| | | | | | |
Executive Officer | | Recent Work Experience | | Yrs of Service | | Age |
Kelly S. King | | Chairman since January 2010. Chief Executive Officer since January 2009. | | 45 | | 69 |
Chairman and Chief Executive Officer | | | | |
Christopher L. Henson | | President since December 2016. Chief Operating Officer since January 2009. | | 33 | | 56 |
President and Chief Operating Officer | | | | |
Daryl N. Bible | | Chief Financial Officer since January 2009. | | 10 | | 56 |
Senior Executive Vice President and | | | | | |
Chief Financial Officer | | | | | |
Clarke R. Starnes III | | Chief Risk Officer since July 2009. | | 35 | | 58 |
Senior Executive Vice President and | | | | | |
Chief Risk Officer | | | | | |
W. Bennett Bradley | | Chief Digital Officer since January 2016. President, Payment Solutions from September 2005 to December 2015. | | 32 | | 56 |
Senior Executive Vice President and | | | | | |
Chief Digital Officer | | | | | |
Barbara F. Duck | | Chief Information Officer since July 2016. Data and Technology Services Manager from January 2016 to June 2016. Enterprise Risk Manager from July 2009 to December 2015. | | 30 | | 51 |
Senior Executive Vice President and | | | | |
Chief Information Officer | | | | |
Jim. D. Godwin | | Chief Credit Officer since January 2018. Deputy Chief Risk Officer from January 2016 to December 2017. Chief Operational Risk Officer from September 2012 to December 2015. Credit Risk Review Manager from May 2009 to September 2012. | | 22 | | 49 |
Senior Executive Vice President and | | | | | |
Chief Credit Officer | | | | | |
Donna C. Goodrich | | Deposit, Operations and Fraud Manager since November 2017. Deposit, Payment and Operations Services Manager from January 2016 to October 2017. Deposit Services Manager from April 2004 to December 2015. | | 32 | | 55 |
Senior Executive Vice President and | | | | |
Deposit, Operations and Fraud Manager | | | | |
Robert J. Johnson, Jr. | | General Counsel, Secretary and Chief Corporate Governance Officer since August 2010. | | 13 | | 45 |
Senior Executive Vice President and | | | | |
General Counsel, Secretary and | | | | | | |
Chief Corporate Governance Officer | | | | | | |
Brant J. Standridge | | President, Retail Banking since January 2018. Lending Group Manager from August 2016 to December 2017. Regional President in Texas from January 2015 to August 2016. Regional President in Georgia from November 2011 to December 2014. | | 19 | | 42 |
Senior Executive Vice President and | | | | | |
President, Retail Banking | | | | | |
David H. Weaver | | President, Community Banking since December 2016. Community Banking Group Executive from 2010 to December 2016. | | 22 | | 51 |
Senior Executive Vice President and | | | | | |
President, Community Banking | | | | | |
Dontá L. Wilson | | Chief Client Experience Officer since August 2016. Regional President in Georgia from December 2014 to July 2016. Regional President in Alabama from August 2009 to November 2014. | | 19 | | 41 |
Senior Executive Vice President and | | | | | |
Chief Client Experience Officer | | | | | |
W. Rufus Yates | | President and CEO of BB&T Securities, LLC since January 2009. Financial Services Commercial Finance Manager since 2012. | | 31 | | 60 |
Senior Executive Vice President and | | | | |
President and CEO of BB&T Securities, LLC | | | | |
and Financial Services Commercial Finance | | | | |
Manager | | | | |
ITEM 1A. RISK FACTORS
Summary of Risk Factors
Merger-Related Risks
•Truist may not be able to successfully integrate the companies or to realize the anticipated benefits of the Merger.
•Truist will continue to incur substantial expenses related to the Merger and the integration.
COVID-19 Risks
•The effects of COVID-19 have adversely impacted, and will likely continue to adversely impact, the Company's financial condition and results of operations.
Market Risks
•Changes in interest rates could adversely affect revenue and expenses, the value of assets and liabilities, as well as the availability and cost of capital, cash flows and liquidity.
•The monetary and fiscal policies of the federal government and its agencies could have a material adverse effect on profitability.
•Financial results, lending or other business activities could be materially affected by a deterioration of economic conditions.
•Instability in global economic conditions and geopolitical matters, as well as volatility in financial markets, could have a material adverse effect on the Company's operations, earnings and financial condition.
•The replacement of LIBOR could adversely affect Truist's profitability and financial condition.
Credit Risks
•The Company is subject to credit risk by lending or committing to lend money, or entering into a letter of credit or other types of contracts with counterparties.
•The Company may have more credit risk and higher credit losses to the extent that loans are concentrated by loan type, industry segment, borrower type or location of the borrower or collateral.
Liquidity Risks
•Truist's liquidity could be impaired by an inability to access short-term funding or an unforeseen outflow of cash.
•Loss of deposits or a change in deposit mix could increase Truist's funding costs.
•Truist relies on the mortgage secondary market and GSEs for some of the Company's liquidity.
•Any reduction in the Company's credit rating could increase the cost of the Company's funding from the capital markets.
•The Parent Company has less access to funding sources and its liquidity could be constrained if the Bank becomes unable to pay dividends during a time of stress.
Compliance Risks
•Truist is subject to extensive and evolving government regulation and supervision, which could increase the cost of doing business, limit Truist's ability to make investments and generate revenue and lead to costly enforcement actions.
•Truist is subject to regulatory capital and liquidity standards that affect the Company's business, operations and ability to pay dividends or otherwise return capital to shareholders.
•Truist is subject to certain risks related to originating and selling mortgages and may be required to repurchase mortgage loans or indemnify mortgage loan purchasers.
•Truist faces risks as a servicer of loans.
Strategic Risks
•Truist may face the risk of financial loss or negative impact resulting from ineffective strategy setting and execution, adverse business decisions, or lack of responsiveness to changes in the external environment.
•Competition may reduce Truist's client base or cause Truist to modify pricing for products and services in order to maintain market share.
•Truist may not be able to complete future mergers or acquisitions.
•Truist has businesses other than banking that are subject to a variety of risks.
Reputational Risks
•Negative public opinion could damage the Company's reputation and adversely impact business and revenues.
•Scrutiny of the Company's sales, training and incentive compensation practices could damage the Company’s reputation and adversely impact business and revenues.
Operational Risks
•Litigation may adversely affect the Company's results.
•The Company may incur fines, penalties and other negative consequences from regulatory violations, including inadvertent or unintentional violations.
•Truist relies on other companies to provide key components of the Company's business infrastructure.
•Truist depends on the expertise of key personnel. If these individuals leave or change their roles without effective replacements, operations may suffer.
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•The Company may not be able to hire or retain additional qualified personnel and recruiting and compensation costs may increase as a result of changes in the marketplace, which may increase costs and adversely impact the Company's ability to implement business strategies.
•The Company's framework for managing risks may not be effective.
•There are risks resulting from the extensive use of models in Truist's business, which may impact decisions made by Management and regulators.
•The Company is at risk of increased losses from fraud.
•The Company's operational or security systems or infrastructure or those of third parties, could fail or be breached, which could disrupt the Company's business and adversely impact the Company's results of operations, liquidity and financial condition, as well as cause legal or reputational harm.
•Natural disasters and other catastrophic events could have a material adverse impact on the Company’s operations or the Company’s financial condition and results.
•Truist may be impacted by the soundness of other financial institutions.
•Truist depends on the accuracy and completeness of information about clients and counterparties.
•The Company's accounting policies and processes are critical to how it reports the Company's financial condition and results of operations. They require management to make estimates about matters that are uncertain.
•Depressed market values for the Company's stock and adverse economic conditions sustained over a period of time may require the Company to write down all or some portion of the Company's goodwill.
•Certain banking laws and certain provisions of the Company's articles of incorporation may have an anti-takeover effect.
Technology Risks
•The Company faces cybersecurity risks, including denial of service, hacking and social engineering attacks that could result in the disclosure of confidential information, adversely affect the Company's operations or reputation and create significant legal and financial exposure.
•Truist will continually encounter technological change and must effectively develop and implement new technology.
The following discussion sets forth some of the more important risk factors that could materially affect BB&T’sTruist's financial condition and operations. When a risk factor spans several risk categories, the below risks have been listed by their primary risk category. Other factors that could affect the Company’s financial condition and operationsThe risks described are discussed in the "Forward-Looking Statements" section above. However, there may be additionalnot all inclusive. Additional risks that are not presently known or risks deemed immaterial may have a material adverse effect on Truist's financial condition, results of operations, business and prospects.
Merger-Related Risks
Truist may not be able to successfully integrate the companies or known,to realize the anticipated benefits of the Merger.
The Company was formed by the Merger of BB&T and SunTrust on December 6, 2019. Truist anticipates further integration of systems, operations, and personnel of BB&T and SunTrust over the next couple of years.
The successful integration of BB&T's and SunTrust's operations will depend substantially on the Company's ability to successfully consolidate operations, management teams, corporate cultures, systems and procedures and to eliminate redundancies and costs. Truist may encounter difficulties during integration, such as:
•the loss of key teammates and clients;
•the disruption of operations and businesses;
•loan, deposit, and revenue attrition;
•inconsistencies in standards, control procedures and policies;
•unexpected issues with planned branch and other facilities closures;
•unexpected issues with costs, operations, personnel, technology; and
•problems with the assimilation of new operations, sites or personnel.
Integration activities have and will continue to divert resources from regular operations. In addition, general market and economic conditions or governmental actions affecting the financial industry may inhibit the Company's successful integration of these entities.
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BB&T and SunTrust merged with the expectation that the Merger would result in various synergies, including benefits relating to enhanced revenues, a strengthened and expanded market position for the combined organization, technology efficiencies, cost savings and operating efficiencies. Achieving the anticipated benefits of the Merger is subject to a number of uncertainties, including whether the Company integrates the institutions in an efficient and effective manner, as well as general competitive factors besides those discussed below,in the marketplace. Failure to achieve or elsewheredelays in achieving these anticipated benefits could result in a share price reduction as well as increased costs, decreases in the amount of expected revenues, and diversion of management's time and energy and could materially and adversely affect the Company's financial condition, results of operations, business and prospects.
Truist will continue to incur substantial expenses related to the Merger and the integration.
There are a large number of processes, policies, procedures, operations, technologies and systems that must be integrated. In addition, the Merger may increase the Company's compliance and legal risks, including increased litigation or regulatory actions such as fines or restrictions related to the business practices or operations of the combined business.
While the Company has assumed that a certain level of expenses would be incurred, there are many factors beyond the Company's control that could affect the total amount or the timing of the integration expenses. Moreover, many of the expenses that will be incurred are, by their nature, difficult to estimate accurately. These expenses could, particularly in the near term, exceed the expected savings from the elimination of duplicative expenses and the realization of economies of scale. The amount and timing of future charges to earnings as a result of Merger or integration expenses are uncertain.
COVID-19 Risks
The effects of COVID-19 have adversely impacted, and will likely continue to adversely impact, the Company's financial condition and results of operations.
The COVID-19 pandemic has severely disrupted almost all economic activity in the U.S. Despite the partial lifting of federal and state shelter-in-place orders, some of which have been renewed, it remains unknown when there will be a return to normal economic activity due to
continued significant numbers of new cases, potential impact of new COVID strains, uncertain vaccination rollout timeline, and increased economic stress associated with the pandemic. Truist temporarily limited access to certain offices, limited branches to drive-thru and appointment only, suspended some services and the majority of the Company's workforce is working remotely, which may increase cybersecurity risks to the Company. 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. Commercial clients are experiencing varying levels of disruptions or restrictions on their business activity and supply chains, closures of facilities or decreases in demand for their products and services. Consumer clients are experiencing interrupted income or unemployment. Certain industries have been particularly susceptible to the effects of the pandemic, such as hotels, resorts, cruise lines, oil and gas companies, senior and acute care facilities, restaurants, and other sensitive retail businesses, and Truist has outstanding loans to clients in these industries. In 2020, several credit rating agencies downgraded their outlook on U.S. banks due in part to the concerns presented by the pandemic. The global financial markets have also experienced significant volatility. The duration of this severe economic disruption and its related financial impact cannot be reasonably estimated at this time.
The effects of the pandemic have already resulted in an increase in the allowance for credit losses, a reduction of fee income, a reduction of net interest margin and an increase in expenses. Prolonged continuation of current conditions could worsen these impacts and also affect the Company's capital and liquidity position, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause an outflow of deposits, cause significant property damage, in case of civil unrest or vandalism, influence the recognition of credit losses on loans and securities and further increase the allowance for credit losses, result in additional lost revenue, cause additional increases in expenses, result in goodwill impairment charges, result in the impairment of other financial and nonfinancial assets, and increase the Company's cost of capital.
Intensive government actions to mitigate the economic suffering caused by the pandemic may not be successful or may result in increased pressure on the banking sector. Net interest margin has been, and is likely to continue to be, affected by the very low interest rate environment. The application of forbearance and payment deferral policies beyond any statutory requirements may impact Truist's interest income. Truist participated in the SBA's PPP, which was recently expanded to permit a second round of funding, as an eligible lender with the benefit of a government guaranty of loans to small business clients, many of whom may face difficulties even after being granted such a loan. The Company faces increased risks, in terms of credit, fraud risk and litigation, in light of participation in this program. Truist has been named in several lawsuits relating to its participation in the PPP.
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It is possible that the pandemic and its aftermath will lead to a prolonged economic slowdown or recession in the U.S. economy or the world economy in general. The ultimate impact on the Company's financial condition, results of operation, and liquidity and capital position will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the pandemic and the actions to contain or treat its impact. Moreover, the effects of the COVID-19 pandemic will heighten the other reports that BB&T filed or furnished with the SEC, that alsorisks described in this Annual Report on Form 10-K.
Market Risks
Changes in interest rates could adversely affect revenue and expenses, the Company.value of assets and liabilities, as well as the availability and cost of capital, cash flows and liquidity.
Compliance RiskTruist’s balance sheet can be sensitive to movements in market interest rates and spreads as well as basis risk arising from the Company's ALM activities, which management must closely monitor. In addition to the impact of the general economy, changes in interest rates or in valuations in the debt or equity markets could directly impact the Company in one or more of the following ways:
Changes•The yield on earning assets and rates paid on interest-bearing liabilities may change in banking lawsdisproportionate ways; or
•The value of financial instruments held could change adversely.
Regional and local economic conditions, competitive pressures and the policies of regulatory authorities affect interest income and interest expense. When interest rates rise, funding costs may rise faster than the yield the Company earns on assets, causing net interest margin to contract. Higher interest rates may also result in lower mortgage production income and elevated charge-offs in certain categories of the loan portfolio. Conversely, when interest rates fall, the yield the Company earns on assets may fall faster than the Company's ability to lower rates paid on deposits or borrowings.
Certain investment securities, notably MBS, are very sensitive to changes in rates. Generally, when rates rise, prepayments will decrease and the duration of MBS will increase. Conversely, when rates fall, prepayments of principal and interest will increase and the duration of MBS will decrease.
In addition, in response to the outbreak of COVID-19 pandemic and its economic consequences, the FRB lowered its target for the federal funds rate to a range of 0% to 0.25%. Low rates increase the risk of a negative interest rate environment, either broadly or for some types of instruments. For example, in March 2020 the yields on one-month and three-month Treasuries briefly dropped below zero. A negative interest rate environment could have a material adverse effect on BB&T.Truist's financial condition and results of operations. In a negative interest rate environment, some depositors may choose to withdraw their deposits in lieu of paying an interest rate to Truist to hold such deposits. Negative rates would also diminish the spreads on loans and securities. Further, Truist cannot predict the nature or timing of future changes in monetary policies in response to the COVID-19 pandemic or the effects that they may have on the Company's activities and financial results.
BB&TThe monetary and fiscal policies of the federal government and its agencies could have a material adverse effect on profitability.
Changes in monetary and fiscal policies, including FRB policies, can adversely affect profitability and cannot be controlled or predicted by the Company. FRB policies can:
•significantly impact the cost of funds, as well as the return on assets, both of which can have an impact on interest income;
•materially affect the value of financial assets and liabilities;
•adversely affect borrowers through higher debt servicing costs and potentially increase the risk that they may fail to repay their loan obligations; and
•artificially inflate asset values during prolonged periods of accommodative policy, which could in turn cause volatile markets and rapidly declining collateral values.
Financial results, lending or other business activities could be materially affected by a deterioration of economic conditions.
A prolonged period of slow growth in the U.S. economy as a whole or in any regional markets that Truist serves, or any deterioration in economic conditions or the financial markets may disrupt or dampen the economy, which could materially adversely affect the Company's financial condition and results.
24 Truist Financial Corporation
If economic conditions deteriorate, the Company may see lower demand for loans by creditworthy clients, reducing the Company's interest income. In addition, if unemployment levels increase or if real estate prices decrease, the Company would expect to incur higher charge-offs and may incur higher expenses in connection with adjustments to the reasonable and supportable forecasts used to estimate the allowance for credit losses in accordance with CECL requirements. These conditions may adversely affect not only consumer loan performance but also commercial and industrial and commercial real estate loans, especially for those businesses that rely on the health of industries or properties that may suffer from deteriorating economic conditions. The ability of these borrowers to repay their loans may be reduced, causing the Company to incur higher credit losses.
The deterioration of economic conditions also could adversely affect financial results for the Company's fee-based businesses. Truist earns fee income from, among other activities, managing assets for clients and providing brokerage and other investment advisory and wealth management services. Investment management fees are often based on the value of assets under management and a decrease in the market prices of those assets could reduce the Company's fee income. Changes in stock or fixed income market prices or client preferences could affect the trading activity of investors, reducing commissions and other fees earned from the Company's brokerage business. Poor economic conditions and volatile or unstable financial markets would likely adversely affect the Company's capital markets-related businesses.
Instability in global economic conditions and geopolitical matters, as well as volatility in financial markets, could have a material adverse effect on the Company's operations, earnings and financial condition.
Instability in global economic conditions and geopolitical matters, as well as volatility in financial markets, could have a material adverse effect on the Company's operations, earnings and financial condition. The macroeconomic environment in the United States is extensively regulated undersusceptible to global events and volatility in financial markets. For example, trade negotiations between the U.S. and other nations remains uncertain and could adversely impact economic and market conditions for the Company and its clients and counterparties.
A negative change in economic conditions, the performance of foreign sovereign debt, changes of trade policies and other matters could adversely affect the Company's business, financial condition and liquidity. Domestic and global political activity, geopolitical matters, including international political unrest or disturbances, terrorist activities, military conflicts, concerns over energy prices, trade wars and economic instability or recession in certain regions could cause volatility in the financial markets, undermine investor confidence or cause a contraction of available credit. Any of these could reduce the value of the Company's assets or cause a reduction in liquidity that adversely impacts the Company's financial condition and results of operations.
The replacement of LIBOR could adversely affect Truist's profitability and financial condition.
LIBOR and certain other interest rate benchmarks are the subject of recent national, international and other regulatory guidance and proposals for reform. These reforms may cause such benchmarks to perform differently than in the past or have other consequences which cannot be predicted. LIBOR in its current form was anticipated to no longer be available after 2021.
On November 30, 2020 the administrator of LIBOR announced it will consult on its intention to cease publication of the one-week and two-month settings immediately following the LIBOR publication on December 31, 2021, and the remaining U.S. dollar LIBOR settings immediately following the LIBOR publication on June 30, 2023. While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, a group of market participants convened by the FRB, the ARRC, has selected the SOFR as its recommended alternative to U.S. dollar LIBOR. In 2020, Truist began offering SOFR-based lending solutions to wholesale and consumer clients, and entered into SOFR-based derivative contracts.
The U.S. federal banking agencies issued a statement in November 2020 encouraging banks to transition away from U.S. dollar LIBOR as soon as practicable and to stop entering into new contracts that use U.S. dollar LIBOR by December 31, 2021. SOFR or other alternative reference rates may perform differently than LIBOR in response to changing market conditions. For example, SOFR could experience greater decreases during times of economic stress, which could require the Company to lend at lower rates at times when the Company's borrowing costs are increasing.
The market transition away from LIBOR to alternative reference rates is complex and could have a range of adverse effects on the Company's business, financial condition and results of operations. In particular, any such transition could:
•adversely affect the interest rates received or paid on the revenue and expenses associated with or the value of the Company's LIBOR-based assets and liabilities;
•adversely affect the interest rates received or paid on the revenue and expenses associated with or the value of other securities or financial arrangements, given LIBOR's role in determining market interest rates globally;
•prompt inquiries or other actions from regulators in respect of the Company's preparation and readiness for the replacement of LIBOR with an alternative reference rate; and
Truist Financial Corporation 25
•result in disputes, litigation or other actions with borrowers or counterparties about the interpretation and enforceability of certain fallback language in LIBOR-based contracts and securities.
The transition away from LIBOR to an alternative reference rate or rates will require the transition to or development of appropriate systems, models and analytics to effectively transition the Company's risk management and other processes from LIBOR-based products to those based on the applicable alternative reference rate, such as SOFR. Truist has developed a LIBOR transition team and project plan that outlines timelines and priorities to prepare its processes, systems and people to support this transition. Timelines and priorities include assessing the impact on the Company's clients, as well as assessing system requirements for operational processes. There can be no guarantee that these efforts will successfully mitigate the operational risks associated with the transition away from LIBOR to an alternative reference rate.
The manner and impact of the transition from LIBOR to an alternative reference rate, as well as the effect of these developments on the Company's funding costs, loan, investment and trading securities portfolios, and ALM, is uncertain.
Credit Risks
The Company is subject to credit risk by lending or committing to lend money, or entering into a letter of credit or other types of contracts with counterparties.
Truist incurs credit risk, which is the risk of loss if the Company's borrowers or counterparties fail to perform according to the terms of their contracts. A number of products expose the Company to credit risk, including loans and leases, lending commitments, derivatives, trading assets and investment securities. Changes in credit quality can have a significant impact on the Company's earnings and capital position. The Company estimates and establishes reserves for credit risks and credit losses inherent in its determination of credit exposure. This process, which is critical to the Company's financial results and condition, requires complex calculations and extensive use of judgment, considering both external and borrower-specific factors that might impair the ability of borrowers to repay their loans. As is the case with any such assessments, there is always the chance that the Company will fail to identify all pertinent factors or that the Company will fail to accurately estimate the impacts of factors identified.
Credit losses may exceed the amount of the Company's reserves as a result of changing economic conditions, including falling real estate or commodity prices and higher unemployment or other factors such as changes in borrower behavior. There is no assurance that reserves will be sufficient to cover all incurred credit losses. In the event of significant deterioration in economic conditions, the Company may be required to increase reserves in future periods, which would reduce the Company's earnings and potentially impact its capital.
The Company may have more credit risk and higher credit losses to the extent that loans are concentrated by loan type, industry segment, borrower type or location of the borrower or collateral.
The Company's credit risk and credit losses can increase if the Company's loans are concentrated in borrowers engaged in the same or similar activities or in borrowers who as a group may be uniquely or disproportionately affected by economic or market conditions.
Deterioration in economic conditions, housing conditions or real estate values, including as a result of climate change or natural disasters, in the markets in which the Company operates could result in materially higher credit losses. The Company is also subject to physical risks, which could manifest in the form of asset quality deterioration and could be exacerbated by specific portfolio concentrations, and transition risks, which could manifest through longer-term shifts in market dynamics and consumer preferences in specific industries that may be more sensitive or vulnerable to a transition to a low carbon economy. Shorter term transition risks arising from regulatory changes or technological breakthroughs may require an acceleration of certain risk mitigation strategies.
Liquidity Risks
Truist's liquidity could be impaired by an inability to access short-term funding or an unforeseen outflow of cash.
Liquidity is essential to Truist's businesses. When volatility or disruptions occur in the wholesale funding markets, the Company's ability to access short-term liquidity could be materially impaired. In addition, other factors outside of the Company's control, such as a general market disruption or an operational problem that affects third parties, could impair the Company's ability to access short-term funding or create an unforeseen outflow of cash due to, among other factors, draws on unfunded commitments or deposit attrition. The Company's inability to access short-term funding or capital markets could constrain the Company's ability to make new loans or meet existing lending commitments and could ultimately jeopardize the Company's overall liquidity and capitalization.
26 Truist Financial Corporation
Loss of deposits or a change in deposit mix could increase Truist's funding costs.
Deposits are a low cost and stable source of funding. Truist competes with banks and other financial institutions for deposits and as a result, could lose deposits in the future or see an increase in costs associated with maintaining deposits. Clients may shift their deposits into higher cost products or the Company may need to raise interest rates to avoid deposit attrition. Funding costs may also increase if deposits lost are replaced with wholesale funding. Higher funding costs reduce Truist's net interest margin, net interest income, and net income.
Truist relies on the mortgage secondary market and GSEs for some of the Company's liquidity.
Truist sells a portion of the mortgage loans originated to reduce the Company's retained credit risk and to provide funding capacity for originating additional loans. GSEs could limit their purchases of conforming loans due to capital constraints or other changes in their criteria for conforming loans (e.g., maximum loan amount or borrower eligibility). This potential reduction in purchases could limit the Company's ability to fund new loans.
Proposals have been presented to reform the housing finance market in the U.S., including the role of the GSEs in the housing finance market. The extent and timing of any such regulatory reform of the housing finance market and the GSEs, as well as any effect on the Company's business and financial results, are uncertain.
Any reduction in the Company's credit rating could increase the cost of the Company's funding from the capital markets.
Ratings agencies regularly evaluate Truist and its subsidiaries. Ratings are based on a number of factors, including the financial strength of the Company as well as conditions affecting the financial services industry generally. Failure to maintain those ratings could adversely affect funding cost and increase the Company's cost of capital. A credit downgrade might also affect the Company's ability to attract or retain deposits from commercial and corporate clients. Additionally, the Company's ability to conduct derivatives business with certain clients and counterparties could also be impacted and could trigger obligations to make cash or collateral payments to certain clients and counterparties.
The Parent Company has less access to funding sources and its liquidity could be constrained if the Bank becomes unable to pay dividends during a time of stress.
The Parent Company relies upon capital markets access and dividends from affiliates for funding and has less access to contingent funding sources than the Bank. If the Bank were subject to a financial stress, its dividends to the Parent Company could be reduced or eliminated in order to support Bank capital ratios or other regulatory requirements. This would increase the Parent Company's reliance on capital markets at a time when spreads and funding costs are likely elevated due the stress impacting the Bank.
Compliance Risks
Truist is subject to extensive and evolving government regulation and supervision, which could increase the cost of doing business, limit Truist's ability to make investments and generate revenue and lead to costly enforcement actions.
The banking and financial services industries are highly regulated. Truist is subject to supervision, regulation and examination by regulators, including the FRB, FDIC, NCCOB, SEC, CFTC, CFPB, FINRA and various state bankingregulatory agencies. The statutory and regulatory framework governing Truist is generally intended to protect depositors, the DIF, clients, and the U.S. financial system as a whole, and not Truist's debt holders or shareholders. Reform of the financial services industry resulting from the Dodd-Frank Act, including the EGRRCPA and other legislative, regulatory and technological changes, affect the Company's operations.
These laws and regulations that are intended primarily for the protection of depositors, the DIFand Truist's inability to act in certain instances without receiving prior regulatory approval affect Truist's lending practices, capital structure, investment practices, dividend policy, ability to repurchase common stock and ability to pursue strategic acquisitions, among other activities. Changes to statutes, regulations or regulatory policies or their interpretation or implementation and the banking system as a whole. In addition, BB&T is subject to changescontinued heightening of regulatory requirements could affect Truist in federalsubstantial and state laws as well as changes in banking and credit regulations and governmental economic and monetary policies. Any of these changes could adversely and materially affect BB&T. The regulatory environment for financial institutions entails significant potential increases in compliance requirements and associated costs, including those related to consumer credit, with a focus on mortgage lending.
unpredictable ways. Federal and state banking regulators also possess broad powers to take supervisory actions as they deem appropriate. These supervisory actions may result in higher capital requirements, higher deposit insurance premiums and limitations on BB&T’sthe Company's activities that could have a material adverse effect on its businessoperations or profitability.
Truist Financial Corporation 27
In recent years, both Congress and profitability.
For example, as discussedthe federal banking regulators have engaged in "Regulatory Considerations" above, the FDIC adopted a final rule that imposes a DIF assessment surcharge for banks with total assets of at least $10 billion. The surcharge became effective July 1, 2016 and will last for a period currently estimated by the FDIC to be two years but ending no later than December 31, 2018. If the DIF has not reached the required level at that time, then the FDIC will impose a special assessment on institutions with assets greater than $10 billion. The net effectrebalancing of the new surcharge increased BB&T's total annual assessmentpost financial crisis legal and regulatory framework, particularly by $84 million for 2017.
The Dodd-Frank Act, and its related rulemaking activities, may result in lower revenues, higher costs and ratings downgrades. In addition, failure to meet the FRB’s capital planning and adequacy requirements and liquidity requirements under the Dodd-Frank Act and other banking laws may limit the ability to pay dividends, pursue acquisitions and repurchase common stock.
The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial services industry, addressing, among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, interchange fees, derivatives, lending limits, and changes among the bank regulatory agencies. Under Dodd-Frank, BB&T is deemed to be a "systemically important" institution subject to certaintailoring enhanced prudential standards imposed byto the FRB. Federal agencies continue to implement the provisionssize, risk profile and complexity of the Dodd-Frank Act. Certainbanking organization. It is possible that the new presidential administration and the new Congress could reconsider this rebalancing of these provisionsthe legal and regulatory framework and also impose significant new regulatory and supervisory burdens on the financial sector. Truist expects that its businesses will remain subject to further rulemaking, guidanceextensive regulation and interpretation by the applicable federal regulators. Additionally, the CFPB has finalized a number of significant rules that impact nearly every aspect of the lifecycle of a residential mortgage. These rules implement the Dodd-Frank Act amendments to the Equal Credit Opportunity Act, the Truth in Lending Act and the Real Estate Settlement Procedures Act. These rules have a direct impact on BB&T’s operations, as BB&T is both a mortgage originator and a servicer.
Due to BB&T’s size, it is subject to additional regulations such as the "living will" requirements relating to the rapid and orderly resolution of systemically important financial institutions in the event of material financial distress or failure. BB&T cannot predict the additional effects that compliance with the Dodd-Frank Act or any regulations will have on BB&T’s businesses or its ability to pursue future business opportunities. Additional regulations resulting from the Dodd-Frank Act may materially adversely affect BB&T’s business, financial condition or results of operations. See "Regulatory Considerations" for additional information regarding the Dodd-Frank Act and its impact upon BB&T.
BB&T is subject to enhanced capital requirements and may be subject to more stringent capital requirements, which could diminish its ability to pay dividends or require BB&T to reduce its operations.
The Dodd-Frank Act requires federal banking agencies to establish more stringent risk-based capital requirements and leverage limits applicable to banks and BHCs. The FRB approved final rules that established a new comprehensive capital framework for U.S. banking organizations and established a more conservative definition of capital. These requirements, known as Basel III, became effective on January 1, 2015, and as a result, BB&T became subject to enhanced minimum capital and leverage ratios. These requirements, and any othersupervision. Any potential new regulations or modifications to existing regulations would likely necessitate changes to Truist's existing regulatory compliance and risk management infrastructure. Compliance with new regulations and supervisory initiatives, including those that have been proposed but not yet implementednewly applicable as a result of the requirements established by the BCBS, could adversely affect BB&T’s ability to pay dividends or raise capital, or could require BB&T to limit certain business activities, whichMerger may adversely affect its results of operations or financial condition. BB&T currently qualifies as a standardized approach banking organization under Basel III. Financial institutions with greater than $250 billion in assets or $10 billion in foreign assets are considered advanced approaches banking organizations, which are subject to a more complex calculation of RWA that includes an assessment of the impact of operational risk, among other requirements. BB&T is preparing to comply with the advanced approaches requirements, and these more stringent requirements, or BB&T’s failure to properly comply with them, could materially and adversely impact BB&T’s financial results and regulatory status once the requirements become applicable to BB&T.increase costs. In addition, the costs associated with complying with more stringent capital requirements, such as the requirement to formulate and submit capital plans based on pre-defined stress scenarios on an annual basis,concerns over climate change may prompt changes in regulations that, in turn, could have a material adverse effectimpact on BB&T. See "Regulatory Considerations" for additional information regardingasset values and the capitalfinancial performance of Truist's businesses and its clients.
Truist is subject to heightened requirements under the Dodd-Frank Actenhanced prudential standards and Basel III.expects increased supervisory scrutiny, including, for example, single counterparty credit limits, heightened expectations with respect to governance, risk management and internal controls and additional capital and liquidity requirements.
For example, BB&T is subject to assessment by the FRB as part of the CCAR program. CCAR is an annual exercise by the FRB to ensure that institutions have forward-looking capital planning processes that account for their risks and sufficient capital to continue operations throughout times of economic and financial stress. BB&T cannot be certain that the FRB will have no objections to BB&T’s future capital plans submitted through the CCAR program. Failure to pass the CCAR review could adversely affect BB&T’s ability to pay dividends, enter into acquisitions and repurchase common stock.
BB&T is subject to extensive and expanding government regulation and supervision, which can lead to costly enforcement actions while increasing the cost of doing business and limiting BB&T’s ability to generate revenue.
The financial services industry is subject to intensefaces scrutiny from bank supervisors in the examination process and aggressivestringent enforcement of regulations on both the federal and state levels, particularlylevels. Areas of focus in the recent past have been with respect to mortgage-related practices, student lending practices, auto lending practices, sales practices and related incentive compensation programs and other consumer compliance matters,matters. Truist continues to be subject to examinations and ongoing monitoring to assess compliance with BSA/AML laws and regulations, as well as sanctions compliance administered by the OFAC. For example, during November 2019, SunTrust Bank entered into a consent order with the FRB in connection with marketing, enrollment and billing practices related to deposit account add-on and similar products provided to certain business customers. Current and future actions by regulators could impact Truist's operations. See additional disclosures in the "Regulatory Considerations" section.
The Company is subject to laws, rules and regulations regarding compliance with anti-money laundering, Bank Secrecy Actprivacy policies and Officethe disclosure, collection, use, sharing and safeguarding of Foreign Assets Controlpersonal identifiable information of certain parties.There has recently been an increase in legislative and regulatory efforts to protect the privacy of consumer data. These initiatives may limit how companies can use customer data and economic sanctionsmay increase compliance complexity and related costs, result in significant financial penalties for compliance failures and limit the Company's ability to develop new products or respond to technological changes. Such legal requirements also could heighten the reputational impact of perceived misuses of customer data by the Company and third parties.
Heightened regulatory scrutiny or the results of an investigation or examination may lead to additional regulatory investigations or enforcement actions. There is no assurance that those actions will not result in regulatory settlements or other enforcement actions against certainTruist. Furthermore, a single event involving a potential violation of law or regulation may give rise to numerous and overlapping investigations and proceedings, either by multiple federal and state agencies and officials in the United States or, in some instances, regulators and other governmental officials in foreign countries and nationals. jurisdictions.
Federal banking law grants substantial enforcement powers to federal banking regulators.regulators and law enforcement agencies. This enforcement authority includes, among other things, the ability to assess significant civil or criminal monetary penalties, fines or restitution; to issue cease and desist or removal orders; and to initiate injunctive actions against banking organizations and institution-affiliated parties. These enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Failure
A failure to comply with theseregulatory requirements and expectations could expose the Company to fines, regulatory penalties, other regulations,costs, reputational damage and supervisory expectations related thereto, may resultregulatory or enforcement actions, such as limitations on engaging in fines, penalties, lawsuits, regulatory sanctions, reputation damagenew activities or expanding geographically.In some cases, governmental authorities have required criminal pleas or other extraordinary terms as part of such settlements, which could have significant consequences for a financial institution, including loss of clients, restrictions on business.
In addition, federal bank regulatory agencies are required to consider the effectiveness of a financial institution’s anti-money laundering activities and other regulatory compliance matters when reviewing bank mergers and BHC acquisitions and, consequently, non-compliance with the applicable regulations could materially impair BB&T’s ability to enter into or complete mergers and acquisitions.
For example, as discussed in "Regulatory Considerations" above, Branch Bank entered into a consent order withaccess the FDICcapital markets and the NCCOB in December 2016 and BB&T entered into a cease and desist order with the FRB and NCCOB in January 2017. The orders call for corrective actions and enhancementsinability to addressoperate certain internal control deficiencies within the BSA/AML Compliance Program. BB&T’s and Branch Bank’s ability to pursue mergers and acquisitions may be limitedbusinesses or offer certain products for a period of time.
In addition, during 2014, BB&T received notice from the HUD-OIG that BB&T had been selected for an audit/survey to assess BB&T's compliance with FHA loan origination and quality control requirements. BB&T subsequently received subpoenas from the HUD-OIG and the Department Violations of Justice seeking additional information regarding its lending practices in connection with loans insured by the FHA. During 2014, BB&T recognized an $85 million charge that was included in other expense on the Consolidated Statements of Income. During 2016, the Company paid $83 million to settle these matters pursuant to an agreement with the Department of Justice.
Issuance of new tax guidance or differences in interpretation of tax laws and regulations or deemed deficiencies in risk management practices also may adversely impact BB&T’s financial statements.
Local, statebe incorporated into Truist's confidential supervisory ratings. A downgrade in these ratings or federal tax authorities may interpret tax laws, including the recently issued Tax Cutsthese or other regulatory actions and Jobs Act,settlements, could limit Truist's ability to conduct expansionary activities for a period of time and regulations differently than BB&T and challenge tax positions that BB&T has taken on its tax returns. This may resultrequire new or additional regulatory approvals before engaging in differences in the treatment of revenues, deductions or credits and/or differences in the timing of these items. The differences in treatment may result in payment of additional taxes, interest or penalties thatcertain other business activities. Any future enforcement action could have a material adverse effect onimpact.
Regulatory changes may reduce Truist's revenues, limit the types of financial results. Potential litigation related to BB&T could adverselyservices and products it may offer, alter the investments it makes, affect BB&T’s financial position or results of operations.
Credit Risk
Changes in national, regional and local economic conditions and deterioration in the geographic and financial marketsmanner in which BB&Tit operates could leadits businesses, increase its litigation and regulatory costs should it fail to higher loan charge-offsappropriately comply with new or modified laws and reduce net incomeregulatory requirements and growth.increase the ability of non-banks to offer competing financial services and products.
BB&T’s business28 Truist Financial Corporation
Truist is subject to fluctuations basedregulatory capital and liquidity standards that affect the Company's business, operations and ability to pay dividends or otherwise return capital to shareholders.
Truist is subject to regulatory capital and liquidity requirements established by the FRB and the FDIC. These regulatory capital and liquidity requirements are typically developed at an international level by the BCBS and then applied, with adjustments, in each country by the appropriate domestic regulatory bodies. Domestic regulatory agencies have the ability to apply stricter capital and liquidity standards than those developed by the BCBS. In several instances, the U.S. banking agencies have done so with respect to U.S. banking organizations.
Requirements to maintain specified levels of capital and liquidity and regulatory expectations as to the quality of the Company's capital and liquidity may prevent the Company from taking advantage of opportunities in the best interest of shareholders or force the Company to take actions contrary to their interests. For example, Truist may be limited in its ability to pay or increase dividends or otherwise return capital to shareholders. In addition, these requirements may impact the amount and type of loans the Company is able to make. Truist may be constrained in its ability to expand, either organically or through mergers and acquisitions. These requirements may cause the Company to sell or refrain from acquiring assets where the capital requirements appear inconsistent with the assets' underlying risks. In addition, liquidity standards require the Company to maintain holdings of highly liquid investments, thereby reducing the Company's ability to invest in less liquid assets, even if more desirable from a balance sheet or interest rate risk management perspective. As a Category III banking organization, Truist is subject to additional capital and liquidity requirements.
The liquidity standards applicable to large U.S. banking organizations have also been supplemented in recent years. For example, in October 2020, the U.S. banking agencies finalized rules to implement the NSFR, which is designed to ensure that banking organizations maintain a stable funding profile in relation to their asset composition and off-balance sheet activities.
In addition to the regulatory capital and liquidity requirements applicable to Truist and Truist Bank, the Company's broker-dealer subsidiaries are subject to capital requirements established by the SEC.
Regulatory capital and liquidity requirements receive periodic review and revision by the BCBS and the U.S. banking agencies. Changes to capital and liquidity requirements may require Truist or Truist Bank to maintain more or higher quality capital or greater liquidity and could increase some of the potential adverse effects described above.
Truist is subject to certain risks related to originating and selling mortgages and may be required to repurchase mortgage loans or indemnify mortgage loan purchasers.
Truist is required to make customary representations and warranties to the purchaser about the mortgage loans and the manner in which they were originated when selling mortgage loans or loan securitizations. An increase in the number of repurchase and indemnity demands from purchasers related to representations and warranties on loans sold could result in an increase in the amount of losses for loan repurchases. Truist also bears a risk of loss from borrower defaults for multi-family commercial mortgage loans sold to FNMA.
In addition to repurchase claims from GSEs, Truist could be subject to indemnification claims from non-GSE purchasers of the Company's loans. Claims could be made if Truist fails to conform to statements about the quality of the mortgage loans sold, the manner in which the loans were originated and underwritten or to comply with state and federal law.
Truist faces risks as a servicer of loans.
The Company acts as servicer and master servicer for mortgage loans included in securitizations and for unsecuritized mortgage loans owned by investors. As a servicer or master servicer for those loans, the Company has certain contractual obligations to the securitization trusts, investors or other third parties. As a servicer, Truist's obligations include foreclosing on defaulted mortgage loans or, to the extent consistent with the applicable securitization or other investor agreement, considering alternatives to foreclosure such as loan modifications or short sales. In the Company's capacity as a master servicer, obligations include overseeing the servicing of mortgage loans by the servicer. Generally, the Company's servicing obligations are set by contract, for which the Company receives a contractual fee. However, GSEs can amend their servicing guidelines, which can increase the scope or costs of the services required without any corresponding increase in the Company's servicing fee. Further, the CFPB has implemented national regionalservicing standards which have increased the scope and localcosts of services which the Company is required to perform. In addition, there has been a significant increase in state laws that impose additional servicing requirements that increase the scope and cost of the Company's servicing obligations. As a servicer, the Company also advances expenses on behalf of investors which it may be unable to collect.
Truist Financial Corporation 29
A material breach of the Company's obligations as servicer or master servicer may result in contract termination if the breach is not cured within a specified period of time following notice, which can generally be given by the securitization trustee or a specified percentage of security holders, causing the Company to lose servicing income. In addition, the Company may be required to indemnify the securitization trustee against losses from any failure by the Company, as a servicer or master servicer, to perform the Company's servicing obligations or any act or omission on the Company's part that involves willful misfeasance, bad faith or gross negligence. For certain investors and certain transactions, Truist may be contractually obligated to repurchase a mortgage loan or reimburse the investor for credit losses incurred on the loan as a remedy for servicing errors with respect to the loan. The Company may be subject to increased repurchase obligations as a result of claims made that the Company did not satisfy its obligations as a servicer or master servicer. The Company may also experience increased loss severity on repurchases, which may require a material increase to the Company's repurchase reserve.
The Company has and may continue to receive indemnification requests related to the Company's servicing of loans owned or insured by other parties, primarily GSEs. Typically, such a claim seeks to impose a compensatory fee on the Company for departures from GSE service levels. In most cases, this is related to delays in the foreclosure process. Additionally, the Company has received indemnification requests where an investor or insurer has suffered a loss due to a breach of the servicing agreement. While the number of such claims has been small, these could increase in the future.
Strategic Risks
Truist may face the risk of financial loss or negative impact resulting from ineffective strategy setting and execution, adverse business decisions, or lack of responsiveness to changes in the external environment.
Embedded within strategic risks are risks associated with:
•maintaining a level of earnings appropriate to support growth objectives and the ability to maintain dividends in various economic conditions,cycles,
•successful delivery of innovation and technology strategies that transform the client experience as well as conditionsthe way Truist conducts business, and
•changes and events within the external environment, including geopolitical, macroeconomic, social, cultural, competitive and regulatory factors.
Any of the foregoing may impact the successful execution of Truist's strategy.
Competition may reduce Truist's client base or cause Truist to modify pricing for products and services in order to maintain market share.
Truist operates in a highly competitive industry that could become even more competitive with neo-banks and other fintechs. Increased competition could arise from technological advancements, legislative and regulatory changes, as well as competition from other financial services companies, some of which may be specificsubject to less extensive regulation than Truist. The Company's success depends, in part, on the Company's ability to adapt its offering of products and services to evolving industry standards and client expectations. The widespread adoption of new technologies has required and will continue to require substantial investments to modify existing products and services or to develop new products and services. In addition, there is increasing pressure to provide products and services at lower prices further reducing contribution margins. The Company may not be successful in introducing new products and services in response to industry trends or developments in technology or those new products may not achieve market acceptance.
Truist also competes with nonbank companies inside and outside of the Company's market area and, in some cases, with companies other than those traditionally considered financial sector participants. In particular, sectorstechnology companies are increasingly focusing on the financial sector, either in partnership with competitor banking organizations or industries.on their own. These fluctuationscompanies generally are not predictable, cannot be controlledsubject to the same regulatory burdens as main street financial institutions and may accordingly realize certain cost strategies and offer products and services at more favorable rates and with greater convenience to the client. This competition could result in the loss of clients and revenue in areas where fintechs are operating. As the pace of technology and change advance, continuous innovation is expected to exert long-term pressure on the financial services industry.
The adoption of new technologies by competitors, including internet banking services, mobile applications, advanced ATM functionality and cryptocurrencies could require the Company to make substantial investments to modify or adapt the Company's existing products and services or even radically alter the way Truist conducts business. These and other capital investments in the Company's business may not produce expected growth in earnings anticipated at the time of the expenditure.
30 Truist Financial Corporation
Certain external environmental factors could also impact the Company's strategy. Increasing frequency and severity of impacts from natural disasters brought on by climate change may alter the Company's strategic direction in order to mitigate certain financial risks. While material impact from climate change is expected to occur over a longer time horizon, the acceleration of a transition to a low-carbon economy could present idiosyncratic risks in certain sectors and carbon intensive industries over time. Climate change is expected to present incremental risks to the execution of the Company's long-term strategy. In addition, concerns over climate change may prompt changes in regulations that, in turn, could have a material adverse impact on BB&T’s operationsasset values and financial condition even if other favorable events occur. BB&T’s banking operations are primarily locally oriented and community-based. Accordingly, BB&T expects to continue to be dependent upon local business conditions as well as conditions in the local residential and CRE markets it serves. For example, an increase in unemployment, a decrease in real estate values or increases in interest rates, as well as other factors, could weaken the economies of the communities BB&T serves. Weakness in BB&T’s market area could depress its earnings and consequently its financial condition because:
customers may not want or need BB&T’s products or services;
borrowers may not be able or willing to repay their loans;
the value of the collateral securing loans to borrowers may decline; and
the quality of BB&T’s loan portfolio may decline.
Any of the latter three scenarios could require BB&T to charge off a higher percentage of loans and/or increase provisions for credit losses, which would reduce net income. These factors could result in higher delinquencies and greater charge-offs in future periods, which could adversely affect our business, financial condition or results of operations.
A systemic lack of available credit, a lack of confidence in the financial sector, volatility in the financial markets and/or reduced business activity could materially adversely affect BB&T’s business, financial conditionperformance of Truist's businesses, and results of operations.
Potential downgrades of U.S. government securities by one or more of the credit ratings agencies could have a material adverse effect on BB&T’s operations, earnings and financial condition.
A possible future downgrade of the sovereign credit ratings of the U.S. government and a decline in the perceived creditworthiness of U.S. government-related obligations could impact BB&T’s ability to obtain funding that is collateralized by affected instruments, as well as affect the pricing of that funding when it is available. A downgrade may also adversely affect the market value of such instruments. BB&T cannot predict if, when or how any changes to the credit ratings or perceived creditworthiness of these obligations will affect economic conditions. Such ratings actions could result in a significant adverse impact on BB&T. For example, BB&T’s securities portfolio consists largely of MBS issued by GSEs, such as FHLMC and FNMA. Among other things, a downgrade in the U.S. government’s credit rating could adversely impact the value of these securities and may trigger requirements that the Company post additional collateral for trades relative to these securities. A downgrade of the sovereign credit ratings of the U.S. government or the credit ratings of related institutions, agencies or instruments would significantly exacerbate the other risks to which BB&T is subject and any related adverse effects on its business, financial condition and results of operations.
The soundness of other financial institutions could adversely affect BB&T.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. BB&T has exposure to many different industries and counterparties, and BB&T and certainthose of its subsidiaries routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds and other institutions. Many of these transactions expose BB&T to credit risk in the event of default of its counterparty. In addition, BB&T’s credit risk may be exacerbated when collateral is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure. These types of losses could materially adversely affect BB&T’s results of operations or financial condition.clients.
BB&T could be affected by the United Kingdom’s eventual withdrawal from the European Union.
In June 2016, the United Kingdom held a non-binding referendum in which a majority of voters voted in favor of the United Kingdom’s exit from the European Union (commonly referred to as “Brexit”). On March 29, 2017, the United Kingdom formally notified the European Union of its intention to withdraw pursuant to the Treaty on European Union. The withdrawal of the United Kingdom from the European Union will take effect either when agreed upon or, in the absence of such an agreement, two years after the United Kingdom provided its notice of withdrawal. It appears likely that this withdrawal will involve a process of lengthy negotiations between the United Kingdom and the European Union member states to determine the terms of the withdrawal as well as the United Kingdom’s relationship with the European Union going forward. The ultimate impact of Brexit and its effects on BB&T still remain uncertain and will depend on the terms of withdrawal and the post-Brexit relationships that the United Kingdom will negotiate with the European Union and other nations that are not a part of the European Union. Increased market volatility and further global economic deterioration resulting from Brexit, or concern about Brexit, could have significant adverse effects on BB&T's businesses, results of operations, financial condition, liquidity and capital. In addition, specific impacts from Brexit could include requirements that BB&T make certain changes to its operational model, business practices and regulatory authorizations in order to continue servicing customers across Europe; detrimental impacts on revenues and expenses; increased difficulties related to recruitment, retention, and mobility of certain European-based associates; and other adverse impacts on business operations.
Liquidity Risk
BB&T’s liquidity could be impaired by an inability to access the capital markets, an unforeseen outflow of cash or a reduction in the credit ratings for BB&T or its subsidiaries.
Liquidity is essential to BB&T’s businesses. When volatility or disruptions occur in the capital markets, BB&T’s ability to access capital could be materially impaired. Additionally, other factors outside of BB&T’s control, such as a general market disruption or an operational problem that affects third parties, could impair BB&T’s ability to access capital markets or create an unforeseen outflow of cash or deposits. BB&T’s inability to access the capital markets could constrain its ability to make new loans or meet its existing lending commitments and could ultimately jeopardize its overall liquidity and capitalization.
BB&T’s credit ratings are also important to its liquidity. Rating agencies regularly evaluate BB&T and its subsidiaries, and their ratings are based on a number of factors, including the financial strength of BB&T and its subsidiaries, as well as factors not entirely within BB&T’s control, including conditions affecting the financial services industry generally. As a result, there can be no assurance that BB&T will maintain its current ratings. A reduction in BB&T’s credit ratings could adversely affect BB&T’s liquidity and competitive position, increase its borrowing costs, limit its access to the capital markets or trigger unfavorable contractual obligations.
Market Risk
Instability in economic conditions and geopolitical matters as well as volatility in financial markets could have a material adverse effect on BB&T’s operations, earnings and financial condition.
The macroeconomic environment in the United States is susceptible to global events and volatility. The negative impact on economic conditions and global markets from foreign sovereign debt matters and other matters could adversely affect BB&T’s business, financial condition and liquidity. Domestic and global political activity, geopolitical matters, including international political unrest or disturbances, concerns over energy prices and economic instability or recession in certain regions could cause turmoil and volatility in the financial markets, which could reduce the value of BB&T’s assets or cause a reduction in liquidity that adversely impacts BB&T’s financial condition and results of operations.
The monetary, tax and other policies of governmental agencies, including the FRB, have a significant impact on market interest rates, and BB&T’s business and financial performance is impacted significantly by such interest rates.
BB&T’s businesses and earnings are affected by the fiscal and other policies adopted by various regulatory authorities of the U.S., non-U.S. governments and international agencies. The FRB regulates the supply of money and credit in the U.S. The federal policies determine in large part the cost of funds for lending and investing and the return earned on those loans and investments. The market impact from such policies can also materially decrease the value of certain of BB&T’s financial assets, most notably debt securities. Changes in the federal policies are beyond BB&T’s control and, consequently, the impact of these changes on BB&T’s activities and results of operations is difficult to predict.
Changes in interest rates may have an adverse effect on BB&T’s profitability.
BB&T’s earnings and financial condition are largely dependent on net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest rate spreads could adversely affect BB&T’s earnings and financial condition. BB&T cannot control or predict with certainty changes in interest rates. Regional and local economic conditions, competitive pressures and the policies of regulatory authorities, including monetary policies of the FRB, affect interest income and interest expense. As discussed in "Market Risk Management – Interest Rate Market Risk (Other than Trading)," BB&T has ongoing policies and procedures designed to manage the risks associated with changes in market interest rates. However, changes in interest rates still may have an adverse effect on BB&T’s profitability. For example, rising interest rates could adversely affect BB&T’s mortgage banking business because higher interest rates could cause customers to apply for fewer mortgages. Similarly, rising interest rates would increase the required periodic payment for variable rate loans and may result in borrowers becoming unable to pay. Additionally, rising interest rates may increase the cost of BB&T’s deposits, which are a primary source of funding. BB&T is also subject to the risk of a negative interest rate scenario, which implies that a depositor would pay a premium for a financial institution to hold funds on deposit. In such a scenario, some depositors may choose to withdraw their deposits in lieu of paying an interest rate to BB&T to hold such deposits. Negative rates would also diminish the spreads on loans and securities. This scenario could have a material adverse effect on BB&T’s financial condition and results of operations.
On July 27, 2017, the Chief Executive of the U.K. Financial Conduct Authority announced that it will no longer persuade or compel banks to submit rates for the calculation of the LIBOR rates after 2021. In the U.S., efforts to identify a set of alternative U.S. dollar reference interest rates include proposals by the Alternative Reference Rates Committee of the FRB and the Federal Reserve Bank of New York. At this time, it is not possible to predict the effect of the Financial Conduct Authority announcement or other regulatory changes or announcements, any establishment of alternative reference rates or any other reforms to LIBOR that may be enacted in the United Kingdom, the United States or elsewhere. Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect BB&T’s financial condition and results of operations.
Loss of deposits or a change in deposit mix could increase the Company’s funding costs.
Deposits are a low cost and stable source of funding. BB&T competes with banks and other financial institutions for deposits. Funding costs may increase because the Company may lose deposits and replace them with more expensive sources of funding, clients may shift their deposits into higher cost products or the Company may need to raise its interest rates to avoid losing deposits. Higher funding costs reduce the Company’s NIM, net interest income and net income.
Operational Risk
BB&T faces cybersecurity risks that could result in the disruption of operations or the disclosure of confidential information, adversely affect BB&T’s business or reputation and create significant legal and financial exposure.
BB&T’s computer systems and network infrastructure are subject to security risks and could be susceptible to cyber attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service, or sabotage systems, often through the introduction of computer viruses or malware, cyber attacks and other means. Denial of service attacks have been launched against a number of large financial services institutions, including BB&T. As a result of these attacks, the performance of BB&T’s website, BBT.com, was adversely affected, and in some instances customers were prevented from accessing BB&T’s website. BB&T expects to be subject to similar attacks in the future. While events to date primarily resulted in inconvenience, future cyber attacks could be more disruptive and damaging. Hacking and identity theft risks, in particular, could cause serious reputational harm. Cyber threats are rapidly evolving and BB&TTruist may not be able to anticipatecomplete future mergers or acquisitions.
The Company must generally satisfy a number of meaningful conditions before completing an acquisition of another bank or BHC, including federal and state regulatory approvals. In determining whether to approve a proposed bank or BHC acquisition, bank regulators will consider, among other factors, the effect of the acquisition on competition; financial condition and future prospects, including current and projected capital ratios and levels; the competence, experience and integrity of management; record of compliance with laws and regulations; the convenience and needs of the communities to be served, including the acquiring institution's record of compliance under the CRA; the effectiveness of the acquiring institution in combating money laundering activities; and protests from various stakeholders. In addition, U.S. regulators must take systemic risk to the U.S. financial system into account when evaluating whether to approve a potential acquisition transaction involving a large financial institution like Truist. There is no certainty as to when or if or on what terms and conditions, any required regulatory approvals will be granted for any potential acquisition. In specific cases, Truist may be required to sell banks or branches or take other actions as a condition to receiving regulatory approval. An inability to satisfy other conditions necessary to consummate an acquisition transaction, such as third party litigation, a judicial order blocking the transaction or lack of shareholder approval, could also prevent all such attacks. BB&T may incur increasing costs inthe Company from completing an effortannounced acquisition.
Truist has businesses other than banking that are subject to minimize thesea variety of risks.
Truist is a diversified financial services company and this diversity subjects the Company's earnings to a broader variety of risks and could be held liable for any security breach or loss.
Despite effortsuncertainties. Other businesses in addition to ensure the integrity of its systems, BB&T will not be able to anticipate all security breaches of these types, and BB&T may not be able to implement effective preventive measures against such security breaches. The techniques used by cyber criminals change frequently and can originate from a wide variety of sources, including outside groups such as external service providers, organized crime affiliates, terrorist organizations or hostile foreign governments. Those parties may also attempt to fraudulently induce associates, customers or other users of BB&T’s systems to disclose sensitive information in order to gain access to its data orbanking that of its clients. These risks may increase in the future as the Company continues to increase its mobile-paymentoperates include insurance, investment banking, securities underwriting and market making, loan syndications, investment management and advice and retail and wholesale brokerage services offered through the Company's subsidiaries. These businesses entail significant market, operational, credit, compliance, technology, legal and other internet-based product offerings and expands its internal usage of web-based products and applications.
A successful penetration or circumvention of system security could cause serious negative consequences to BB&T, including disruption of operations, misappropriation of confidential information of BB&T or its customers, or damage to computer systems of BB&T or its customers and counterparties. A security breach could result in violations of applicable privacy and other laws, financial loss to BB&T or to its customers, loss of confidence in BB&T’s security measures, significant litigation exposure and harm to BB&T’s reputation, all of which could have a material adverse effect.
BB&T relies on its associates, systems and certain counterparties, and certain failuresrisks that could materially adversely affectimpact the Company's results of operations.
BB&T’s business is dependent on the ability to process, record and monitor a large number of complex transactions. The Company could be materially adversely affected if one or more of its associates causes a significant operational breakdown or failure, either as a result of human error or intentionally. Financial, accounting or other data processing systems may fail or have other significant shortcomings that materially adversely affect BB&T’s business. BB&T’s systems may not be able to handle certain scenarios, such as a negative interest rate environment. In addition, products, services and processes are continually changing and BB&T may not fully identify new operational risks that may arise from such changes. Any of these occurrences could diminish the ability to operate one or more BUs or result in potential liability to clients, increased operating expenses, higher litigation costs (including fines and sanctions), reputational damage, regulatory intervention or weaker competitive standing, any of which could be material to the Company.Reputational Risks
If personal, confidential or proprietary information of clients were to be mishandled or misused, significant regulatory consequences, reputational damage and financial loss could occur. Such mishandling or misuse could include circumstances where, for example, such information was erroneously provided to parties who are not permitted to have the information, either through the fault of systems, associates, or counterparties, or where such information was intercepted or otherwise inappropriately taken by third parties.
BB&T may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control, which may include, for example, security breaches; electrical or telecommunications outages; failures of computer servers or other damage to property or assets; natural disasters; health emergencies or pandemics; or events arising from political events, including terrorist acts. There can be no assurance that disaster recovery or other plans will fully mitigate all potential business continuity risks. Any failures or disruptions of systems or operations could impact BB&T’s ability to service its clients, which could adversely affect BB&T’s results of operations by subjecting BB&T to losses, litigation, regulatory fines or penalties or by requiring the expenditure of significant resources to correct the failure or disruption.
Significant litigation and regulatory proceedings could have a material adverse effect on BB&T.
BB&T faces significant litigation and regulatory proceedings in its business. The volume of claims and amount of damages and penalties claimed in litigation and regulatory proceedings against financial institutions remains high. Given the inherent uncertainties involved in litigation and regulatory proceedings, and the very large or indeterminate damages sought in some matters asserted against BB&T, there can be significant uncertainty as to the ultimate liability BB&T may incur from such matters. The finding, or even the assertion, of substantial legal liability or significant regulatory action against BB&T may have material adverse financial effects or cause significant reputational harm to BB&T, which in turn could seriously harm BB&T’s business prospects.
BB&T faces significant operational and other risks related to its activities, which could expose it to negative publicity, litigation and/or regulatory action.
BB&T is exposed to many types of operational risks, legal and compliance risk, internal or external fraud (including identity and information theft), transaction processing errors due to clerical or record-keeping mistakes or those resulting from faulty or disabled computer or telecommunications systems. Negative public opinion cancould damage the Company's reputation and adversely impact business and revenues.
Truist's earnings and capital are subject to risks associated with negative public opinion. Negative public opinion could result from BB&T’sthe Company's actual or alleged conduct in any number of activities, including lending, sales and other operating practices, corporate governance, and acquisitions, activities relateda breach of client or teammate information, the failure of any product or service sold to asset sales and balance sheet management and from actions taken by government regulators and community organizations in response to those activities.meet clients' expectations or applicable regulatory requirements. Negative public opinion cancould adversely affect BB&T’sthe Company’s ability to attract and keep customersretain clients and personnel and can expose it toresult in litigation and regulatory action.
Becauseactions. Actual or alleged conduct by one of the nature ofCompany's businesses can result in negative public opinion about the Company's other businesses. Actual or alleged conduct by another financial institution can result in negative public opinion about the financial services industry involvesin general and, as a high volumeresult, adversely affect Truist.
Scrutiny of transactions, certain errorsthe Company's sales, training and incentive compensation practices could damage the Company’s reputation and adversely impact business and revenues.
The Company may face increased scrutiny of the Company's sales and other business practices, training practices, incentive compensation design and governance, and quality assurance and client complaint resolution practices. There can be no assurance that the Company's processes and actions will meet regulatory standards or expectations. Findings from self-identified or regulatory reviews may require responsive actions, including increased investments in compliance systems and personnel or the payment of fines, penalties, increased regulatory assessments or client redress and may increase legal or reputational risk exposures.
Truist Financial Corporation 31
Operational Risks
Litigation may adversely affect the Company's results.
The Company is subject to litigation in the ordinary course of business. Claims and legal actions, including supervisory actions by the Company's regulators, could involve large monetary claims and significant defense costs. The outcome of litigation and regulatory matters as well as the timing of ultimate resolution are inherently difficult to predict.
Actual legal and other costs of resolving claims may be repeatedgreater than the Company's legal reserves. The ultimate resolution of a pending legal proceeding, depending on the remedy sought and granted, could materially adversely affect the Company's results of operations and financial condition.
In addition, governmental authorities have, at times, sought criminal penalties against companies in the financial services sector for violations, and, at times, have required an admission of wrongdoing from financial institutions in connection with resolving such matters. Criminal convictions or compounded before they are discoveredadmissions of wrongdoing in a settlement with the government can lead to greater exposure in civil litigation and successfully rectified. BB&T’s necessary dependence upon automatedreputational harm.
Substantial legal liability or significant regulatory action against the Company could have material adverse financial effects or cause significant reputational harm, which adversely impact the Company's business prospects. Further, the Company may be exposed to substantial uninsured liabilities, which could adversely affect the Company's results of operations and financial condition.
The Company may incur fines, penalties and other negative consequences from regulatory violations, including inadvertent or unintentional violations.
Truist maintains systems and procedures designed to recordensure that it complies with applicable laws and process its transaction volumeregulations, but there can be no assurance that these will be effective. In addition to fines and penalties, the Company may further increasesuffer other negative consequences from regulatory violations including restrictions on certain activities, such as the riskCompany's mortgage business, which may affect the Company's relationship with the GSEs and may also damage the Company's reputation and this in turn might materially affect the Company's business and results of operations.
Further, some legal frameworks provide for the imposition of fines or penalties for noncompliance even when the noncompliance was inadvertent or unintentional and even when there were systems and procedures in place designed to ensure compliance. For example, Truist is subject to regulations issued by OFAC that technical flaws or associate tampering or manipulationprohibit financial institutions from participating in the transfer of property belonging to the governments of certain foreign countries and designated nationals of those systems will resultcountries. OFAC may impose penalties for inadvertent or unintentional violations even if reasonable processes are in losses that are difficultplace to detect. BB&T alsoprevent the violations. Courts may be subject to disruptions of its operating systems arising from events that are whollyuphold significant additional penalties on financial institutions, even where the financial institution had already reimbursed the government or partially beyond its control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. BB&T is further exposed to the risk that its external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as is BB&T) and to the risk that BB&T’s (or its vendors’) business continuity and data security systems prove to be inadequate.other counterparties for actual losses.
BB&TTruist relies on other companies to provide certain key components of itsthe Company's business infrastructure.
Third party vendorsparties provide certain key components of BB&T’sthe Company's business infrastructure, such as banking services, data processing, business processes, internet connections and network access and certain transaction processing. While BB&T has selected these third party vendors carefully, it does not control their operations.access. Any failuredisruption in such services provided by these third parties or any failure of these third parties to performhandle current or provide agreed upon goods and services for any reason, or their poor performancehigher volumes of services,use could adversely affect BB&T’sthe Company's ability to deliver products and services to its customersclients, to support teammates and otherwise to conduct its business. Replacing theseTechnological or financial difficulties of a third party vendorsservice provider could also entail significant delayadversely affect the Company's business to the extent those difficulties result in the interruption or discontinuation of services provided by that party. Further, in some instances, the Company may be responsible for failures of such third parties to comply with government regulations. The Company is not insured against all types of losses as a result of third party failures and expense.insurance coverage may be inadequate to cover all losses resulting from system failures or other disruptions. Failures in the Company's business infrastructure could interrupt the operations or increase the costs of doing business.
BB&TTruist depends on the expertise of key personnel. If these individuals leave or change their roles without effective replacements, operations may suffer.
The Company's success depends, to a large degree, on the continued services of executive officers and other key personnel who have extensive experience in the industry. The Company's business could be adversely impacted from the loss of key persons or failure to manage a smooth transition to new personnel. These risks may be exacerbated as the Company continues to integrate processes and systems subsequent to the Merger.
32 Truist Financial Corporation
The Company may not be able to successfully integrate mergershire or retain additional qualified personnel and acquisitions.
Difficultiesrecruiting and compensation costs may arise in the integration of the business and operations of BHCs, banks and non-bank entities that BB&T acquires and,increase as a result BB&Tof changes in the marketplace, which may increase costs and adversely impact the Company's ability to implement business strategies.
The Company's success depends upon the ability to attract and retain high performing, diverse and well-qualified personnel. The Company faces significant competition in the recruitment of highly motivated teammates that can deliver Truist's purpose, mission and values. The Company's ability to execute its business strategy and provide high quality service may suffer if the Company is unable to recruit or retain a sufficient number of qualified teammates or if the costs of employee compensation or benefits increase substantially. The U.S. banking agencies have jointly issued comprehensive guidance designed to ensure that incentive compensation policies do not undermine the safety and soundness of banking organizations by encouraging teammates to take imprudent risks. This guidance significantly affects the amount, form and context of incentive compensation to teammates. The FRB, FDIC, SEC and other federal regulatory agencies have jointly proposed rules, which would affect incentive compensation. These rules, which have been pending for several years, if finalized, may result in additional costs and restrictions on the form of the Company's incentive compensation.
The Company's framework for managing risks may not be ableeffective.
The Company's risk management framework seeks to achievemitigate risk and loss. Truist has established policies, processes and procedures intended to identify, measure, monitor, report and analyze the cost savingstypes of risk to which the Company is subject, including liquidity, credit, market, operational, technology, reputational, legal, model and synergies that it expects will result from such transactions. Achieving cost savings is dependent on consolidating certain operational and functional areas, eliminating duplicative positions and terminating certain agreements for outside services. Additional operational savings are dependent uponcompliance risk, among others. However, the integration of the acquired or merged entity’s businesses with BB&T or one of BB&T’s subsidiaries, the conversion of core operating systems, data systems and products and the standardization of business practices. Complications or difficulties in the conversion of core operating systems, data systems and products may result in the loss of customers, damage to BB&T’s reputation within the financial services industry, operational problems, one-time costs currently not anticipated or reduced cost savings resulting from such mergers or acquisitions. Annual cost savings in each such transaction may be materially less than anticipated if the merger or acquisition is delayed unexpectedly, the integration of operations is delayed beyond what is anticipated or the conversion to a single set of data systems is not accomplished on a timely basis.
Difficulty in integrating an acquired company may prevent BB&T from realizing expected revenue increases, cost savings, increases in geographic or product presence and/or other projected benefits from the acquisition. The integration could result in higher than expected deposit attrition, loss of key associates, disruption of BB&T’s businesses or the businesses of the acquired company, or otherwise adversely affect BB&T’s ability to maintain relationships with customers and associates or achieve the anticipated benefits of the acquisition. Also, the negative effect of any divestitures required by regulatory authorities in acquisitions or business combinations may be greater than expected. As a result of these and other factors, BB&T could incur losses on acquired assets and increased expenses resulting from the failure to successfully integrate an acquired company, which could adversely impact its financial condition or results of operations.
BB&TCompany's risk management measures may not be able to successfully implementfully effective in identifying and mitigating the Company's risk exposure in all market environments or against all types of risk, including risks that are unidentified or unanticipated, even if the models for assessing risk are properly designed and implemented. Some of the Company’s methods of managing risk are based upon the Company's use of observed historical market behavior and management's judgment. These methods may not accurately predict future information technology system enhancements,exposures, which could adversely affect BB&T’s business operations and profitability.
BB&T invests significant resources in information technology system enhancements in order to provide functionality and security at an appropriate level. BB&T may not be able to successfully implement and integrate future system enhancements, whichsignificantly greater than historical measures indicate. If the Company's risk management framework proves ineffective, it could adversely impact the ability to provide timely and accurate financial information in compliance with legal and regulatory requirements, which could result in sanctions from regulatory authorities. Such sanctions could include fines and suspension of trading in BB&T stock, among others. In addition, future system enhancements could have higher than expected costs and/or result in operating inefficiencies, which could increase the costs associated with the implementation as well as ongoing operations.
Failure to properly utilize system enhancements that are implemented in the future could result in impairment charges that adversely impact BB&T’s financial condition and results of operationssuffer unexpected losses and could result in significant costs to remediate or replace the defective components. In addition, BB&T may incur significant training, licensing, maintenance, consulting and amortization expenses during and after systems implementations, and any such costs may continue for an extended period of time.be materially adversely affected.
There are risks resulting from the extensive use of models in BB&T’s business.Truist's business, which may impact decisions made by Management and regulators.
BB&TTruist relies on quantitative models to measure risks and to estimate certain financial values. Models may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rate and other market risks, predicting or estimating losses, assessing capital adequacy and calculating economic and regulatory capital levels, as well as to estimateestimating the value of financial instruments and balance sheet items.
Poorly designed or implemented models present the risk that BB&T’sTruist's business decisions based on information incorporating model output would be adversely affected due to the inadequacy of that information. Also, information BB&TTruist provides to the public or to its regulators based on poorly designed or implemented models could be inaccurate or misleading. Some of the decisions that the regulators make, including those related to capital distributions to BB&T’sTruist's shareholders, could be adversely affected adversely due to the perception that the quality of the models used to generate the relevant information is insufficient.
The Company is at risk of increased losses from fraud.
BB&T’s risk management measures may not be fully effective.
Management of risk, including compliance, credit, liquidity, market, operational, reputation and strategic risks, requires policies and procedures to properly record and verify a large number of transactions and events. BB&T’s risk management measures may not be fully effective in identifying and mitigating its risk exposure in all market environments or against all types of risk, including risks thatCriminals committing fraud increasingly are unidentified or unanticipated, even if the models for assessing risk are properly designed and implemented. Some of BB&T’s methods of managing risk are based upon its use of observed historical market behavior and management's judgment. These methods may not accurately predict future exposures, which could be significantly greater than the historical measures indicate. In addition, credit risk is inherent in the financial services business. BB&T’s ability to assess the creditworthiness of its customers may be impaired if the models and approaches it uses to select, manage and underwrite consumer and commercial customers become less predictive of future charge-offs.
BB&T's set of risk monitoring and risk mitigationusing more sophisticated techniques and the judgments that accompany their application, cannot anticipate every economic and financial outcome or the timing of such outcomes. BB&T may, therefore, incur losses in the course of its risk management or investing activities.
Strategic and Other Risk
BB&T may experience significant competition from new or existing competitors, which may reduce its customer base or cause it to lower prices for its products and services in order to maintain market share.
There is intense competition among commercial banks in BB&T’s market area. In addition, BB&T competes with other providers of financial services, such as savings and loan associations, credit unions, consumer finance companies, securities firms, insurance companies, commercial finance and leasing companies, the mutual funds industry, full-service brokerage firms and discount brokerage firms, some of which are subject to less extensive regulations than BB&T is with respect to the products and services they provide. BB&T’s success depends, in part, on its ability to adapt its products and services to evolving industry standards and customer expectations. There is increasing pressure to provide products and services at lower prices. Lower prices can reduce BB&T’s NIM and revenues from its fee-based products and services.
In addition, the adoption of new technologies by competitors, including internet banking services, mobile applications and advanced ATM functionality could require BB&T to make substantial expenditures to modify or adapt its existing products and services. These and other capital investments in BB&T’s business may not produce expected growth in earnings anticipated at the time of the expenditure. BB&T may not be successful in introducing new products and services, achieving market acceptance of its products and services, anticipating or reacting to consumers’ changing technological preferences or developing and maintaining loyal customers. In addition, BB&T could lose market share to the shadow banking system or other non-traditional banking organizations.
Any potential adverse reactions to BB&T’s financial condition or status in the marketplace, as compared to its competitors, could limit BB&T’s ability to attract and retain customers and to compete for new business opportunities. The inability to attract and retain customers or to effectively compete for new business may have a material and adverse effect on BB&T’s financial condition and results of operations.
BB&T also experiences competition from nonbank companies inside and outside of its market area and in some cases, from companiesare a part of larger criminal organizations, which allow them to be more effective. Fraudulent activity has taken many forms and escalates as more tools for accessing financial services emerge, such as real-time payments. Fraud schemes are broad and continuously evolving and include such things as debit card/credit card fraud, check fraud, mechanical devices attached to ATM machines, social engineering and phishing attacks to obtain personal information or impersonation of the Company's clients through the use of falsified or stolen credentials.
In addition, individuals or business entities may properly identify themselves, yet seek to establish a business relationship for the purpose of perpetrating fraud. Increased deployment of technologies, such as chip card technology, defray and reduce aspects of fraud; however, criminals are turning to other than those traditionally considered financial sector participants. In particular, technology companies have begunsources to focussteal personally identifiable information, such as unaffiliated healthcare providers and government entities, in order to impersonate the consumer to commit fraud. Further, as a result of the increased sophistication of fraud activity, the Company has increased spending on the financial sectorsystems, resources and offer softwarecontrols to detect and products primarily over the Internet, with an increasing focus on mobile device delivery. These companies generally are not subjectprevent fraud, as well as increased spending to provide certain credit monitoring and identity theft protection services to the comparable regulatory burdensCompany's consumer clients. This will result in continued ongoing investments in the future.
Truist Financial Corporation 33
The Company's operational or security systems or infrastructure or those of third parties, could fail or be breached, which could disrupt the Company's business and adversely impact the Company's results of operations, liquidity and financial condition, as financial institutionswell as cause legal or reputational harm.
The potential for operational risk exposure exists throughout the Company's business and, may accordingly realize certain cost savingsas a result of the Company's interactions with and offer products and services at more favorable rates and with greater conveniencereliance on third parties, is not limited to the customer.Company's own internal operational functions. The Company's operational and security systems and infrastructure, including computer systems, data management and internal processes, as well as those of third parties, are integral to the Company's performance. Truist teammates and third parties may expose the Company to risk as a result of human error, misconduct, malfeasance, or a failure or breach of systems and infrastructure. For example, a number of companies offer bill pay and funds transfer services that allow customersthe Company's ability to avoid using a bank. Technology companies are generally positioned and structuredconduct business may be adversely affected by any significant disruptions, including to quickly adapt to technological advances and directly focus resources on implementing those advances. This competition could result in the loss of fee income and customer deposits and related income. In addition, changes in consumer spending and saving habits could adversely affect BB&T’s operations, andthird parties with whom the Company may be unable to develop competitive and timely new products and services in response. As the pace of technology and change advance, continuous innovation is expected to exert long-term pressure on the financial services industry.interacts with or relies upon.
BB&T may not be able to complete future acquisitions.
BB&T must generally satisfy a number of meaningful conditions before it can complete an acquisition of another bank or BHC, including federal and/or state regulatory approvals. In determining whether to approve a proposed bank or BHC acquisition, bank regulators will consider, among other factors, the effect of the acquisition on competition, financial condition and future prospects, including current and projected capital ratios and levels, the competence, experience and integrity of management and record of compliance with laws and regulations, the convenience and needs of the communities to be served, including the acquiring institution’s record of compliance under the CRA, the effectiveness of the acquiring institution in combating money laundering activities and protests from various stakeholders of both BB&T and its acquisition partner. Also, under the Dodd-Frank Act, U.S. regulators must now take systemic risk into account when evaluating whether to approve a potential acquisition transaction involving a large financial institution like BB&T. BB&T cannot be certain when or if, or on what terms and conditions, any required regulatory approvals will be granted. In specific cases, BB&T may be required to sell banks or branches, or take other actions as a condition to receiving regulatory approval. An inability to satisfy other conditions necessary to consummate an acquisition transaction, such as third-party litigation, a judicial order blocking the transaction or lack of shareholder approval, could also prevent BB&T from completing an announced acquisition.
Catastrophic weather-related eventsNatural disasters and other natural disasterscatastrophic events could have a material adverse effectimpact on BB&T.the Company’s operations or the Company’s financial condition and results.
The occurrence of catastrophic weather events such as hurricanes, tropical storms, tornados, winter storms and other large scale catastrophesor pandemics could adversely affect BB&T’sthe Company’s financial condition or results of operations. BB&TTruist has significant operations and customersclients along the Gulf and Atlantic coasts as well as other partsregions of the southeastern United States. Such areasU.S., which could be adversely impacted by such eventshurricanes, tornadoes and other severe weather in those regions,areas. Truist’s clients could also be disrupted by the nature and severityphysical effects of climate change, which may be impacted bybecome more frequent and intense. Natural and other types of disasters, including as a result of climate change, and are difficult to predict. These and other unpredictable natural disasters could have an adverse effectimpact on BB&TTruist's businesses in that such events could materially disrupt itsthe Company’s operations or the ability or willingness of its customersthe Company’s clients to access the financial services offered, by BB&T.including adverse impacts on the Company’s borrowers to timely repay their loans and the value of any collateral held. These events could reduce BB&T’sthe Company’s earnings and cause volatility in itsthe Company’s financial results for any fiscal quarter or year and have a material adverse effect on BB&T’sthe Company’s financial condition and/orand results of operations.
Although Truist has business continuity plans and other safeguards in place, the Company’s operations and communications may be adversely affected by natural disasters or other catastrophic events and there can be no assurance that such business continuity plans will be effective.
Truist may be impacted by the soundness of other financial institutions.
The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty and other relationships. Truist has exposure to many different industries and counterparties and routinely executes transactions with counterparties in the financial industry, including brokers and dealers, central counterparties, commercial banks, investment banks, mutual and hedge funds and other institutional investors and clients. As a result, defaults by, or even rumors or questions about, one or more financial services institutions or the financial services industry generally, in the past have led to market-wide liquidity problems and could lead to losses or defaults by Truist or by other institutions. Many of these transactions expose the Company to credit risk in the event of default of the Company’s counterparty or client. In addition, the Company’s credit risk may be exacerbated when the collateral held by Truist cannot be liquidated or is liquidated at prices not sufficient to recover the full amount of the Company’s exposure. Any such losses could materially and adversely affect the Company’s results of operations and financial condition.
Truist depends on the accuracy and completeness of information about clients and counterparties.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, Truist relies on the completeness and accuracy of representations made by and information furnished by or on behalf of clients and counterparties, including financial statements and other financial information. If the information provided is not accurate or complete, the Company’s decisions about extending credit or entering into other transactions with clients or counterparties could be adversely affected and the Company could suffer defaults, credit losses or other negative consequences as a result.
The Company's accounting policies and processes are critical to how it reports the Company's financial condition and results of operations. They require management to make estimates about matters that are uncertain.
Accounting policies and processes are fundamental to how the Company records and reports its financial condition and results of operations. Some of these policies require the use of estimates and assumptions that may affect the value of the Company’s assets or liabilities and financial results. Several of the Company’s accounting policies are critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. If assumptions or estimates underlying the Company’s financial statements are incorrect or are adjusted periodically, the Company may experience material losses.
34 Truist Financial Corporation
Management has identified certain accounting policies as being critical because they require management’s judgment to ascertain the valuations of assets, liabilities, commitments and contingencies. A variety of factors could affect the realization of income and expense or the recognition of assets and liabilities in the Company's financial statements. Truist has established detailed policies and control procedures that are intended to ensure these critical accounting estimates and judgments are well controlled and applied consistently. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. Due to the uncertainty surrounding the Company’s judgments and the estimates pertaining to these matters, the Company cannot guarantee that adjustments to accounting policies or restatement of prior period financial statements will not be required.
Further, from time to time, the FASB and SEC change the financial accounting and reporting standards that govern the preparation of the Company’s financial statements. In addition, accounting standard setters and those who interpret the accounting standards may change or even reverse their previous interpretations or positions on how these standards should be applied. Changes in financial accounting and reporting standards and changes in current interpretations may be beyond the Company’s control, can be hard to predict and could materially affect how the Company reports its financial results and condition. In some cases, the Company could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.
Depressed market values for the Company's stock and adverse economic conditions sustained over a period of time may require the Company to write down all or some portion of the Company's goodwill.
Goodwill is periodically tested for impairment by comparing the fair value of each reporting unit to its carrying amount. If the fair value is greater than the carrying amount, then the reporting unit’s goodwill is deemed not to be impaired. The fair value of a reporting unit is impacted by the reporting unit’s expected financial performance and susceptibility to adverse economic, regulatory and legislative changes. Future adverse changes in economic conditions or expected financial performance may cause the fair value of a reporting unit to be below its carrying amount, resulting in goodwill impairment. The estimated fair values of the individual reporting units are assessed for reasonableness by reviewing a variety of indicators, including comparing these estimated fair values to the Company’s market capitalization over a reasonable period of time. While this comparison provides some relative market information about the estimated fair value of the reporting units, it is not determinative and needs to be evaluated in the context of the current economic environment. However, significant and sustained declines in the Company’s market capitalization could be an indication of potential goodwill impairment. Refer to the "Critical Accounting Policies" section for additional details related to the Company’s intangible assets policy.
Certain banking laws and certain provisions of the Company's articles of incorporation may have an anti-takeover effect.
Provisions of federal banking laws, including regulatory approval requirements, could make it difficult for a third party to acquire the Company, even if doing so would be perceived to be beneficial to the Company’s owners. Acquisition of certain amounts of any class of voting stock of a BHC or depository institution, including shares of the Company’s common stock, may create a rebuttable presumption that the acquirer "controls" the BHC or depository institution and thus, unless the acquirer is able to rebut this presumption, it would be subject to various laws and regulations applicable to a BHC. Also, a BHC must obtain the prior approval of the FRB before, among other things, acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, including Truist Bank.
There also are provisions in the Company’s amended and restated articles of incorporation and amended and restated bylaws, such as limitations on the ability to call a special meeting of the Company’s shareholders, that may be used to delay or block a takeover attempt. In addition, the Company’s Board will be authorized under the Company’s amended and restated articles of incorporation to issue shares of the Company’s preferred stock and to determine the rights, terms, conditions and privileges of such preferred stock, without shareholder approval. These provisions may effectively inhibit a non-negotiated merger or other business combination.
Technology Risks
The Company faces cybersecurity risks, including denial of service, hacking and social engineering attacks that could result in the disclosure of confidential information, adversely affect the Company's operations or reputation and create significant legal and financial exposure.
The Company’s computer systems and network infrastructure and those of third parties are frequently targeted in cyber-attacks, such as denial of service attacks, hacking, malware intrusion, data corruption attempts, terrorist activities or identity theft. The Company’s business relies on the secure processing, transmission, storage and retrieval of confidential, proprietary and other information in the Company’s information systems and that of third parties. In addition, to access the Company’s network, products and services, the Company’s clients and other third parties may use personal mobile devices or computing devices that are outside of the Company’s network environment and can introduce added cybersecurity risks.
Truist Financial Corporation 35
Truist and Truist’s clients, regulators and other third parties, including other financial services institutions and companies engaged in data processing, have been subject to and are likely to continue to be the target of, cyber-attacks. Cyber-attacks may expose security vulnerabilities in the Company’s systems or the systems of third parties or other security measures that could result in the unauthorized gathering, monitoring, misuse, release, loss or destruction of confidential, proprietary or sensitive information. A cyber-attack could also damage the Company’s systems by introducing material disruptions to the Company’s or the Company’s clients’ or other third parties’ network access or business operations. As cyber threats continue to evolve, the Company may be required to expend significant additional resources to continue to modify or enhance the Company’s protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite efforts to ensure the integrity of the Company’s systems and implement controls, processes, policies and other protective measures, the Company may not be able to anticipate all security breaches, nor may the Company be able to implement sufficient preventive measures against such security breaches, which may result in material losses or consequences to Truist.
Cybersecurity risks for financial institutions have significantly increased in recent years in part because of the proliferation of new technologies to facilitate and conduct financial transactions. For example, cybersecurity risks may increase in the future as Truist continues to expand its mobile-payment and internet-based product offerings and expand the Company’s internal usage of web-based products and applications. In addition, cybersecurity risks have significantly increased in recent years in part due to the increased sophistication and activities of organized crime affiliates, terrorist organizations, hostile foreign governments, disgruntled teammates or vendors, activists and other external parties, including those involved in corporate espionage. Even the most advanced internal control environment may be vulnerable to compromise. Persistent attackers may succeed in penetrating defenses given enough resources, time and motive. The techniques used by cyber criminals change frequently, and may not be recognized until launched or well after a breach has occurred. In addition, the existence of cyber-attacks or security breaches at third party vendors with access to the Company’s data may not be disclosed in a timely manner.
The Company also faces indirect technology, cybersecurity and other operational risks relating to clients and other third parties that the Company relies upon to facilitate or enable business activities, including, financial counterparties, regulators and providers of critical infrastructure such as internet access and electrical power. In addition, Truist faces cybersecurity and other operational risks relating to the Merger, including increased phishing attacks on teammates, increased network perimeter scanning by attackers searching for vulnerabilities and domain name squatting. Further, as a result of increasing consolidation, interdependence and complexity of financial entities and technology systems, a technology failure, cyber-attack or other information or security breach that significantly degrades, deletes, or compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants. This consolidation, interconnectivity and complexity increases the risk of operational failure, on both individual and industry-wide bases, as disparate systems need to be integrated, often on an accelerated basis. Any third party technology failure, cyber-attack, other information or security breach, termination, or constraint could, among other things, adversely affect the Company’s ability to conduct transactions, service the Company’s clients, manage the Company’s exposure to risk or expand the Company’s business.
The public perception that a cyber-attack on the Company’s systems has been successful, whether or not this perception is correct, may damage the Company’s reputation with clients and third parties with whom the Company does business. Hacking of personal information and identity theft risks, in particular, could cause serious reputational harm. A successful penetration or circumvention of system security could cause serious negative consequences, including loss of clients and business opportunities; costs associated with maintaining business relationships after an attack or breach; significant disruption to the Company’s operations and business; misappropriation, exposure or destruction of the Company’s confidential information, intellectual property, funds and those of the Company’s clients; or damage to the Company’s or the Company’s clients’ or third parties’ computers or systems and could result in a violation of applicable privacy laws and other laws. This could result in litigation exposure, regulatory fines, penalties, loss of confidence in the Company’s security measures, reputational damage, reimbursement or other compensatory costs, additional compliance costs, which could adversely impact the Company’s results of operations, liquidity and financial condition. In addition, the Company may not have adequate insurance coverage to compensate for losses from a cybersecurity event.
Truist will continually encounter technological change and must effectively develop and implement new technology.
The financial services industry is undergoing rapid technological change with frequent introductions of new technology-driven products and services. Truist has invested in technology and connectivity to automate functions previously performed manually, to facilitate the ability of clients to engage in financial transactions and otherwise to enhance the client experience with respect to the Company’s products and services. Truist expects to make additional investments in innovation and technology to address technological disruption in the industry and improve client offerings and service. These changes allow the Company to better serve the Company’s clients and to reduce costs.
36 Truist Financial Corporation
The Company’s continued success depends, in part, upon the Company’s ability to address clients’ needs by using technology to provide products and services that satisfy client demands, including demands for faster and more secure payment services, to create efficiencies in the Company’s operations and to integrate those offerings with legacy platforms or to update those legacy platforms. A failure to maintain or enhance the Company’s competitive position with respect to technology, whether because of a failure to anticipate client expectations, a failure in the performance of technological developments or an untimely roll out of developments, may cause the Company to lose market share or incur additional expense.
ITEM 2. PROPERTIES
BB&T leasesTruist’s owns its headquarters building at 200 West Second214 North Tryon Street, Winston-Salem, North Carolina 27101 and owns or leases other significant office space in the vicinity of its headquarters. BB&TCharlotte, NC, 28202. Truist owns or leases free-standing operations centers, with its primary operations and information technology centers located in various locations in the Southeastern and Mid-Atlantic United States. Offices are either ownedTruist owns or operated under long-term leases. BB&T operatesleases retail branches and other offices in a number of states, primarily concentrated in the Southeastern and Mid-Atlantic United States. See Table 12 for a list of BB&T’sTruist's branches by state. BB&TTruist also operates numerous insurance agencies and other businesses that occupy facilities throughout the U.S. and Canada. Management believes that thethese premises are well-located and suitably equipped to serve as financial services facilities. See "Note 4.6. Premises and Equipment" for additional disclosures related to properties and other fixed assets.
Truist Financial Corporation 37
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ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
BB&T’s
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Truist's common stock is traded on the NYSE under the symbol "BBT."TFC." TheAs of December 31, 2020, Truist's common stock was held by approximately 480,000 shareholders and 450,000 shareholders at December 31, 2017 and 2016, respectively. The following table sets forth the quarterly high, low and closing sales prices for BB&T’s common stock and the cash dividends declared per share of common stock for the last two years.92,600 registered shareholders.
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Table 2 |
Quarterly Summary of Market Prices and Cash Dividends Declared on Common Stock |
| | | | |
| | 2017 | | 2016 |
| | Sales Prices | | Cash Dividends Declared | | Sales Prices | | Cash Dividends Declared |
| | High | | Low | | Close | | | High | | Low | | Close | |
Quarter Ended: | | | | | | | | | | | | | | | | |
March 31 | | $ | 49.88 |
| | $ | 42.73 |
| | $ | 44.70 |
| | $ | 0.30 |
| | $ | 37.03 |
| | $ | 29.95 |
| | $ | 33.27 |
| | $ | 0.27 |
|
June 30 | | 46.50 |
| | 41.17 |
| | 45.41 |
| | 0.30 |
| | 37.02 |
| | 32.22 |
| | 35.61 |
| | 0.28 |
|
September 30 | | 48.90 |
| | 43.03 |
| | 46.94 |
| | 0.33 |
| | 38.81 |
| | 33.72 |
| | 37.72 |
| | 0.30 |
|
December 31 | | 51.11 |
| | 44.62 |
| | 49.72 |
| | 0.33 |
| | 47.85 |
| | 37.40 |
| | 47.02 |
| | 0.30 |
|
Year | | 51.11 |
| | 41.17 |
| | 49.72 |
| | $ | 1.26 |
| | 47.85 |
| | 29.95 |
| | 47.02 |
| | $ | 1.15 |
|
The stock price reached an all-time high during the first quarter of 2018.
Common Stock, Dividends and Share Repurchases
BB&T’sTruist's ability to pay dividends is primarily dependent on earnings from operations, the adequacy of capital and the availability of liquid assets for distribution and is subject to the FRB not objecting to its capital plan. BB&T’splan meeting the SCB requirements from the FRB. Truist's ability to generate liquid assets for distribution is dependent on the ability of BranchTruist Bank to pay dividends to the Parent Company. The payment of cash dividends is an integral part of providing a competitive return on shareholders’ investments. The Company’s policy isshareholders' investments and needs to accomplish this while retainingbe balanced with maintaining sufficient capital to support future growth and to meet regulatory requirements. Management has established a guideline that the
Management’s target common dividend payout ratio (computed by dividing common stock dividends by net income available to common shareholders) will beis between 30% and 50% during normal economic conditions. BB&T’sTruist's common dividend payout ratio was 45.3%58.0% in 20172020 compared to 40.9%43.2% in 20162019 and 40.8%39.3% in 2015. BB&T has paid a cash dividend2018. Management's target total payout ratio (computed by dividing the sum of common stock dividends declared and share repurchases, excluding shares repurchased in connection with equity awards, by net income available to shareholders every year since 1903. BB&Tcommon shareholders) is between 30% and 80% during normal economic conditions. Truist may consider higher total distributions based on its capital position, earnings and prevailing economic conditions. The total payout ratio was 58.0%, 43.2% and 78.7% in 2020, 2019 and 2018, respectively.
Truist expects common dividend declarations, if declared,made, to occur in January, April, July and October with payment dates on or about the first of March, June, September and December. A discussion of dividend restrictions is included in "Note 14.17. Regulatory Requirements and Other Restrictions" and in the "Regulatory Considerations" section.
Share Repurchases
BB&TTruist has periodically repurchased shares of its own common stock. In accordance with North Carolina law, repurchased shares cannot be held as treasury stock, but revert to the status of authorized and unissued shares upon repurchase. Repurchases may be effected through open market purchases, privately negotiated transactions, trading plans established in accordance with Securities and Exchange CommissionSEC rules or other means. The timing and exact amount of repurchases will be consistent with the Company's capital plan andare subject to various factors, including the Company's capital position, liquidity, financial performance, alternative uses of capital, stock trading price and general market conditions, and may be suspended at any time. Shares repurchased constitute authorized but unissued shares of the Company and are therefore available for future issuances. During 2017,2020, the Company repurchased 35.5 million shares ofhad no common stock totaling $1.6 billion.
Management's guideline for the total payout ratio (computed by dividing the sum of common stock dividends declared and share repurchases, excludingexcept shares repurchasedexchanged or surrendered in connection with equitythe exercise of equity-based awards byunder equity-based compensation plans.
In December 2020, Truist announced that its Board of Directors had authorized the repurchase of up to $2.0 billion of the Company's common stock, beginning in the first quarter of 2021, consistent with recent FRB capital restriction guidance, to optimize Truist's capital position.
| | | | | | | | | | | | | | | | | | | | | | | |
Table 6: Share Repurchase Activity |
(Dollars in millions, except per share data, shares in thousands) | Total Shares Repurchased (1) | | Average Price Paid Per Share (2) | | Total Shares Repurchased Pursuant to Publicly-Announced Plan | | Maximum Remaining Dollar Value of Shares Available for Repurchase Pursuant to Publicly-Announced Plan |
| | | | | | | |
November 2020 | 4 | | | $ | 43.47 | | | — | | | $ | — | |
December 2020 | — | | | 47.93 | | | — | | | 2,000 | |
Total | 4 | | | 43.64 | | | — | | | |
(1)Includes shares exchanged or surrendered in connection with the exercise of equity-based awards under equity-based compensation plans.
(2)Excludes commissions.
38 Truist Financial Corporation
Preferred Stock
Issuances
During 2020, Truist issued $3.5 billion in series O, series P, series Q and series R preferred stock, gross of issuance cost, to further strengthen its capital position. During 2019, the Company issued $1.7 billion of series N non-cumulative perpetual preferred stock.
Upon closing of the Merger, each outstanding share of SunTrust perpetual preferred stock was converted into the right to receive one share of an applicable newly issued series of Truist preferred stock having substantially the same terms as such share of SunTrust preferred stock. The Company issued series I, J, K, L and M non-cumulative perpetual preferred stock with a total par and fair value of $2.0 billion on the Merger closing date.
Redemptions
Early in 2021, the Company announced the forthcoming redemption of all 18,000 outstanding shares of its perpetual preferred stock series F and the corresponding depositary shares representing fractional interests in such series for $450 million and all 20,000 outstanding shares of its perpetual preferred stock series G and the corresponding depositary shares representing fractional interests in such series for $500 million.
During 2020, the Company redeemed all 5,000 outstanding shares of its perpetual preferred stock series K and the corresponding depositary shares representing fractional interests in such series for $500 million plus any unpaid dividends. The preferred stock redemption was in accordance with the terms of the Company’s Articles of Amendment to its Articles of Incorporation, effective as of December 6, 2019.
During 2019, the Company redeemed all 23,000 outstanding shares of series D and 46,000 outstanding shares of series E non-cumulative perpetual preferred stock and the corresponding depositary shares representing fractional interests in each such series for $1.7 billion. In connection with the redemptions, net income available to common shareholders) is that it will range between 30%shareholders was reduced by $46 million to recognize the difference in the redemption price and 80% during normal economic conditions. BB&T may consider higher total distributions based on its capital position, earnings and prevailing economic conditions. The total payout ratio was 117.9%, 64.0% and 40.8% in 2017, 2016 and 2015, respectively.the carrying value.
|
| | | | | | | | | | | | | | |
Table 3 |
Share Repurchase Activity |
| | | | | | | | |
(shares in thousands) | | Total Shares Repurchased (1) | | Average Price Paid Per Share | | Total Shares Purchased Pursuant to Publicly-Announced Plan (2) | | Maximum Remaining Dollar Value of Shares Available for Repurchase Pursuant to Publicly-Announced Plan |
October 2017 | | 5,477 |
| | $ | 48.12 |
| | 5,477 |
| | $ | 696 |
|
November 2017 | | 2,296 |
| | 47.53 |
| | 2,296 |
| | 640 |
|
December 2017 | | — |
| | — |
| | — |
| | 640 |
|
Total | | 7,773 |
| | 47.95 |
| | 7,773 |
| | |
|
| |
(2) | Pursuant to the 2017 Repurchase Plan, announced on June 28, 2017, authorizing up to $1.88 billion of share repurchases over a one-year period ending June 30, 2018. In November 2017, the amount authorized was increased $53 million to $1.93 billion for the same one-year period. |
Preferred Stock
See "Note 9.12. Shareholders' Equity" for information about preferred stock.stock and "Note 2. Business Combinations" for additional information related to the Merger.
Equity Compensation Plan Information
In connection with the Merger, each outstanding heritage SunTrust equity award granted under heritage SunTrust's equity compensation plans was converted into a corresponding award with respect to Company common stock, with the number of shares underlying such award (and, in the case of stock options, the applicable exercise price) adjusted based on the exchange ratio. Each such converted Company equity award will continue to be subject to the same terms and conditions as applied to the corresponding heritage SunTrust equity award, except that, in the case of heritage SunTrust performance stock unit awards, the number of shares underlying the converted Company equity award was determined based on actual performance through September 30, 2019 and target performance for the balance of the applicable performance period and such award will continue to vest after the Merger solely based on continued service. The following table provides information concerning securities to be issued upon the exercise of outstanding equity-based awards as of December 31, 2017:2020:
| | | | | | | | | | | | | | | | | | | | |
Table 7: Equity Compensation Plan Information |
Plan Category | | (a)(1)(2) Number of securities to be issued upon exercise of outstanding options, warrants and rights | | (b)(3) Weighted-average exercise price of outstanding options, warrants and rights | | (c)(4) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in (a)) |
Approved by security holders | | 13,220,891 | | | $ | 32.20 | | | 8,876,596 | |
Not approved by security holders | | 7,469,504 | | | 20.60 | | | 10,938,274 | |
Total | | 20,690,395 | | | $ | 29.22 | | | 19,814,870 | |
(1)Includes 11,286,223 RSUs and PSUs in plans approved by security holders.
(2)Plans not approved by security holders consists of 668,015 options outstanding with a weighted average exercise price of $20.60 and 6,801,489 RSUs for plans that were assumed in mergers and acquisitions.
(3)Excludes RSUs and PSUs because they do not have an exercise price.
(4)Plans not approved by security holders consists of shares of common stock issuable pursuant to the 2012 Incentive Plan, as amended, in respect of shares reserved for issuance under the SunTrust Banks, Inc. 2018 Omnibus Incentive Compensation Plan, which share reserve was assumed by the Company on December 6, 2019 in connection with the Merger. Awards with respect to such shares may only be granted to heritage SunTrust teammates.
Truist Financial Corporation 39
|
| | | | | | | | |
Table 4 |
Equity Compensation Plan Information |
| | | | | | |
Plan Category | | (a)(1) Number of securities to be issued upon exercise of outstanding options, warrants and rights | | (b)(2) Weighted-average exercise price of outstanding options, warrants and rights | | (c)(3) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in (a)) |
Approved by security holders | | 18,474,088 |
| | $30.88 | | 19,408,161 |
|
Not approved by security holders (4) | | — |
| | — | | — |
|
Total | | 18,474,088 |
| | 30.88 | | 19,408,161 |
|
| |
(1) | Includes 12,521,571 RSUs and PSUs. |
| |
(2) | Excludes RSUs and PSUs because they do not have an exercise price. |
| |
(3) | All awards remaining available for future issuance will be issued under the terms of the 2012 Incentive Plan, as amended. |
| |
(4) | Excludes 195,933 options outstanding with a weighted average exercise price of $31.40 for plans that BB&T will not make future awards under and were assumed in mergers and acquisitions. |
Performance GraphsGraph
The following graphs comparegraph and table compares the cumulative total returns (assuming concurrent $100 initial investments at the beginningas of each periodDecember 31, 2015 and reinvestment of dividends)dividends without commissions) of BB&TTruist common stock, the S&P 500 Index and an industry peer group. The companies in the peer group were Comerica Incorporated, Fifth-Thirdare Bank of America Corporation, Citizens Financial Group, Inc., Fifth Third Bancorp, Huntington Bancshares, Incorporated,JPMorgan Chase & Co, KeyCorp, M&T Bank Corporation, The PNC Financial Services Group, Inc., Regions Financial Corporation, SunTrust Banks, Inc., U.S. Bancorp and Wells Fargo & CompanyCompany.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Table 8: Cumulative Total Shareholder Return | | | |
| | | | |
| Invested | | Cumulative Total Return | | | |
As of / Through December 31, | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | |
Truist Financial Corporation | $ | 100.00 | | | $ | 128.47 | | | $ | 139.62 | | | $ | 125.35 | | | $ | 168.62 | | | $ | 149.85 | | | | |
S&P 500 Index | 100.00 | | | 111.95 | | | 136.38 | | | 130.39 | | | 171.44 | | | 202.96 | | | | |
Peer Group | 100.00 | | | 124.02 | | | 151.70 | | | 129.52 | | | 179.98 | | | 153.29 | | | | |
40 Truist Financial Corporation
ITEM 6. SELECTED FINANCIAL DATA
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of/ For the Year Ended December 31, | |
(Dollars in millions, except per share data, shares in thousands) | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
Summary Income Statement: | | | | | | | | | |
Revenue -TE (1) | $ | 22,830 | | $ | 12,664 | | $ | 11,654 | | $ | 11,476 | | $ | 10,953 |
Less: TE adjustment (2) | 125 | | 96 | | 96 | | 159 | | 160 |
Revenue-reported (1) | 22,705 | | 12,568 | | 11,558 | | 11,317 | | 10,793 |
Provision for credit losses | 2,335 | | 615 | | 566 | | 547 | | 572 |
Noninterest expense | 14,897 | | 7,934 | | 6,932 | | 7,444 | | 6,721 |
Income before income taxes | 5,473 | | 4,019 | | 4,060 | | 3,326 | | 3,500 |
Provision for income taxes | 981 | | 782 | | 803 | | 911 | | 1,058 |
Net income | 4,492 | | 3,237 | | 3,257 | | 2,415 | | 2,442 |
Noncontrolling interest | 10 | | 13 | | 20 | | 21 | | 16 |
Preferred stock dividends | 298 | | 196 | | 174 | | 174 | | 167 |
Net income available to common shareholders | 4,184 | | 3,028 | | 3,063 | | 2,220 | | 2,259 |
Per Common Share: | | | | | | | | | |
Basic EPS | $ | 3.11 | | | $ | 3.76 | | | $ | 3.96 | | | $ | 2.78 | | | $ | 2.81 | |
Diluted EPS | 3.08 | | | 3.71 | | | 3.91 | | | 2.74 | | | 2.77 | |
Cash dividends declared | 1.80 | | | 1.71 | | | 1.56 | | | 1.26 | | | 1.15 | |
Common shareholders' equity | 46.52 | | | 45.66 | | | 35.46 | | | 34.01 | | | 33.14 | |
Average Balances: | | | | | | | | | |
Total assets | $ | 499,085 | | $ | 247,494 | | $ | 222,273 | | $ | 221,065 | | $ | 218,945 |
Securities, at amortized cost (3) | 83,227 | | 50,645 | | 47,100 | | 46,029 | | 46,279 |
Loans and leases (4) | 314,501 | | 161,604 | | 146,417 | | 144,075 | | 141,759 |
Deposits | 363,293 | | 173,269 | | 157,483 | | 159,241 | | 157,469 |
Long-term debt | 45,793 | | 24,756 | | 23,755 | | 21,660 | | 22,791 |
Shareholders' equity | 68,024 | | 34,108 | | 29,743 | | 30,001 | | 29,355 |
Period-End Balances: | | | | | | | | | |
Total assets | $ | 509,228 | | $ | 473,078 | | $ | 225,697 | | $ | 221,642 | | $ | 219,276 |
Securities (5) | 120,788 | | 74,727 | | 45,590 | | 47,574 | | 43,606 |
Loans and leases (4) | 305,793 | | 308,215 | | 150,001 | | 144,800 | | 145,038 |
Deposits | 381,077 | | 334,727 | | 161,199 | | 157,371 | | 160,234 |
Long-term debt | 39,597 | | 41,339 | | 23,709 | | 23,648 | | 21,965 |
Shareholders' equity | 70,912 | | 66,558 | | 30,178 | | 29,695 | | 29,926 |
Selected Ratios: | | | | | | | | | |
NIM | 3.22% | | 3.42% | | 3.46% | | 3.46% | | 3.39% |
Rate of return on: | | | | | | | | | |
Average total assets | 0.90 | | 1.31 | | 1.47 | | 1.09 | | 1.12 |
Average common shareholders' equity | 6.82 | | 9.87 | | 11.50 | | 8.25 | | 8.57 |
Average total shareholders' equity | 6.60 | | 9.49 | | 10.95 | | 8.05 | | 8.32 |
| | | | | | | | | |
Average total shareholders' equity to average total assets | 13.63 | | 13.78 | | 13.38 | | 13.57 | | 13.41 |
(1)Revenue is defined as net interest income plus noninterest income.
(2)TE adjustment is based on the federal income tax rate.
(3)Include AFS and Zions Bancorporation.HTM securities.
(4)Loans and leases are net of unearned income and include LHFS.
(5)Includes AFS securities at fair value and HTM securities at amortized cost.
Truist Financial Corporation 41
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of / Through December 31, | | 10 Year Cumulative Total Return Through 12/31/2017(1) |
| | Invested | | Cumulative Total Return | |
| | 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | |
BB&T Corporation | | $ | 100.00 |
| | $ | 132.72 |
| | $ | 141.87 |
| | $ | 141.73 |
| | $ | 182.08 |
| | $ | 197.88 |
| | $ | 228.92 |
|
S&P 500 Index | | 100.00 |
| | 132.38 |
| | 150.49 |
| | 152.55 |
| | 170.79 |
| | 208.06 |
| | 225.85 |
|
BB&T's Peer Group | | 100.00 |
| | 136.23 |
| | 161.16 |
| | 162.89 |
| | 189.90 |
| | 217.45 |
| | 217.40 |
|
| |
(1) | The 10 year cumulative total return assumes $100 was invested on December 31, 2007 |
|
| | | | | | | | | | | | | | | | | | | | |
ITEM 6. SELECTED FINANCIAL DATA |
| | |
| | As of/ For the Year Ended December 31, |
(Dollars in millions, except per share data, shares in thousands) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Summary Income Statement: | | | | | | | | | | |
Revenue-TE (1) | | $ | 11,476 |
| | $ | 10,953 |
|
| $ | 9,757 |
| | $ | 9,373 |
| | $ | 9,798 |
|
Less: TE adjustment (2) | | 159 |
| | 160 |
| | 146 |
| | 143 |
| | 146 |
|
Revenue-reported (1) | | 11,317 |
| | 10,793 |
| | 9,611 |
| | 9,230 |
| | 9,652 |
|
Provision for credit losses | | 547 |
| | 572 |
| | 428 |
| | 251 |
| | 592 |
|
Noninterest expense | | 7,444 |
| | 6,721 |
| | 6,266 |
| | 5,852 |
| | 5,777 |
|
Income before income taxes | | 3,326 |
|
| 3,500 |
|
| 2,917 |
|
| 3,127 |
|
| 3,283 |
|
Provision for income taxes | | 911 |
| | 1,058 |
| | 794 |
| | 921 |
| | 1,553 |
|
Net income | | 2,415 |
|
| 2,442 |
|
| 2,123 |
|
| 2,206 |
|
| 1,730 |
|
Noncontrolling interest | | 21 |
| | 16 |
| | 39 |
| | 75 |
| | 50 |
|
Dividends and accretion on preferred stock | | 174 |
| | 167 |
| | 148 |
| | 148 |
| | 117 |
|
Net income available to common shareholders | | 2,220 |
|
| 2,259 |
|
| 1,936 |
|
| 1,983 |
|
| 1,563 |
|
| | | | | | | | | | |
Per Common Share: | | | | | | |
| | |
| | |
|
Basic EPS | | $ | 2.78 |
| | $ | 2.81 |
| | $ | 2.59 |
| | $ | 2.76 |
| | $ | 2.22 |
|
Diluted EPS | | 2.74 |
| | 2.77 |
| | 2.56 |
| | 2.72 |
| | 2.19 |
|
Cash dividends declared | | 1.26 |
| | 1.15 |
| | 1.05 |
| | 0.95 |
| | 0.92 |
|
Common equity | | 34.01 |
| | 33.14 |
| | 31.66 |
| | 30.09 |
| | 28.48 |
|
| | | | | | | | | | |
Average Balances: | | | | | | |
| | |
| | |
|
Total assets | | $ | 221,065 |
| | $ | 218,945 |
| | $ | 197,347 |
| | $ | 185,095 |
| | $ | 181,282 |
|
Securities (3) | | 46,029 |
| | 46,279 |
| | 42,103 |
| | 40,541 |
| | 36,772 |
|
Loans and leases (4) | | 144,075 |
| | 141,759 |
| | 127,802 |
| | 118,830 |
| | 117,527 |
|
Deposits | | 159,241 |
| | 157,469 |
| | 138,498 |
| | 129,077 |
| | 128,555 |
|
Long-term debt | | 21,660 |
| | 22,791 |
| | 23,343 |
| | 22,210 |
| | 19,301 |
|
Shareholders' equity | | 30,001 |
| | 29,355 |
| | 25,871 |
| | 23,954 |
| | 21,860 |
|
| | | | | | | | | | |
Period-End Balances: | | | | | | | | | | |
Total assets | | $ | 221,642 |
| | $ | 219,276 |
| | $ | 209,947 |
| | $ | 186,834 |
| | $ | 183,043 |
|
Securities (3) | | 47,574 |
| | 43,606 |
| | 43,827 |
| | 41,147 |
| | 40,205 |
|
Loans and leases (4) | | 144,800 |
| | 145,038 |
| | 136,986 |
| | 121,307 |
| | 117,139 |
|
Deposits | | 157,371 |
| | 160,234 |
| | 149,124 |
| | 129,040 |
| | 127,475 |
|
Long-term debt | | 23,648 |
| | 21,965 |
| | 23,769 |
| | 23,312 |
| | 21,493 |
|
Shareholders' equity | | 29,695 |
| | 29,926 |
| | 27,340 |
| | 24,377 |
| | 22,780 |
|
| | | | | | | | | | |
Selected Ratios: | | | | | | | | | | |
NIM | | 3.46 | % | | 3.39 | % | | 3.32 | % | | 3.42 | % | | 3.68 | % |
Rate of return on: | | | | | | | | | | |
Average total assets | | 1.09 |
| | 1.12 |
| | 1.08 |
| | 1.19 |
| | 0.95 |
|
Average common equity | | 8.25 |
| | 8.57 |
| | 8.34 |
| | 9.32 |
| | 8.07 |
|
Average total shareholders' equity | | 8.05 |
| | 8.32 |
| | 8.21 |
| | 9.21 |
| | 7.91 |
|
Average total shareholders' equity to average total assets | | 13.57 |
| | 13.41 |
| | 13.11 |
| | 12.94 |
| | 12.06 |
|
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
(1) | Revenue is defined as net interest income plus noninterest income. |
| |
(2) | TE adjustment is based on the marginal income tax rates for the periods presented. |
| |
(3) | Excludes trading securities. HTM securities at amortized cost. AFS securities at fair value. |
| |
(4) | Loans and leases are net of unearned income and include LHFS. |
| |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This MD&A is intended to assist readers in their analysis of the accompanying Consolidated Financial Statements and supplemental financial information. It should be read in conjunction with the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements in this Form 10-K, as well as with the other information contained in this document. Truist’s financial results for 2020 reflect the first full calendar year of operations of the combined Company. Results for 2019 reflect heritage BB&T results prior to the completion of the Merger on December 6, 2019, and Truist results from the Merger closing date forward. For discussion of 2019 results as compared to 2018 results, see "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report on Form 10-K for the year ended December 31, 2019.
Executive Overview
Overview
Despite the challenges Truist and its clients faced in 2020, significant progress was made on integration and conversion efforts during the year. Below is an overview on progress in a few key areas.
Integration Efforts
Truist completed the Merger on December 6, 2019, and made significant progress on integration and conversion efforts in 2020. Some milestones include unveiling Truist’s purpose, mission, and values; launching the Truist brand and visual identity; completing the purchase of Significant EventsTruist Center, the new corporate headquarters in Charlotte, NC; launching Truist social media platforms; announcing brand conversions for several business units including Truist Insurance, Truist Securities, and Truist Leadership Institute; launching Truist Foundation and Truist Ventures; beginning early migrations for the mortgage business; and introducing the blended branch program. Recent highlights include:
•Completed the job regrading initiative for all teammates.
•Activated Integrated Relationship Management.
•Migrated correspondent mortgage lenders to the Truist origination ecosystem.
•Executed numerous corporate function integration activities across Audit, Risk, Legal and Finance.
•Truist reaffirmed its commitment to achieving $1.6 billion in net cost saves on a run rate basis by the fourth quarter of 2022.
Supporting Clients
Truist acted swiftly to support clients, teammates and communities in response to the COVID-19 pandemic last year and continues to support these stakeholders. Truist is actively helping clients impacted by COVID-19, providing payment relief assistance for credit cards, personal loans, auto loans, home equity lines of credit, and residential mortgages. Truist was one of the largest lenders of PPP loans in 2020 and remains committed to helping small businesses get access to emergency funds for first and second-draw PPP loans. Truist is working closely with clients, providing resources and guidance to ensure a smooth and efficient experience from application to funding and forgiveness. The carrying value of PPP loans was $11.0 billion as of December 31, 2020.
Supporting Teammates
Through the challenges faced, Truist’s concern for teammates and their families remains a top priority. Truist provided over $100 million in special COVID-19 support to teammates, including bonuses, special reimbursement for childcare and an increase in emergency child- and elder-care benefits, enhanced onsite pay, and steps to enhance wellness and family support. Truist released its first Corporate Social Responsibility report, which included a commitment to increasing the number of racially and ethnically diverse teammates among senior leadership positions from approximately 12% to at least 15%. Truist is also committed to ensuring regular, ongoing pay equity reviews for teammates. On the topic of racial inequity, Truist hosted more than 260 "Days of Understanding" sessions designed to encourage bold dialogue on real world topics in an open, trusting environment. The Company also rolled out enhanced unconscious bias training for teammates and Executive Leadership.
Supporting Communities
In response to COVID-19 in 2020, the Company launched Truist Cares, providing a total of $50 million in philanthropic support to aid charities meeting basic needs, furnishing medical supplies and addressing financial hardships across the nation, and have provided a total of 355 grants to community partners.
Truist is committed to addressing racial and social inequity and has taken a number of actions to expand efforts towards advancing equity, economic empowerment and education for clients, communities and teammates.
42 Truist Financial Corporation
In 2020, Truist provided $78 million to support historically underrepresented communities, including a $40 million initial donation to help establish CornerSquare Community Capital made through the Truist Foundation, Inc. and the Truist Charitable Fund, and approximately $20 million over three years to develop and strengthen partnerships, programs, and scholarships that benefit historically black colleges and universities and their students. The Company increased financial resources for low- and moderate-income communities through a $60 billion Community Benefits Plan from 2020-2022 to support home ownership, small business growth and community revitalization.
Financial Results
Net income available to common shareholders totaled $2.2$4.2 billion for 2017,2020, a 1.7% decrease38.2% increase from the prior year. On a diluted per common share basis, earnings for 20172020 were $2.74,$3.08, compared to $2.77$3.71 for 2016. BB&T’s2019. Truist's results of operations for 20172020 produced a return on average assets of 1.09%0.90% and a return on average common shareholders’shareholders' equity of 8.25%6.82% compared to prior year ratios of 1.12%1.31% and 8.57%9.87%, respectively. These resultsResults include merger-related and restructuring charges of $115$860 million ($660 million after-tax) for 20172020 compared to $171$360 million ($285 million after-tax) for 2016. Net interest income was up primarily due2019, and incremental operating expenses related to an 11 basis point increase in the yield on earning assets, and a $2.3 billion increase in average outstanding loans. Noninterest income was up dueMerger of $534 million ($409 million after-tax) for 2020 compared to increased business activity$164 million ($127 million after-tax) for 2019. Additionally, the majority of revenue sources, as well as higher income from SBIC and other investments. Noninterest expense was up due to2020 results include a loss on the early extinguishment of higher-cost FHLB advancesdebt of $392$235 million ($246180 million after tax),after-tax) and $136charitable contributions of $50 million ($8638 million after tax)after-tax), offset by securities gains of $402 million ($308 million after-tax). The 2019 results include securities losses of $116 million ($90 million after-tax), a reduction in one-time expenses incurred in connection with tax reform legislation. The current period provision fornet income taxes includesavailable to common shareholders of $46 million arising from the redemption of preferred stock, partially offset by a $14 million after-tax net tax benefitgain from the sale of $43 million due to the passage of tax reform legislation.residential mortgage loans.
BB&T’sTruist's revenue for 20172020 was $11.3$22.7 billion. On a TE basis, revenue was $11.5$22.8 billion, which represents an increase of $523 million$10.2 billion compared to 2016.2019. Net interest income on a TE basis was up $214 million$14.0 billion, an increase of $6.5 billion compared to the prior year, which reflects a $308 million$6.2 billion increase in interest income and a $94$374 million increasedecrease in interest expense. Noninterest income increased $310 million for the year, driven by improvements in FDIC loss share income, higher other income primarily due to income from SBIC investment and income related to assets for certain post-employment benefits, and higher insurance income primarily from the acquisition of Swett and Crawford in 2016. The increase in noninterestnet interest income was due primarily to a $152.9 billion increase in average outstanding loans, a $32.6 billion increase in average securities, partially offset by lower mortgage banking income primarily resulting from a decline78 basis point decrease in the net mortgage servicing rights valuation.earning asset yields.
NIM was 3.46%3.22% for 2017,2020, down 20 basis points compared to 3.39% for the prior year. Average earning assets increased $2.3$217.2 billion or 1.2%100.4%, while average interest-bearing liabilities decreased $1.2increased $153.7 billion or 0.9%101.8%, and noninterest-bearing deposits increased $59.1 billion or 106.4%. The annualized TE yield on the total loan portfolio for 20172020 was 4.41%4.33%, up 11down 66 basis points compared to the prior year. The annualized TE yield on the average securities portfolio was 2.45%2.09%, up 12down 53 basis points compared to the prior year. The average cost of interest-bearing deposits was 0.32%, down 61 basis points compared to the prior year. The average cost of total deposits was 0.22%, down 42 basis points compared to the prior year.
The provision for credit losses was $547 million,$2.3 billion, compared to $572$615 million for the prior year. This decrease was primarily driven by improvement in the commercial and industrial portfolio.
NPAs decreased $186 millionNet charge-offs were $1.1 billion, compared to 2016. This included a $166 million decrease in NPLs primarily within commercial and industrial lending and residential mortgage, and a $20 million decrease in foreclosed real estate and other property. Net charge-offs for 2017 were $537 million, compared to $532$634 million for the prior year. Asset quality ratios were relatively stable at December 31, 2020 compared to the prior year, reflecting diversification benefits of the Merger and effective problem asset resolution. The ratio of the ALLL to net charge-offs was 2.78x5.21X for 2017,2020, compared to 2.80x2.44X in 2016.2019, reflecting the CECL adoption build, as well as a reserve build in 2020 in connection with COVID-19 and the economic downturn. NPAs increased $703 million year over year, primarily due to PCI loans that would have been classified as nonperforming at December 31, 2019 and loans exiting certain accommodation programs related to the CARES Act.
Noninterest expenseincome increased $723 million$3.6 billion for the year with nearly all categories of noninterest income being impacted by the Merger. Additional increases in noninterest income were primarily due to higher losses frominsurance income driven by improved production levels and acquisitions. Noninterest expense increased $7.0 billion for the earlyyear. Excluding merger-related and restructuring charges, incremental operating expenses related to the Merger, the loss on extinguishment of debt, charitable contribution and expenses incurred in connection with tax reform legislation. The actions taken associated with tax reform include a $100the impact of an increase of $521 million contribution to the Company's philanthropic fund and $36 millionof amortization expense for a one-time bonus paid to associates who do not generally receive incentives. Additionally,intangibles, noninterest expense increased due to higher incentive costs as a result$5.3 billion, primarily reflecting the impact of improved performance.the Merger.
The effective tax rate was 27.4% for 2017, compared to 30.2% for the prior year. The current period provision includes a net tax benefit related to tax reform legislation and excess tax benefits from equity-based compensation plans.
BB&T’sTruist's total assets at December 31, 20172020 were $221.6$509.2 billion, an increase of $2.4$36.2 billion compared to December 31, 2016. This includes2019, reflecting a $4.0$46.1 billion increase in the total securities portfolio. The fair value of AFS securities, totaled $24.5partially offset by an increase in ALLL of $4.3 billion, a decrease in LHFS of $2.3 billion and a decrease in other assets of $1.2 billion.
Total liabilities at December 31, 2020 were $438.3 billion, an increase of $31.8 billion from the prior year, reflecting an increase of $46.4 billion in deposits, partially offset by a decrease of $12.1 billion in short-term borrowings. During 2020, the Company also issued $6.5 billion of senior and subordinated long-term debt.
Total shareholders' equity was $70.9 billion at December 31, 2017, compared to $26.92020, up $4.4 billion at December 31, 2016. The amortized cost of HTM securities was $23.0 billion at December 31, 2017 compared to $16.7 billion in the prior year.
Total deposits at December 31, 2017 were $157.4 billion, a decrease of $2.9 billion from the prior year. Noninterest-bearing deposits increased $3.1 billion, interest checking decreased $2.6 billion and money market and savings decreased $2.1 billion. Time deposits declined $1.2 billion. The overall growth in lower-cost deposits is primarily due to increases in commercial and public funds balances. The average cost of interest-bearing deposits for 2017 was 0.32%, up 9 basis points compared to the prior year.
Total shareholders’ equity was $29.7 billion at December 31, 2017, down slightly compared to the prior year. NetThe increase is due to net income in excess of dividends totaling $1.2paid of $1.8 billion wasand OCI of $1.6 billion. During 2020, Truist issued $3.5 billion in preferred stock, gross of issuance costs, to further strengthen its capital position and redeemed $500 million of series K preferred stock. The increases in shareholders equity were partially offset by $1.6a $2.1 billion cumulative effect adjustment related to the adoption of share repurchases. BB&T’s Tier 1 risk-basedCECL.
Truist Financial Corporation 43
Truist maintained strong capital and total risk-based capital ratios atliquidity in 2020. As of December 31, 2017 were 11.9% and 13.9%, respectively, compared to 12.0% and 14.1% at December 31, 2016, respectively. The2020, the CET1 ratio was 10.2% at December 31, 201710.0% and the average LCR was 113%. Truist declared common dividends of $1.80 per share during 2020. The dividend and total payout ratios for 2020 were 58.0% compared to 10.2% at43.2% for the prior year. In December 31, 2016.
Current Regulatory Environment
Over2020, Truist’s Board of Directors authorized the past several years, BB&T has made substantial investments and incurred significant costs relatedrepurchase of up to personnel, infrastructure and other items in response to increased regulations. While the impact of any relief is uncertain, the current U.S. administration has stated its intention to potentially alleviate part$2.0 billion of the regulatory burden on financial institutions.company’s common stock beginning in the first quarter of 2021, consistent with recent FRB capital restriction guidance. In early 2021, Truist declared common dividends of $0.450 per share for the first quarter of 2021.
Key Challenges
BB&T’sTruist's business is dynamic and complex. Consequently, management annually evaluates and, as necessary, adjusts the Company’sCompany's business strategy in the context of the current operating environment. During this process, management considers the current financial condition and performance of the Company and its expectations for future economic activity from both a national and local market perspective. The achievement ofAchieving key strategic objectives and established long-term financial goals is subject to many uncertainties and challenges. In the opinion of management, the following challenges that are the most relevant and likely to have aimpact Truist’s near to medium term impactperformance:
•Activating the Company’s culture of striving to make life better for clients, teammates and stakeholders;
•Achieving the benefits from the Merger, including anticipated synergies and cost savings;
•Managing the integration of systems and operations, while safeguarding the Company against external threats;
•Executing the Company’s "T3 strategy" by focusing on performance are presented below:personal touch and technology to engender trust and provide distinctive, secure and successful client experiences;
•Driving innovation and remaining attuned to evolving client preferences to succeed in an intensely competitive environment;
Intense competition within•Onboarding and retaining key personnel while maintaining safety protocols to protect clients, teammates and communities; and
•Navigating economic risks and actively managing credit exposures impacted by the financial services industry given the challenge in growing assets.COVID-19 pandemic.
New technologies and evolving consumer preferences will put pressure on market share and customer loyalty.
Global economic and geopolitical risk, including potential financial system instability and ramifications of sovereign debt issues.
Cost and risk associated with regulatory initiatives and IT projects.
In addition, certain other challenges and unforeseen events could have a near term impact on BB&T’sTruist's financial condition and results of operations. See the sections titled "Forward-Looking Statements" and "Risk Factors" for additional examples of such challenges.
Analysis of Results of Operations
Net Interest Income and NIM
Net interest income is BB&T’s primary source of revenue. Net interest income is influenced by a number of factors, including the volume, mix and maturity of interest-earning assets and interest-bearing liabilities and the interest rates earned and paid thereon. The difference between rates earned on interest-earning assets and the cost of funds (with a TE adjustment made to tax-exempt items to provide comparability with taxable items) is measured by the NIM.
20172020 compared to 20162019
For 2017,The net interest income on a TE basis totaled $6.7 billion, an increase of $213 million or 3.3% compared to the prior year. The increase reflects higher interest income due to rate increases and higher outstanding loans primarily due to organic loan growth. Thismargin was partially offset by runoff in PCI and residential mortgage loans. Interest expense increased $94 million, reflecting higher funding costs due to rate increases.
The NIM is the primary measure used in evaluating the gross profit margin from the portfolios of earning assets. The NIM was 3.46% in 2017 compared with 3.39% in 2016. The increase in the NIM reflects higher yields on loans and securities, partially offset by higher funding costs. The average annualized TE yield for total loans and leases was 4.41% for 2017, compared to 4.30% for the prior year. The increase was primarily due to rate increases, partially offset by runoff in PCI loans. The TE yield on the total securities portfolio was 2.45%3.22% for the year ended December 31, 2017,2020, down 20 basis points compared to 2.33%the earlier period. Average earning assets increased $217.2 billion, which primarily reflects a $152.9 billion increase in average total loans and leases, a $32.6 billion increase in average securities, a $28.4 billion increase in average other earning assets and a $3.4 billion increase in interest earning trading assets. Average interest-bearing liabilities increased $153.7 billion. Average interest-bearing deposits increased $131.0 billion, average long-term debt increased $21.0 billion and average short-term borrowings increased $1.7 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 prior year.
The average rate paid on interest-bearing deposits for 2017 increasedyear ended December 31, 2020 was 4.33%, down 66 basis points compared to 0.32%, from 0.23% in 2016. This primarily reflectsthe earlier period, reflecting the impact of rate increases.
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 year ended December 31, 2020 was 2.09%, down 53 basis points compared to the earlier period primarily due to lower yields on new purchases and higher premium amortization. The average cost of total deposits was 0.22%, down 42 basis points compared to the earlier period. The average cost of interest-bearing deposits was 0.32%, down 61 basis points compared to the earlier period. The average rate on short-term borrowings was 0.94% in 2017,1.35%, down 99 basis points compared to 0.35% in 2016. The increase in the rate on short-term borrowings reflects the federal funds target rate increases.earlier period. The average rate on long-term debt was 2.10% during 2017,1.75%, down 147 basis points compared to 2.13% in the prior year.earlier period. The decline inlower rates on interest-bearing liabilities reflect the averagelower rate environment. The lower rates on long-term debt reflectsalso reflect the impactamortization of the early extinguishmentfair value mark on the assumed debt and the issuance of $2.9 billionnew long-term debt.
As of higher cost FHLB advances in the first quarter, partially offset by new issuances. At December 31, 2017,2020, the targeted Federal funds rate was a rangeremaining unamortized fair value marks on the loan and lease portfolio, deposits and long-term debt were $2.4 billion, $19 million and $216 million, respectively. The remaining unamortized fair value mark on loans and leases consists of 1.25% to 1.50%.$1.1 billion for commercial loans and leases and $1.3 billion for consumer loans and leases. These amounts will be recognized over the remaining contractual lives of the underlying instruments or as paydowns occur.
2016 compared to 2015
For 2016,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.
44 Truist Financial Corporation
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Table 9: Taxable-Equivalent Net Interest Income and Rate / Volume Analysis (1) | | | | | | |
| | | | | | | | | | | | | | | | | | | 2020 vs. 2019 | | 2019 vs. 2018 |
Year Ended December 31, (Dollars in millions) | Average Balances (5) | | Yield/Rate | | Income/Expense | | Incr. (Decr.) | | Change due to | | Incr. (Decr.) | | Change due to |
2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 | | | Rate | | Volume | | | Rate | | Volume |
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total securities, at amortized cost: (2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury | $ | 2,194 | | | $ | 2,644 | | | $ | 3,800 | | | 1.81 | % | | 2.01 | % | | 1.89 | % | | $ | 40 | | | $ | 53 | | | $ | 72 | | | $ | (13) | | | $ | (5) | | | $ | (8) | | | $ | (19) | | | $ | 4 | | | $ | (23) | |
GSE | 1,846 | | | 2,402 | | | 2,394 | | | 2.33 | | | 2.26 | | | 2.23 | | | 43 | | | 53 | | | 54 | | | (10) | | | 2 | | | (12) | | | (1) | | | (1) | | | — | |
Agency MBS | 78,564 | | | 44,710 | | | 39,559 | | | 2.07 | | | 2.59 | | | 2.45 | | | 1,625 | | | 1,161 | | | 969 | | | 464 | | | (270) | | | 734 | | | 192 | | | 59 | | | 133 | |
States and political subdivisions | 501 | | | 587 | | | 958 | | | 3.92 | | | 3.73 | | | 3.68 | | | 19 | | | 21 | | | 35 | | | (2) | | | 1 | | | (3) | | | (14) | | | — | | | (14) | |
Non-agency MBS | 86 | | | 269 | | | 349 | | | 16.81 | | | 14.05 | | | 11.93 | | | 15 | | | 38 | | | 42 | | | (23) | | | 6 | | | (29) | | | (4) | | | 7 | | | (11) | |
Other | 36 | | | 33 | | | 40 | | | 2.33 | | | 3.75 | | | 3.34 | | | 1 | | | 1 | | | 1 | | | — | | | — | | | — | | | — | | | — | | | — | |
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Total securities | 83,227 | | | 50,645 | | | 47,100 | | | 2.09 | | | 2.62 | | | 2.49 | | | 1,743 | | | 1,327 | | | 1,173 | | | 416 | | | (266) | | | 682 | | | 154 | | | 69 | | | 85 | |
Interest earning trading assets | 4,655 | | | 1,277 | | | 633 | | | 3.62 | | | 2.02 | | | 3.82 | | | 168 | | | 26 | | | 24 | | | 142 | | | 33 | | | 109 | | | 2 | | | (15) | | | 17 | |
Other earning assets (3) | 31,240 | | | 2,888 | | | 1,618 | | | 0.50 | | | 2.89 | | | 2.63 | | | 156 | | | 83 | | | 43 | | | 73 | | | (122) | | | 195 | | | 40 | | | 5 | | | 35 | |
Loans and leases, net of unearned income: (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | 141,850 | | | 67,435 | | | 59,663 | | | 3.39 | | | 4.25 | | | 3.98 | | | 4,801 | | | 2,868 | | | 2,374 | | | 1,933 | | | (681) | | | 2,614 | | | 494 | | | 169 | | | 325 | |
CRE | 27,410 | | | 17,651 | | | 16,994 | | | 3.32 | | | 4.79 | | | 4.67 | | | 914 | | | 849 | | | 798 | | | 65 | | | (311) | | | 376 | | | 51 | | | 21 | | | 30 | |
Commercial Construction | 6,659 | | | 4,061 | | | 4,441 | | | 3.72 | | | 5.23 | | | 4.79 | | | 243 | | | 208 | | | 209 | | | 35 | | | (74) | | | 109 | | | (1) | | | 19 | | | (20) | |
Lease financing | 5,753 | | | 2,443 | | | 1,917 | | | 4.38 | | | 3.44 | | | 3.19 | | | 252 | | | 84 | | | 61 | | | 168 | | | 28 | | | 140 | | | 23 | | | 5 | | | 18 | |
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Residential mortgage | 51,423 | | | 31,668 | | | 29,932 | | | 4.51 | | | 4.08 | | | 4.05 | | | 2,320 | | | 1,291 | | | 1,212 | | | 1,029 | | | 148 | | | 881 | | | 79 | | | 9 | | | 70 | |
Residential home equity and direct | 26,951 | | | 12,716 | | | 11,860 | | | 6.03 | | | 5.97 | | | 5.41 | | | 1,625 | | | 759 | | | 641 | | | 866 | | | 8 | | | 858 | | | 118 | | | 70 | | | 48 | |
Indirect auto | 25,055 | | | 12,545 | | | 11,215 | | | 6.61 | | | 8.51 | | | 8.18 | | | 1,656 | | | 1,068 | | | 917 | | | 588 | | | (282) | | | 870 | | | 151 | | | 38 | | | 113 | |
Indirect other | 11,264 | | | 6,654 | | | 5,896 | | | 7.11 | | | 6.65 | | | 6.25 | | | 801 | | | 443 | | | 368 | | | 358 | | | 33 | | | 325 | | | 75 | | | 25 | | | 50 | |
Student | 7,596 | | | 460 | | | — | | | 4.62 | | | 5.20 | | | — | | | 351 | | | 24 | | | — | | | 327 | | | (3) | | | 330 | | | 24 | | | — | | | 24 | |
Credit card | 5,027 | | | 3,181 | | | 2,723 | | | 9.34 | | | 9.05 | | | 8.73 | | | 470 | | | 288 | | | 238 | | | 182 | | | 10 | | | 172 | | | 50 | | | 9 | | | 41 | |
PCI | — | | | 631 | | | 548 | | | — | | | 16.05 | | | 19.64 | | | — | | | 102 | | | 108 | | | (102) | | | — | | | (102) | | | (6) | | | (21) | | | 15 | |
Total loans and leases HFI | 308,988 | | | 159,445 | | | 145,189 | | | 4.35 | | | 5.01 | | | 4.77 | | | 13,433 | | | 7,984 | | | 6,926 | | | 5,449 | | | (1,124) | | | 6,573 | | | 1,058 | | | 344 | | | 714 | |
LHFS | 5,513 | | | 2,159 | | | 1,228 | | | 3.13 | | | 3.91 | | | 4.13 | | | 173 | | | 85 | | | 50 | | | 88 | | | (20) | | | 108 | | | 35 | | | (3) | | | 38 | |
Total loans and leases | 314,501 | | | 161,604 | | | 146,417 | | | 4.33 | | | 4.99 | | | 4.77 | | | 13,606 | | | 8,069 | | | 6,976 | | | 5,537 | | | (1,144) | | | 6,681 | | | 1,093 | | | 341 | | | 752 | |
Total earning assets | 433,623 | | | 216,414 | | | 195,768 | | | 3.61 | | | 4.39 | | | 4.20 | | | 15,673 | | | 9,505 | | | 8,216 | | | 6,168 | | | (1,499) | | | 7,667 | | | 1,289 | | | 400 | | | 889 | |
Nonearning assets | 65,462 | | | 31,080 | | | 26,505 | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | $ | 499,085 | | | $ | 247,494 | | | $ | 222,273 | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Shareholders' Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-checking | $ | 94,879 | | | $ | 31,592 | | | $ | 26,951 | | | 0.23 | | | 0.62 | | | 0.43 | | | 216 | | | 197 | | | 116 | | | 19 | | | (184) | | | 203 | | | 81 | | | 59 | | | 22 | |
Money market and savings | 123,826 | | | 67,922 | | | 62,257 | | | 0.21 | | | 0.91 | | | 0.62 | | | 264 | | | 621 | | | 387 | | | (357) | | | (664) | | | 307 | | | 234 | | | 196 | | | 38 | |
Time deposits | 30,008 | | | 17,970 | | | 13,963 | | | 1.02 | | | 1.54 | | | 0.94 | | | 305 | | | 277 | | | 132 | | | 28 | | | (115) | | | 143 | | | 145 | | | 100 | | | 45 | |
Foreign office deposits - interest-bearing | — | | | 272 | | | 494 | | | — | | | 2.35 | | | 1.67 | | | — | | | 6 | | | 9 | | | (6) | | | — | | | (6) | | | (3) | | | 2 | | | (5) | |
Total interest-bearing deposits (6) | 248,713 | | | 117,756 | | | 103,665 | | | 0.32 | | | 0.93 | | | 0.62 | | | 785 | | | 1,101 | | | 644 | | | (316) | | | (963) | | | 647 | | | 457 | | | 357 | | | 100 | |
Short-term borrowings | 10,129 | | | 8,462 | | | 5,955 | | | 1.35 | | | 2.34 | | | 1.86 | | | 137 | | | 198 | | | 111 | | | (61) | | | (95) | | | 34 | | | 87 | | | 33 | | | 54 | |
Long-term debt | 45,793 | | | 24,756 | | | 23,755 | | | 1.75 | | | 3.22 | | | 2.88 | | | 800 | | | 797 | | | 683 | | | 3 | | | (472) | | | 475 | | | 114 | | | 84 | | | 30 | |
Total interest-bearing liabilities | 304,635 | | | 150,974 | | | 133,375 | | | 0.57 | | | 1.39 | | | 1.08 | | | 1,722 | | | 2,096 | | | 1,438 | | | (374) | | | (1,530) | | | 1,156 | | | 658 | | | 474 | | | 184 | |
Noninterest-bearing deposits (6) | 114,580 | | | 55,513 | | | 53,818 | | | | | | | | | | | | | | | | | | | | | | | | | |
Other liabilities | 11,846 | | | 6,899 | | | 5,337 | | | | | | | | | | | | | | | | | | | | | | | | | |
Shareholders' equity | 68,024 | | | 34,108 | | | 29,743 | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and shareholders' equity | $ | 499,085 | | | $ | 247,494 | | | $ | 222,273 | | | | | | | | | | | | | | | | | | | | | | | | | |
Average interest-rate spread | | | | | | | 3.04 | % | | 3.00 | % | | 3.12 | % | | | | | | | | | | | | | | | | | | |
NIM/net interest income | | | | | | | 3.22 | % | | 3.42 | % | | 3.46 | % | | $ | 13,951 | | | $ | 7,409 | | | $ | 6,778 | | | $ | 6,542 | | | $ | 31 | | | $ | 6,511 | | | $ | 631 | | | $ | (74) | | | $ | 705 | |
Taxable-equivalent adjustment | | | | | | | | | | | | | $ | 125 | | | $ | 96 | | | $ | 96 | | | | | | | | | | | | | |
(1)Yields are stated on a TE basis totaled $6.5 billion, an increase of $743 million or 12.9% compared to the prior year.utilizing federal tax rate. The increase reflects higherchange in interest incomenot solely due to acquisitionschanges 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 organic loan growth, partially offset by lower yields on new loansdividends.
(2)Total securities include AFS and securitiesHTM securities.
(3)Includes cash equivalents, interest-bearing deposits with banks, FHLB stock and runoffother 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 loan portfolio acquired from the FDIC. Interest expense increased slightly, reflecting higher balances from acquisitions, partially offset by improvement in the mix of funding sources.average balances.
(5)Excludes basis adjustments for fair value hedges.
The NIM is the primary measure used in evaluating the gross profit margin from the portfolios of earning assets. The NIM was 3.39% in 2016 compared with 3.32% in 2015. The increase in the NIM reflects higher yields on loans(6)Total deposit costs were 0.22%, 0.64% and improved funding mix, partially offset by lower yields on securities. The average annualized TE yield for total loans and leases was 4.30% for 2016, compared to 4.26%0.41% for the prior year. The increase was primarily due to acquisitions, partially offset by lower yields on new loan originations and the runoff of higher yielding loans acquired from the FDIC. The TE yield on the total securities portfolio was 2.33% for the yearyears ended December 31, 2016, compared to 2.36% for the prior year.
The average rate paid on interest-bearing deposits for 2016 dropped to 0.23%, from 0.24% in 2015. This improvement was driven by changes in mix, with time deposits representing a lower percentage of interest-bearing deposits at December 31, 2016.
The rate paid on average short-term borrowings was 0.35% in 2016, compared to 0.15% in 2015. The increase in the rate on short-term borrowings reflects the federal funds target rate increase from December 2015. The average rate on long-term debt was 2.13% during 2016, flat compared to the prior year. At December 31, 2016, the targeted Federal funds rate range was 0.50% to 0.75%.
2020, 2019 and 2018, respectively.
Truist Financial Corporation 45
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 5 |
TE Net Interest Income and Rate / Volume Analysis (1) |
Year Ended December 31, 2017, 2016 and 2015 |
| | 2017 vs. 2016 | | 2016 vs. 2015 |
| | Average Balances (6) | | Yield/Rate | | Income/Expense | | Incr. | | Change due to | | Incr. | | Change due to |
(Dollars in millions) | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | 2017 | | 2016 | | 2015 | | (Decr.) | | Rate | | Vol. | | (Decr.) | | Rate | | Vol. |
Assets | | |
| | |
| | |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Total securities, at amortized cost: (2) | | |
| | | | |
| | | | | | |
| | | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
|
U.S. Treasury | | $ | 4,179 |
| | $ | 3,061 |
| | $ | 2,650 |
| | 1.71 | % | | 1.67 | % | | 1.58 | % | | $ | 72 |
| | $ | 51 |
| | $ | 42 |
| | $ | 21 |
| | $ | 1 |
| | $ | 20 |
| | $ | 9 |
| | $ | 2 |
| | $ | 7 |
|
GSE | | 2,385 |
| | 3,601 |
| | 5,338 |
| | 2.22 |
| | 2.13 |
| | 2.13 |
| | 53 |
| | 77 |
| | 113 |
| | (24 | ) | | 3 |
| | (27 | ) | | (36 | ) | | — |
| | (36 | ) |
Agency MBS | | 37,250 |
| | 36,658 |
| | 30,683 |
| | 2.26 |
| | 2.05 |
| | 1.98 |
| | 841 |
| | 750 |
| | 605 |
| | 91 |
| | 79 |
| | 12 |
| | 145 |
| | 22 |
| | 123 |
|
States and political subdivisions | | 1,748 |
| | 2,361 |
| | 2,204 |
| | 4.77 |
| | 5.20 |
| | 5.65 |
| | 83 |
| | 123 |
| | 125 |
| | (40 | ) | | (10 | ) | | (30 | ) | | (2 | ) | | (11 | ) | | 9 |
|
Non-agency MBS | | 411 |
| | 534 |
| | 751 |
| | 18.80 |
| | 14.56 |
| | 13.51 |
| | 77 |
| | 78 |
| | 102 |
| | (1 | ) | | 19 |
| | (20 | ) | | (24 | ) | | 7 |
| | (31 | ) |
Other | | 56 |
| | 64 |
| | 477 |
| | 2.17 |
| | 1.87 |
| | 1.31 |
| | 1 |
| | — |
| | 7 |
| | 1 |
| | 1 |
| | — |
| | (7 | ) | | 1 |
| | (8 | ) |
Total securities | | 46,029 |
| | 46,279 |
| | 42,103 |
| | 2.45 |
| | 2.33 |
| | 2.36 |
| | 1,127 |
| | 1,079 |
| | 994 |
| | 48 |
| | 93 |
| | (45 | ) | | 85 |
| | 21 |
| | 64 |
|
Other earning assets (3) | | 3,484 |
| | 3,202 |
| | 2,768 |
| | 1.53 |
| | 1.64 |
| | 1.39 |
| | 53 |
| | 53 |
| | 38 |
| | — |
| | (4 | ) | | 4 |
| | 15 |
| | 8 |
| | 7 |
|
Loans and leases, net of unearned income: (4)(5) | | |
| | |
| | |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
| | | | |
| | |
| | |
Commercial: | | |
| | |
| | |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
| | | | |
| | |
| | |
Commercial and industrial | | 57,994 |
| | 56,227 |
| | 49,518 |
| | 3.59 |
| | 3.40 |
| | 3.25 |
| | 2,080 |
| | 1,914 |
| | 1,612 |
| | 166 |
| | 106 |
| | 60 |
| | 302 |
| | 77 |
| | 225 |
|
CRE | | 20,497 |
| | 19,407 |
| | 15,840 |
| | 4.08 |
| | 3.75 |
| | 3.67 |
| | 837 |
| | 727 |
| | 581 |
| | 110 |
| | 67 |
| | 43 |
| | 146 |
| | 13 |
| | 133 |
|
Lease financing | | 1,726 |
| | 1,524 |
| | 1,183 |
| | 2.82 |
| | 3.01 |
| | 2.82 |
| | 49 |
| | 45 |
| | 33 |
| | 4 |
| | (3 | ) | | 7 |
| | 12 |
| | 2 |
| | 10 |
|
Retail: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgage | | 29,140 |
| | 30,184 |
| | 30,252 |
| | 4.02 |
| | 4.05 |
| | 4.15 |
| | 1,170 |
| | 1,224 |
| | 1,255 |
| | (54 | ) | | (10 | ) | | (44 | ) | | (31 | ) | | (28 | ) | | (3 | ) |
Direct | | 11,968 |
| | 11,796 |
| | 9,375 |
| | 4.60 |
| | 4.27 |
| | 4.07 |
| | 550 |
| | 503 |
| | 381 |
| | 47 |
| | 40 |
| | 7 |
| | 122 |
| | 20 |
| | 102 |
|
Indirect | | 17,840 |
| | 17,072 |
| | 16,443 |
| | 6.89 |
| | 6.94 |
| | 6.86 |
| | 1,230 |
| | 1,186 |
| | 1,127 |
| | 44 |
| | (9 | ) | | 53 |
| | 59 |
| | 13 |
| | 46 |
|
Revolving credit | | 2,662 |
| | 2,521 |
| | 2,406 |
| | 8.88 |
| | 8.77 |
| | 8.76 |
| | 236 |
| | 221 |
| | 211 |
| | 15 |
| | 3 |
| | 12 |
| | 10 |
| | — |
| | 10 |
|
PCI | | 784 |
| | 1,063 |
| | 1,083 |
| | 18.86 |
| | 19.55 |
| | 16.57 |
| | 148 |
| | 208 |
| | 179 |
| | (60 | ) | | (7 | ) | | (53 | ) | | 29 |
| | 32 |
| | (3 | ) |
Total loans and leases HFI | | 142,611 |
| | 139,794 |
| | 126,100 |
| | 4.42 |
| | 4.31 |
| | 4.27 |
| | 6,300 |
| | 6,028 |
| | 5,379 |
| | 272 |
| | 187 |
| | 85 |
| | 649 |
| | 129 |
| | 520 |
|
LHFS | | 1,464 |
| | 1,965 |
| | 1,702 |
| | 3.62 |
| | 3.34 |
| | 3.63 |
| | 53 |
| | 66 |
| | 62 |
| | (13 | ) | | 5 |
| | (18 | ) | | 4 |
| | (5 | ) | | 9 |
|
Total loans and leases | | 144,075 |
| | 141,759 |
| | 127,802 |
| | 4.41 |
| | 4.30 |
| | 4.26 |
| | 6,353 |
| | 6,094 |
| | 5,441 |
| | 259 |
| | 192 |
| | 67 |
| | 653 |
| | 124 |
| | 529 |
|
Total earning assets | | 193,588 |
| | 191,240 |
| | 172,673 |
| | 3.89 |
| | 3.78 |
| | 3.75 |
| | 7,533 |
| | 7,226 |
| | 6,473 |
| | 307 |
| | 281 |
| | 26 |
| | 753 |
| | 153 |
| | 600 |
|
Nonearning assets | | 27,477 |
| | 27,705 |
| | 24,674 |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
| | | | |
| | |
| | |
Total assets | | $ | 221,065 |
| | $ | 218,945 |
| | $ | 197,347 |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
| | | | |
| | |
| | |
Liabilities and Shareholders’ Equity | | | | | | |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
| | | | |
| | |
| | |
Interest-bearing deposits: | | |
| | |
| | |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
| | | | |
| | |
| | |
Interest checking | | $ | 28,033 |
| | $ | 27,595 |
| | $ | 22,092 |
| | 0.25 |
| | 0.14 |
| | 0.08 |
| | $ | 70 |
| | $ | 39 |
| | $ | 18 |
| | $ | 31 |
| | $ | 30 |
| | $ | 1 |
| | $ | 21 |
| | $ | 16 |
| | $ | 5 |
|
Money market and savings | | 63,061 |
| | 62,966 |
| | 56,592 |
| | 0.30 |
| | 0.20 |
| | 0.19 |
| | 190 |
| | 123 |
| | 107 |
| | 67 |
| | 67 |
| | — |
| | 16 |
| | 5 |
| | 11 |
|
Time deposits | | 14,133 |
| | 16,619 |
| | 16,405 |
| | 0.51 |
| | 0.51 |
| | 0.66 |
| | 72 |
| | 85 |
| | 107 |
| | (13 | ) | | — |
| | (13 | ) | | (22 | ) | | (23 | ) | | 1 |
|
Foreign office deposits - interest-bearing | | 1,142 |
| | 1,034 |
| | 593 |
| | 1.05 |
| | 0.38 |
| | 0.12 |
| | 12 |
| | 4 |
| | 1 |
| | 8 |
| | 8 |
| | — |
| | 3 |
| | 2 |
| | 1 |
|
Total interest-bearing deposits | | 106,369 |
| | 108,214 |
| | 95,682 |
| | 0.32 |
| | 0.23 |
| | 0.24 |
| | 344 |
| | 251 |
| | 233 |
| | 93 |
| | 105 |
| | (12 | ) | | 18 |
| | — |
| | 18 |
|
Short-term borrowings | | 4,311 |
| | 2,554 |
| | 3,221 |
| | 0.94 |
| | 0.35 |
| | 0.15 |
| | 41 |
| | 9 |
| | 4 |
| | 32 |
| | 23 |
| | 9 |
| | 5 |
| | 6 |
| | (1 | ) |
Long-term debt | | 21,660 |
| | 22,791 |
| | 23,343 |
| | 2.10 |
| | 2.13 |
| | 2.13 |
| | 454 |
| | 485 |
| | 498 |
| | (31 | ) | | (7 | ) | | (24 | ) | | (13 | ) | | — |
| | (13 | ) |
Total interest-bearing liabilities | | 132,340 |
| | 133,559 |
| | 122,246 |
| | 0.63 |
| | 0.56 |
| | 0.60 |
| | 839 |
| | 745 |
| | 735 |
| | 94 |
| | 121 |
| | (27 | ) | | 10 |
| | 6 |
| | 4 |
|
Noninterest-bearing deposits | | 52,872 |
| | 49,255 |
| | 42,816 |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Other liabilities | | 5,852 |
| | 6,776 |
| | 6,414 |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Shareholders’ equity | | 30,001 |
| | 29,355 |
| | 25,871 |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Total liabilities and shareholders’ equity | | $ | 221,065 |
| | $ | 218,945 |
| | $ | 197,347 |
| | | | |
| | |
| | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Average interest rate spread | | |
| | |
| | |
| | 3.26 | % | | 3.22 | % | | 3.15 | % | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
NIM / net interest income | | |
| | | | | | 3.46 | % | | 3.39 | % | | 3.32 | % | | $ | 6,694 |
| | $ | 6,481 |
| | $ | 5,738 |
| | $ | 213 |
| | $ | 160 |
| | $ | 53 |
| | $ | 743 |
| | $ | 147 |
| | $ | 596 |
|
TE adjustment | | |
| | | | | | | | | | |
| | $ | 159 |
| | $ | 160 |
| | $ | 146 |
| | |
| | |
| | |
| | |
| | |
| | |
|
| |
(1) | Yields are stated on a TE basis utilizing the marginal income tax rates for the periods presented. The change in interest not solely due to changes in yield/rate or volume has been allocated on a pro-rata basis based on the absolute dollar amount of each. |
| |
(2) | Total securities include AFS and HTM securities. |
| |
(3) | Includes cash equivalents, interest-bearing deposits with banks, trading securities, FHLB stock and other earning assets. |
| |
(4) | Loan fees, which are not material for any of the periods shown, are included for rate calculation purposes. |
| |
(5) | NPLs are included in the average balances. |
| |
(6) | Excludes basis adjustments for fair value hedges. |
Provision for Credit Losses
2017
2020 compared to 20162019
The provision for credit losses was $547 million in 2017,$2.3 billion, compared to $572 million in the prior year. The decrease in the provision for credit losses was primarily driven by improvement in the commercial and industrial portfolio, which reflects lower net charge-offs and nonaccrual loans compared to the prior year. The ratio of the ALLL to net charge-offs was 2.78x for 2017, compared to 2.80x for 2016.
Net charge-offs were $537$615 million for 2017 compared to $532 million in 2016. The ratio of net charge-offs to average loans and leases held for investment was 0.38% for both 2017 and 2016. Net charge-offs increased by $31 million in the indirect lending portfolio, driven by an increase in loss severity associated with used car values. Commercial and industrial net charge-offs decreased $40 million, primarily due to losses in the energy portfolio during 2016.
2016 compared to 2015
The provision for credit losses was $572 million in 2016, compared to $428 million in the prior year.earlier period. The increase in the provision for credit losses was driven by indirect lending
reflects the significant builds to the allowance for credit losses in the first and commercial and industrial portfolios, which reflects higher net charge-offs in these portfolios. The ratiosecond quarters of the ALLLyear due to net charge-offs was 2.80x for 2016,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, increased loan balances arising from the Merger and the effect of applying the CECL methodology in the current period compared to 3.36x for 2015.the incurred loss methodology in the earlier period.
Net charge-offs for the year ended December 31, 2020 were 0.38% of average loans and leases held for investment for 2016,$1.1 billion, compared to 0.35% of average loans and leases held for investment during 2015. Net charge-offs were $532$634 million for 2016the 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 0.36% for the year ended December 31, 2020 was down four basis points compared to $436 million in 2015. Commercial and industrial net charge-offs increased $50 million, primarily due to the energy portfolio. Net charge-offs increased by $49 million in the indirect lending portfolio, driven by an increase in loss severity associated with used car values and loan growth.earlier period.
Noninterest Income
Noninterest income is a significant contributor to BB&T’sTruist's financial results. Management focuses on diversifying its sources of revenue to further reduce BB&T’sTruist'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 10: Noninterest Income | |
| | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Year Ended December 31, (Dollars in millions) | | | | | | | | | | | | | % Change | |
| | | | | | 2020 | | 2019 | | 2018 | | 2020 vs. 2019 | | 2019 vs. 2018 | |
Insurance income | | | | | | | $ | 2,193 | | | $ | 2,072 | | | $ | 1,852 | | | 5.8 | % | | 11.9 | % | |
Wealth management income | | | | | | | 1,277 | | | 715 | | | 660 | | | 78.6 | | | 8.3 | | |
Service charges on deposits | | | | | | | 1,020 | | | 762 | | | 712 | | | 33.9 | | | 7.0 | | |
Residential mortgage income | | | | | | | 1,000 | | | 285 | | | 258 | | | NM | | 10.5 | | |
Investment banking and trading income | | | | | | | 944 | | | 244 | | | 154 | | | NM | | 58.4 | | |
Card and payment related fees | | | | | | | 761 | | | 555 | | | 522 | | | 37.1 | | | 6.3 | | |
Lending related fees | | | | | | | 315 | | | 124 | | | 99 | | | 154.0 | | | 25.3 | | |
Operating lease income | | | | | | | 309 | | | 153 | | | 145 | | | 102.0 | | | 5.5 | | |
Commercial real estate related income | | | | | | | 271 | | | 116 | | | 100 | | | 133.6 | | | 16.0 | | |
Income from bank-owned life insurance | | | | | | | 179 | | | 129 | | | 116 | | | 38.8 | | | 11.2 | | |
Securities gains (losses) | | | | | | | 402 | | | (116) | | | 3 | | | NM | | NM | |
Other income (loss) | | | | | | | 208 | | | 216 | | | 255 | | | (3.7) | | | (15.3) | | |
Total noninterest income | | | | | | | $ | 8,879 | | | $ | 5,255 | | | $ | 4,876 | | | 69.0 | | | 7.8 | | |
|
| | | | | | | | | | | | | | | | | | |
Table 6 |
Noninterest Income |
| | | | |
| | Year Ended December 31, | | % Change |
| | | 2017 vs. 2016 | | 2016 vs. 2015 |
(Dollars in millions) | | 2017 | | 2016 | | 2015 | | |
Insurance income | | $ | 1,754 |
| | $ | 1,713 |
| | $ | 1,596 |
| | 2.4 | % | | 7.3 | % |
Service charges on deposits | | 706 |
| | 664 |
| | 631 |
| | 6.3 |
| | 5.2 |
|
Mortgage banking income | | 415 |
| | 463 |
| | 455 |
| | (10.4 | ) | | 1.8 |
|
Investment banking and brokerage fees and commissions | | 410 |
| | 408 |
| | 398 |
| | 0.5 |
| | 2.5 |
|
Trust and investment advisory revenues | | 278 |
| | 266 |
| | 240 |
| | 4.5 |
| | 10.8 |
|
Bankcard fees and merchant discounts | | 271 |
| | 237 |
| | 218 |
| | 14.3 |
| | 8.7 |
|
Checkcard fees | | 214 |
| | 195 |
| | 174 |
| | 9.7 |
| | 12.1 |
|
Operating lease income | | 146 |
| | 137 |
| | 124 |
| | 6.6 |
| | 10.5 |
|
Income from bank-owned life insurance | | 122 |
| | 123 |
| | 113 |
| | (0.8 | ) | | 8.8 |
|
FDIC loss share income, net | | — |
| | (142 | ) | | (253 | ) | | (100.0 | ) | | (43.9 | ) |
Securities gains (losses), net | | (1 | ) | | 46 |
| | (3 | ) | | (102.2 | ) | | NM |
|
Other income | | 467 |
| | 362 |
| | 326 |
| | 29.0 |
| | 11.0 |
|
Total noninterest income | | $ | 4,782 |
| | $ | 4,472 |
| | $ | 4,019 |
| | 6.9 |
| | 11.3 |
|
20172020 compared to 20162019
Noninterest income was a record $4.8for the year ended December 31, 2020 increased $3.6 billion for 2017, an increase of $310 million compared to 2016.the earlier period. The increase was broad based across almostcurrent period includes $402 million of net securities gains primarily from the sale of non-agency MBS in the second quarter of 2020 and agency MBS in the third quarter of 2020. The prior period includes $116 million of net securities losses from the sale of agency MBS. Excluding the net securities gains and losses, noninterest income increased $3.1 billion, with nearly all major categories of noninterest income.
Incomeincome being impacted by the Merger. In addition to the impacts from BB&T’sthe Merger, insurance agency/brokerage operations was the largest source of noninterest income in 2017. Insurance income totaled $1.8 billion for 2017, an increase of $41increased $121 million compared to 2016. The increase was largely due to the acquisition of Swettstrong production and Crawford on April 1, 2016. In addition, organic commissions and fees were higher, which was offset by lower performance based commissions.
acquisitions. Service charges on deposits were $706 million for 2017, an increase of $42 million comparedup despite reduced overdraft incident rates and increased refunds and waivers to 2016. The increasesupport clients impacted by the COVID-19 pandemic. Residential mortgage banking income was up due to changes in client behavior, pricing increasesstrong production and the acquisition of National Penn on April 1, 2016.
Mortgage banking income declined $48 million primarily due to a decline of $39 million in the net mortgage servicing rights valuation.
Bankcard fees and merchant discounts increased $34 million due to higher volumes and a reduction in the accrual for rewards.
FDIC loss share income improved by $142 million due to the termination of the loss sharing agreements during the third quarter of 2016.
Other income totaled $467 million for 2017, an increase of $105 million from 2016, primarily due to a $34 million increase in income from SBIC investments and a $50 million increaserefinance activity driven by income related to assets for certain post-employment benefits.
2016 compared to 2015
Noninterest income was $4.5 billion for 2016, an increase of $453 million compared to 2015. This increase was across all categories and primarily reflects the impact from acquisitions.
Income from BB&T’s insurance agency/brokerage operations was the largest source of noninterest income in 2016. Insurance income totaled $1.7 billion for 2016, an increase of $117 million compared to 2015. The increase was largely the result of the acquisition of Swett and Crawford, which was partially offset by the impact from selling American Coastal in 2015.
FDIC loss share income improved by $111 million, primarily due to the termination of the loss sharing agreements during the third quarter of 2016.
Other income totaled $362 million for 2016, an increase of $36 million from 2015. This increase is primarily due to the $26 million loss on sale of American Coastal during the second quarter of 2015, $19 million for client derivatives revenues and $10 million of trading gains. These increases werelower rate environment, partially offset by lower partnershipsvaluations of the mortgage servicing rights and other investmentincreased amortization driven by higher prepayments speeds. Investment banking and trading income which was up, but was negatively impacted by credit valuation adjustments on the resultderivatives portfolio primarily related to the decline in interest rates and widening of an opportunistic sale that resulted in a $28 million gain during the third quarter of 2015.credit spreads.
46 Truist Financial Corporation
Noninterest Expense
The following table provides a breakdown of BB&T’sTruist's noninterest expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Table 11: Noninterest Expense |
| | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Year Ended December 31, (Dollars in millions) | | | | | | | | | | | | | % Change |
| | | | | | 2020 | | 2019 | | 2018 | | 2020 vs. 2019 | | 2019 vs. 2018 |
Personnel expense | | | | | | | $ | 8,146 | | | $ | 4,833 | | | $ | 4,313 | | | 68.5 | % | | 12.1 | % |
Professional fees and outside processing | | | | | | | 1,252 | | | 433 | | | 365 | | | 189.1 | | | 18.6 | |
Net occupancy expense | | | | | | | 904 | | | 507 | | | 491 | | | 78.3 | | | 3.3 | |
Software expense | | | | | | | 862 | | | 338 | | | 272 | | | 155.0 | | | 24.3 | |
Amortization of intangibles | | | | | | | 685 | | | 164 | | | 131 | | | NM | | 25.2 | |
Equipment expense | | | | | | | 484 | | | 280 | | | 267 | | | 72.9 | | | 4.9 | |
Marketing and customer development | | | | | | | 273 | | | 137 | | | 102 | | | 99.3 | | | 34.3 | |
Operating lease depreciation | | | | | | | 258 | | | 136 | | | 120 | | | 89.7 | | | 13.3 | |
Loan-related expense | | | | | | | 242 | | | 123 | | | 108 | | | 96.7 | | | 13.9 | |
Regulatory costs | | | | | | | 125 | | | 81 | | | 134 | | | 54.3 | | | (39.6) | |
Merger-related and restructuring charges | | | | | | | 860 | | | 360 | | | 146 | | | 138.9 | | | 146.6 | |
Loss (gain) on early extinguishment of debt | | | | | | | 235 | | | — | | | — | | | NM | | NM |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Other expense | | | | | | | 571 | | | 542 | | | 483 | | | 5.4 | | | 12.2 | |
Total noninterest expense | | | | | | | $ | 14,897 | | | $ | 7,934 | | | $ | 6,932 | | | 87.8 | | | 14.5 | |
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Table 7 |
Noninterest Expense |
| | | | |
| | Year Ended December 31, | | % Change |
| | | 2017 vs. 2016 | | 2016 vs. 2015 |
(Dollars in millions) | | 2017 | | 2016 | | 2015 | | |
Personnel expense | | $ | 4,121 |
| | $ | 3,964 |
| | $ | 3,469 |
| | 4.0 | % | | 14.3 | % |
Occupancy and equipment expense | | 784 |
| | 786 |
| | 708 |
| | (0.3 | ) | | 11.0 |
|
Software expense | | 242 |
| | 224 |
| | 192 |
| | 8.0 |
| | 16.7 |
|
Outside IT services | | 160 |
| | 186 |
| | 135 |
| | (14.0 | ) | | 37.8 |
|
Regulatory charges | | 153 |
| | 145 |
| | 101 |
| | 5.5 |
| | 43.6 |
|
Amortization of intangibles | | 142 |
| | 150 |
| | 105 |
| | (5.3 | ) | | 42.9 |
|
Loan-related expense | | 130 |
| | 95 |
| | 150 |
| | 36.8 |
| | (36.7 | ) |
Professional services | | 123 |
| | 102 |
| | 130 |
| | 20.6 |
| | (21.5 | ) |
Merger-related and restructuring charges, net | | 115 |
| | 171 |
| | 165 |
| | (32.7 | ) | | 3.6 |
|
Loss (gain) on early extinguishment of debt | | 392 |
| | (1 | ) | | 172 |
| | NM |
| | (100.6 | ) |
Other expense | | 1,082 |
| | 899 |
| | 939 |
| | 20.4 |
| | (4.3 | ) |
Total noninterest expense | | $ | 7,444 |
| | $ | 6,721 |
| | $ | 6,266 |
| | 10.8 |
| | 7.3 |
|
20172020 compared to 20162019
Noninterest expense totaled $7.4for the year ended December 31, 2020 was up $7.0 billion for 2017, an increasecompared to the earlier period. Merger-related and restructuring charges and other incremental operating expenses related to the Merger increased $500 million and $370 million, respectively. In addition, the current period was impacted by $235 million of $723 million from 2016. The increase includes actions taken in the fourth quarter of 2017 in connection with the passage of tax reform legislation. This included a contribution of $100 million to BB&T's philanthropic fund and $36 million for a one-time bonus paid to associates who do not generally receive incentives or commissions. The increase also includes a $392 million charge in 2017 forlosses on the early extinguishment of $2.9 billion of higher cost FHLB advances.
Personnel expense is the largest component of noninterest expenselong-term debt and includes salaries and incentives, as well as pension and other employee benefit costs. Personnel expense totaled $4.1 billion, a $157 million increase compared to 2016. Salaries and incentives increased $120 million compared to the prior year, primarily due to higher incentives as a result of improved performance and the one-time bonus previously mentioned. Equity based compensation increased $14 million and benefit costs increased $23 million. The increase in benefit costs was primarily the result of an increase of $43 million for post-employment benefits that is primarily offset in other income. This was partially offset by a decline of $26 million for pension expense.
Software expense was higher $18 million compared to 2016, primarily reflecting higher depreciation on recent investments.
Outside IT services expense decreased $26 million compared to the prior year, while professional services expense increased $21 million. These fluctuations are due to the volume of project related work in the current year compared to the prior year.
Loan-related expense totaled $130 million for 2017, an increase of $35 million compared to the prior year. This increase is largely the result of a release of $31 million in reserves during the fourth quarter of 2016, which was primarily driven by lower anticipated loan repurchase requests.
Merger-related and restructuring expense decreased $56 million compared to 2016. This includes a decrease in merger-related charges, partially offset by branch closures and other restructuring initiatives.
Other expense increased $183 million primarily due to higher operating charge-offs and charitable contributions. Operating charge-offs increased $108 million due to a net benefit of $73 million recorded in 2016 related to the settlement of matters involving the origination of certain legacy mortgage loans insured by the FHA. Charitable contributions increased $44 million as the company made a $100 million contribution to its philanthropic fund in 2017 as noted above, compared to $50 million made in the third quarter of 2016.
2016 compared to 2015
Noninterest expense totaled $6.7 billion for 2016, an increase of $455 million from 2015. This increase was primarily driven by higher personnel expense.
Personnel expense is the largest component of noninterest expense and includes salaries, wages and incentives, as well as pension and other employee benefit costs. Personnel expense totaled $4.0 billion, a $495 million increase compared to 2015. This increase was driven by a $284 million increase in salaries, which was primarily due to additional headcount from acquisitions. Incentives expense was higher $110 million due to performance against targets and acquisitions. Personnel expense also increased due to a $48 million increase in pension expense that reflects higher amortization, service and interest costs. Additionally, personnel expense reflects a $26 million increase in payroll taxes as a result of higher salaries and incentives.
Loss on early extinguishment of debt was down $173 million for 2016, as the prior year included a loss of $172 million, compared to a small gain for 2016.
Occupancy and equipment expense totaled $786 million for 2016, compared to $708 million for 2015. The increase reflects the acquisition activity. Software expense was higher $32 million compared to 2015, primarily reflecting higher depreciation on recent investments.
Outside IT services expense totaled $186 million for 2016, compared to $135 million in the prior year. This increase was due to higher costs related to projects.
Loan-related expense totaled $95 million for 2016, a decrease of $55 million compared to the prior year. This decrease is largely the result of a release of $31 million in reserves during the fourth quarter of 2016, which was primarily driven by lower anticipated loan repurchase requests.
Regulatory charges totaled $145 million for 2016, an increase of $44 million compared to the prior year. This increase reflects the impact from acquisitions and the surcharge assessed to large banks, which was implemented in the third quarter of 2016.
Other expense decreased $40 million primarily due to a net benefit of $73 million in the third quarter related to the settlement of certain legacy mortgage matters involving the origination of mortgage loans insured by the FHA. In addition, business referral expense decreased $16 million primarily due to the sale of American Coastal in the prior year. Partially offsetting these decreases was a $50 million charitable contribution to the Truist Charitable Fund. Excluding the items mentioned above and the impact of an increase of $521 million of amortization expense for intangibles, noninterest expense increased $5.3 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 approximately $250 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. Additionally, personnel expenses increased as a result of the completion of a post-Merger reevaluation of job grades that was also maderesulted in the third quarter.additional salaries, incentives and equity-based compensation expenses.
Merger-Related and Restructuring Charges
BB&T
Truist has incurred certain merger-related and restructuring charges, which include:
•severance and personnel-related costs or credits, which typically occur in corporate support and data processing functions;credits;
•occupancy and equipment charges or credits, which relate to costs or gains associated with lease terminations, obsolete equipment write-offs and the sale of duplicate facilities and equipment;
•professional services, which relate to legal and investment banking advisory fees and other consulting services pertaining to the transaction;restructuring initiatives or transactions;
•systems conversion and related charges, which represent costs to integrate the acquired entity’sentity's information technology systems; and
•other merger-related and restructuring charges or credits, which include expenses necessary to convert and combine the acquired branches and operations of merged companies, direct media advertising related to the mergers and acquisitions, asset and supply inventory write-offs, and other similar charges.charges; and
•write-offs related to exiting certain businesses.
Merger-related and restructuring accruals are established when the costs are incurred or once all requirements for a plan to dispose of or outsource certain business functions have been approved by management. In general, a major portion of accrued costs are utilized in conjunction with or immediately following the systems conversion, when most of the duplicate positions are eliminated and the terminated employees begin to receive severance. Other accruals are utilized over time based on the sale, closing or disposal of duplicate facilities or equipment or the expiration of lease contracts. Merger and restructuring accruals are re-evaluated periodically and adjusted as necessary. The remaining accruals at December 31, 20172020 are generally expected to be utilized within one year, unless they relate to specific contracts that expire later.
The 2020 merger-related and restructuring costs primarily reflect higher charges as a result of the Merger, including costs for severance and other benefits and costs related to exiting facilities, while the 2019 costs primarily reflect branch closures and other restructuring initiatives.
Truist Financial Corporation 47
The following table presents a summary of merger-related and restructuring charges and the related accruals:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Table 12: Merger-Related and Restructuring Accrual Activity |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in millions) | | | | | | | | | Accrual at Jan 1, 2019 | | Expense | | Utilized | | Accrual at Dec 31, 2019 | | | | Expense | | Utilized | | Accrual at Dec 31, 2020 | | | | |
Severance and personnel-related | | | | | | | | | $ | 43 | | | $ | 149 | | | $ | (146) | | | $ | 46 | | | | | $ | 232 | | | $ | (242) | | | $ | 36 | | | | | |
Occupancy and equipment | | | | | | | | | — | | | 13 | | | (13) | | | — | | | | | 294 | | | (294) | | | — | | | | | |
Professional services | | | | | | | | | 1 | | | 102 | | | (61) | | | 42 | | | | | 238 | | | (264) | | | 16 | | | | | |
Systems conversion and related costs | | | | | | | | | — | | | 4 | | | (4) | | | — | | | | | 30 | | | (30) | | | — | | | | | |
Other adjustments | | | | | | | | | — | | | 92 | | | (91) | | | 1 | | | | | 66 | | | (56) | | | 11 | | | | | |
Total (1) | | | | | | | | | $ | 44 | | | $ | 360 | | | $ | (315) | | | $ | 89 | | | | | $ | 860 | | | $ | (886) | | | $ | 63 | | | | | |
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Table 8 |
Merger-related and Restructuring Accrual Activity |
| | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 |
(Dollars in millions) | | Beginning Balance | | Expense | | Utilized | | Ending Balance | | Beginning Balance | | Expense | | Utilized | | Ending Balance |
Severance and personnel-related | | $ | 25 |
| | $ | 40 |
| | $ | (51 | ) | | $ | 14 |
| | $ | 26 |
| | $ | 51 |
| | $ | (52 | ) | | $ | 25 |
|
Occupancy and equipment (1) | | 21 |
| | 43 |
| | (44 | ) | | 20 |
| | 11 |
| | 49 |
| | (39 | ) | | 21 |
|
Professional services | | 1 |
| | 2 |
| | (3 | ) | | — |
| | 13 |
| | 14 |
| | (26 | ) | | 1 |
|
Systems conversion and related costs (1) | | 1 |
| | 26 |
| | (27 | ) | | — |
| | — |
| | 27 |
| | (26 | ) | | 1 |
|
Other adjustments | | 1 |
| | 4 |
| | (5 | ) | | — |
| | 2 |
| | 30 |
| | (31 | ) | | 1 |
|
Total | | $ | 49 |
| | $ | 115 |
| | $ | (130 | ) | | $ | 34 |
| | $ | 52 |
| | $ | 171 |
| | $ | (174 | ) | | $ | 49 |
|
(1) Includes asset impairment charges.
The 2017 costs primarily reflect branch closuresCompany recognized $825 million and other restructuring initiatives, while the 2016 costs primarily reflect the acquisitions of National Penn and Swett & Crawford.
Provision for Income Taxes
BB&T’s provision for income taxes totaled $911 million, $1.1 billion and $794$298 million for 2017, 2016the year ended December 31, 2020 and 2015, respectively. BB&T’s effective tax rates for2019, respectively, related to the years ended 2017, 2016Merger. At December 31, 2020 and 2015 were 27.4%, 30.2%2019, the Company had an accrual of $50 million and 27.2%, respectively. BB&T has extended credit to and invested in the obligations of states and municipalities and their agencies and has made other investments and loans that produce tax-exempt income. The income generated from these investments, together with certain other transactions that have favorable tax treatment, have reduced BB&T’s overall effective tax rate from the statutory rate in all periods presented. The lower effective tax rate for 2017 was due to a net tax benefit of $43$76 million related to the impact of tax reform.Merger, respectively. The lower effective tax rate for 2015 was primarily dueremaining expense and accrual relate to adjustments for uncertain tax positions.other restructuring activities.
Refer to the "Note 11. Income Taxes" for a reconciliation of the effective tax rate to the statutory tax rate and a discussion of uncertain tax positions and other tax matters.
Segment Results
See "Note 19.21. Operating Segments" for additional disclosures related to BB&T’sTruist's operating segments, the internal accounting and reporting practices used to manage these segments and financial disclosures for these segments.segments, including additional details related to results of operations.
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Table 13: Net Income by Reportable Segment |
| | | | | | | | | | | | | | | | | | | | | | | % Change |
Year Ended December 31, (Dollars in millions) | | | | | | | | | | | | | | | 2020 | | 2019 | | 2018 | | | | | | 2020 vs. 2019 | | 2019 vs. 2018 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer Banking and Wealth | | | | | | | | | | | | | | | | | $ | 3,059 | | | $ | 1,765 | | | $ | 1,435 | | | | | | | 73.3 | % | | 23.0 | % |
Corporate and Commercial Banking | | | | | | | | | | | | | | | | | 2,321 | | | 1,791 | | | 1,598 | | | | | | | 29.6 | | | 12.1 | |
Insurance Holdings | | | | | | | | | | | | | | | | | 407 | | | 318 | | | 253 | | | | | | | 28.0 | | | 25.7 | |
Other, Treasury & Corporate | | | | | | | | | | | | | | | | | (1,295) | | | (637) | | | (29) | | | | | | | 103.3 | | | NM |
Truist Financial Corporation | | | | | | | | | | | | | | | | | $ | 4,492 | | | $ | 3,237 | | | $ | 3,257 | | | | | | | 38.8 | | | (0.6) | |
Fluctuations in noninterest income and noninterest expense incurred directly by the segments are more fully discussed in the "Noninterest Income" and "Noninterest Expense" sections above. The operating results for Susquehanna and National Penn were included in OT&C prior to their systems conversions in mid-November 2015 and mid-July 2016, respectively. Post-conversion results are included in the segments that received the various lines of business, with the majority going to CB-Retail and CB-Commercial.
In 2017, BB&T restructured its segments to reflect a change in the way management reviews performance and makes decisions as discussed in "Note 19. Operating Segments." In addition, a change was made in the method for allocation of capital to the operating segments impacting both the allocated balances and funding credit. Results for prior periods have been revised to reflect the new allocations.
20172020 compared to 20162019
CommunityConsumer Banking Retail and Wealth
Consumer Finance
CB-RetailBanking and Wealth had 2,0492,781 banking offices at December 31, 2017,2020, a decrease of 147177 offices compared to the prior year.December 31, 2019. The decrease in offices was driven primarily driven by the consolidation of nearby financial centers104 branches leveraging the blended branch program strategy beginning in the fourth quarter, as well as 30 branches divested in the third quarter.
Consumer Banking and the closure of certain lower volume branches.
CB-RetailWealth net income was $1.1$3.1 billion in 2017, a decreasefor 2020, an increase of $37 million,$1.3 billion, or 3.3%73.3%, compared to 2016.
2019. Segment net interest income increased $159 million,$4.2 billion primarily due to the National Penn acquisition, deposit growthMerger. Noninterest income increased $1.7 billion due primarily to the Merger and higher funding spreads on deposits,residential mortgage income as a result of the lower rate environment driving mortgage production through refinance activity, partially offset by lower credit spreads on loans. Noninterestresidential mortgage servicing income increased $50 million, primarily due todriven by higher bankcardprepayment and merchant discounts, service charges on deposits, and checkcard fees, partially offset by a declinean MSR fair value adjustment in mortgage banking income due to a decrease in net MSR income.
2020. The allocated provision for credit losses increased $26$491 million primarily due to higher net charge-offs, partially offset by a decline in loss estimates.the Merger. Noninterest expense increased $256 million, driven by a net benefit$3.8 billion primarily due to operating expenses and amortization of $73 million in 2016intangibles related to the settlement of certain legacy mortgage matters involving the origination of mortgage loans insured by the FHA, the release of $31Merger and impacts from COVID-19 in 2020. The allocated provision for income taxes increased $378 million in mortgage repurchase reserves in 2016,due primarily to higher pre-tax income.
Consumer Banking and increases in personnel expense, allocated corporate expenses, and occupancy and equipment expense.
CB-RetailWealth average loans and leases HFIheld for investment increased $413 million,$67.9 billion, or 0.6%94.9%, compared to 2019 driven primarily by the prior year.Merger. Average loan and leases HFI for residential mortgage, home equity and direct lending and indirect auto loans increased $768 million,$19.8 billion, or 4.5%62.4%, $14.2 billion, or 111.6%, and $12.5 billion, or 99.7%, respectively.
Consumer Banking and Wealth average direct loanstotal deposits increased $391 million,$119.5 billion, or 3.4%. Partially offsetting these increases was average residential mortgage loans, which decreased $761 million,120.4%, compared to 2019 driven primarily by the Merger and COVID-19 stimulus impacts. Average noninterest-bearing deposits, money market and savings accounts, and time deposits increased $32.5 billion, or 2.5%.128.7%, $49.8 billion, or 114.8%, and $11.4 billion, or 91.6%, respectively.
Community48 Truist Financial Corporation
Corporate and Commercial Banking
Corporate and Commercial
CB-Commercial Banking net income was $834 million in 2017,$2.3 billion for 2020, an increase of $99$530 million, or 13.5%29.6%, compared to 2016.
2019. Segment net interest income increased $111 million,$2.4 billion, primarily due to the National Penn acquisition, loanMerger. Noninterest income increased $1.3 billion primarily due to the Merger and deposit growth and higher funding spreads on deposits,other increases in investment banking income, partially offset by lowerlosses in trading income primarily related to the decline in interest rates and widening of credit spreads on loans. Noninterest income increased $31 million, primarily due to higher service charges on deposits.
spreads. The allocated provision for credit losses increased $109$1.2 billion primarily due to the Merger as well as increased economic stress associated with the pandemic. Noninterest expense increased $1.9 billion primarily due to operating expenses and amortization of intangibles related to the Merger in 2020. The allocated provision for income taxes increased $103 million due primarily to higher pre-tax income.
Corporate and Commercial Banking average loans and leases held for investment increased $81.6 billion, or 95.9%, compared to 2019 driven primarily by the Merger and growth in corporate loans. Average loans and leases HFI for the Corporate and Institutional Group increased $47.4 billion, or 157.0%, driven primarily by the Merger and growth in commercial and industrial loans, while average loans and leases HFI for Commercial Community Banking increased $34.2 billion, or 62.3%, driven primarily by the Merger, and growth in commercial and industrial loans, and PPP impact.
Corporate and Commercial Banking average total deposits increased $68.0 billion, or 102.7%, compared to 2019 driven primarily by the Merger and COVID-19 stimulus impacts. Average interest checking, noninterest-bearing deposits and money market and savings increased $37.0 billion, or 291.4%, $26.1 billion, or 88.2%, and $4.3 billion, or 18.9%, respectively.
Insurance Holdings
Insurance Holdings net income was $407 million in 2020, an increase of $89 million, or 28.0%, compared to 2019. Noninterest income increased $129 million primarily due to organic growth in commercial property and casualty and other insurance commissions, along with acquisitions made in 2020.
Other, Treasury and Corporate
Other, Treasury and Corporate generated a net loss of $1.3 billion in 2020, compared to a net loss of $637 million in 2019. Segment net interest income decreased $158 million primarily due to a decline in funding charges on assets to other segments relative to the rate of improvement infunding credit trends and loan growth. Noninterest expense decreased $104 million, primarily due to lower personnel expense driven by a change in the allocation approach for capitalized loan origination costs in the current year as well as a decline in salaries expense and employee benefits expense. Additionally, there was a decline in allocated corporate expenses.
CB-Commercial average loans and leases HFI increased $2.4 billion, or 4.9%, partially driven by acquisition activity.
Financial Services and Commercial Finance
FS&CF net income was $491 million in 2017, an increase of $115 million, or 30.6%, compared to 2016.
Segment net interest income increased $57 million, primarily driven by higher funding spreadsprovided on deposits and average loan growth, partially offset by a decline in credit spreads on loans.liabilities. Noninterest income increased $33$447 million due primarily driven by higher trust and investment advisory revenues, operating lease income, commercial loan fees, investment banking and brokerage fees and commissions, and service chargesto the gain on deposits,sale of securities in 2020, partially offset by lower commercial mortgage banking income.
The allocated provision for credit losses decreased $143 million, primarily due to a decrease in reserves in the current period related to energy lending exposures, a decline in loss estimates and lower net charge-offs. Noninterest expense increased $49 million, primarily due to higher allocated corporate expenses and personnel expense, partially offset by a decline in merger-related and restructuring charges.
FS&CF continues to generate solid loan growth through expanded lending strategies, with Corporate Banking’s average loans HFI increasing $743 million, or 5.3%, compared to 2016, while BB&T Wealth’s average loans HFI increased $205 million, or 13.8%. Corporate Banking’s average transaction account deposits fell $112 million, or 5.4%, while BB&T Wealth grew transaction account balances by $760 million, or 19.8%. Client invested assets totaled $160.3 billion as of December 31, 2017, an increase of $16.6 billion, or 11.6%, compared to 2016. Average loans HFI at Grandbridge increased $200 million, or 15.6%, compared to 2016 and increased 15.5% and 9.1%, respectively, for Equipment Finance and Governmental Finance.
Insurance Holdings and Premium Finance
IH&PF net income was $161 million in 2017, a decrease of $5 million, or 3.0%, compared to 2016.
Noninterest income increased $46 million, which reflects the acquisition of Swett and Crawford in April 2016 and higher property and casualty insurance commissions, as well as higher life insurance commissions and employee benefit commissions.
Noninterest expense increased $65 million, primarily driven by higher personnel expense and allocated corporate expenses, both of which are primarily attributable to the Swett and Crawford acquisition.
Other, Treasury and Corporate
OT&C net loss was $163 million in 2017, compared to net income of $36 million in 2016.
Segment net interest income decreased $123 million, primarily due to the inclusion of National Penn results for a portion of the earlier period, a decline in average PCI loans and an increase in short-term borrowings, partially offset by an increase in average securities.
Noninterest income increased $150 million, primarily driven by a $142 million improvement in FDIC loss share income as a result of terminating the loss share agreements in the third quarter of 2016. Also, there were increases in income related to assets for certain post-employment benefits and income from SBIC private equity investments, partially offset by securities gains recognized in the earlier period.
The allocated provision for credit losses decreased $18 million, primarily due to credit losses for PCI loans. Noninterest expense increased $457 million, primarily due to the first quarter 2017 loss of $392 million on the early extinguishment of higher-cost FHLB advances, as well as higher personnel expense driven by a change in allocation approach for capitalized loan origination costs and higher expense related to assets for certain post-employment benefits. Additionally, 2017 included a $100 million charitable contribution made to BB&T’s philanthropic fund compared to a $50 million charitable contribution in 2016. Other increases to noninterest expense include professional services and software expense, partially offset by an increase in allocated corporate expenses that were allocated to other operating segments, lower merger-related and restructuring charges, and a decline in outside IT services. The benefit for income taxes increased $213 million as the first quarter of 2017 included $35 million of excess tax benefits from equity-based compensation plans and the fourth quarter of 2017 included a net tax benefit of $43 million due to the impact of tax reform.
2016 compared to 2015
Community Banking Retail and Consumer Finance
CB-Retail had 2,196 banking offices at the end of 2016, an increase of 57 offices compared to December 31, 2015. The increase in offices was primarily driven by the acquisition of 126 branches with the acquisition of National Penn, partially offset by the consolidation of nearby financial centers and the closure of certain lower volume branches.
CB-Retail net income was $1.1 billion in 2016, an increase of $181 million, or 19.1%, compared to 2015, primarily driven by the National Penn and Susquehanna acquisitions.
Segment net interest income increased $489 million, primarily driven by acquisition activity, average deposit and loan growth and higher funding spreads on deposits, partially offset by lower credit spreads on loans. Noninterest income increased $12 million, primarily due to higher service charges on deposits, checkcard fees and bankcard and merchant discounts, partially offset by a decline in mortgage banking income.
The allocated provision for credit losses increased $110$27 million primarily due to the provision for unfunded commitments. Noninterest expense increased $1.2 billion primarily due to operating expenses related to the Merger, higher merger-related charges and incremental operating expenses related to the Merger, loss on early extinguishment of long-term debt, and elevated COVID-related expenses in 2020. The benefit for income taxes increased $306 million primarily due to a decline in the rate of improvement in credit trends, higher net charge-offs and loan growth. Noninterest expense increased $112 million, primarily driven by higher personnel expense, allocated corporate expenses, occupancy and equipment expense, and amortization of intangibles, all of which increased primarily due to acquisition activity. The increases were partially offset by a decline in operating charge-offs due to a net benefit of $73 million in 2016 related to the settlement of certain legacy mortgage matters involving the origination of mortgage loans insured by the FHA, a decline in loan-related expense due to a $31 million release of mortgage repurchase reserves in 2016, and lower professional services.pre-tax loss.
CB-Retail average loans and leases HFI increased $4.7 billion, or 8.0%, compared to the prior year primarily due to acquisition activity. Average residential mortgage loans increased $62 million, or 0.2%, average indirect loans grew $1.1 billion, or 6.7%, and average direct loans increased $2.7 billion, or 30.5%, primarily due to acquisitions.Truist Financial Corporation 49
Community Banking Commercial
CB-Commercial net income was $735 million in 2016, an increase of $154 million, or 26.5%, compared to 2015, primarily driven by acquisitions.
Segment net interest income increased $339 million, primarily driven by acquisition activity, average loan and deposit growth and higher funding spreads on deposits, partially offset by lower credit spreads on loans.
The allocated provision for credit losses decreased $41 million, primarily due to lower net charge-offs and an improvement in credit trends. Noninterest expense increased $149 million, primarily driven by higher personnel expense, allocated corporate expenses and amortization of intangibles, all of which increased primarily due to acquisition activity.
CB-Commercial average loans and leases HFI increased $8.0 billion, or 19.6%, primarily driven by acquisition activity.
Financial Services and Commercial Finance
FS&CF net income was $376 million in 2016, an increase of $15 million, or 4.2%, compared to 2015.
Segment net interest income increased $100 million, primarily driven by higher loan and deposit balances and higher funding spreads on deposits, partially offset by lower credit spreads on loans. Noninterest income increased $102 million, primarily driven by higher trust and investment advisory revenues, commercial mortgage banking income, client and derivative income, operating lease income and investment banking and brokerage fees and commissions.
The allocated provision for credit losses increased $61 million, primarily driven by higher net charge-offs within the energy sector for the Corporate Banking loan portfolio. Noninterest expense increased $121 million, primarily due to higher personnel expense, depreciation on property held under operating leases, allocated corporate expenses and merger-related and restructuring charges.
FS&CF generated strong loan growth, with Corporate Banking’s average loans HFI increasing $2.1 billion, or 17.6%, compared to 2015, while BB&T Wealth’s average loans HFI increased $213 million, or 14.3%. Corporate Banking’s average transaction account deposits grew $495 million, or 31.3%, while BB&T Wealth grew transaction account balances by $743 million, or 19.9%, and money market and savings balances by $808 million, or 10.5%, compared to 2015, partially attributable to the ongoing identification and servicing of wealth clients in CB-Retail. Client invested assets totaled $143.7 billion as of December 31, 2016, an increase of $13.1 billion, or 10.0%, compared to 2015. Average loans HFI at Grandbridge increased $448 million, or 53.5%, compared to 2015 and increased 12.9% and 5.0%, respectively, for Equipment Finance and Governmental Finance.
Insurance Holdings and Premium Finance
IH&PF net income was $166 million in 2016, a decrease of $28 million, or 14.4%, compared to 2015.
Noninterest income increased $120 million, which primarily reflects the acquisition of Swett and Crawford and higher property and casualty insurance commissions, employee benefit commissions and life insurance commissions, partially offset by the sale of American Coastal in the second quarter of 2015.
Noninterest expense increased $154 million, primarily due to higher personnel expense and amortization of intangibles, which were driven by the Swett and Crawford acquisition. In addition, allocated corporate expenses increased. These increases were partially offset by lower business referral and insurance claims expense driven by the sale of American Coastal.
Other, Treasury and Corporate
OT&C net income was $36 million in 2016, a decrease of $3 million, or 7.7%, compared to 2015.
Segment net interest income decreased $203 million, primarily due to the inclusion of Susquehanna for a portion of the prior year and higher funding spreads credited to segments with deposits, partially offset by growth in the securities portfolio and the inclusion of National Penn for part of 2016.
Noninterest income increased $217 million, which reflects improved FDIC loss share income primarily due to the early termination in the third quarter of 2016, securities gains on the investment portfolio in 2016, the 2015 loss on sale of American Coastal and higher bank-owned life insurance income, partially offset by lower income from SBIC private equity investments.
Noninterest expense decreased $81 million, primarily due to a $172 million loss on early extinguishment of debt in 2015, the inclusion of Susquehanna for a portion of 2015, and an increase in allocated corporate expenses that were allocated to the operating segments. These declines were partially offset by higher personnel expense, occupancy and equipment expense, outside IT services and software expense, as well as higher regulatory charges and donations and contributions driven by the $50 million charitable contribution made in 2016. The benefit for income taxes fell $83 million, primarily driven by a $107 million tax benefit in 2015 as a result of a decision by the U.S. Court of Appeals related to previously disallowed deductions in connection with a financing transaction.
Analysis of Financial Condition
Investment Activities
BB&T’s board-approved
Truist’s Board-approved investment policy is carried out by the MRLCC, which meets regularly to review the economic environment and establish investment strategies. The MRLCC also has much broader responsibilities, which are discussed in the "Market Risk Management" section in "Management’s Discussion and Analysis of Financial Condition and Results of Operations."this MD&A.
Investment strategies are reviewed by the MRLCC based on the interest rate environment, balance sheet mix, actual and anticipated loan demand, funding opportunities and the overall interest rate sensitivity of the Company. In general, the goals of the investment portfolio are: (i) to provide a sufficient margin of liquid assets to meet unanticipated deposit and loan fluctuations and overall funds management objectives; (ii) to provide eligible securities to secure public funds, trust deposits as prescribed by law and other borrowings; and (iii) to earn an optimal return on funds invested commensurate with meeting the requirements of (i) and (ii) and consistent with ourthe Company’s risk appetite.
BranchTruist Bank invests in securities allowable under bank regulations. These securities may include obligations of the U.S. Treasury, U.S. government agencies, GSEs (including MBS), bank eligible obligations of any state or political subdivision, non-agency MBS, structured notes, bank eligible corporate obligations (including corporate debentures), commercial paper, negotiable CDs, bankers acceptances, mutual funds and limited types of equity securities. Branch Bank also may deal in securities subject to the provisions of the Gramm-Leach-Bliley Act. BB&T’s full-service brokerage and investment banking subsidiary engages in the underwriting, trading and sales of equity and debt securities subject to the risk management policies of the Company.
| | | | | | | | | | | | | | | |
Table 14: Composition of Securities Portfolio | | |
December 31, (Dollars in millions) | 2020 | | 2019 | | | | |
AFS securities (at fair value): | | | | | | | |
U.S. Treasury | $ | 1,746 | | | $ | 2,276 | | | | | |
GSE | 1,917 | | | 1,881 | | | | | |
Agency MBS - residential | 113,541 | | | 68,236 | | | | | |
Agency MBS - commercial | 3,057 | | | 1,341 | | | | | |
States and political subdivisions | 493 | | | 585 | | | | | |
Non-agency MBS | — | | | 368 | | | | | |
Other | 34 | | | 40 | | | | | |
| | | | | | | |
Total AFS securities | $ | 120,788 | | | $ | 74,727 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The following table provides information regarding the composition of the securities portfolio for the years presented:
|
| | | | | | | | | | | | |
Table 9 |
Composition of Securities Portfolio |
| | |
| | December 31, |
(Dollars in millions) | | 2017 | | 2016 | | 2015 |
AFS securities (at fair value): | | | | | | |
U.S. Treasury | | $ | 2,291 |
| | $ | 2,587 |
| | $ | 1,832 |
|
GSE | | 179 |
| | 180 |
| | 51 |
|
Agency MBS | | 20,101 |
| | 21,264 |
| | 20,046 |
|
States and political subdivisions | | 1,392 |
| | 2,205 |
| | 2,375 |
|
Non-agency MBS | | 576 |
| | 679 |
| | 989 |
|
Other | | 8 |
| | 11 |
| | 4 |
|
Total AFS securities | | 24,547 |
|
| 26,926 |
|
| 25,297 |
|
HTM securities (at amortized cost): | | |
| | |
| | |
|
U.S. Treasury | | 1,098 |
| | 1,098 |
| | 1,097 |
|
GSE | | 2,198 |
| | 2,197 |
| | 5,045 |
|
Agency MBS | | 19,660 |
| | 13,225 |
| | 12,267 |
|
States and political subdivisions | | 28 |
| | 110 |
| | 63 |
|
Other | | 43 |
| | 50 |
| | 58 |
|
Total HTM securities | | 23,027 |
|
| 16,680 |
|
| 18,530 |
|
Total securities | | $ | 47,574 |
|
| $ | 43,606 |
|
| $ | 43,827 |
|
The securities portfolio totaled $47.6$120.8 billion at December 31, 2017,2020, compared to $43.6$74.7 billion at December 31, 2016.2019. The increase was due primarily to a $47.0 billion increase in Agency MBS. The increase in the overallAgency MBS portfolio was due to new purchasesincludes the redeployment of excess liquidity. During 2020, the Company sold non-Agency MBS, and reinvestments insold and reinvested residential Agency MBS. These sales were the HTM portfolio. A change inprimary drivers for the mix between AFS and HTM also contributed togains of $402 million for the increase in HTM securities.year ended December 31, 2020.
As of December 31, 2017,2020, approximately 5.8%1.9% of the securities portfolio was variable rate, compared to 7.5%3.6% as of December 31, 2016.2019. The effective duration of the securities portfolio was 4.0 years at December 31, 2020, compared to 4.7 years at December 31, 2017, compared to 4.8 years at the end of 2016. The duration of the securities portfolio excludes equity securities2019.
U.S. Treasury, GSE and certain non-agency MBS acquired from the FDIC.
Agency MBS represented 83.6%99.6% of the total securities portfolio at year-end 2017,as of December 31, 2020, compared to 79.1%98.7% as of the prior year end.
Refer to "Note 2. Securities" for additional disclosures related to the evaluation of securities for OTTI.50 Truist Financial Corporation
The following table presents the securities portfolio at December 31, 2017,2020, segregated by major category of security holdings with ranges of maturities and average yields disclosed:
| | | | | | | | | | | | | | | |
Table 15: Securities Yields by Major Category and Maturity |
December 31, 2020 (Dollars in millions) | AFS | | |
Fair Value | | Yield (1) | | | | |
U.S. Treasury: | | | | | | | |
Within one year | $ | 254 | | | 1.51 | % | | | | |
One to five years | 1,492 | | | 0.85 | | | | | |
| | | | | | | |
Total | 1,746 | | | 0.95 | | | | | |
GSE: | | | | | | | |
Within one year | 288 | | | 2.81 | | | | | |
One to five years | 1,553 | | | 2.20 | | | | | |
After ten years | 76 | | | 3.03 | | | | | |
Total | 1,917 | | | 2.33 | | | | | |
Agency MBS - residential: (2) | | | | | | | |
| | | | | | | |
One to five years | 1 | | | 2.77 | | | | | |
Five to ten years | 441 | | | 2.42 | | | | | |
After ten years | 113,099 | | | 1.95 | | | | | |
Total | 113,541 | | | 1.95 | | | | | |
Agency MBS - commercial: (2) | | | | | | | |
| | | | | | | |
One to five years | 2 | | | 2.80 | | | | | |
Five to ten years | 10 | | | 2.86 | | | | | |
After ten years | 3,045 | | | 1.92 | | | | | |
Total | 3,057 | | | 1.93 | | | | | |
States and political subdivisions: | | | | | | | |
Within one year | 29 | | | 3.54 | | | | | |
One to five years | 132 | | | 2.58 | | | | | |
Five to ten years | 115 | | | 4.58 | | | | | |
After ten years | 217 | | | 3.65 | | | | | |
Total | 493 | | | 3.57 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other: | | | | | | | |
Within one year | 1 | | | 1.83 | | | | | |
One to five years | 7 | | | 3.55 | | | | | |
| | | | | | | |
After ten years | 26 | | | 1.70 | | | | | |
Total | 34 | | | 2.08 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total securities | $ | 120,788 | | | 1.95 | | | | | |
|
| | | | | | | | | | | | | | |
Table 10 |
Securities Yields By Major Category and Maturity |
| | |
| | December 31, 2017 |
| | AFS | | HTM |
(Dollars in millions) | | Fair Value | | Effective Yield (1) | | Amortized Cost | | Effective Yield (1) |
U.S. Treasury: | | | | | | | | |
Within one year | | $ | 307 |
| | 1.21 | % | | $ | — |
| | — | % |
One to five years | | 246 |
| | 1.53 |
| | 1,098 |
| | 2.30 |
|
Five to ten years | | 1,738 |
| | 1.52 |
| | — |
| | — |
|
Total | | 2,291 |
| | 1.48 |
| | 1,098 |
| | 2.30 |
|
GSE: | | |
| | |
| | |
| | |
|
One to five years | | 26 |
| | 1.45 |
| | 1,136 |
| | 2.35 |
|
Five to ten years | | 141 |
| | 1.55 |
| | 1,062 |
| | 2.21 |
|
After ten years | | 12 |
| | 2.69 |
| | — |
| | — |
|
Total | | 179 |
| | 1.61 |
| | 2,198 |
| | 2.29 |
|
Agency MBS: (2) | | |
| | |
| | |
| | |
|
One to five years | | 1 |
| | 2.09 |
| | — |
| | — |
|
Five to ten years | | 16 |
| | 2.64 |
| | 31 |
| | 2.09 |
|
After ten years | | 20,084 |
| | 2.23 |
| | 19,629 |
| | 2.56 |
|
Total | | 20,101 |
| | 2.23 |
| | 19,660 |
| | 2.56 |
|
States and political subdivisions: (3) | | |
| | |
| | |
| | |
|
Within one year | | 20 |
| | 4.96 |
| | — |
| | — |
|
One to five years | | 223 |
| | 5.05 |
| | 2 |
| | 1.72 |
|
Five to ten years | | 446 |
| | 4.45 |
| | 18 |
| | 1.28 |
|
After ten years | | 703 |
| | 6.03 |
| | 8 |
| | 1.59 |
|
Total | | 1,392 |
| | 5.35 |
| | 28 |
| | 1.40 |
|
Non-agency MBS: (2) | | |
| | |
| | |
| | |
|
After ten years | | 576 |
| | 18.96 |
| | — |
| | — |
|
Total | | 576 |
| | 18.96 |
| | — |
| | — |
|
Other: | | |
| | |
| | |
| | |
|
Within one year | | 8 |
| | 1.09 |
| | — |
| | — |
|
One to five years | | — |
| | — |
| | 1 |
| | 2.03 |
|
After ten years | | — |
| | — |
| | 42 |
| | 2.79 |
|
Total | | 8 |
| | 1.09 |
| | 43 |
| | 2.78 |
|
Total securities | | $ | 24,547 |
| | 2.73 |
| | $ | 23,027 |
| | 2.52 |
|
(1)Yields represent interest computed under the effective interest method on a TE basis using the federal income tax rate and the amortized cost of the securities. | |
(1) | Yields represent interest computed using the effective interest method on a TE basis using marginal income tax rates and the amortized cost of the securities. |
| |
(2) | For purposes of the maturity table, MBS, which are not due at a single maturity date, have been included in maturity groupings based on the contractual maturity. The expected life of MBS will differ from contractual maturities because borrowers may have the right to call or prepay the underlying mortgage loans. |
| |
(3) | Weighted-average yield excludes the effect of pay-fixed swaps hedging municipal securities. |
(2)For purposes of the maturity table, MBS, which are not due at a single maturity date, have been included in maturity groupings based on the contractual maturity. The expected life of MBS will differ from contractual maturities because borrowers may have the right to call or prepay the underlying mortgage loans.
Lending Activities
The primary goal
Truist strives to meet the credit needs of the BB&T lending function is to helpits clients achieve their financial goals by providing qualitywhile pursuing a balanced strategy of loan products that are fair to the clientprofitability, loan growth and profitable to the Company.loan quality. Management believes that this purpose can best be accomplished by building strong profitable client relationships over time with BB&T becoming an important contributor to the prosperity and well-being of its clients. In addition to the importance placed on client knowledge and continuous involvement with clients, BB&T’s lending process incorporates the standards of a consistent company-wide credit culture and andeveloping in-depth local market knowledge. Furthermore, theThe Company employs strict underwriting criteria governing the degree of risk assumed risk and the diversity of the loan portfolio in terms of type, industry and geographical concentration. In this context, BB&T strives
Truist lends to meeta diverse client base that is geographically dispersed to mitigate concentration risk arising from local and regional economic downturns. International loans were immaterial as of December 31, 2020 and 2019. The following discussion provides additional information on the Company's loan and lease portfolios. Refer to the "Risk Management" section for a discussion of the credit needsrisk management policies used to manage the portfolios.
Commercial Loan and Lease Portfolio
Commercial loans and leases represent the largest category of the Company's loan and lease portfolio. Commercial Community Banking generally targets small-to-middle market businesses with annual sales between $2 million and $500 million, while CIB provides lending solutions to large commercial clients. The commercial loan and lease portfolio consists of lending to public and private business clients and is composed of commercial and industrial, owner occupied, equipment leasing and financing and commercial real estate, as well as government and institutional financing.
Truist Financial Corporation 51
In accordance with the Company's lending policy, each commercial loan undergoes a detailed underwriting process. Commercial loans are typically priced with an interest rate tied to market indices, such as the prime rate, LIBOR, or SOFR and are individually monitored and reviewed for deterioration in the ability of the client to repay the loan. The majority of Truist's commercial loans are secured by real estate, business equipment, inventories and other types of collateral.
Residential Mortgage Loan Portfolio
Truist Bank offers various types of fixed and adjustable-rate loans for the purpose of constructing, purchasing or refinancing residential properties. Truist primarily originates conforming mortgage loans and higher quality jumbo and construction-to-permanent loans for owner-occupied properties. Conforming loans are loans that are underwritten in accordance with the underwriting standards set forth by FNMA and FHLMC. They are generally collateralized by one-to-four-family residential real estate, typically have loan-to-collateral value ratios of 80% or less at origination, or have mortgage insurance as required by investors and are made to borrowers in good credit standing.
Risks associated with mortgage lending include interest rate risk, which is mitigated through the sale of a substantial portion of conforming fixed-rate loans in the secondary mortgage market and an effective MSR hedging process. Credit risk is managed through rigorous underwriting procedures and mortgage insurance. The right to service the loans and receive servicing income is generally retained when conforming loans are sold. Management believes that the retention of mortgage servicing is a relationship driver in retail banking and a part of management's strategy to establish long-term client relationships and offer high quality client service. Truist also purchases residential mortgage loans from correspondent originators. The loans purchased from third party originators are subject to substantially the same underwriting and risk-management criteria as loans originated internally.
Residential Home Equity and Direct Loan Portfolio
The residential home equity and direct loan portfolio is composed of a wide variety of secured and unsecured loans offered through Truist’s branch network, as well as loans originated by LightStream, Truist’s national online consumer lending division. Loans originated through the Truist branch network include revolving home equity lines of credit secured by first or second liens on residential real estate and certain other secured and unsecured lending marketed to qualifying clients and other creditworthy candidates in Truist’s market areas. LightStream provides fixed-rate, unsecured lending to consumers with strong credit through its proprietary online loan origination system.
Indirect Auto Loan Portfolio
The indirect auto portfolio primarily includes secured indirect installment loans to consumers for the purchase of new and used automobiles. The indirect auto portfolio also includes nonprime and near prime automobile finance. Such loans are originated through approved franchised and independent dealers throughout the Truist market area and nationally through Regional Acceptance Corporation. These loans are relatively homogeneous and no single loan is individually significant in terms of its size and potential risk of loss. Indirect auto loans are subject to rigorous lending policies and procedures and are underwritten with note amounts and credit limits that are consistent with the Company's risk philosophy. In addition to its normal underwriting due diligence, Truist uses application systems and scoring systems to help underwrite and manage the credit risk in its indirect auto portfolio.
Indirect Other Loan Portfolio
The indirect other portfolio includes secured indirect installment loans to consumers for the purchase of new and used boats and recreational vehicles. The indirect other portfolio also includes small ticket consumer lending related to the purchase of power sports equipment. These loans are relatively homogeneous and no single loan is individually significant in terms of its size and potential risk of loss. These loans are subject to similar rigorous lending policies and procedures as the indirect auto loan portfolio. The indirect other loan portfolio also includes other indirect lending to consumers to finance home improvements, furniture purchases, and certain elective health-care services. These loans are originated in accordance with strict underwriting criteria as determined by Truist.
Student Loan Portfolio
The student loan portfolio is composed of government guaranteed student loans and certain private student loans originated by third parties. The government guarantee mitigates substantially all of the risk related to principal and interest repayment for this component of the portfolio. Private student loans were purchased from third party originators with credit enhancements that partially mitigate the Company’s credit exposure.
52 Truist Financial Corporation
Credit Card Loan Portfolio
The credit card portfolio consists of the outstanding balances on credit cards. Truist markets while pursuingcredit cards to its existing client base and does not solicit cardholders through nationwide programs or other forms of mass marketing. Such balances are generally unsecured and actively managed.
PCI
Prior to the adoption of CECL, the PCI balance included loans acquired with credit deterioration subsequent to origination as well as loans that were formerly covered by loss sharing agreements. In connection with the adoption of CECL, all loans previously in the PCI portfolio became PCD loans and were transferred to their respective portfolios.
Refer to "Note 5. Loans and ACL" for additional information.
The following table summarizes the loan portfolio:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 16: Loans and Leases as of Period End | | |
December 31, (Dollars in millions) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | |
Commercial: | | | | | | | | | | | | |
Commercial and industrial | | $ | 138,354 | | | $ | 130,180 | | | $ | 61,935 | | | $ | 59,153 | | | $ | 57,739 | | | |
CRE | | 26,595 | | | 26,832 | | | 16,808 | | | 17,173 | | | 15,945 | | | |
Commercial construction | | 6,491 | | | 6,205 | | | 4,252 | | | 4,090 | | | 3,819 | | | |
Lease financing | | 5,240 | | | 6,122 | | | 2,018 | | | 1,911 | | | 1,677 | | | |
Consumer: | | | | | | | | | | | | |
Residential mortgage | | 47,272 | | | 52,071 | | | 31,393 | | | 28,725 | | | 29,921 | | | |
Residential home equity and direct | | 26,064 | | | 27,044 | | | 11,775 | | | 12,088 | | | 12,295 | | | |
Indirect auto | | 26,150 | | | 24,442 | | | 11,282 | | | 11,641 | | | 13,342 | | | |
Indirect other | | 11,177 | | | 11,100 | | | 6,143 | | | 5,594 | | | 5,222 | | | |
Student | | 7,552 | | | 6,743 | | | — | | | — | | | — | | | |
Credit card | | 4,839 | | | 5,619 | | | 2,941 | | | 2,675 | | | 2,452 | | | |
PCI | | — | | | 3,484 | | | 466 | | | 651 | | | 910 | | | |
Total loans and leases HFI | | 299,734 | | | 299,842 | | | 149,013 | | | 143,701 | | | 143,322 | | | |
LHFS | | 6,059 | | | 8,373 | | | 988 | | | 1,099 | | | 1,716 | | | |
Total loans and leases | | $ | 305,793 | | | $ | 308,215 | | | $ | 150,001 | | | $ | 144,800 | | | $ | 145,038 | | | |
Loans and leases HFI were $299.7 billion at December 31, 2020, down $108 million compared to 2019.
Commercial loans increased $7.3 billion during 2020. The growth in the commercial portfolio was primarily in commercial and industrial loans and reflects PPP loan originations, which was partially offset by lower utilization of commercial lines. Truist served as the fourth largest PPP lender in 2020. The carrying value of PPP loans was $11.0 billion as of December 31, 2020. Additionally, 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. Growth in commercial portfolios was partially offset by a balanced strategydecline in dealer floor plan lending and the transfer of loan profitability, loan growth and loan quality.
During 2017, the classification$1.0 billion of certain loans and leases to held for sale related to the decision to exit a small ticket loan and lease portfolio.
Consumer loans decreased $3.2 billion during 2020 primarily those previously categorizeddue 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 auto due to expanded client offerings and an improving credit environment.
Credit card loans decreased $780 million during 2020 due to lower business and consumer spending as other lending subsidiaries, was reviseda result of COVID-19.
LHFS decreased $2.3 billion during 2020 primarily due to better reflect the naturesale of loans that had been placed in LHFS after the close of the underlying loans. Prior period amounts were reclassifiedMerger and the branch divestiture in connection with the Merger, partially offset by the transfer of $1.0 billion to conformLHFS due to the current presentation.decision to exit a small ticket loan and lease portfolio.
Truist Financial Corporation 53
|
| | | | | | | | | | | | | | | | | | | | |
Table 11 |
Quarterly Average Balances of Loans and Leases |
| | |
| | For the Three Months Ended |
(Dollars in millions) | | 12/31/2017 | | 9/30/2017 | | 6/30/2017 | | 3/31/2017 | | 12/31/2016 |
Commercial: | | | | | | | | | | |
Commercial and industrial | | $ | 58,478 |
| | $ | 58,211 |
| | $ | 58,150 |
| | $ | 57,125 |
| | $ | 57,226 |
|
CRE | | 20,998 |
| | 20,776 |
| | 20,304 |
| | 19,892 |
| | 19,830 |
|
Lease financing | | 1,851 |
| | 1,732 |
| | 1,664 |
| | 1,653 |
| | 1,570 |
|
Retail: | | | | | | | | | | |
Residential mortgage | | 28,559 |
| | 28,924 |
| | 29,392 |
| | 29,701 |
| | 30,044 |
|
Direct | | 11,901 |
| | 11,960 |
| | 12,000 |
| | 12,014 |
| | 12,046 |
|
Indirect | | 17,426 |
| | 17,678 |
| | 18,127 |
| | 18,137 |
| | 18,041 |
|
Revolving credit | | 2,759 |
| | 2,668 |
| | 2,612 |
| | 2,607 |
| | 2,608 |
|
PCI | | 689 |
| | 742 |
| | 825 |
| | 883 |
| | 974 |
|
Total loans and leases HFI | | 142,661 |
| | 142,691 |
| | 143,074 |
| | 142,012 |
| | 142,339 |
|
LHFS | | 1,428 |
| | 1,490 |
| | 1,253 |
| | 1,686 |
| | 2,230 |
|
Total loans and leases | | $ | 144,089 |
| | $ | 144,181 |
| | $ | 144,327 |
| | $ | 143,698 |
| | $ | 144,569 |
|
The following table presents a summary of the commercial loan portfolio, segregated by contractual maturities and interest rate terms. Determinations of maturities are based on contractual terms. Truist's credit policy typically does not permit automatic renewal of loans. At the scheduled maturity date (including balloon payment date), the client generally must request a new loan to replace the matured loan and execute either a new note or note modification with rate, terms and conditions negotiated at that time. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 17: Commercial Loan Maturities | |
December 31, 2020 (Dollars in millions) | | 1 Year or Less | | 1 to 5 Years | | After 5 Years | | | | Total |
Fixed rate: | | | | | | | | | | | |
Commercial and industrial | | $ | 4,776 | | | $ | 21,910 | | | $ | 18,383 | | | | | $ | 45,069 | | |
CRE | | 359 | | | 2,296 | | | 2,273 | | | | | 4,928 | | |
Commercial construction | | 10 | | | 85 | | | 116 | | | | | 211 | | |
Lease financing | | 189 | | | 1,876 | | | 1,807 | | | | | 3,872 | | |
Total fixed rate | | 5,334 | | | 26,167 | | | 22,579 | | | | | 54,080 | | |
Variable rate: | | | | | | | | | | |
Commercial and industrial | | 20,610 | | | 54,435 | | | 18,240 | | | | | 93,285 | | |
CRE | | 3,354 | | | 12,364 | | | 5,949 | | | | | 21,667 | | |
Commercial construction | | 1,738 | | | 4,054 | | | 488 | | | | | 6,280 | | |
Lease financing | | 147 | | | 315 | | | 906 | | | | | 1,368 | | |
Total variable rate | | 25,849 | | | 71,168 | | | 25,583 | | | | | 122,600 | | |
Total commercial loans and leases | | $ | 31,183 | | | $ | 97,335 | | | $ | 48,162 | | | | | $ | 176,680 | | |
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Certain residential mortgage loans have an initial period where the borrower is only required to pay the periodic interest. After the interest-only period, the loan will require the payment of both interest and principal over the remaining term. The outstanding balances of variable rate residential mortgage loans in the interest-only phase were approximately $358 million and $392 million at December 31, 2020 and December 31, 2019, respectively.
The following table presents the composition of average loans and leases for each of the last five quarters:
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Table 18: Average Loans and Leases |
For the Three Months Ended (Dollars in millions) | | Dec 31, 2020 | | Sep 30, 2020 | | Jun 30, 2020 | | Mar 31, 2020 | | Dec 31, 2019 |
Commercial: | | | | | | | | | | |
Commercial and industrial | | $ | 139,223 | | | $ | 143,452 | | | $ | 152,991 | | | $ | 131,743 | | | $ | 81,853 | |
CRE | | 27,030 | | | 27,761 | | | 27,804 | | | 27,046 | | | 19,896 | |
Commercial construction | | 6,616 | | | 6,861 | | | 6,748 | | | 6,409 | | | 4,506 | |
Lease financing | | 5,401 | | | 5,626 | | | 5,922 | | | 6,070 | | | 3,357 | |
Consumer: | | | | | | | | | | |
Residential mortgage | | 48,847 | | | 51,500 | | | 52,380 | | | 52,993 | | | 34,824 | |
Residential home equity and direct | | 26,327 | | | 26,726 | | | 27,199 | | | 27,564 | | | 15,810 | |
Indirect auto | | 25,788 | | | 24,732 | | | 24,721 | | | 24,975 | | | 15,390 | |
Indirect other | | 11,291 | | | 11,530 | | | 11,282 | | | 10,950 | | | 7,772 | |
Student | | 7,519 | | | 7,446 | | | 7,633 | | | 7,787 | | | 1,825 | |
Credit card | | 4,818 | | | 4,810 | | | 4,949 | | | 5,534 | | | 3,788 | |
PCI | | — | | | — | | | — | | | — | | | 1,220 | |
Total average loans and leases HFI | | $ | 302,860 | | | $ | 310,444 | | | $ | 321,629 | | | $ | 301,071 | | | $ | 190,241 | |
Average loans and leases held for investment for the fourth quarter of 20172020 were $142.7$302.9 billion, down $30 million, or 0.1 percent annualized$7.6 billion compared to the third quarter of 2017.2020.
Average commercial loans decreased $5.4 billion, primarily in commercial and industrial loans increased $267 million, while average CRE increased $222 million. Average lease financing increased $119 million due to strong production from our leasing businesses. paydowns on commercial lines. This was partially offset by growth in mortgage warehouse lending, dealer floor plan lending and governmental finance loans. The carrying value of PPP loans was down $1.4 billion compared to September 30, 2020, which resulted in a decline of $304 million in average PPP loans compared to the average for the third quarter of 2020. In addition, average commercial loans were impacted by the transfer of $1.0 billion of certain loans and leases to held for sale, which resulted in a decline in the average balance of $323 million compared to the third quarter of 2020.
Average revolving credit increased $91 million,consumer loans decreased $2.2 billion primarily due to seasonal spending.seasonally lower loan production and 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 auto loans.
Average54 Truist Financial Corporation
COVID-19 Lending Activities
The CARES Act created the PPP, which has temporarily expanded the Small Business Administration’s business loan guarantee program. The CARES Act additionally 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." Payment relief assistance includes forbearance, deferrals, extension and re-aging programs, along with certain other modification strategies. The following table provides a summary of accommodations as of December 31, 2020:
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Table 19: Client Accommodations (1) |
| Active Accommodations | | Exited Accommodations | | |
December 31, 2020 (Dollars in millions) | Total Count | | Outstanding Balance | | Outstanding Balance | | % Paid-off or Current (2) | | Types of Accommodations |
Commercial | 835 | | | $ | 274 | | | $ | 21,239 | | | 97.2 | % | | Clients may elect to defer loan or lease payments for up to 90 days without late fees being incurred but with finance charges continuing to accrue. |
Consumer | 123,191 | | | 3,729 | | | 8,062 | | | 90.8 | | | Clients may elect to defer loan payments for time periods that generally range from 30 to 90 days without late fees being incurred but with finance charges generally continuing to accrue. The Company’s residential mortgage forbearance program generally provides up to 180 days of relief, provided that additional relief may be provided in certain circumstances. |
Credit card | 5,996 | | | 31 | | | 187 | | | 88.5 | | | Clients may elect to defer payments for up to 90 days without late fees being incurred but with finance charges accruing. In addition, Truist provided credit card clients with 5% cash back on qualifying card purchases for certain important basic needs. |
Total | 130,022 | | | $ | 4,034 | | | $ | 29,488 | | | | | |
(1)Excludes approximately 46,000 of active accommodations related to government guaranteed loans totaling approximately $2.3 billion.
(2)Calculated based on accommodation count; includes loans that are less than 30 days past due.
The following table provides a summary of the Company’s exposure related to loans that have exited accommodations:
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Table 20: Accommodations Exposure |
December 31, 2020 (Dollars in billions) | Exposure |
Current | $ | 28,571 | |
Past due and still accruing | 545 | |
Nonperforming | 372 | |
Total | $ | 29,488 | |
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 9.0% of loans held for investment at December 31, 2020. Truist is actively managing these portfolios and will continue to make underwriting or risk acceptance adjustments as appropriate. These exposures decreased $0.8 billion or 2.6% during the fourth quarter. In addition, management is closely monitoring its leveraged lending and small secured real estate portfolios which comprised 3.1% and 1.5% of loans held for investment at December 31, 2020, respectfully.
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Table 21: Selected Credit Exposures |
December 31, 2020 (Dollars in billions) | Outstanding Balance | | Percentage of Loans HFI |
Hotels, Resorts & Cruise Lines | $ | 6.5 | | | 2.2 | % |
Senior Care | 6.2 | | | 2.1 | |
Oil & Gas Portfolio | 4.9 | | | 1.6 | |
Acute Care Facilities | 4.6 | | | 1.5 | |
Restaurants | 2.9 | | | 1.0 | |
Sensitive Retail | 2.0 | | | 0.6 | |
Total | $ | 27.1 | | | 9.0 | % |
Other exposures (included in industries above): | | | |
Leveraged lending | $ | 9.4 | | | 3.1 | % |
Small secured real estate | 4.4 | | | 1.5 | |
Truist Financial Corporation 55
Asset Quality
The following tables summarize asset quality information for each of the last five years:
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Table 22: Asset Quality | | | | | | | | |
December 31, (Dollars in millions) | 2020 | | | | | | | | 2019 | | 2018 | | 2017 | | 2016 | | |
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NPAs: | | | | | | | | | | | | | | | | | |
NPLs: | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 532 | | | | | | | | | $ | 212 | | | $ | 200 | | | $ | 259 | | | $ | 369 | | | |
CRE | 75 | | | | | | | | | 10 | | | 63 | | | 37 | | | 40 | | | |
Commercial construction | 14 | | | | | | | | | — | | | 2 | | | 8 | | | 17 | | | |
Lease financing | 28 | | | | | | | | | 8 | | | 3 | | | 1 | | | 4 | | | |
Residential mortgage | 316 | | | | | | | | | 55 | | | 119 | | | 129 | | | 172 | | | |
Residential home equity and direct | 205 | | | | | | | | | 67 | | | 53 | | | 64 | | | 63 | | | |
Indirect auto | 155 | | | | | | | | | 100 | | | 82 | | | 71 | | | 71 | | | |
Indirect other | 5 | | | | | | | | | 2 | | | — | | | 1 | | | — | | | |
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Total NPLs HFI | 1,330 | | | | | | | | | 454 | | | 522 | | | 570 | | | 736 | | | |
Loans held for sale | 5 | | | | | | | | | 107 | | | — | | | — | | | — | | | |
Total nonaccrual loans and leases | 1,335 | | | | | | | | | 561 | | | 522 | | | 570 | | | 736 | | | |
Foreclosed real estate | 20 | | | | | | | | | 82 | | | 35 | | | 32 | | | 50 | | | |
Other foreclosed property | 32 | | | | | | | | | 41 | | | 28 | | | 25 | | | 27 | | | |
Total nonperforming assets | $ | 1,387 | | | | | | | | | $ | 684 | | | $ | 585 | | | $ | 627 | | | $ | 813 | | | |
TDRs: | | | | | | | | | | | | | | | | | |
Performing TDRs: | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 78 | | | | | | | | | $ | 47 | | | $ | 65 | | | $ | 50 | | | $ | 57 | | | |
CRE | 47 | | | | | | | | | 6 | | | 8 | | | 11 | | | 16 | | | |
Commercial construction | — | | | | | | | | | 37 | | | 2 | | | 5 | | | 9 | | | |
Lease financing | 60 | | | | | | | | | — | | | — | | | — | | | — | | | |
Residential mortgage | 648 | | | | | | | | | 470 | | | 656 | | | 605 | | | 769 | | | |
Residential home equity and direct | 88 | | | | | | | | | 51 | | | 56 | | | 63 | | | 69 | | | |
Indirect auto | 392 | | | | | | | | | 333 | | | 299 | | | 274 | | | 234 | | | |
Indirect other | 6 | | | | | | | | | 5 | | | 6 | | | 7 | | | 6 | | | |
Student | 5 | | | | | | | | | — | | | — | | | — | | | — | | | |
Credit card | 37 | | | | | | | | | 31 | | | 27 | | | 28 | | | 27 | | | |
Total performing TDRs | $ | 1,361 | | | | | | | | | $ | 980 | | | $ | 1,119 | | | $ | 1,043 | | | $ | 1,187 | | | |
Nonperforming TDRs | 164 | | | | | | | | | 82 | | | 176 | | | 189 | | | 184 | | | |
Total TDRs | $ | 1,525 | | | | | | | | | $ | 1,062 | | | $ | 1,295 | | | $ | 1,232 | | | $ | 1,371 | | | |
Loans 90 days or more past due and still accruing: (1) | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 13 | | | | | | | | | $ | 1 | | | $ | — | | | $ | 1 | | | $ | — | | | |
CRE | — | | | | | | | | | — | | | — | | | 1 | | | — | | | |
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Residential mortgage | 841 | | | | | | | | | 543 | | | 405 | | | 465 | | | 522 | | | |
Residential home equity and direct | 10 | | | | | | | | | 9 | | | 8 | | | 6 | | | 6 | | | |
Indirect auto | 2 | | | | | | | | | 11 | | | 6 | | | 6 | | | 5 | | | |
Indirect other | 2 | | | | | | | | | 2 | | | — | | | — | | | 1 | | | |
Student | 1,111 | | | | | | | | | 188 | | | — | | | — | | | — | | | |
Credit card | 29 | | | | | | | | | 22 | | | 13 | | | 12 | | | 12 | | | |
PCI | — | | | | | | | | | 1,218 | | | 30 | | | 57 | | | 90 | | | |
Total loans 90 days or more past due and still accruing | $ | 2,008 | | | | | | | | | $ | 1,994 | | | $ | 462 | | | $ | 548 | | | $ | 636 | | | |
Loans 30-89 days past due and still accruing: (1) | | | | | | | | | | | | | | | | | |
Commercial and industrial | $ | 83 | | | | | | | | | $ | 94 | | | $ | 34 | | | $ | 41 | | | $ | 44 | | | |
CRE | 14 | | | | | | | | | 5 | | | 4 | | | 8 | | | 6 | | | |
Commercial construction | 5 | | | | | | | | | 1 | | | 1 | | | — | | | 2 | | | |
Lease financing | 6 | | | | | | | | | 2 | | | 1 | | | 4 | | | 4 | | | |
Residential mortgage | 782 | | | | | | | | | 498 | | | 456 | | | 472 | | | 525 | | | |
Residential home equity and direct | 98 | | | | | | | | | 122 | | | 63 | | | 67 | | | 62 | | | |
Indirect auto | 495 | | | | | | | | | 560 | | | 390 | | | 373 | | | 347 | | | |
Indirect other | 68 | | | | | | | | | 85 | | | 46 | | | 39 | | | 30 | | | |
Student | 618 | | | | | | | | | 650 | | | — | | | — | | | — | | | |
Credit card | 51 | | | | | | | | | 56 | | | 26 | | | 21 | | | 21 | | | |
PCI | — | | | | | | | | | 140 | | | 23 | | | 27 | | | 36 | | | |
Total loans 30-89 days past due and still accruing | $ | 2,220 | | | | | | | | | $ | 2,213 | | | $ | 1,044 | | | $ | 1,052 | | | $ | 1,077 | | | |
(1)The past due status of loans that received a deferral under the CARES Act is generally frozen during the deferral period.
56 Truist Financial Corporation
Nonperforming assets totaled $1.4 billion at December 31, 2020, up $703 million compared to December 31, 2019 primarily from the adoption of CECL, which resulted in the discontinuation of the pool-level accounting for PCI loans and replaced that with a loan-level evaluation for nonaccrual status. As of December 31, 2019, there was approximately $500 million of PCI loans that would have been classified as nonperforming had the Company evaluated accrual status on a loan level basis. The remaining increase in nonperforming loans held for investment is primarily in commercial and industrial loans and an increase in nonperforming mortgage loans due to loans exiting certain accommodation programs related to the CARES Act. Nonperforming loans and leases represented 0.44% of total loans and leases, up 26 basis points compared to December 31, 2019.
Performing TDRs were up $381 million compared to the prior year primarily in residential mortgage, lease financing and indirect auto loans. This increase primarily reflects the application of acquisition accounting related to the Merger, which resulted in the removal of the TDR designation on all loans that were restructured by SunTrust prior to the Merger date.
Loans 90 days or more past due and still accruing totaled $2.0 billion at December 31, 2020, relatively flat compared to the prior year. In connection with the discontinuation of pool level accounting for PCI loans, loans 90 days or more past due and still accruing decreased as loan-level evaluations resulted in certain loans being placed in nonaccrual status. This decrease was partially offset by an increase in government guaranteed student loans. Additionally, residential mortgage loans decreased $365 million as the majority of conforming loans continue to be sold in the secondary market. In addition, average indirect loans decreased $252 million,90 days or more past due increased primarily due to strategic optimizationthe repurchase of delinquent government guaranteed loans. The ratio of loans 90 days or more past due and directing investments toward higher-yielding assets.still accruing as a percentage of loans and leases was 0.67% at December 31, 2020, an increase of 1 basis point from the prior year. Excluding government guaranteed and PCI loans, the ratio of loans 90 days or more past due and still accruing as a percentage of loans and leases was 0.04% at December 31, 2020, up 1 basis point from December 31, 2019.
Loans 30-89 days past due and still accruing totaled $2.2 billion at December 31, 2020, relatively flat compared to the prior year. Loans 30-89 days past due reflects a decrease in PCI loans, offset by a corresponding increase in the portfolios where these loans were transferred in connection with the implementation of CECL. The ratio of loans 30-89 days or more past due and still accruing as a percentage of loans and leases was 0.74% at December 31, 2020, flat compared to the prior year.
Problem loans include NPLs and loans that are 90 days or more past due and still accruing as disclosed in Table 22. 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.
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Table 23: Asset Quality Ratios | | | | | | | | | |
As Of / For The Year Ended December 31, | | | | | | | | | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
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Loans 30-89 days past due and still accruing as a percentage of loans and leases HFI | | | | | | | | | | 0.74 | % | | 0.74 | % | | 0.70 | % | | 0.73 | % | | 0.75 | % |
Loans 90 days or more past due and still accruing as a percentage of loans and leases HFI | | | | | | | | | | 0.67 | | | 0.66 | | | 0.31 | | | 0.38 | | | 0.44 | |
NPLs as a percentage of loans and leases HFI | | | | | | | | | | 0.44 | | | 0.15 | | | 0.35 | | | 0.40 | | | 0.51 | |
Nonperforming loans and leases as a percentage of loans and leases (1) | | | | | | | | | | 0.44 | | | 0.18 | | | 0.35 | | | 0.40 | | | 0.51 | |
NPAs as a percentage of: | | | | | | | | | | | | | | | | | | |
Total assets (1) | | | | | | | | | | 0.27 | | | 0.14 | | | 0.26 | | | 0.28 | | | 0.37 | |
Loans and leases HFI plus foreclosed property | | | | | | | | | | 0.46 | | | 0.19 | | | 0.39 | | | 0.44 | | | 0.57 | |
Net charge-offs as a percentage of average loans and leases HFI | | | | | | | | | | 0.36 | | | 0.40 | | | 0.36 | | | 0.38 | | | 0.38 | |
ALLL as a percentage of loans and leases HFI | | | | | | | | | | 1.95 | | | 0.52 | | | 1.05 | | | 1.04 | | | 1.04 | |
Ratio of ALLL to: | | | | | | | | | | | | | | | | | | |
Net charge-offs | | | | | | | | | | 5.21x | | 2.44x | | 2.98x | | 2.78x | | 2.80x |
NPLs | | | | | | | | | | 4.39x | | 3.41x | | 2.99x | | 2.62x | | 2.03x |
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) | | | | | | | | | | 0.04 | % | | 0.03 | % | | 0.04 | % | | 0.05 | % | | 0.07 | % |
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Applicable ratios are annualized.
(1)Includes LHFS.
(2)This asset quality ratio has been adjusted to remove the impact of government guaranteed mortgage, student and PPP 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 57
The following table presents activity related to NPAs:
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Table 24: Rollforward of NPAs | |
(Dollars in millions) | | 2020 | | 2019 | |
Balance, January 1 | | $ | 684 | | | $ | 585 | | |
New NPAs (1) | | 3,247 | | | 1,499 | | |
Advances and principal increases | | 299 | | | 143 | | |
Disposals of foreclosed assets (2) | | (432) | | | (479) | | |
Disposals of NPLs (3) | | (712) | | | (239) | | |
Charge-offs and losses | | (578) | | | (295) | | |
Payments | | (766) | | | (392) | | |
Transfers to performing status | | (339) | | | (137) | | |
Other, net | | (16) | | | (1) | | |
Ending balance, December 31 | | $ | 1,387 | | | $ | 684 | | |
(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 $139 million and $228 million for the year ended December 31, 2020 and 2019, respectively.
(3)Includes charge-offs and losses recorded upon sale of $132 million and $39 million for the year ended December 31, 2020 and 2019, respectively.
TDRs occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near term and a concession has been granted to the borrower. As a result, Truist works with variableborrowers to prevent further difficulties and to improve the likelihood of recovery on a 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. Payment relief assistance provided by Truist includes forbearance, deferrals, extension and re-aging programs, along with certain other modification strategies. The Company adopted certain provisions of the CARES Act and other regulatory guidance that provide relief from the requirement to apply TDR accounting to (1) certain modifications of federally backed mortgages upon request from the borrower, and (2) certain modifications of other non-federally backed mortgages for borrowers impacted by the COVID-19 pandemic that were less than 30 days past due at December 31, 2019. Refer to "Note 1. Basis of Presentation" for Truist’s policy related to TDRs and COVID-19 loan modifications.
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 are evaluated for potential treatment as TDRs in accordance with Truist's accounting policies.
The following table provides a summary of performing TDR activity:
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Table 25: Rollforward of Performing TDRs | |
(Dollars in millions) | | 2020 | | 2019 | |
Balance, January 1 | | $ | 980 | | | $ | 1,119 | | |
Inflows | | 933 | | | 576 | | |
Payments and payoffs (1) | | (194) | | | (214) | | |
Charge-offs | | (44) | | | (67) | | |
Transfers to nonperforming TDRs (2) | | (78) | | | (77) | | |
Removal due to the passage of time | | (8) | | | (18) | | |
Non-concessionary re-modifications | | (3) | | | (8) | | |
Transferred to LHFS, sold and other | | (225) | | | (331) | | |
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Balance, December 31 | | $ | 1,361 | | | $ | 980 | | |
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(1)Includes scheduled principal payments, prepayments and payoffs of amounts outstanding.
(2)Represent loans that no longer meet the requirements necessary to reflect the loan in accruing status.
TDR classification may be removed due to the passage of time if the loan: (i) did not include a forgiveness of principal or interest, rates:(ii) has performed in accordance with the modified terms (generally a minimum of six months), (iii) was reported as a TDR over a year-end reporting period, and (iv) reflected an interest rate on the modified loan that was no less than a market rate at the date of modification. TDR classification may also be removed for an accruing loan upon the occurrence of a subsequent non-concessionary modification granted at market terms and within current underwriting guidelines. In connection with consumer TDRs, a NPL will be returned to accruing status when (i) the borrower has resumed paying the full amount of the scheduled contractual interest and principal payments, (ii) management concludes that all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment, and (iii) there is a sustained period of repayment performance, generally a minimum of six months.
58 Truist Financial Corporation
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Table 12 |
Variable Rate Loans (Excluding PCI and LHFS) |
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December 31, 2017 | | Outstanding Balance | | Wtd. Avg. Contractual Rate | | Wtd. Avg. Remaining Term (1) |
(Dollars in millions) | | | |
Commercial: | | | | | | | |
Commercial and industrial | | $ | 38,562 |
| | 3.13 | % | | 4.1 |
| yrs |
CRE | | 16,046 |
| | 3.94 |
| | 4.0 |
| |
Lease financing | | 133 |
| | 3.22 |
| | 5.6 |
| |
Retail: | | |
| | |
| | |
| |
Residential mortgage | | 5,148 |
| | 3.62 |
| | 24.4 |
| |
Direct | | 9,777 |
| | 4.43 |
| | 8.0 |
| |
Indirect | | 20 |
| | 4.06 |
| | NM |
| |
Revolving credit | | 2,552 |
| | 10.86 |
| | NM |
| |
| |
(1) | Commercial and industrial loans and direct loans totaling $1.7 billion and $100 million, respectively, have been excluded from the weighted average remaining term because they are callable on demand. |
The following table provides further details regarding the payment status of TDRs outstanding at December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 26: Payment Status of TDRs (1) |
December 31, 2020 (Dollars in millions) | Current | | Past Due 30-89 Days | | Past Due 90 Days Or More | | Total |
Performing TDRs: | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | |
Commercial and industrial | $ | 77 | | | 98.7 | % | | $ | — | | | — | % | | $ | 1 | | | 1.3 | % | | $ | 78 | |
CRE | 47 | | | 100.0 | | | — | | | — | | | — | | | — | | | 47 | |
Commercial construction | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Lease financing | 60 | | | 100.0 | | | — | | | — | | | — | | | — | | | 60 | |
Consumer: | | | | | | | | | | | | | |
Residential mortgage | 383 | | | 59.1 | | | 107 | | | 16.5 | | | 158 | | | 24.4 | | | 648 | |
Residential home equity and direct | 82 | | | 93.2 | | | 5 | | | 5.7 | | | 1 | | | 1.1 | | | 88 | |
Indirect auto | 333 | | | 84.9 | | | 59 | | | 15.1 | | | — | | | — | | | 392 | |
Indirect other | 5 | | | 83.3 | | | 1 | | | 16.7 | | | — | | | — | | | 6 | |
Student | 5 | | | 100.0 | | | — | | | — | | | — | | | — | | | 5 | |
Credit card | 32 | | | 86.5 | | | 3 | | | 8.1 | | | 2 | | | 5.4 | | | 37 | |
Total performing TDRs | 1,024 | | | 75.2 | | | 175 | | | 12.9 | | | 162 | | | 11.9 | | | 1,361 | |
Nonperforming TDRs | 76 | | | 46.3 | | | 20 | | | 12.2 | | | 68 | | | 41.5 | | | 164 | |
Total TDRs | $ | 1,100 | | | 72.1 | | | $ | 195 | | | 12.8 | | | $ | 230 | | | 15.1 | | | $ | 1,525 | |
(1)Past due performing TDRs are included in past due disclosures and nonperforming TDRs are included in NPL disclosures.
Truist Financial Corporation 59
ACL
Activity related to the ACL is presented in the following tables:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Table 27: Activity in ACL | | | | | | | | | | |
| | | | | | | | | | | | | |
(Dollars in millions) | | | | | | | | | | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | | | |
Balance, beginning of period | | | | | | | | | | | $ | 1,889 | | | $ | 1,651 | | | $ | 1,609 | | | $ | 1,599 | | | $ | 1,550 | | | | | |
CECL adoption - impact to retained earnings before tax | | | | | | | | | | | 2,762 | | | — | | | — | | | — | | | — | | | | | |
CECL adoption - reserves on PCD assets | | | | | | | | | | | 378 | | | — | | | — | | | — | | | — | | | | | |
Provision for credit losses | | | | | | | | | | | 2,335 | | | 615 | | | 566 | | | 547 | | | 572 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Charge-offs: | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | | | | | | | | | | (358) | | | (90) | | | (92) | | | (95) | | | (143) | | | | | |
CRE | | | | | | | | | | | (78) | | | (33) | | | (10) | | | (8) | | | (8) | | | | | |
Commercial construction | | | | | | | | | | | (30) | | | — | | | (3) | | | (2) | | | (1) | | | | | |
Lease financing | | | | | | | | | | | (54) | | | (11) | | | (4) | | | (5) | | | (6) | | | | | |
Residential mortgage | | | | | | | | | | | (56) | | | (21) | | | (21) | | | (47) | | | (40) | | | | | |
Residential home equity and direct | | | | | | | | | | | (231) | | | (93) | | | (79) | | | (69) | | | (61) | | | | | |
Indirect auto | | | | | | | | | | | (378) | | | (370) | | | (342) | | | (355) | | | (315) | | | | | |
Indirect other | | | | | | | | | | | (60) | | | (62) | | | (49) | | | (47) | | | (51) | | | | | |
Student | | | | | | | | | | | (23) | | | — | | | — | | | — | | | — | | | | | |
Credit card | | | | | | | | | | | (182) | | | (109) | | | (76) | | | (68) | | | (61) | | | | | |
PCI | | | | | | | | | | | — | | | — | | | (2) | | | (1) | | | (15) | | | | | |
Total charge-offs | | | | | | | | | | | (1,450) | | | (789) | | | (678) | | | (697) | | | (701) | | | | | |
Recoveries: | | | | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | | | | | | | | | | 92 | | | 25 | | | 39 | | | 36 | | | 44 | | | | | |
CRE | | | | | | | | | | | 5 | | | 5 | | | 3 | | | 9 | | | 9 | | | | | |
Commercial construction | | | | | | | | | | | 11 | | | 3 | | | 5 | | | 7 | | | 10 | | | | | |
Lease financing | | | | | | | | | | | 4 | | | 1 | | | 1 | | | 2 | | | 2 | | | | | |
Residential mortgage | | | | | | | | | | | 10 | | | 2 | | | 2 | | | 2 | | | 3 | | | | | |
Residential home equity and direct | | | | | | | | | | | 66 | | | 30 | | | 25 | | | 27 | | | 28 | | | | | |
Indirect auto | | | | | | | | | | | 87 | | | 52 | | | 49 | | | 46 | | | 44 | | | | | |
Indirect other | | | | | | | | | | | 23 | | | 17 | | | 13 | | | 14 | | | 11 | | | | | |
Student | | | | | | | | | | | 1 | | | — | | | — | | | — | | | — | | | | | |
Credit card | | | | | | | | | | | 32 | | | 20 | | | 17 | | | 17 | | | 18 | | | | | |
Total recoveries | | | | | | | | | | | 331 | | | 155 | | | 154 | | | 160 | | | 169 | | | | | |
Net charge-offs | | | | | | | | | | | (1,119) | | | (634) | | | (524) | | | (537) | | | (532) | | | | | |
Other | | | | | | | | | | | (46) | | | 257 | | | — | | | — | | | 9 | | | | | |
Balance, end of period | | | | | | | | | | | $ | 6,199 | | | $ | 1,889 | | | $ | 1,651 | | | $ | 1,609 | | | $ | 1,599 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
ALLL (excluding PCD / PCI loans) | | | | | | | | | | | $ | 5,668 | | | $ | 1,541 | | | $ | 1,549 | | | $ | 1,462 | | | $ | 1,445 | | | | | |
ALLL for PCD / PCI loans | | | | | | | | | | | 167 | | | 8 | | | 9 | | | 28 | | | 44 | | | | | |
RUFC | | | | | | | | | | | 364 | | | 340 | | | 93 | | | 119 | | | 110 | | | | | |
Total ACL | | | | | | | | | | | $ | 6,199 | | | $ | 1,889 | | | $ | 1,651 | | | $ | 1,609 | | | $ | 1,599 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
The ACL totaled $6.2 billion at December 31, 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 December 31, 2017, approximately $1262020, the allowance for loan and lease losses was 1.95% of loans and leases held for investment. The allowance for credit losses includes $5.8 billion for loans and leases and $364 million for the reserve for unfunded commitments.
At December 31, 2020, the allowance for loan and lease losses was 4.39 times nonperforming loans and leases held for investment, compared to 3.41 times at December 31, 2019. At December 31, 2020, the allowance for loan and lease losses was 5.21 times annualized net charge-offs, compared to 2.44 times at December 31, 2019.
60 Truist Financial Corporation
Net charge-offs during 2020 totaled $1.1 billion, up $485 million compared to the prior year. The increase in net charge-offs primarily reflects the Merger. As a percentage of average loans and leases, annualized net charge-offs were 0.36%, down four basis points compared to the prior year. Current year net charge-offs include $97 million of variable rate residential mortgagecharge-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 year and concluded in certain situations that a charge-off was required. Excluding these additional charge-offs, net charge-offs would have been an annualized 0.33% of average loans are currently inand leases for 2020, down seven basis points compared to the prior year.
The following table presents an interest-only phase. Approximately 95.0% of these balances will begin amortizing within the next three years. Variable rate residential mortgage loans typically reset every 12 months beginning after a 3 to 10 year fixed period, with an annual cap on rate changes ranging from 2.0% to 6.0%.
As of December 31, 2017, the direct lending portfolio includes $8.5 billion of variable rate home equity lines, $1.0 billion of variable rate other lines of credit and $255 million of variable rate loans. Approximately $6.5 billionallocation of the variable rate home equity lines is currently in the interest-only phase and approximately 9.4% of these balances will begin amortizing within the next three years. Approximately $911 millionALLL. The entire amount of the outstanding balanceallowance is available to absorb losses occurring in any category of variable rate other lines of credit is in the interest-only phaseloans and 17.0% of these balances will begin amortizing within the next three years. Variable rate home equity lines and other lines of credit typically reset on a monthly basis.leases.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 28: Allocation of ALLL by Category | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
December 31, (Dollars in millions) | Amount | | | | % Loans in Each Category | | Amount | | | | % Loans in Each Category | | Amount | | | | % Loans in each category | | Amount | | | | % Loans in each category | | Amount | | | | % Loans in each category |
Commercial and industrial | $ | 2,156 | | | | | 46.2 | % | | $ | 560 | | | | | 43.4 | % | | $ | 546 | | | | | 41.4 | % | | $ | 522 | | | | | 41.1 | % | | $ | 530 | | | | | 40.4 | % |
CRE | 573 | | | | | 8.9 | | | 150 | | | | | 8.9 | | | 142 | | | | | 11.3 | | | 118 | | | | | 12.0 | | | 120 | | | | | 11.1 | |
Commercial construction | 81 | | | | | 2.2 | | | 52 | | | | | 2.1 | | | 48 | | | | | 2.9 | | | 42 | | | | | 2.8 | | | 25 | | | | | 2.7 | |
Lease financing | 48 | | | | | 1.7 | | | 10 | | | | | 2.0 | | | 11 | | | | | 1.4 | | | 9 | | | | | 1.3 | | | 7 | | | | | 1.2 | |
Residential mortgage | 368 | | | | | 15.8 | | | 176 | | | | | 17.4 | | | 232 | | | | | 21.1 | | | 209 | | | | | 20.0 | | | 227 | | | | | 20.8 | |
Residential home equity and direct | 714 | | | | | 8.7 | | | 107 | | | | | 9.0 | | | 104 | | | | | 7.9 | | | 113 | | | | | 8.4 | | | 111 | | | | | 8.6 | |
Indirect auto | 1,198 | | | | | 8.7 | | | 304 | | | | | 8.2 | | | 298 | | | | | 7.6 | | | 296 | | | | | 8.1 | | | 273 | | | | | 9.3 | |
Indirect other | 208 | | | | | 3.7 | | | 60 | | | | | 3.7 | | | 58 | | | | | 4.1 | | | 52 | | | | | 3.9 | | | 54 | | | | | 3.6 | |
Student | 130 | | | | | 2.5 | | | — | | | | | 2.2 | | | — | | | | | — | | | — | | | | | — | | | — | | | | | — | |
Credit card | 359 | | | | | 1.6 | | | 122 | | | | | 1.9 | | | 110 | | | | | 2.0 | | | 101 | | | | | 1.9 | | | 98 | | | | | 1.7 | |
PCI | — | | | | | — | | | 8 | | | | | 1.2 | | | 9 | | | | | 0.3 | | | 28 | | | | | 0.5 | | | 44 | | | | | 0.6 | |
Total ALLL | 5,835 | | | | | 100.0 | % | | 1,549 | | | | | 100.0 | % | | 1,558 | | | | | 100.0 | % | | 1,490 | | | | | 100.0 | % | | 1,489 | | | | | 100.0 | % |
RUFC | 364 | | | | | | | 340 | | | | | | | 93 | | | | | | | 119 | | | | | | | 110 | | | | | |
Total ACL | $ | 6,199 | | | | | | | $ | 1,889 | | | | | | | $ | 1,651 | | | | | | | $ | 1,609 | | | | | | | $ | 1,599 | | | | | |
BB&TTruist 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. BB&TTruist also receives notification when the first lien holder, whether BB&TTruist or another financial institution, has initiated foreclosure proceedings against the borrower. When notified that the first lien is in the process of foreclosure, BB&TTruist obtains valuations to determine if any additional charge-offs or reserves are warranted. These valuations are updated at least annually thereafter.
BB&TTruist has limited ability to monitor the delinquency status of the first lien, unless the first lien is held or serviced by BB&T.Truist. As a result, using migration assumptions that are based on historical experience and adjusted for current trends, BB&TTruist 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, BB&TTruist also provides additional reserves tofor second lien positions when the estimated combined current loan to value ratio for the credit exceeds 100%. As of December 31, 2017, BB&T2020, Truist held or serviced the first lien on 30.4%30.6% of its second lien positions.
BB&T lends to a diverse customer base that is substantially located within the Company’s primary market area. At the same time, the loan portfolio is geographically dispersed throughout BB&T’s branch network to mitigate concentration risk arising from local and regional economic downturns. Refer to the "Risk Management" section for a discussion of each of the loan portfolios and the credit risk management policies used to manage the portfolios.Truist Financial Corporation 61
Other Assets
The following table summarizes the loan portfolio:
|
| | | | | | | | | | | | | | | | | | | | |
Table 13 |
Composition of Loan and Lease Portfolio |
| | |
| | December 31, |
(Dollars in millions) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Commercial: | | | | | | | | | | |
Commercial and industrial | | $ | 59,153 |
| | $ | 57,739 |
| | $ | 53,746 |
| | $ | 46,110 |
| | $ | 42,954 |
|
CRE | | 21,263 |
| | 19,764 |
| | 18,312 |
| | 14,128 |
| | 13,042 |
|
Lease financing | | 1,911 |
| | 1,677 |
| | 1,535 |
| | 1,119 |
| | 1,125 |
|
Retail: | | | | | | | | | | |
Residential mortgage (1) | | 28,725 |
| | 29,921 |
| | 30,533 |
| | 31,090 |
| | 24,648 |
|
Direct (1) | | 11,891 |
| | 12,092 |
| | 11,140 |
| | 8,146 |
| | 15,869 |
|
Indirect | | 17,235 |
| | 18,564 |
| | 17,053 |
| | 15,616 |
| | 13,841 |
|
Revolving credit | | 2,872 |
| | 2,655 |
| | 2,510 |
| | 2,460 |
| | 2,403 |
|
PCI | | 651 |
| | 910 |
| | 1,122 |
| | 1,215 |
| | 2,035 |
|
Total loans and leases HFI | | 143,701 |
|
| 143,322 |
|
| 135,951 |
|
| 119,884 |
|
| 115,917 |
|
LHFS | | 1,099 |
| | 1,716 |
| | 1,035 |
| | 1,423 |
| | 1,222 |
|
Total loans and leases | | $ | 144,800 |
|
| $ | 145,038 |
|
| $ | 136,986 |
|
| $ | 121,307 |
|
| $ | 117,139 |
|
(1) During the first quartercomponents of 2014, $8.3 billion of loans were transferred from direct lending to residential mortgage.
Loans and leases HFI were $143.7 billion at December 31, 2017, an increase of $379 million compared to the prior year.
Commercial and industrial loans were up $1.4 billion and CRE loans were up $1.5 billion.
Residential mortgage loans declined $1.2 billion as the majority of conforming loan production continues to be sold in the secondary market. Indirect loans were down $1.3 billion, primarily due to strategic optimization and directing investments into higher yielding assets.
The PCI loan portfolio, which totaled $651 million at December 31, 2017, continued to run off during the year.
The majority of loansOther assets are with clients in domestic market areas, which are primarily concentrated in the Southeastern United States. International loans were immaterial as of December 31, 2017 and 2016.
Scheduled repayments are reported in the maturity category in which the payment is due. Determinations of maturities are based on contract terms. BB&T’s credit policy typically does not permit automatic renewal of loans. At the scheduled maturity date (including balloon payment date), the customer generally must request a new loan to replace the matured loan and execute either a new note or note modification with rate, terms and conditions negotiated at that time.
|
| | | | | | | | | | | | | | | | |
Table 14 |
Commercial Loan Maturities and Interest Sensitivity |
|
| | December 31, 2017 |
(Dollars in millions) | | 1 Year or Less | | Over 1 to 5 Years | | After 5 Years | | Total |
Fixed rate: | | | | | | | | |
Commercial and industrial | | $ | 3,325 |
| | $ | 7,833 |
| | $ | 9,433 |
| | $ | 20,591 |
|
CRE | | 442 |
| | 2,783 |
| | 1,992 |
| | 5,217 |
|
Lease financing | | 73 |
| | 1,203 |
| | 502 |
| | 1,778 |
|
Total fixed rate | | 3,840 |
| | 11,819 |
|
| 11,927 |
|
| 27,586 |
|
Variable rate: | | | | |
| | |
| | |
|
Commercial and industrial | | 9,295 |
| | 19,716 |
| | 9,551 |
| | 38,562 |
|
CRE | | 2,305 |
| | 9,013 |
| | 4,728 |
| | 16,046 |
|
Lease financing | | — |
| | 56 |
| | 77 |
| | 133 |
|
Total variable rate | | 11,600 |
| | 28,785 |
|
| 14,356 |
|
| 54,741 |
|
Total commercial loans and leases | | $ | 15,440 |
| | $ | 40,604 |
|
| $ | 26,283 |
|
| $ | 82,327 |
|
Asset Quality
Potential problem loans include loans on nonaccrual status or past due as disclosed in Table 16. 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 3. Loans and ACL" for additional disclosures related to these potential problem loans.
TDRs generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term. As a result, BB&T will work with the borrower to prevent further difficulties, and ultimately 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. Refer to "Note 1. Summary of Significant Accounting Policies" for additional policy information regarding TDRs.
The following table presents activity related to NPAs. Foreclosed real estate acquired from the FDIC is excluded for periods prior to the loss share termination: |
| | | | | | | | |
Table 15 |
Rollforward of NPAs |
| | |
| | Year Ended December 31, |
(Dollars in millions) | | 2017 | | 2016 |
Balance at beginning of year | | $ | 813 |
| | $ | 686 |
|
New NPAs | | 1,297 |
| | 1,716 |
|
Advances and principal increases | | 328 |
| | 253 |
|
Disposals of foreclosed assets (1) | | (520 | ) | | (516 | ) |
Disposals of NPLs (2) | | (212 | ) | | (302 | ) |
Charge-offs and losses | | (251 | ) | | (279 | ) |
Payments | | (660 | ) | | (586 | ) |
Transfers to performing status | | (164 | ) | | (179 | ) |
Foreclosed real estate, included as a result of loss share termination | | — |
| | 17 |
|
Other, net | | (4 | ) | | 3 |
|
Balance at end of year | | $ | 627 |
| | $ | 813 |
|
| |
(1) | Includes charge-offs and losses recorded upon sale of $236 million and $210 million for the year ended December 31, 2017 and 2016, respectively. |
| |
(2) | Includes charge-offs and losses recorded upon sale of $33 million and $30 million for the year ended December 31, 2017 and 2016, respectively. |
NPAs, which include foreclosed real estate, repossessions and NPLs, totaled $627 million at December 31, 2017 compared to $813 million at December 31, 2016. This decrease consisted of a $166 million decrease in NPLs and a $20 million decrease in foreclosed real estate and other property.
The decrease in NPLs is primarily due to a $110 million decline in commercial and industrial NPLs primarily resulting from payoffs, sales and writedowns. In addition, residential mortgage NPLs were down $43 million largely due to sales.
NPAs as a percentage of loans and leases plus foreclosed property were 0.44% at December 31, 2017 compared with 0.57% at December 31, 2016.
The following tables summarize asset quality information for the past five years:
|
| | | | | | | | | | | | | | | | | | | | |
Table 16 |
Asset Quality |
| | |
| | December 31, |
(Dollars in millions) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Nonaccrual loans and leases: | | | | | | | | | | |
Commercial and industrial (1) | | $ | 259 |
| | $ | 369 |
| | $ | 242 |
| | $ | 243 |
| | $ | 364 |
|
CRE | | 45 |
| | 57 |
| | 51 |
| | 100 |
| | 164 |
|
Lease financing | | 1 |
| | 4 |
| | 1 |
| | — |
| | — |
|
Residential mortgage (2) | | 129 |
| | 172 |
| | 173 |
| | 166 |
| | 243 |
|
Direct | | 64 |
| | 63 |
| | 43 |
| | 48 |
| | 109 |
|
Indirect | | 72 |
| | 71 |
| | 66 |
| | 59 |
| | 55 |
|
Total nonaccrual loans and leases (1)(2) | | 570 |
|
| 736 |
| | 576 |
| | 616 |
|
| 935 |
|
Foreclosed real estate | | 32 |
| | 50 |
| | 108 |
| | 143 |
| | 192 |
|
Other foreclosed property | | 25 |
| | 27 |
| | 28 |
| | 23 |
| | 47 |
|
Total NPAs (1)(2) | | $ | 627 |
|
| $ | 813 |
| | $ | 712 |
| | $ | 782 |
|
| $ | 1,174 |
|
| | | | | | | | | | |
Performing TDRs: | | | | | | | | | | |
Commercial and industrial | | $ | 50 |
| | $ | 57 |
| | $ | 50 |
| | $ | 65 |
| | $ | 78 |
|
CRE | | 16 |
| | 25 |
| | 29 |
| | 57 |
| | 89 |
|
Residential mortgage (3)(4) | | 605 |
| | 769 |
| | 604 |
| | 621 |
| | 1,161 |
|
Direct (4) | | 62 |
| | 67 |
| | 72 |
| | 84 |
| | 187 |
|
Indirect | | 281 |
| | 240 |
| | 194 |
| | 182 |
| | 142 |
|
Revolving credit | | 29 |
| | 29 |
| | 33 |
| | 41 |
| | 48 |
|
Total performing TDRs (3)(4) | | $ | 1,043 |
| | $ | 1,187 |
| | $ | 982 |
| | $ | 1,050 |
| | $ | 1,705 |
|
| | | | | | | | | | |
Loans 90 days or more past due and still accruing: | | |
| | |
| | |
| | |
| | |
|
Commercial and industrial | | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5 |
|
CRE | | 1 |
| | — |
| | — |
| | — |
| | — |
|
Residential mortgage | | 465 |
| | 522 |
| | 541 |
| | 731 |
| | 876 |
|
Direct | | 6 |
| | 6 |
| | 7 |
| | 12 |
| | 33 |
|
Indirect | | 6 |
| | 6 |
| | 5 |
| | 5 |
| | 5 |
|
Revolving credit | | 12 |
| | 12 |
| | 10 |
| | 9 |
| | 10 |
|
PCI | | 57 |
| | 90 |
| | 114 |
| | 188 |
| | 304 |
|
Total loans 90 days or more past due and still accruing | | $ | 548 |
| | $ | 636 |
| | $ | 677 |
| | $ | 945 |
|
| $ | 1,233 |
|
| | | | | | | | | | |
Loans 30-89 days past due and still accruing: | | |
| | |
| | |
| | |
| | |
|
Commercial and industrial | | $ | 41 |
| | $ | 44 |
| | $ | 53 |
| | $ | 37 |
| | $ | 50 |
|
CRE | | 8 |
| | 8 |
| | 22 |
| | 5 |
| | 10 |
|
Lease financing | | 4 |
| | 4 |
| | 1 |
| | — |
| | — |
|
Residential mortgage | | 472 |
| | 525 |
| | 475 |
| | 474 |
| | 546 |
|
Direct | | 65 |
| | 60 |
| | 58 |
| | 41 |
| | 132 |
|
Indirect | | 412 |
| | 377 |
| | 358 |
| | 285 |
| | 262 |
|
Revolving credit | | 23 |
| | 23 |
| | 22 |
| | 23 |
| | 23 |
|
PCI | | 27 |
| | 36 |
| | 42 |
| | 33 |
| | 88 |
|
Total loans 30-89 days past due and still accruing | | $ | 1,052 |
|
| $ | 1,077 |
|
| $ | 1,031 |
|
| $ | 898 |
|
| $ | 1,111 |
|
| |
(1) | During 2016, approximately $191 million of nonaccrual energy-related loans were sold. |
| |
(2) | During 2017 and 2014, approximately $61 million and $121 million, respectively, of nonaccrual residential mortgage loans were sold. |
| |
(3) | During 2017 and 2014, approximately $331 million and $540 million, respectively, of performing residential mortgage TDRs were sold. |
| |
(4) | During 2014, approximately $94 million of performing TDRs were transferred from direct lending to residential mortgage. |
Asset quality continued to improve in 2017 with declines across almost all loan categories. NPAs declined $186 million driven by commercial and industrial loans and its reduction in the energy-related portfolio. Performing TDRs declined $144 million driven by the sale of $199 million of performing residential mortgage TDRs. Delinquent loans still accruing interest declined $113 million driven by residential mortgage loans, which reflects general improvements in credit quality within that portfolio.
|
| | | | | | | | | | | | | | |
Table 17 |
Asset Quality Ratios |
| |
| As Of / For The Year Ended December 31, |
| 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Asset Quality Ratios: | | | | | | | | | |
Loans 30-89 days past due and still accruing as a percentage of loans and leases HFI | 0.73 | % | | 0.75 | % | | 0.76 | % | | 0.75 | % | | 0.96 | % |
Loans 90 days or more past due and still accruing as a percentage of loans and leases HFI | 0.38 |
| | 0.44 |
| | 0.50 |
| | 0.79 |
| | 1.06 |
|
NPLs as a percentage of loans and leases HFI | 0.40 |
| | 0.51 |
| | 0.42 |
| | 0.51 |
| | 0.81 |
|
NPAs as a percentage of: | | | | | | | | | |
Total assets | 0.28 |
| | 0.37 |
| | 0.34 |
| | 0.42 |
| | 0.64 |
|
Loans and leases HFI plus foreclosed property | 0.44 |
| | 0.57 |
| | 0.52 |
| | 0.65 |
| | 1.01 |
|
Net charge-offs as a percentage of average loans and leases HFI | 0.38 |
| | 0.38 |
| | 0.35 |
| | 0.46 |
| | 0.69 |
|
ALLL as a percentage of loans and leases HFI | 1.04 |
| | 1.04 |
| | 1.07 |
| | 1.23 |
| | 1.49 |
|
Ratio of ALLL to: | | | | | | | | | |
Net charge-offs | 2.78 | x | | 2.80 | x | | 3.36 | x | | 2.74 | x | | 2.19 | x |
NPLs | 2.62 |
| | 2.03 |
| | 2.53 |
| | 2.39 |
| | 1.85 |
|
| | | | | | | | | |
Asset Quality Ratios (Excluding Government Guaranteed and PCI): (1) | |
| | |
| | | | | | |
Loans 90 days or more past due and still accruing as a percentage of loans and leases HFI | 0.05 | % | | 0.07 | % | | 0.06 | % | | 0.09 | % | | 0.11 | % |
| |
(1) | These asset quality ratios have been adjusted to remove the impact of government guaranteed and PCI assets. Appropriate adjustments to the numerator and denominator have been reflected in the calculation of these ratios. |
The following table provides a summary of performing TDR activity:
|
| | | | | | | | |
Table 18 |
Rollforward of Performing TDRs |
| | |
| | Year Ended December 31, |
(Dollars in millions) | | 2017 | | 2016 |
Balance at beginning of year | | $ | 1,187 |
| | $ | 982 |
|
Inflows | | 635 |
| | 699 |
|
Payments and payoffs | | (253 | ) | | (217 | ) |
Charge-offs | | (55 | ) | | (41 | ) |
Transfers to nonperforming TDRs, net | | (78 | ) | | (68 | ) |
Removal due to the passage of time | | (46 | ) | | (54 | ) |
Non-concessionary re-modifications | | (3 | ) | | — |
|
Sold and transferred to LHFS | | (344 | ) | | (114 | ) |
Balance at end of year | | $ | 1,043 |
| | $ | 1,187 |
|
Payments and payoffs include scheduled principal payments, prepayments and payoffs of amounts outstanding. Transfers to nonperforming TDRs represent loans that no longer meet the requirements necessary to reflect the loan in accruing status.
TDRs may be removed due to the passage of time if they: (1) did not include a forgiveness of principal or interest, (2) have performed in accordance with the modified terms (generally a minimum of six months), (3) were reported as a TDR over a year end reporting period, and (4) reflected an interest rate on the modified loan that was no less than a market rate at the date of modification. These loans were previously considered TDRs as a result of structural concessions such as extended interest-only terms or an amortization period that did not otherwise conform to normal underwriting guidelines.
In addition, certain loans may be removed from classification as a TDR as a result of a subsequent non-concessionary re-modification. Non-concessionary re-modifications represent TDRs that did not contain concessionary terms at the date of a subsequent renewal/modification and there was a reasonable expectation that the borrower would continue to comply with the terms of the loan subsequent to the date of the re-modification. A re-modification may be considered for such a re-classification if the loan has not had a forgiveness of principal or interest and the modified terms qualify as more than minor such that the re-modified loan is considered a new loan. Alternatively, such loans may be considered for reclassification in years subsequent to the date of the re-modification based on the passage of time as described in the preceding paragraph.
In connection with consumer loan TDRs, a NPL will be returned to accruing status when current as to principal and interest and upon a sustained historical repayment performance (generally a minimum of six months).
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Table 19 |
Payment Status of TDRs |
| | |
| | December 31, 2017 |
(Dollars in millions) | | Current | | Past Due 30-89 Days | | Past Due 90 Days Or More | | Total |
Performing TDRs (1): | | | | | | | | | | |
| | | | |
Commercial: | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 50 |
| | 100.0 | % | | $ | — |
| | — | % | | $ | — |
| | — | % | | $ | 50 |
|
CRE | | 16 |
| | 100.0 |
| | — |
| | — |
| | — |
| | — |
| | 16 |
|
Retail: | |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| | — |
|
Residential mortgage | | 315 |
| | 52.1 |
| | 111 |
| | 18.3 |
| | 179 |
| | 29.6 |
| | 605 |
|
Direct | | 58 |
| | 93.5 |
| | 4 |
| | 6.5 |
| | — |
| | — |
| | 62 |
|
Indirect | | 229 |
| | 81.5 |
| | 52 |
| | 18.5 |
| | — |
| | — |
| | 281 |
|
Revolving credit | | 24 |
| | 82.8 |
| | 4 |
| | 13.8 |
| | 1 |
| | 3.4 |
| | 29 |
|
Total performing TDRs | | 692 |
| | 66.3 |
| | 171 |
| | 16.4 |
| | 180 |
| | 17.3 |
| | 1,043 |
|
Nonperforming TDRs (2) | | 88 |
| | 46.6 |
| | 29 |
| | 15.3 |
| | 72 |
| | 38.1 |
| | 189 |
|
Total TDRs | | $ | 780 |
| | 63.3 |
| | $ | 200 |
| | 16.2 |
| | $ | 252 |
| | 20.5 |
| | $ | 1,232 |
|
| |
(1) | Past due performing TDRs are included in past due disclosures. |
| |
(2) | Nonperforming TDRs are included in NPL disclosures. |
ACL
Information related to the ACL is presented in the following table:
| | | | | | | | | | | |
Table 29: Other Assets as of Period End | | | |
| | | |
December 31, (Dollars in millions) | 2020 | | 2019 |
Bank-owned life insurance | $ | 6,479 | | | $ | 6,383 | |
Tax credit and other private equity investments | 5,685 | | | 5,448 | |
Prepaid pension assets | 4,358 | | | 3,579 | |
Derivative assets | 3,837 | | | 2,053 | |
Accrued income | 1,934 | | | 1,807 | |
Accounts receivable | 1,833 | | | 2,418 | |
Leased assets and related assets | 1,810 | | | 1,897 | |
ROU assets | 1,333 | | | 1,823 | |
Prepaid expenses | 1,247 | | | 1,254 | |
Equity securities at fair value | 1,054 | | | 817 | |
Structured real estate | 390 | | | 987 | |
FHLB stock | 164 | | | 764 | |
Other | 549 | | | 2,602 | |
Total other assets | $ | 30,673 | | | $ | 31,832 | |
| | | |
| | | |
| | | |
|
| | | | | | | | | | | | | | | | | | | | |
Table 20 |
Analysis of ACL |
| | |
| | Year Ended December 31, |
(Dollars in millions) | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
Beginning balance | | $ | 1,599 |
| | $ | 1,550 |
| | $ | 1,534 |
| | $ | 1,821 |
| | $ | 2,048 |
|
Provision for credit losses (excluding PCI) | | 562 |
| | 574 |
| | 430 |
| | 280 |
| | 587 |
|
Provision for PCI loans | | (15 | ) | | (2 | ) | | (2 | ) | | (29 | ) | | 5 |
|
Charge-offs: | | |
| | |
| | | | | | |
Commercial and industrial | | (95 | ) | | (143 | ) | | (90 | ) | | (143 | ) | | (257 | ) |
CRE | | (10 | ) | | (9 | ) | | (24 | ) | | (42 | ) | | (132 | ) |
Lease financing | | (5 | ) | | (6 | ) | | — |
| | — |
| | — |
|
Residential mortgage (1) | | (47 | ) | | (40 | ) | | (46 | ) | | (84 | ) | | (81 | ) |
Direct (1) | | (61 | ) | | (53 | ) | | (54 | ) | | (69 | ) | | (148 | ) |
Indirect | | (402 | ) | | (366 | ) | | (303 | ) | | (280 | ) | | (269 | ) |
Revolving credit | | (76 | ) | | (69 | ) | | (70 | ) | | (71 | ) | | (85 | ) |
PCI | | (1 | ) | | (15 | ) | | (1 | ) | | (21 | ) | | (19 | ) |
Total charge-offs | | (697 | ) |
| (701 | ) |
| (588 | ) |
| (710 | ) |
| (991 | ) |
Recoveries: | | |
| | |
| | |
| | |
| | |
|
Commercial and industrial | | 36 |
| | 44 |
| | 38 |
| | 45 |
| | 49 |
|
CRE | | 16 |
| | 19 |
| | 18 |
| | 33 |
| | 51 |
|
Lease financing | | 2 |
| | 2 |
| | — |
| | — |
| | 1 |
|
Residential mortgage (1) | | 2 |
| | 3 |
| | 3 |
| | 7 |
| | 3 |
|
Direct (1) | | 25 |
| | 26 |
| | 29 |
| | 29 |
| | 38 |
|
Indirect | | 60 |
| | 55 |
| | 44 |
| | 39 |
| | 40 |
|
Revolving credit | | 19 |
| | 20 |
| | 20 |
| | 19 |
| | 17 |
|
Total recoveries | | 160 |
|
| 169 |
|
| 152 |
|
| 172 |
|
| 199 |
|
Net charge-offs | | (537 | ) | | (532 | ) | | (436 | ) | | (538 | ) | | (792 | ) |
Other changes, net | | — |
| | 9 |
| | 24 |
| | — |
| | (27 | ) |
Ending balance | | $ | 1,609 |
|
| $ | 1,599 |
|
| $ | 1,550 |
|
| $ | 1,534 |
|
| $ | 1,821 |
|
| | | | | | | | | | |
ALLL (excluding PCI loans) | | $ | 1,462 |
| | $ | 1,445 |
| | $ | 1,399 |
| | $ | 1,410 |
| | $ | 1,618 |
|
Allowance for PCI loans | | 28 |
| | 44 |
| | 61 |
| | 64 |
| | 114 |
|
RUFC | | 119 |
| | 110 |
| | 90 |
| | 60 |
| | 89 |
|
Total ACL | | $ | 1,609 |
|
| $ | 1,599 |
|
| $ | 1,550 |
|
| $ | 1,534 |
|
| $ | 1,821 |
|
| |
(1) | During the first quarter of 2014, $8.3 billion of loans were transferred from direct lending to residential mortgage. Charge-offs and recoveries have been reflected in these line items based upon the date the loans were transferred. |
The ACL consists of the ALLL, which is presented separately on the Consolidated Balance Sheets, and the RUFC, which is included in other liabilities on the Consolidated Balance Sheets. The ACL totaled $1.6 billion at December 31, 2017, an increase of $10 million compared to the prior year.
The ALLL amounted to 1.04% of loans and leases held for investment at December 31, 2017 and 2016. The ratio of the ALLL to NPLs held for investment was 2.62x at December 31, 2017 compared to 2.03x at December 31, 2016.
Net charge-offs totaled $537 million for 2017, compared to $532 million in 2016. Net charge-offs as a percentage of average loans and leases HFI were 0.38% for 2017, flat compared to 2016.
Refer to "Note 3. Loans and ACL" for additional disclosures.
The following table presents an allocation of the ALLL at the end of each of the last five years. This allocation of the ALLL is calculated on an approximate basis and is not necessarily indicative of future losses or allocations. The entire amount of the allowance is available to absorb losses occurring in any category of loans and leases. During 2013, the balance in the unallocated ALLL was incorporated into the loan portfolio segments.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 21 |
Allocation of ALLL by Category |
| | |
| | December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
(Dollars in millions) | | Amount | | % Loans in each category | | Amount | | % Loans in each category | | Amount | | % Loans in each category | | Amount | | % Loans in each category | | Amount | | % Loans in each category |
Balances at end of period applicable to: | | | | | | | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 522 |
| | 41.1 | % | | $ | 530 |
| | 40.3 | % | | $ | 488 |
| | 39.6 | % | | $ | 445 |
| | 38.5 | % | | $ | 475 |
| | 37.0 | % |
CRE | | 160 |
| | 14.8 |
| | 145 |
| | 13.8 |
| | 175 |
| | 13.5 |
| | 212 |
| | 11.8 |
| | 227 |
| | 11.3 |
|
Lease financing | | 9 |
| | 1.3 |
| | 7 |
| | 1.2 |
| | 5 |
| | 1.1 |
| | 4 |
| | 0.9 |
| | 7 |
| | 1.0 |
|
Residential mortgage (1) | | 209 |
| | 20.0 |
| | 227 |
| | 20.8 |
| | 217 |
| | 22.4 |
| | 253 |
| | 25.9 |
| | 331 |
| | 21.3 |
|
Direct (1) | | 106 |
| | 8.3 |
| | 103 |
| | 8.4 |
| | 105 |
| | 8.2 |
| | 110 |
| | 6.8 |
| | 209 |
| | 13.7 |
|
Indirect | | 348 |
| | 12.0 |
| | 327 |
| | 13.0 |
| | 305 |
| | 12.6 |
| | 276 |
| | 13.0 |
| | 254 |
| | 11.9 |
|
Revolving credit | | 108 |
| | 2.0 |
| | 106 |
| | 1.9 |
| | 104 |
| | 1.8 |
| | 110 |
| | 2.1 |
| | 115 |
| | 2.1 |
|
PCI | | 28 |
| | 0.5 |
| | 44 |
| | 0.6 |
| | 61 |
| | 0.8 |
| | 64 |
| | 1.0 |
| | 114 |
| | 1.7 |
|
Total ALLL | | 1,490 |
| | 100.0 | % | | 1,489 |
| | 100.0 | % | | 1,460 |
| | 100.0 | % | | 1,474 |
| | 100.0 | % | | 1,732 |
| | 100.0 | % |
RUFC | | 119 |
| | |
| | 110 |
| | |
| | 90 |
| | |
| | 60 |
| | |
| | 89 |
| | |
|
Total ACL | | $ | 1,609 |
|
|
|
|
| $ | 1,599 |
|
|
|
|
| $ | 1,550 |
|
|
|
|
| $ | 1,534 |
|
|
|
|
| $ | 1,821 |
| | |
| |
(1) | During the first quarter of 2014, $8.3 billion in loans were transferred from direct to residential mortgage. |
FDIC Loss Share Receivable/Payable and Assets Acquired from the FDIC
In connection with the Colonial acquisition, Branch Bank entered into loss sharing agreements with the FDIC that outlined the terms and conditions under which the FDIC would reimburse Branch Bank for a portion of the losses incurred on certain loans, investment securities and other assets. During 2016, Branch Bank entered into an early termination agreement with the FDIC that terminated the loss share agreements. Branch Bank made a payment of approximately $230 million to the FDIC as consideration for the early termination of the loss share agreements. The early termination eliminated the FDIC loss share receivable/payable associated with the indemnification by the FDIC. As a result of the settlement, no future loss sharing or gain sharing will occur related to the Colonial acquisition.
Funding Activities
Deposits are the primary source of funds for the Company's lending and investing activities. Scheduled payments as well as prepayments, and maturities from portfolios of loans and investment securities also provide a stable source of funds. FHLB advances, other secured borrowings, Federal funds purchased and other short-term borrowed funds, as well as long-term debt issued through the capital markets, all provide supplemental liquidity sources. Funding activities are monitored and governed through BB&T’sTruist's overall asset/liability managementALM process under the governance and oversight of the MRLCC, which is further discussed in the "Market Risk Management" section in "Management’s Discussion and Analysis of Financial Condition and Results of Operations."MD&A. The following section provides a brief description of the various sources of funds.
Deposits
Deposits are attractedobtained principally from clients within BB&T’s branch network through the offering of a broad selection of deposit instruments to individuals and businesses includingwithin Truist's branch network and include noninterest-bearing checking accounts, interest-bearing checking accounts, savings accounts, money market deposit accounts, CDs and IRAs. Deposit account terms vary with respect to the minimum balance required, the time period the funds must remain on deposit and service charge schedules. Interest rates paid on specific deposit types are determined based on (i) the interestcompetitor deposit rates, offered by competitors, (ii) the anticipated amount and timing of funding needs, (iii) the availability and cost of alternative sources of funding, and (iv) anticipated future economic conditions and interest rates. Deposits are attractive sources of funding because of their stability and relative cost.
Total deposits were $157.4 billion at December 31, 2017, a decrease of $2.9 billion compared to year-end 2016. Noninterest-bearing deposits totaled $53.8 billion at December 31, 2017, an increase of $3.1 billion from December 31, 2016. The majority of the increase in noninterest-bearing deposits was attributable to personal and business deposits, which grew $1.7 billion (12.7%) and $1.4 billion (4.1%), respectively.
Interest checking decreased $2.6 billion and money market and savings decreased $2.1 billion during 2017 driven by business deposits, while time deposits decreased $1.2 billion during 2017 primarily in personal accounts.
For the year ended December 31, 2017, total deposits averaged $159.2 billion, an increase of $1.8 billion compared to 2016, primarily due to the National Penn acquisition in 2016. The cost of interest-bearing deposits was 0.32% for 2017, compared to 0.23% for 2016.
The following table presents deposits for each of the compositionlast five years:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 30: Deposits as of Period End | | | | | | |
December 31, (Dollars in millions) | 2020 | | | | | | | | 2019 | | 2018 | | 2017 | | 2016 |
| | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | | $ | 127,629 | | | | | | | | | $ | 92,405 | | | $ | 53,025 | | | $ | 53,767 | | | $ | 50,697 | |
Interest checking | | 105,269 | | | | | | | | | 85,492 | | | 28,130 | | | 27,677 | | | 30,263 | |
Money market and savings | | 126,238 | | | | | | | | | 120,934 | | | 63,467 | | | 62,757 | | | 64,883 | |
Time deposits | | 21,941 | | | | | | | | | 35,896 | | | 16,577 | | | 13,170 | | | 14,391 | |
| | | | | | | | | | | | | | | | |
Total deposits | | $ | 381,077 | | | | | | | | | $ | 334,727 | | | $ | 161,199 | | | $ | 157,371 | | | $ | 160,234 | |
Deposits totaled $381.1 billion at December 31, 2020, an increase of $46.4 billion from December 31, 2019. The growth in deposits reflects solid growth in all non-time deposit categories resulting from pandemic-related client behavior and government stimulus programs. Time deposits decreased primarily due to maturities of wholesale negotiable certificates of deposit and higher-cost personal and business accounts.
62 Truist Financial Corporation
The following table presents average deposits for each of the last five quarters:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 31: Average Deposits |
Three Months Ended (Dollars in millions) | | Dec 31, 2020 | | Sep 30, 2020 | | Jun 30, 2020 | | Mar 31, 2020 | | Dec 31, 2019 |
Noninterest-bearing deposits | | $ | 127,103 | | | $ | 123,966 | | | $ | 113,875 | | | $ | 93,135 | | | $ | 64,485 | |
Interest checking | | 99,866 | | | 96,707 | | | 97,863 | | | 85,008 | | | 43,246 | |
Money market and savings | | 124,692 | | | 123,598 | | | 126,071 | | | 120,936 | | | 79,903 | |
Time deposits | | 23,605 | | | 27,940 | | | 33,009 | | | 35,570 | | | 23,058 | |
Foreign office deposits - interest-bearing | | — | | | — | | | — | | | — | | | 24 | |
Total average deposits | | $ | 375,266 | | | $ | 372,211 | | | $ | 370,818 | | | $ | 334,649 | | | $ | 210,716 | |
|
| | | | | | | | | | | | | | | | | | | | |
Table 22 |
Quarterly Composition of Average Deposits |
| | |
| | For the Three Months Ended |
(Dollars in millions) | | 12/31/2017 | | 9/30/2017 | | 6/30/2017 | | 3/31/2017 | | 12/31/2016 |
Noninterest-bearing deposits | | $ | 54,288 |
| | $ | 53,489 |
| | $ | 52,573 |
| | $ | 51,095 |
| | $ | 51,421 |
|
Interest checking | | 26,746 |
| | 27,000 |
| | 28,849 |
| | 29,578 |
| | 28,634 |
|
Money market and savings | | 61,693 |
| | 61,450 |
| | 64,294 |
| | 64,857 |
| | 63,884 |
|
Time deposits | | 13,744 |
| | 13,794 |
| | 14,088 |
| | 14,924 |
| | 15,693 |
|
Foreign office deposits - interest-bearing | | 1,488 |
| | 1,681 |
| | 459 |
| | 929 |
| | 486 |
|
Total average deposits | | $ | 157,959 |
|
| $ | 157,414 |
|
| $ | 160,263 |
|
| $ | 161,383 |
|
| $ | 160,118 |
|
Average deposits for the fourth quarter of 20172020 were $158.0$375.3 billion, up $545 millionan increase of $3.1 billion compared to the prior quarter. Average noninterest-bearing and interest checking deposit growth was strong for the fourth quarter of 2020 driven by anticipated seasonal inflows in addition to continued growth resulting from pandemic-related client behavior. Average time deposits decreased primarily due to maturity of wholesale negotiable certificates of deposit and higher-cost personal and business accounts.
Average noninterest-bearing deposits increased $799 million, primarily due to increases in commercial, public funds and personal balances.
Interest checking decreased $254 million, primarily due to decreases in public funds, personal and commercial balances.
Money market and savings increased $243 million primarily due to commercial balances partially offset by decreased personal and public funds balances.
Average time deposits decreased $50 million as decreases in personal balances and IRAs were partially offset by higher commercial balances.
Average foreign office deposits decreased $193 million due to lower overall funding needs.
Noninterest-bearing deposits represented 34.4%33.9% of total average deposits for the fourth quarter of 2020, compared to 34.0%33.3% for the prior quarter and 32.1% a year ago.quarter. The cost of interest-bearingaverage total deposits was 0.40%0.07% for the fourth quarter, up fivedown three basis points compared to the prior quarter. The cost of average interest-bearing deposits was 0.11% for the fourth quarter, down four basis points compared to the prior quarter.
The following table summarizes the maturities of time deposits above $100,000:
|
| | | |
Table 23 |
Scheduled Maturities of Time Deposits $100,000 and Greater |
| |
(Dollars in millions) | December 31, 2017 |
Three months or less | $ | 1,647 |
|
Over three through six months | 865 |
|
Over six through twelve months | 1,289 |
|
Over twelve months | 1,525 |
|
Total | $ | 5,326 |
|
| | | | | |
Table 32: Scheduled Maturities of Time Deposits $100,000 and Greater |
December 31, 2020 (Dollars in millions) | |
Three months or less | $ | 3,400 | |
Over three through six months | 2,252 | |
Over six through twelve months | 1,882 | |
Over twelve months | 1,482 | |
Total | $ | 9,016 | |
Short-Term
Borrowings
BB&T also uses various types of short-term borrowings to meet funding needs. While deposits remain the primary source for funding loan originations, management uses short-term borrowings as a supplementary funding source for loan growth and other balance sheet management purposes. Short-term borrowings were 2.0% of total funding on average in 2017 as compared to 1.2% in 2016.
The types of short-term borrowings that have been, or may be, used by the Company include Federal funds purchased, securities sold under repurchase agreements, master notes, commercial paper, short-term bank notes and short-term FHLB advances. Short-term borrowings atfluctuate based on the end of 2017 were $4.9 billion, compared to $1.4 billion at year-end 2016. AverageCompany's funding needs. While deposits remain the primary source for funding loan originations, management uses short-term borrowings totaled $4.3 billion during 2017 compared to $2.6 billion last year. The increase in the average balance of short-term borrowings during 2017 primarily reflects a decrease in deposits as a supplementary funding source.
source for loan growth and other balance sheet management purposes. The following table summarizes certain information for the past three years with respect to short-term borrowings:borrowings excluding trading liabilities, hedges, and collateral in excess of derivative exposure:
| | | | | | | | | | | | | | | | | | | | |
Table 33: Short-Term Borrowings |
As Of / For The Year Ended December 31, (Dollars in millions) | | 2020 | | 2019 | | 2018 |
Securities sold under agreements to repurchase: | | | | | | |
Maximum outstanding at any month-end during the year | | $ | 2,348 | | | $ | 1,969 | | | $ | 836 | |
Balance outstanding at end of year | | 1,221 | | | 1,969 | | | 270 | |
Average outstanding during the year | | 1,504 | | | 826 | | | 446 | |
Average interest rate during the year | | 0.64 | % | | 2.01 | % | | 1.35 | % |
Average interest rate at end of year | | 0.13 | | | 1.41 | | | 1.59 | |
Federal funds purchased and short-term borrowed funds: | | | | | | |
Maximum outstanding at any month-end during the year | | $ | 19,392 | | | $ | 14,493 | | | $ | 8,919 | |
Balance outstanding at end of year | | 3,372 | | | 14,493 | | | 4,763 | |
Average outstanding during the year | | 6,951 | | | 7,354 | | | 5,341 | |
Average interest rate during the year | | 1.17 | % | | 2.28 | % | | 1.98 | % |
Average interest rate at end of year | | 0.20 | | | 1.75 | | | 2.49 | |
At December 31, 2020, short-term borrowings totaled $6.1 billion, a decrease of $12.1 billion compared to December 31, 2019, due primarily to a decrease of $10.8 billion in short-term FHLB advances. These borrowing sources were replaced with deposit funding.
Truist Financial Corporation 63
|
| | | | | | | | | | | | |
Table 24 |
Short-Term Borrowings |
| | |
| | As Of / For The Year Ended December 31, |
(Dollars in millions) | | 2017 | | 2016 | | 2015 |
Securities Sold Under Agreements to Repurchase: | | | | | | |
Maximum outstanding at any month-end during the year | | $ | 1,923 |
| | $ | 2,265 |
| | $ | 1,327 |
|
Balance outstanding at end of year | | 483 |
| | 970 |
| | 617 |
|
Average outstanding during the year | | 1,449 |
| | 1,600 |
| | 901 |
|
Average interest rate during the year | | 0.70 | % | | 0.37 | % | | 0.23 | % |
Average interest rate at end of year | | 0.43 |
| | 0.52 |
| | 0.70 |
|
| | | | | | |
Federal Funds Purchased and Short-Term Borrowed Funds: | | |
| | |
| | |
|
Maximum outstanding at any month-end during the year | | $ | 6,859 |
| | $ | 3,003 |
| | $ | 4,041 |
|
Balance outstanding at end of year | | 4,455 |
| | 436 |
| | 2,976 |
|
Average outstanding during the year | | 2,862 |
| | 954 |
| | 2,320 |
|
Average interest rate during the year | | 1.06 | % | | 0.30 | % | | 0.11 | % |
Average interest rate at end of year | | 1.34 |
| | 0.71 |
| | 0.32 |
|
Average short-term borrowings were $10.1 billion, or 2.4% of total funding for 2020, as compared to $8.5 billion, or 4.1% for the prior year. The increase in the average amount was due to the Merger. Average short-term borrowings decreased as a percentage of funding sources due to strong deposit growth.Long-Term Debt
Long-term debt provides funding and, to a lesser extent, regulatory capital. Atcapital, and primarily consists of senior and subordinated notes issued by Truist and Truist Bank. Long-term debt totaled $39.6 billion at December 31, 2017, long-term debt totaled $23.6 billion, an increase2020, a decrease of $1.7 billion compared to year-end 2016. The increaseDecember 31, 2019. During 2020, the Company issued $4.8 billion of senior notes with interest rates from 1.125% to 1.95% maturing in long-term debt reflects new2023 to 2030, $500 million in floating rate senior debtnotes maturing in 2023 and $1.3 billion of subordinated notes with an interest rate of 2.25% maturing in 2030. These issuances of $7.3 billion and $1.5 billion in new FHLB advances,were partially offset by the early extinguishmentredemption of $2.9$4.6 billion of senior notes during 2020 and a decrease of $3.3 billion in long-term FHLB advances and other repayments totaling $4.2 billion of long-term debt. The average cost of long-term debt was 2.10% in 2017, down 3 basis points compared to 2016. See "Note 8. Long-Term Debt" for additional disclosures.
advances. FHLB advances represented 10.5%2.2% of total outstanding long-term debt at December 31, 2017,2020, compared to 18.7%10.0% at December 31, 2016.2019. The remainderaverage cost of long-term debt is primarily issuanceswas 1.75% for the year ended December 31, 2020, down 147 basis points compared to the same period in 2019. Truist entered into $20 billion of seniorFHLB advances during 2020 to build liquidity and subordinated notes by BB&Tensure the Company was able to meet the funding needs of its clients. As market conditions stabilized and Branch Bank.deposits increased, these advances were repaid and the Company recognized a loss of $235 million on the early extinguishment of debt. The repayment of these advances improved net interest income, the net interest margin and the leverage ratios.
Shareholders’
Shareholders' Equity
Shareholders’Total shareholders' equity totaled $29.7was $70.9 billion at December 31, 2017, a decrease2020, an increase of $231$4.4 billion from December 31, 2019. This increase includes the gross issuance of $3.5 billion of preferred stock during the year, $4.5 billion in net income available to common shareholders and an increase of $1.6 billion in AOCI, which was partially offset by $2.1 billion related to the adoption of CECL and $2.7 billion for common and preferred dividends. In addition, Truist redeemed $500 million or 0.8%, from year-end 2016. Bookof its Series K preferred stock during 2020. Truist's book value per common share at December 31, 20172020 was $34.01,$46.52, compared to $33.14$45.66 at December 31, 2016.2019.
The change in shareholders' equity reflects $1.6 billion of share repurchases and common and preferred dividends totaling $1.2 billion, partially offset by net income of $2.4 billion.
Tangible book value per common share, which is a non-GAAP measure, at December 31, 2017 was $20.80 compared to $20.18 at December 31, 2016. Refer to the section titled "Capital""Note 12. Shareholders' Equity" for a discussion of how BB&T calculates and uses these measures in the evaluation of the Company.additional disclosures related to preferred stock issuances.
Risk Management
BB&T hasTruist maintains a strong and consistent risk culture, based on established risk values, which promotes predictable and consistent performance within an environment of open communication and effective challenge. The strong culture influences all associates in the organization daily and helps them evaluate whether risks are acceptable or unacceptable while making decisions that balance quality, profitability and growth appropriately. BB&T’s effectivecomprehensive risk management framework establishes an environment whichsupported 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 optimizing risk and return while operating in a safe and sound manner and promoting compliance with applicable laws and regulations. The Company’s risk management framework promotes the execution of business strategies and objectives in alignment with its risk appetite.
Truist has developed and employs a risk taxonomy that further guides business functions in identifying, measuring, responding to, monitoring and reporting on possible exposures to the organization. The risk taxonomy drives internal risk conversations and enables Truist to clearly and transparently communicate to stakeholders the level of potential risk the Company faces, both presently and in the future, and the Company’s position on managing it to achieve superior performance relativeacceptable levels.
Truist is committed to peers, ensuresfostering a culture that BB&Tsupports identification and escalation of risks across the organization. All teammates are responsible for upholding the Company’s purpose, mission, and values, and are encouraged to speak up if there is viewed amongany activity or behavior that is inconsistent with the safestCompany’s culture. The Truist code of banksethics guides the Company’s decision making and assures the operational freedominforms teammates on how to act on opportunities.in the absence of specific guidance.
BB&T ensures that there isTruist seeks an appropriate return for the amount of risk taken and that the expected return is in line with its strategic objectives and business plan.operations. Risk-taking activities are evaluated and prioritized to identify those that present attractive risk-adjusted returns, while preserving asset value. BB&T only undertakes risks that are understoodvalue and can be managed effectively. By managing risk well, BB&T ensures sufficient capital is available to maintain and grow core business operations in a safe and sound manner.capital.
Regardless of financial gain or loss to the Company, associates are held accountable if they do not follow the established risk management policies and procedures. Compensation decisions take into account an associate’sa teammate's adherence to, and successful implementation of, BB&T’sTruist's risk values.values and associated policies and procedures. The Company's compensation structure supports the Company’sits core values and sound risk management practices in an effort to promote judicious risk-taking behavior.
BB&T’s risk culture encourages transparency and open dialogue between all levels inTruist employs a comprehensive change management program to manage the performance of organizational functions, such as the development, marketing and implementation of a product or service.
risks associated with integrating heritage BB&T has established aand heritage SunTrust. The Board and Executive Leadership oversee the change management program, which is designed to ensure key decisions are reviewed and that there is appropriate oversight of integration activities.
Truist's purpose, mission and values are the foundation for the risk management framework basedutilized at Truist and therefore serve as the basis on a "three lines of defense" model:
First Line of Defense: Risk management begins withwhich the BUs, the point at which risk is originatedappetite and where risks must be managed. Business unit managers in the first line identify, assess, control and report their group’s risk profile compared to its approved risk limits.
Second Line of Defense: Thestrategy are built. Truist's RMO provides independent oversight and guidance offor risk-taking across the enterprise. TheIn keeping with the belief that consistent values drive long-term behaviors, Truist's RMO aggregates, integrates,has established the following risk values which guide teammates’ day-to-day activities:
64 Truist Financial Corporation
•Managing risk is the responsibility of every teammate.
•Proactively identifying risk and correlates risk information into a holistic picturemanaging the inherent risks of their businesses is the responsibility of the corporation’sbusiness units.
•Managing risk profilewith a balanced approach which includes quality, profitability, and concentrations. The RMO establishes policiesgrowth.
•Measuring what is managed and limitsmanaging what is measured.
•Utilizing sound and reports sourcesconsistent risk management practices.
•Thoroughly analyzing risk quantitatively and amountsqualitatively.
•Realizing lower cost of capital from high quality risk to Executive Managementmanagement.
Truist places significant emphasis on risk management oversight and maintains a separate Board-level Risk Committee, which assists the Board of Directors.
Third Line of Defense: Audit Services (BB&T’s internal audit function) evaluates the design and effectivenessin its oversight of the Company’s risk management function. The Committee is responsible for approving and periodically reviewing the Company’s risk management framework and its results. Results are reported to Executive Management and the Board of Directors according to Audit Services Policy.
The following chart depicts the three lines of defense model:
|
| | | | |
Risk Committees | Board of Directors | Executive Management |
| | |
1st Line of Defense
| 2nd Line of Defense
| 3rd Line of Defense
|
Business Units | Risk Functions | Audit Services |
| | |
Chief Risk Officer |
The CRO leads the RMO, which designs, organizes and manages BB&T’s risk management framework. policies as well as monitoring the Company’s risk profile, approving risk appetite statements, and providing input to management regarding Truist's risk appetite and risk profile.
The RMO is led by the CRO and is responsible for ensuring effective risk management oversight,overseeing the identification, measurement, monitoring, management and reporting and consistency.of risk. The CRO has direct access to the Board of Directors and Executive Management. The CRO is responsible for identifying and communicating in a timely manner to communicate any risk issues (current or emerging) as well as the CEO and the Boardperformance of Directors meaningful risks and significant instances when the RMO’s assessment of risk differs from that of a BU, significant instances when a BU is not adhering to the risk governance framework, and BB&T’s risk profile in relation to its risk appetite on at least a quarterly basis. Inmanagement activities throughout the event that the CRO and CEO’s assessment of risk were to differ or if the CEO were to not adhere toenterprise.
As illustrated below, the risk management framework is supported by three lines of defense. The following figure describes the CRO would haveroles of the responsibilitythree lines of defense:
Truist’s Risk Governance framework is designed to report such mattersprovide comprehensive Board and Executive Leadership risk oversight, maintaining a committee governance structure that is designed to ensure alignment and execution of the risk management framework. The committee structure provides a mechanism to allow for efficient aggregation and escalation of risk information from the BUs up to the Board of Directors.risk programs, Executive Leadership and ultimately the Board.
Truist Financial Corporation 65
The executive level committees include the ERC, ECRPMC, MRLCC, EBPCC, TMC and DC, each of which is chaired by a member of Executive Management-led enterprise riskLeadership. These committees provide oversight of each of the first and second lines of defense and communicateprimary risk appetite and values to the RMO. The CRO and the enterprise risk committees approve policies, set risk limits and tolerances and monitor results.types.
The RMC, CRMC, ORMC, CROC and the MRLCC are the enterprise risk committees and provide oversight of the risks as described in the common risk language. There is Executive Management representation in all five committees.
The risk management framework is composed of specialized risk functions focused on specific types of risk. The MRLCC, CRMC, CROC and ORMC provide oversight of market, liquidity, capital, credit, compliance, and operational risk while RMC providesERC establishes a fully integrated view of all material risks across the company. The RMCcompany, provides broad strategic oversight of all risksrisk types, and its purpose is to review BB&T’s aggregateoversees corporate-wide strategies for identifying, assessing, controlling, measuring, monitoring and reporting risk exposure, evaluate risk appetite, and evaluate risks not reviewed by other risk committees.at the enterprise level.
The RMCERC is responsible for taking a broad view ofmaintaining an effective risk incorporating information from all risk functions. This combination of broadmanagement framework and specific focus providesmonitoring its adoption and execution across the most effective framework for the management of risk.enterprise. The RMCERC is chaired by the CRO and its membership includes all members of Executive Management,Leadership and the General Auditor (ex officio) and senior leaders from Financial Management, the RMO and other areas.Auditor.
The principal types of inherent risk include compliance,market, credit, liquidity, market,compliance, strategic, reputational, operational reputation and strategictechnology risks. The following is a discussion of these risks.
Compliance risk
Market Risk
Compliance
Market risk is the risk to current or anticipated earnings, capital or capitaleconomic value arising from violationschanges in the market value of laws, rulesportfolios, securities, or regulations,other financial instruments. Market risk results from changes in the level, volatility or correlations among financial market risk factors or prices, including interest rates, credit spreads, foreign exchange rates, equity, and commodity prices.
Effective management of market risk is essential to achieving Truist's strategic financial objectives. Truist's most significant market risk exposure is to interest rate risk in its balance sheet; however, market risk also results from non-conformance with prescribed practices, internal policiesunderlying product liquidity risk, price risk and procedures or ethical standards. Thisvolatility risk exposes BB&T to fines, civil money penalties, paymentin Truist's BUs. Interest rate risk results from differences between the timing of damagesrate changes and the voidingtiming of contracts. Compliancecash 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 canmanagement are to minimize adverse effects from changes in market risk factors on net interest income, net income and capital and to offset the risk of price changes for certain assets and liabilities recorded at fair value. At Truist, market risk management also includes the enterprise-wide IPV function.
66 Truist Financial Corporation
Interest Rate Market Risk
As a financial institution, Truist is exposed to interest rate risk both on its assets and on its liabilities. Since interest rate changes are out of the control of any private sector institution, Truist actively manages its interest rate risk exposure through the strategic repricing of its assets and liabilities, taking into account the volumes, maturities and mix, with the goal of keeping net interest margin as stable as possible. Truist primarily uses three methods to measure and monitor its interest rate risk: (i) simulations of possible changes to net interest income over the next two years based on gradual changes in interest rates; (ii) analysis of interest rate shock scenarios; and (iii) analysis of economic value of equity based on changes in interest rates.
The Company’s simulation model takes into account assumptions related to prepayment trends, using a combination of market data and internal historical experiences for deposits and loans, as well as scheduled maturities and payments and the expected outlook for the economy and interest rates. These assumptions are reviewed and adjusted monthly to reflect changes in current interest rates compared to the rates applicable to Truist’s assets and liabilities. The model also considers Truist's current and prospective liquidity position, current balance sheet volumes and projected growth and/or contractions, accessibility of funds for short-term needs and capital maintenance.
Deposit betas are an important assumption in the interest rate risk modeling process. Truist applies an average deposit beta (the sensitivity of deposit rate changes relative to market rate changes) of approximately 50% to its non-maturity interest-bearing deposit accounts when 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.
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 34: Interest Sensitivity Simulation Analysis |
Interest Rate Scenario | | Annualized Hypothetical Percentage Change in Net Interest Income |
Linear Change in Prime Rate (bps) | | Prime Rate | |
| Dec 31, 2020 | | Dec 31, 2019 | | Dec 31, 2020 | | Dec 31, 2019 |
Up 100 | | 4.25 | % | | 5.75 | % | | 4.18 | % | | 0.95 | % |
Up 50 | | 3.75 | | | 5.25 | | | 3.24 | | | 0.75 | |
No Change | | 3.25 | | | 4.75 | | | — | | | — | |
Down 25 (1) | | 3.00 | | | 4.50 | | | (1.82) | | | NA |
Down 50 (1) | | 2.75 | | | 4.25 | | | (2.09) | | | (1.18) | |
(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.
Truist has established parameters related to interest rate sensitivity measures that prescribe a maximum impact on net interest income under different interest rate scenarios that would result in diminished reputation, reduced franchisean escalation to the Board. The following parameters and interest rate scenarios are considered Truist's primary measures of interest rate risk:
•Maximum impact on net interest income of 7.5% for the next 12 months assuming a 25 basis point change in interest rates each quarter for four quarters; and a
•Maximum impact on net interest income of 10% for an immediate 100 basis point parallel change in rates.
This interest rate shock analysis is designed to create an outer bound of acceptable interest rate risk.
Management considers how the interest rate risk position could be impacted by changes in balance sheet mix. Liquidity in the banking industry has been very strong during the current economic cycle. Much of this liquidity increase has resulted in growth in noninterest-bearing demand deposits. Consistent with the industry, Truist has seen a significant increase in this funding source. The behavior of these deposits is one of the most important assumptions used in determining the interest rate risk position of Truist. A decrease in the amount of these deposits in the future would reduce the asset sensitivity of Truist’s balance sheet because the Company would increase interest-bearing funds to offset the loss of this advantageous funding source.
The following table shows the results of Truist's interest-rate sensitivity position assuming the loss of demand deposits and an associated increase in managed rate deposits under various scenarios. For purposes of this analysis, Truist modeled the incremental beta of managed rate deposits for the replacement of the demand deposits at 100%.
Truist Financial Corporation 67
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
Table 35: Deposit Mix Sensitivity Analysis |
Linear Change in Rates (bps) | | Base Scenario at December 31, 2020 (1) | | Results Assuming a Decrease in Noninterest-Bearing Demand Deposits |
| | $20 Billion | | $40 Billion |
Up 100 | | 4.18 | % | | 3.36 | % | | 2.54 | % |
Up 50 | | 3.24 | | | 2.64 | | | 2.04 | |
(1)The base scenario is equal to the annualized hypothetical percentage change in net interest income at December 31, 2020 as presented in the preceding table.
Truist also uses an EVE analysis to focus on longer-term projected changes in asset and liability values given potential changes in interest rates. This measure allows Truist to analyze interest rate risk that falls outside the net interest income simulation period. The EVE model is a discounted cash flow of the portfolio of assets, liabilities and derivative instruments. The difference in the present value of assets minus the present value of liabilities is defined as EVE.
The following table shows the effect that the indicated changes in interest rates would have on EVE:
| | | | | | | | | | | | | | | | | | |
Table 36: EVE Simulation Analysis |
Change in Interest Rates (bps) | | | | Hypothetical Percentage Change in EVE |
| | | | | Dec 31, 2020 | | Dec 31, 2019 |
| | | | | | | | |
Up 100 | | | | | | 3.9 | % | | (2.9) | % |
No Change | | | | | | — | | | — | |
| | | | | | | | |
Down 100 | | | | | | (7.6) | | | (3.0) | |
| | | | | | | | |
| | | | | | | | |
Truist uses financial instruments including derivatives to manage interest rate risk related to securities, commercial loans, MSRs and mortgage banking operations, long-term debt and other funding sources. During October 2020, Truist initiated a new investment securities fair value hedging program, using fixed interest rate swaps to hedge prepayable securities. Truist also uses derivatives to facilitate transactions on behalf of its clients and as part of associated hedging activities. As of December 31, 2020, Truist had derivative financial instruments outstanding with notional amounts totaling $322.9 billion, with an associated net fair value of $3.3 billion. See "Note 19. Derivative Financial Instruments" for additional disclosures.
LIBOR in its current form was anticipated to no longer be available after 2021. For most tenors of U.S. dollar LIBOR, subject to the results of a consultation period ending January 2021, the administrator of LIBOR is considering extending publication until June 30, 2023. Tenors used infrequently by Truist, including one week and two month U.S. dollar LIBOR, are still anticipated to cease publication at December 31, 2021, based on this new guidance. Truist has U.S. dollar LIBOR-based contracts that extend beyond June 30, 2023. To prepare for the transition to an alternative reference rate, management has formed a cross-functional project team to address the LIBOR transition. The project team has performed an assessment to identify the potential risks related to the transition from LIBOR to a new index. The project team provides updates to Executive Leadership and the Board.
Contract fallback language for existing loans and leases is under review and certain contracts will need updated provisions for the transition. Current fallback language used for new, renewed, and modified contracts is generally consistent with ARRC recommendations. Updates to current fallback language will be evaluated according to new regulatory guidance for the extension of timelines for the transition and expectations for production of U.S. dollar LIBOR contracts during 2021. Truist continues to manage the impact of these contracts and other financial instruments, systems implications, hedging strategies, and related operational and market risks on established project plans for business and operational readiness for the transition. 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 "Item1A. Risk Factors." In 2020, Truist began offering SOFR-based lending solutions to wholesale and consumer clients, and entered into SOFR-based derivative contracts. 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, which is intended to ensure that exposures are in line with Truist's risk appetite.
Truist is also subject to risk-based capital guidelines for market risk under the Market Risk Rule.
68 Truist Financial Corporation
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 enterprisewith 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 the Company’s 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 19. Derivative Financial Instruments," "Note 18. Fair Value Disclosures," and "Critical Accounting Policies" herein for discussion of valuation policies, procedures and methodologies.
Securitizations
As of December 31, 2020, the aggregate market value of on-balance sheet securitization positions subject to the Market Risk Rule was not material. Consistent with the Market Risk Rule requirements, the Company performs pre-purchase due diligence on each securitization position to identify the characteristics including, but not limited to, deal structure and the asset quality of the underlying assets, that materially affect valuation and performance. Securitization positions are subject to Truist’s comprehensive risk management framework, which includes daily monitoring against a suite of limits. There were no off-balance sheet securitization positions during the reporting period.
Correlation Trading Positions
The trading portfolio of covered positions did not contain any correlation trading positions as of December 31, 2020.
VaR-Based Measures
VaR measures the potential loss of a given position or portfolio of positions at a specified confidence level and time horizon. Truist utilizes a historical VaR methodology to measure and aggregate risks across its covered trading positions. Prior to the integration of the two institutional broker dealer businesses to form Truist Securities in the third quarter of 2020, Truist operated two historical VaR models and the aggregate company-wide VaR across the systems was determined additively with no benefit of diversification. The heritage BB&T VaR model was retired following the formation of Truist Securities. Following the formation of Truist Securities, VaR is calculated on a consolidated basis using the Truist VaR engine. For risk management purposes, the VaR calculation is based on a historical simulation approach and measures the potential trading losses using a one-day holding period at a one-tail, 99% confidence level. For Market Risk Rule purposes, the Company calculates VaR using a 10-day holding period and a 99% confidence level. Due to inherent limitations of the VaR methodology, such as the assumption that past market behavior is indicative of future market performance, VaR is only one of several tools used to measure and manage market risk. Other tools used to actively manage market risk include stress testing, profit and loss attribution, and stop loss limits.
The trading portfolio’s VaR profile is influenced by a variety of factors, including the size and composition of the portfolio, market volatility and the correlation between different positions. A portfolio of trading positions is typically less risky than the sum of the risk from each of the individual sub-portfolios, because, under normal market conditions, risk within each category partially offsets the exposure to other risk categories. The following table summarizes certain VaR-based measures for both the three and twelve months ended December 31, 2020 and 2019. The increase from the prior year was mainly due to the integration of the heritage SunTrust trading business opportunities and lessened expansion potential.the market volatility due to the COVID-19 pandemic. As illustrated in the tables below, the inclusion of volatility levels observed in March 2020 in the 12-month VaR historic look-back window led to a convergence between VaR and Stressed VaR measures.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Table 37: VaR-based Measures | | | | | | | | | | | | |
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| | | | | | | | | | | |
Year Ended December 31, | | | | | | | | | 2020 | | 2019 |
(Dollars in millions) | | | | | | | | | 10-Day Holding Period | | 1-Day Holding Period | | 10-Day Holding Period | | 1-Day Holding Period |
VaR-based Measures: | | | | | | | | | | | | | | | |
Maximum | | | | | | | | | $ | 65 | | | $ | 11 | | | $ | 9 | | | $ | 2 | |
Average | | | | | | | | | 27 | | | 6 | | | 1 | | | 1 | |
Minimum | | | | | | | | | 3 | | | 1 | | | — | | | — | |
Period-end | | | | | | | | | 28 | | | 7 | | | 7 | | | 2 | |
VaR by Risk Class: | | | | | | | | | | | | | | | |
Interest Rate Risk | | | | | | | | | | | 2 | | | | | 2 | |
Credit Spread Risk | | | | | | | | | | | 9 | | | | | 3 | |
Equity Price Risk | | | | | | | | | | | 2 | | | | | 2 | |
Foreign Exchange Risk | | | | | | | | | | | — | | | | | — | |
Portfolio Diversification | | | | | | | | | | | (5) | | | | | (5) | |
Period-end | | | | | | | | | | | 7 | | | | | 2 | |
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 the Company’s trading portfolio. The following table summarizes Stressed VaR-based measures:
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Table 38: Stressed VaR-based Measures - 10 Day Holding Period | | | | | | |
| | | |
Year Ended December 31, | | | | | | | |
(Dollars in millions) | | | | | 2020 | | 2019 |
Maximum | | | | | $ | 65 | | | $ | 33 | |
Average | | | | | 33 | | | 5 | |
Minimum | | | | | 13 | | | 2 | |
Period-end | | | | | 28 | | | 28 | |
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.
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 seven company-wide VaR backtesting exceptions during the twelve months ended December 31, 2020, primarily driven by the COVID-19 pandemic, which led to a sudden and significant repricing of instruments in financial markets during the first and second quarters of 2020, as well as 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, Truist determined that the VaR model performed in line with expectations and that the significant moves in underlying market risk factors caused by the COVID-19 pandemic would not typically have been captured within the 1-day VaR measure.
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Model Risk Management
MRM is responsible for the independent model validation of all decision tools and models including trading market risk models. The validation activities are conducted in accordance with MRM policy, which incorporates regulatory guidance related to the evaluation of model conceptual soundness, ongoing monitoring and outcomes analysis. As part of ongoing monitoring efforts, the performance of all trading risk models are reviewed regularly to preemptively address emerging developments in financial markets, assess evolving modeling approaches, and to identify potential model enhancement.
Stress Testing
The Company uses a comprehensive range of stress testing techniques to help monitor risks across trading desks and to augment standard daily VaR and other risk limits reporting. The stress testing framework is designed to quantify the impact of extreme, but plausible, stress scenarios that could lead to large unexpected losses. Stress tests include simulations for historical repeats and hypothetical risk factor shocks. All trading positions within each applicable market risk category (interest rate risk, equity risk, foreign exchange rate risk, credit spread risk, and commodity price risk) are included in the Company's comprehensive stress testing framework. Management reviews stress testing scenarios on an ongoing basis and makes updates, as necessary, which is intended 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.
Credit riskRisk
Credit risk is the risk to current or anticipated earnings or capital arising from the default, inability or unwillingness of a borrower, obligor, or counterparty to meet the terms of any financial obligation with BB&Tto Truist or otherwise perform as agreed. Credit risk exists in all activities where success depends on the performance of a borrower, obligor, or counterparty. Credit risk arises when BB&TTruist funds are extended, committed, invested, or otherwise exposed through actual or implied contractual agreements, whether on or off balanceoff-balance sheet. Credit risk also occursincreases when the credit quality of an issuer whose securities or other instruments the bank holds deteriorates.
BB&TTruist has established the following general practices to manage credit risk:
•limiting the amount of credit that individual lenders may extend to a borrower;
•establishing a process for credit approval accountability;
•careful initial underwriting and analysis of borrower, transaction, market and collateral risks;
•ongoing servicing and monitoring of individual loans and lending relationships;
•continuous monitoring of the portfolio, market dynamics and the economy; and
•periodically reevaluating the bank’sCompany's strategy and overall exposure as economic, market and other relevant conditions change.
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The following discussion presents the principal types of lending conducted by BB&T and describes the underwriting procedures and overall risk management of BB&T’sTruist's lending function.
Underwriting ApproachModel Risk Management
MRM is responsible for the independent model validation of all decision tools and models including trading market risk models. The validation activities are conducted in accordance with MRM policy, which incorporates regulatory guidance related to the evaluation of model conceptual soundness, ongoing monitoring and outcomes analysis. As part of ongoing monitoring efforts, the performance of all trading risk models are reviewed regularly to preemptively address emerging developments in financial markets, assess evolving modeling approaches, and to identify potential model enhancement.
Stress Testing
The loan portfolio isCompany uses a primary sourcecomprehensive range of profitabilitystress testing techniques to help monitor risks across trading desks and risk; therefore, proper loan underwriting is critical to BB&T’s long-term financial success. BB&T’s underwriting approachaugment standard daily VaR and other risk limits reporting. The stress testing framework is designed to define acceptable combinationsquantify the impact of specific risk-mitigating featuresextreme, but plausible, stress scenarios that ensurecould 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 relationships conform to BB&T’sspread risk, philosophy. Provided below is a summary of the most significant underwriting criteria used to evaluate new loans and loan renewals:
Cash flow and debt service coverage—cash flow adequacy is a necessary condition of creditworthiness, meaning that loans must either be clearly supported by a borrower’s cash flow or, if not, must be justified by secondary repayment sources.
Secondary sources of repayment—alternative repayment fundscommodity price risk) are a significant risk-mitigating factor as long as they are liquid, can be easily accessed and provide adequate resources to supplement the primary cash flow source.
Value of any underlying collateral—loans are generally secured by the asset being financed. Because an analysis of the primary and secondary sources of repayment is the most important factor, collateral, unless it is liquid, does not justify loans that cannot be serviced by the borrower’s normal cash flows.
Overall creditworthiness of the customer, taking into account the customer’s relationships, both past and current, with BB&T and other lenders—BB&T’s success depends on building lasting and mutually beneficial relationships with clients, which involves assessing their financial position and background.
Level of equity investedincluded in the transaction—in general, borrowersCompany's comprehensive stress testing framework. Management reviews stress testing scenarios on an ongoing basis and makes updates, as necessary, which is intended to ensure that both current and emerging risks are requiredcaptured appropriately. Management also utilizes stress analyses to contribute or invest a portion of their own funds prior to any loan advances.
Commercial Loan and Lease Portfolio
The commercial loan and lease portfolio represents the largest category ofsupport the Company’s total loan portfolio. BB&T’s commercial lending program is generally targeted to serve small-to-middle market businesses with salescapital adequacy assessment standards. See the "Capital" section of $250 million or less. In addition, BB&T’s Corporate Banking Group provides lending solutions to large corporate clients. Traditionally, lending to small and mid-sized businesses has been among BB&T’s strongest market segments. The commercial loan and lease portfolio consists of dealer-based financing of equipment for small businesses, commercial equipment leasing and finance, and full-service commercial mortgage banking. BB&T offers these services to bank clients as well as nonbank clients within and outside BB&T’s primary geographic market area.
In accordance with the Company’s lending policy, each loan undergoes a detailed underwriting process, which incorporates BB&T’s underwriting approach, procedures and evaluations described above. Commercial loans are typically priced with an interest rate tied to market indices, such as the prime rate or LIBOR. Commercial loans are individually monitored and reviewed for any possible deterioration in the ability of the client to repay the loan. Approximately 86.8% of BB&T’s commercial loans are secured by real estate, business equipment, inventories and other types of collateral.
Residential Mortgage Loan Portfolio
Branch Bank offers various types of fixed and adjustable-rate loans for the purpose of constructing, purchasing or refinancing residential properties. BB&T primarily originates conforming mortgage loans and higher quality jumbo and construction-to-permanent loans for owner-occupied properties. Conforming loans are loans that are underwritten in accordance with the underwriting standards set forth by FNMA and FHLMC. They are generally collateralized by one-to-four-family residential real estate, typically have loan-to-collateral value ratios of 80% or less at origination, and are made to borrowers in good credit standing.
Risks associated with the mortgage lending function include interest rate risk, which is mitigated through the sale of a substantial portion of conforming fixed-rate loans in the secondary mortgage market, and an effective MSR hedging process. Borrower risk is lessened through rigorous underwriting procedures and mortgage insurance. The right to service the loans and receive servicing income is generally retained when conforming loans are sold. Management believes that the retention of mortgage servicing is a relationship driver in retail banking and a part of management’s strategy to establish profitable long-term customer relationships and offer high quality client service. BB&T also purchases residential mortgage loans from correspondent originators. The loans purchased from third-party originators are subject to the same underwriting and risk-management criteria as loans originated internally.
Direct Loan Portfolio
The direct loan portfolio primarily consists of a wide variety of loan products offered through BB&T’s branch network. Various types of secured and unsecured loans are marketed to qualifying existing clients and to other creditworthy candidates in BB&T’s market area. The vast majority of direct loans are revolving home equity lines of credit secured by first or second liens on residential real estate. Direct loans are subject to the same rigorous lending policies and procedures as described above for commercial loans and are underwritten with note amounts and credit limits that ensure consistency with the Company’s risk philosophy.
Indirect Loan Portfolio
The indirect portfolio primarily includes secured indirect installment loans to consumers for the purchase of new and used automobiles, boats and recreational vehicles. The indirect portfolio also includes nonprime automobile finance. Such loans are originated through approved franchised and independent dealers throughout the BB&T market area. These loans are relatively homogeneous and no single loan is individually significant in terms of its size and potential risk of loss. Indirect loans are subject to the same rigorous lending policies and procedures as described above for commercial loans and are underwritten with note amounts and credit limits that ensure consistency with the Company’s risk philosophy. In addition to its normal underwriting due diligence, BB&T uses application systems and "scoring systems" to help underwrite and manage the credit risk in its indirect portfolio.
Revolving Credit Loan Portfolio
The revolving credit portfolio consists of the outstanding balances on credit cards and BB&T’s checking account overdraft protection product, Constant Credit. BB&T markets credit cards to its existing banking client base and does not solicit cardholders through nationwide programs or other forms of mass marketing. Such balances are generally unsecured and actively managed.
PCI
The PCI balance includes loans acquired with credit deterioration subsequent to origination as well as loans that were formerly covered by loss sharing agreements. Refer to "Note 3. Loans and ACL"this MD&A for additional information.discussion of capital adequacy.
Liquidity risk
Credit Risk
Liquidity risk is the risk to current or anticipated earnings or capital that BB&T will be unable to meet its obligations as they come due because of an inability to liquidate assets or obtain adequate funding (funding liquidity risk), or that it cannot easily unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions (market liquidity risk).
Market risk
MarketCredit risk is the risk to current or anticipated earnings or capital arising from changesthe default, inability or unwillingness of a borrower, obligor, or counterparty to meet the terms of any financial obligation to Truist or otherwise perform as agreed. Credit risk exists in all activities where success depends on the market valueperformance of portfolios,a borrower, obligor, or counterparty. Credit risk arises when Truist funds are extended, committed, invested, or otherwise exposed through actual or implied contractual agreements, whether on or off-balance sheet. Credit risk increases when the credit quality of an issuer whose securities or other financial instruments. Market risk results from changes ininstruments the level, volatility or correlations among financialbank holds deteriorates.
Truist has established the following general practices to manage credit risk:
•limiting the amount of credit that individual lenders may extend to a borrower;
•establishing a process for credit approval accountability;
•careful initial underwriting and analysis of borrower, transaction, market rates or prices, including interest rates, foreign exchange rates, equity prices, commodity prices orand collateral risks;
•ongoing servicing and monitoring of individual loans and lending relationships;
•continuous monitoring of the portfolio, market dynamics and the economy; and
•periodically reevaluating the Company's strategy and overall exposure as economic, market and other relevant rates or prices.conditions change.
Interest rateTruist Financial Corporation 71
The following discussion describes the underwriting procedures and overall risk results from differences between the timing of rate changes and the timing of cash flows (re-pricing risk); from changing rate relationships among different yield curves affecting bank activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest-related options embedded in bank products (options risk).
For additional information concerning BB&T’s management of market risk, see the "Market Risk Management" section of "Management’s Discussion and Analysis of Financial Condition and Results of Operations."Truist's lending function.
Operational risk
Operational risk is the risk to current or anticipated earnings or capital arising from inadequate or failed internal processes, people and systems or from external events. This definition includes legal risk, which is the risk of loss arising from defective transactions, litigation or claims made, or the failure to adequately protect company-owned assets.
Cybersecurity
In recent years, cybersecurity has gained prominence within the financial services industry due to increases in the quantity and sophistication of cyber attacks, which include significant distributed denial-of-service and credential validation attacks, malicious code and viruses and attempts to breach the security of systems, which, in certain instances, have resulted in unauthorized access to customer account data.
BB&T has a number of complex information systems used for a variety of functions by customers, employees and vendors. In addition, third parties with which BB&T does business or that facilitate business activities (e.g., vendors, exchanges, clearing houses, central depositories and financial intermediaries) could also be sources of cybersecurity risk to BB&T, including with respect to breakdowns or failures of their systems, misconduct by the employees of such parties, or cyber attacks which could affect their ability to deliver a product or service to BB&T.
As a FHC, BB&T must adhere to the security requirements and expectations of the applicable regulatory agencies, which include requirements related to data privacy, systems availability and business continuity planning, among others. The regulatory agencies have established guidelines for the responsibilities of the Board of Directors and senior management, which include establishing policy, appointing and training personnel, implementing review and testing functions and ensuring an appropriate frequency of updates.
The Risk Committee of the Board of Directors is responsible for the management of cybersecurity risk. The DTSSRC and its subcommittees are responsible for cybersecurity strategy, and monitoring and reporting on cybersecurity risks. Corporate Information Security is responsible for day-to-day cybersecurity operations. Various reports on cybersecurity are provided to Executive Management and a quarterly update is provided to the Risk Committee or the full Board of Directors on a rotating basis. Additionally, Corporate Information Security provides an Information Security Annual Report, which includes cybersecurity risk assessments, to the Board of Directors.
As a complement to the overall cybersecurity infrastructure, BB&T utilizes a number of internal training methods, both formally through mandatory courses and informally through written communications and other updates. Internal policies and procedures have been implemented to encourage the reporting of potential phishing attacks or other security risks. BB&T also uses third party services as part of its cybersecurity framework, and any such third parties are required to comply with BB&T’s policies regarding information security and confidentiality. BB&T also uses third party groups to assess and supplement the Company’s cybersecurity needs.
These cyber attacks have not, to date, resulted in any material disruption to BB&T’s operations or harm to its customers and have not had a material adverse effect on BB&T’s results of operations; however, there can be no assurance that a sophisticated cyber attack can be detected or thwarted.
Model Risk Management
MRM is responsible for the independent model validation of all decision tools and models including trading market risk models. The validation activities are conducted in accordance with MRM policy, which incorporates regulatory guidance related to the evaluation of model conceptual soundness, ongoing monitoring and outcomes analysis. As part of ongoing monitoring efforts, the performance of all trading risk models are reviewed regularly to preemptively address emerging developments in financial markets, assess evolving modeling approaches, and to identify potential model enhancement.
Stress Testing
The Company uses a comprehensive range of stress testing techniques to help monitor risks across trading desks and to augment standard daily VaR and other risk limits reporting. The stress testing framework is designed to quantify the impact of extreme, but plausible, stress scenarios that could lead to large unexpected losses. Stress tests include simulations for historical repeats and hypothetical risk factor shocks. All trading positions within each applicable market risk category (interest rate risk, equity risk, foreign exchange rate risk, credit spread risk, and commodity price risk) are included in the Company's comprehensive stress testing framework. Management reviews stress testing scenarios on an ongoing basis and makes updates, as necessary, which is intended 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.
Credit Risk
Credit risk is the risk to current or anticipated earnings or capital arising from the default, inability or unwillingness of a borrower, obligor, or counterparty to meet the terms of any financial obligation to Truist or otherwise perform as agreed. Credit risk exists in all activities where success depends on the performance of a borrower, obligor, or counterparty. Credit risk arises when Truist funds are extended, committed, invested, or otherwise exposed through actual or implied contractual agreements, whether on or off-balance sheet. Credit risk increases when the credit quality of an issuer whose securities or other instruments the bank holds deteriorates.
Truist has established the following general practices to manage credit risk:
•limiting the amount of credit that individual lenders may extend to a borrower;
•establishing a process for credit approval accountability;
•careful initial underwriting and analysis of borrower, transaction, market and collateral risks;
•ongoing servicing and monitoring of individual loans and lending relationships;
•continuous monitoring of the portfolio, market dynamics and the economy; and
•periodically reevaluating the Company's strategy and overall exposure as economic, market and other relevant conditions change.
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The following discussion describes the underwriting procedures and overall risk management of Truist's lending function.
Underwriting Approach
The loan portfolio is a primary source of profitability and risk; therefore, proper loan underwriting is critical to Truist's long-term financial success. Truist's underwriting approach is designed to define acceptable combinations of specific risk-mitigating features that promote credit relationships that conform to Truist's risk philosophy. Provided below is a summary of the most significant underwriting criteria used to evaluate new loans and loan renewals:
•Cash flow and debt service coverage - cash flow adequacy is a necessary condition of creditworthiness, meaning that loans must either be clearly supported by a borrower's cash flow or, if not, must be justified by secondary repayment sources.
•Secondary sources of repayment - alternative repayment funds are a significant risk-mitigating factor as long as they are liquid, can be easily accessed, and provide adequate resources to supplement the primary cash flow source.
•Value of any underlying collateral - loans are generally secured by the asset being financed. Because an analysis of the primary and secondary sources of repayment is the most important factor, collateral, unless it is liquid, does not justify loans that cannot be serviced by the borrower's normal cash flows.
•Overall creditworthiness of the client, taking into account the client's relationships, both past and current, with Truist and other lenders - Truist's success depends on building lasting and mutually beneficial relationships with clients, which involves assessing their financial position and background.
•Level of equity invested in the transaction - in general, borrowers are required to contribute or invest a portion of their own funds prior to any loan advances.
Refer to the "Lending Activities" section in this MD&A for a discussion of each loan and lease portfolio.
Liquidity Risk
Liquidity risk is the risk that (i) Truist will be unable to meet its obligations as they come due because of an inability to obtain adequate funding (funding liquidity risk), or (ii) Truist cannot easily unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions (market liquidity risk).
Compliance Risk
Compliance risk is the risk to current or anticipated earnings or capital arising from violations of laws, rules or regulations, or from non-conformance with prescribed practices, internal policies and procedures or ethical standards. This risk exposes Truist to fines, civil monetary penalties, payment of damages and the voiding of contracts. Compliance risk can result in diminished reputation, reduced franchise or enterprise value, limited business opportunities and lessened expansion potential.
Strategic Risk
Strategic risk is the risk of financial loss, diminished stakeholder confidence, or negative impact to human capital resulting from ineffective strategy setting and execution, adverse business decisions, or lack of responsiveness to changes in the banking industry and operating environment. Truist is committed to fulfilling its overall strategic objectives by selecting business strategies and operating businesses in a manner consistent with achieving profitability/earnings growth and maintaining strong confidence and trust with its key stakeholder constituencies.
Reputation Risk
Reputation risk is the risk to current or anticipated earnings, capital, enterprise value, the Truist brand, and public confidence arising from negative publicity or public opinion, whether real or perceived, regarding Truist's business practices, products, services, transactions, or other activities undertaken by Truist, its representatives, or its partners. A negative reputation may impair Truist's relationship with clients, teammates, communities or shareholders, and it is often a residual risk that arises when other risks are not managed properly.
Operational Risk
Operational risk is the risk to current or anticipated earnings or capital arising from inadequate or failed internal processes, people and systems or from external events. It includes legal risk, which is the risk of loss arising from defective transactions, litigation or claims made, or the failure to adequately protect company-owned assets. An operational loss occurs when an event results in a loss or reserve originating from operational risk.
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Model Risk
Model risk is the risk to current or anticipated earnings or capital from decisions based on incorrect or misused model outputs. BB&TTruist uses models for many purposes, including the valuation of financial positions, estimation of credit losses, and the measurement of risk. Valuation models are used to value certain financial instruments for which quoted prices may not be readily available. Valuation models are also used as inputs for VaR, the estimation of VaR itself, regulatory capital, stress testing and the ACL. Models are owned by the applicable BUs, who are responsible for the development, implementation and use of their models. Oversight of these functions is performed by the MRM, which is a component of the RMO. Once models have been approved, model owners are responsible for the maintenance of an appropriate operating environment and must monitor and evaluate the performance of the models on a recurring basis. Models are updated in response to changes in portfolio composition, industry and economic conditions, technological capabilities and other developments.
MRM manages model risk in a holistic manner through a suite of model governance and model validation activities. The risk of each model is assessed and classified into various risk tiers. Additionally, MRM maintains an enterprise-wide model inventory containing relevant model information. Regarding model validation, MRM utilizes internal validation analysts and managers with skill sets in predictive modeling to perform detailed reviews of model development, implementation and conceptual soundness. On certain occasions, the MRM will also engage external parties to assist with validation efforts. TheOnce in a production environment, MRM maintains documented quality assurance procedures that are used to confirm that validation analysts have completed the necessary field work in an auditable and complete fashion. Theassesses a model’s performance on a periodic basis through ongoing monitoring reviews. MRM tracks issues that have been identified byduring model validation analystsor through ongoing monitoring, and engages with model owners to ensure their timely remediation. MRM presentsgauges model limitations and risksrisk utilizing a collection of key risk indicators, which are periodically reported to management andrelevant committees, including but not limited to, the Model Risk Management Committee as well as the Board Risk Committee. MRM will also present model risk topics to the Board Risk Committee as necessary.
Merger Integration Risk
The Truist Merger Program was designed to ensure successful integration following the Merger through strong governance practices and controls, with processes, metrics and reporting exemplifying a strong risk culture. The core Truist Merger Program structure consists of Directors via model validation reportskey stakeholders from each line of business. Integration activities and regular meetingsrisk mitigation are monitored through established workgroups and Truist Merger Program leadership, with oversight and escalation into the ORMC.Merger Oversight Committee (as the primary committee), TMC and Board Technology Committee.
Reputation riskTechnology Risk
ReputationTechnology risk is the risk to current or anticipated earnings, capital, enterprise value, the BB&T brand, and public confidence arising from negative publicity or public opinion, whether real or perceived, regarding BB&T’s business practices, products, services, transactions, or other activities undertaken by BB&T, its representatives, or its partners. A negative reputation may impair BB&T’s relationship with clients, associates, communities or shareholders, and it is often a residual risk that arises when other risks are not managed properly.
Strategic risk
Strategic risk is the risk to current or anticipated earnings, capital, enterprise value and the achievement of BB&T’s vision, mission, purpose and business objectives consistent with its values that arises from BB&T’s business strategy or potentially adverse business decisions, improper or ineffective implementation of business decisions or lack of responsiveness to changes in the banking industry and operating environment. Strategic risk is a function of BB&T’s strategic goals, business strategies, resources and quality of implementation. The responsibility for managing this risk rests with the Board of Directors, Executive Management and the Senior Leadership Team.
Market Risk Management
The effective management of market risk is essential to achieving BB&T’s strategic financial objectives. As a financial institution, BB&T’s most significant market risk exposure is interest rate risk in its balance sheet; however, market risk also includes product liquidity risk, price risk and volatility risk in BB&T’s BUs. The primary objectives of market risk management are to minimize any adverse effect that changes in market risk factors may have on net interest income, net income and capital and to offset the risk of price changes for certain assets recorded at fair value. At BB&T, market risk management also includes the enterprise-wide IPV function.
Interest Rate Market Risk (Other than Trading)
BB&T actively manages market risk associated with assetthe use, ownership, operation, involvement, influence and liability portfoliosadoption of information technology across the Company. Truist has defined and adopted a technology risk framework that provides the foundation for technology risk strategy, program and oversight and defines key objectives, operating model components, risk domains and capabilities to manage this risk.
Digital technology is constantly evolving, and new and unforeseen threats and actions by others may disrupt operations or result in losses beyond Truist’s risk control thresholds. Truist maintains a comprehensive risk-based information security / cybersecurity framework implemented through people, processes, and technology whereby Truist actively monitors and evaluates threats, events, and the performance of its business operations and continually adapts its risk mitigation activities accordingly.
Truist's framework aligns with a focus onthose of the strategic pricingNational Institute of assetStandards and liability accountsTechnology, the International Standards Organization 27000 series, the IT Governance Institute, and management of appropriate maturity mixes of assetsthe Control Objectives for Information and liabilities. The goal of these activities isRelated Technology, as well as conforms with the requirements and guidance from applicable regulatory authorities, including the Federal Financial Institutions Examination Council. In addition, Truist’s framework, which includes internally and externally focused capabilities, drives the development and implementation of appropriate maturity and repricing opportunities in BB&T’s portfolios of assets and liabilitiesTruist’s holistic data security strategy that will produce reasonably consistent net interest income during periods of changing interest rates. These portfolios are analyzed for proper fixed-rate and variable-rate mixes under various interest rate scenarios.
The asset/liability management process is designed to achieve relatively stable NIMreduce risk while enabling Truist’s corporate business objectives.
Truist has built an organization with dedicated, skilled talent to operationalize Truist’s cybersecurity strategy. The cybersecurity strategy is enabled by continuous enhancement of Truist’s multilayered defenses including advanced capabilities for early and assure liquidity by coordinatingrapid cyber threat identification, detection, protection, response, and recovery. Truist participates in the volumes, maturities or repricing opportunities of earning assets, depositsfederally recognized financial sector information sharing organization structure, known as the Financial Services Information Sharing and borrowed funds. Among other things, this process gives consideration to prepayment trends related to securities, loans and leases and certain deposits that have no stated maturity. Prepayment assumptions are developed usingAnalysis Center as a combination of market data and internal historical prepayment experience for residential mortgage-related loans and securities, and internal historical prepayment experience for client deposits with no stated maturity and loans that are not residential mortgage related. These assumptions are subject to monthly review and adjustment, and are modified as deemed necessary to reflect changes in interest rates relative to the reference ratekey part of the underlying assets or liabilities. On a monthly basis, BB&T evaluates the accuracy of its Simulation model, which includes an evaluation of its prepayment assumptions, to ensure that all significant assumptions inherent in the model appropriately reflect changes in the interest rate environmentCompany’s cyber threat intelligence and related trends in prepayment activity. It is the responsibility of the MRLCC to determine and achieve the most appropriate volume and mix of earning assets and interest-bearing liabilities,response programs, as well as to ensure an adequate level of liquidityother industry organizations and capital, within the context of corporate performance goals. The MRLCC also sets policy guidelines and establishes long-term strategies with respect to interest rate risk exposure and liquidity. The MRLCC meets regularly to review BB&T’s interest rate risk and liquidity positions in relation to present and prospective market and business conditions, and adopts funding and balance sheet management strategiesinitiatives that are intended to ensure that the potential impacts on earnings and liquidity as a result of fluctuations in interest rates are within acceptable tolerance guidelines.
BB&T uses derivatives primarily to manage economic risk related to securities, commercial loans, MSRs and mortgage banking operations, long-term debt and other funding sources. BB&T also uses derivatives to facilitate transactions on behalf of its clients. As of December 31, 2017, BB&T had derivative financial instruments outstanding with notional amounts totaling $75.2 billion, with a net fair value loss of $271 million. See "Note 17. Derivative Financial Instruments" for additional disclosures.
The majority of BB&T’s assets and liabilities are monetary in nature and, therefore, differ greatly from most commercial and industrial companies that have significant investments in fixed assets or inventories. Fluctuations in interest rates and actions of the FRB to regulate the availability and cost of credit have a greater effect on a financial institution’s profitability than do the effects of higher costs for goods and services. Through its balance sheet management function, which is monitored by the MRLCC, management believes that BB&T is positioned to respond to changing needs for liquidity, changes in interest rates and inflationary trends.
Management uses the Simulation to measure the sensitivity of projected earnings to changes in interest rates. The Simulation projects net interest income and interest rate risk for a rolling two-year period of time. The Simulation takes into account the current contractual agreements that BB&T has made with its customers on deposits, borrowings, loans, investments and commitments to enter into those transactions. Furthermore, the Simulation considers the impact of expected customer behavior. Management monitors BB&T’s interest sensitivity by means of a model that incorporates the current volumes, average rates earned and paid, and scheduled maturities and payments of asset and liability portfolios, together with multiple scenarios that include projected prepayments, repricing opportunities and anticipated volume growth. Using this information, the model projects earnings based on projected portfolio balances under multiple interest rate scenarios. This level of detail is needed to simulate the effect that changes in interest rates and portfolio balances may have on the earnings of BB&T. This method is subject to the accuracy of the assumptions that underlie the process, but management believes that it provides a better illustration of the sensitivity of earnings to changes in interest rates than other analysespromote industry best practices such as static or dynamic gap. In additionharmonized cybersecurity standards, cyber readiness, and secure consumer financial data sharing.
To further mitigate the risks presented by an evolving cyber threat landscape, Truist provides data protection guidance to the Simulation, BB&T uses EVEclients and promotes data protection awareness and accountability through mandatory teammate training. Truist conducts scenario-driven test exercises simulating impacts and consequences developed through analysis to focus on projected changes in assets and liabilities given potential changes in interest rates. This measure also allows BB&T to analyze interest rate risk that falls outside the analysis window contained in the Simulation. 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 the economic value of equity.
The asset/liability management process requires a number of key assumptions. Management determines the most likely outlook for the economy and interest rates by analyzing external factors, including published economic projections and data, the effects of likely monetary and fiscal policies,real-world technology incidents as well as any enacted or prospective regulatory changes. BB&T’s currentknown and prospective liquidity position, current balance sheet volumes and projected growth, accessibility of funds for short-term needs and capital maintenance are also considered. This data is combined with various interest rate scenarios to provide management with the information necessary to analyze interest sensitivity and to aid in the development of strategies to reach performance goals.
The following table shows the effect that the indicated changes in interest rates would have on net interest income as projected for the next twelve months assuming a gradual change in interest rates as described below. Key assumptions in the preparation of the table include prepayment speeds of mortgage-related and other assets, cash flows and maturities of derivative financial instruments, loan volumes and pricing, deposit sensitivity, customer preferences and capital plans. The resulting change in net interest income reflects the level of interest rate sensitivity that income has in relation to the investment, loan and deposit portfolios.
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Table 25 |
Interest Sensitivity Simulation Analysis |
| | |
Interest Rate Scenario | | Annualized Hypothetical Percentage Change in Net Interest Income |
| | Prime Rate | |
Linear Change in Prime Rate | | December 31, | | December 31, |
| 2017 | | 2016 | | 2017 | | 2016 |
Up 200 bps | | 6.50 | % | | 5.75 | % | | 3.09 | % | | 3.13 | % |
Up 100 | | 5.50 |
| | 4.75 |
| | 2.07 |
| | 2.14 |
|
No Change | | 4.50 |
| | 3.75 |
| | — |
| | — |
|
Down 25 | | 4.25 |
| | 3.50 |
| | (1.06 | ) | | (0.93 | ) |
Down 100 | | 3.50 |
| | 2.75 |
| | (6.62 | ) | | NA |
|
The MRLCC has established parameters related to interest sensitivity that prescribe a maximum negative impact on net interest income under different interest rate scenarios. In the event the results of the Simulation model fall outside the established parameters, management will make recommendations to the MRLCC on the most appropriate response given the current economic forecast. The following parameters and interest rate scenarios are considered BB&T’s primary measures of interest rate risk:
Maximum negative impact on net interest income of 2% for the next 12 months assuming a 25 basis point change in interest rates each month for four months followed by a flat interest rate scenario for the remaining eight month period.
Maximum negative impact on net interest income of 4% for the next 12 months assuming a 25 basis point change in interest rates each month for eight months followed by a flat interest rate scenario for the remaining four month period.
If a parallel rate change of 200 basis points cannot be modeled due to a low level of rates, a proportional limit applies, and the maximum negative impact on net interest income is adjusted on a proportional basis. Regardless of the proportional limit, the negative risk exposure limit will be the greater of the 4% or the proportional limit.
Management has also established a maximum negative impact on net interest income of 4% for an immediate 100 basis points parallel change in rates and 8% for an immediate 200 basis points parallel change in rates. Management currently only models up to a negative 100 basis point decline, and the maximum negative impact on net interest income is adjusted on a proportional basis. Regardless of the proportional limit, the negative risk exposure limit will be the greater of 4% or the proportional limit.anticipated cyber threats. These "interest rate shock" limitsexercises are designed to create an outer bandassess the viability of acceptableTruist’s crisis response and management programs and provide the basis for continuous improvement.
Truist Financial Corporation 73
Truist’s cybersecurity risk based upon a significantprogram is overseen by Executive Leadership and immediate change in rates.
Management has temporarily suspended its interest rate exposure limits to declining interest rates. As the Federal Reserve has started to raise rates, competitive pressureBoard. Regular updates on deposit rates has not materialized. As a result, asset repricing in excess of liability repricing is causing the measured exposure to declining rates to increase. Management evaluates its interest rate risk position each month.
Management must also consider how the balance sheet and 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 been due to a significant increase in noninterest-bearing demand deposits. Consistent with the industry, Branch Bank has seen a significant increase in this funding source. The behavior of these deposits is onestatus of the most important assumptions used in determining the interest ratecybersecurity risk position of BB&T. A loss of these deposits in the future would reduce the asset sensitivity of BB&T’s balance sheet as the Company increases interest-bearing fundsprogram, including information security risks and incidents, emerging threats, and control environment, are aggregated and escalated to offset the loss of this advantageous funding source.
Beta represents the correlation between overall market interest ratesExecutive Leadership and the rates paid by BB&T on interest-bearing deposits. BB&T applies an average beta of approximately 50%Board. Additionally, Truist has a Cyber Incident Response Team that manages significant cyber-specific events with escalation up to Executive Leadership and the Board. Truist’s framework requires annual exercises at a minimum to test Truist’s preparedness. The Board devotes significant time and attention to its non-maturity interest bearing deposit accountsoversight of cyber security risk and approves related information security policies. Although Truist has invested substantial resources to manage and reduce cybersecurity risk, it is not possible to completely eliminate this risk. Truist obtains insurance that protects against certain losses, expenses, and damages associated with cybersecurity risk. See Item 1A, "Risk Factors," 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. Due to current market conditions the actual deposit beta on non-maturity interest bearing deposits has been less than 15%; however, BB&T expects the beta to increase as rates continue to rise. BB&T regularly conducts sensitivity on other key variables to determine the impact they could have on the interest rate risk position. This allows BB&T to evaluate the likely impact on its balance sheet management strategies due to a more extreme variation in a key assumption than expected.additional information regarding cybersecurity risk.
The following table shows the effect that the loss of demand deposits and an associated increase in managed rate deposits would have on BB&T’s interest-rate sensitivity position. For purposes of this analysis, BB&T modeled the incremental beta for the replacement of the lost demand deposits at 100%.
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Table 26 |
Deposit Mix Sensitivity Analysis |
| | | | |
Increase in Rates | | Base Scenario at December 31, 2017 (1) | | Results Assuming a Decrease in Noninterest-Bearing Demand Deposits |
| | $1 Billion | | $5 Billion |
Up 200 bps | | 3.09 | % | | 2.88 | % | | 2.04 | % |
Up 100 | | 2.07 |
| | 1.94 |
| | 1.42 |
|
| |
(1) | The base scenario is equal to the annualized hypothetical percentage change in net interest income at December 31, 2017 as presented in the preceding table. |
If rates increased 200 basis points, BB&T could absorb the loss of $14.8 billion, or 27.5%, of noninterest-bearing demand deposits and replace them with managed rate deposits with a beta of 100% before becoming neutral to interest rate changes.
The following table shows the effect that the indicated changes in interest rates would have on EVE. Key assumptions in the preparation of the table include prepayment speeds of mortgage-related and other assets, cash flows and maturities of derivative financial instruments, loan volumes and pricing and deposit sensitivity.
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Table 27 |
EVE Simulation Analysis |
| | | | |
| | EVE/Assets | | Hypothetical Percentage Change in EVE |
| | December 31, | | December 31, |
Change in Rates | | 2017 | | 2016 | | 2017 | | 2016 |
Up 200 bps | | 11.4 | % | | 11.6 | % | | (5.1 | )% | | 1.3 | % |
Up 100 | | 11.9 |
| | 11.7 |
| | (0.9 | ) | | 1.8 |
|
No Change | | 12.0 |
| | 11.5 |
| | — |
| | — |
|
Down 25 | | 11.9 |
| | 11.3 |
| | (0.7 | ) | | (1.1 | ) |
Down 100 | | 11.1 |
| | NA |
| | (7.7 | ) | | NA |
|
Market Risk from Trading Activities
BB&T also manages market risk from trading activities which consists of acting as a financial intermediary to provide its customers access to derivatives, foreign exchange and securities markets. Trading market risk is managed through the use of statistical and non-statistical risk measures and limits. BB&T utilizes a historical VaR methodology to measure and aggregate risks across its covered trading BUs. This methodology uses two years of historical data to estimate economic outcomes for a one-day time horizon at a 99% confidence level. The average 99% one-day VaR and the maximum daily VaR for the years ended December 31, 2017 and 2016 were each less than $1 million. Market risk disclosures under Basel II.5 are available in the Additional Disclosures section of the Investor Relations site on BBT.com.
Liquidity
Liquidity represents the continuing ability to meet funding needs, including deposit withdrawals, timely repayment of borrowings and other liabilities, and funding of loan commitments. In addition to the level of liquid assets, such as cash, cash equivalents and AFS securities, many other factors affect the ability to meet liquidity needs, including access to a variety of funding sources, maintaining borrowing capacity, in national money markets, growing core deposits, theloan repayment of loans and the ability to securitize or package loans for sale.
BB&TTruist monitors the ability to meet customerclient demand for funds under both normal and stressed market conditions. In considering its liquidity position, management evaluates BB&T’sTruist's funding mix based on client core funding, client rate-sensitive funding and national markets funding. In addition, management also evaluates exposure to rate-sensitive funding sources that mature in one year or less. Management also measures liquidity needs against 30 days of stressed cash outflows for Branch BankTruist and BB&T.Truist Bank. To ensure a strong liquidity position and compliance with regulatory requirements, management maintains a liquid asset buffer of cash on hand and highly liquid unpledgedunencumbered securities. BB&T follows the FRB's enhanced prudential standards for purposes of determining the liquid asset buffer. BB&T’s policy is to use the greater of 5% or a range of projected net cash outflows over a 30 day period. As of December 31, 20172020 and 2016, BB&T’sDecember 31, 2019, Truist's liquid asset buffer, was 14.3% and 12.6%, respectively,as a percent of total assets.assets, was 20.2% and 16.5%, respectively.
BB&TThe LCR rule directs large U.S. banking organizations to hold unencumbered high-quality liquid assets sufficient to withstand projected 30-day total net cash outflows, each as defined under the LCR rule. As of January 1, 2020, Truist is considered to be a "modified LCR" holding company. BB&T would be subject to fullthe Category III reduced LCR requirements if its assets were to increase above $250 billion or if it were to be considered internationally active. BB&T produces LCR calculations to effectively manage the position of High-Quality Liquid Assets and the balance sheet deposit mix to optimize BB&T's liquidity position. BB&T'srequirements. Truist's average LCR was approximately 138% at113% for the three months ended December 31, 2017, compared to2020, well above the regulatory minimum for such entities of 100%, which puts BB&T in full compliance with the rule. The LCR can experience volatility due to issues like maturing debt rolling into the 30 day measurement period, or client inflows and outflows. The daily change in BB&T’s LCR can be positive or negative, with negative changes representing a reduction in measured liquidity. The negative changes averaged less than 2% during 2017 with a maximum change of approximately 11%.
As noted above, BB&T is currently subject to the modified LCR requirement. BB&T routinely evaluates the impact of becoming subject to the full LCR requirement. This includes an evaluation of the changes to the balance sheet and investment strategy that would be necessary to comply with the requirement. Management does not currently expect the required changes to have a material impact on BB&T’s financial condition or results of operations.
On April 27, 2016, the OCC, the FRB and the FDIC released a notice of proposed rulemaking for the US version of the net stable funding ratio. Under the proposal, BB&T will be a "modified NSFR" holding company. BB&T would be subject to full NSFR requirements if it has $250 billion or more in assets or $10 billion or more in total on-balance sheet foreign exposure. BB&T is evaluating the information in the proposal but does not currently expect a material impact on its results of operations or financial condition.
Parent Company
The purpose of the Parent Company is to serveserves as the primary source of capital for the operating subsidiaries, withsubsidiaries. The Parent Company's assets consist primarily consisting of cash on deposit with BranchTruist Bank, equity investments in subsidiaries, advances to subsidiaries, accountsand notes receivable from subsidiaries, and other miscellaneous assets.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 subsidiary,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 for investments in subsidiaries, advances to subsidiaries, dividend payments to common and preferred shareholders, retirement of common stock, and payments on long-term debt.
The primary source of funds used for Parent Company cash requirements was dividends received from subsidiaries. See "Note 15.22. Parent Company Financial Statements"Information" for additional information regarding dividends from subsidiaries and debt transactions.
LiquidityAccess to funding at the Parent Company is more susceptiblesensitive to market disruptions. BB&TTherefore, Truist prudently manages cash levels at the Parent Company to cover a minimum of one year of projected contractual cash outflows which includes unfunded external commitments, debt service, common and preferred dividends and scheduled debt maturities, without the benefit of any new cash infusions. Generally, BB&Tinflows. Truist maintains a significant buffer above the projected one year of contractual cash outflows. In determining the buffer, BB&TTruist considers cash requirements for common and preferred dividends, unfunded commitments to affiliates, beingserving as a source of strength to its banking subsidiariesTruist Bank, and being able to withstand sustained market disruptions that could limit access to the capital markets. As ofAt December 31, 20172020 and 2016,December 31, 2019, the Parent Company had 2943 months and 2529 months, respectively, of cash on hand to satisfy projected contractual cash outflows, and 2322 months and 1920 months, respectively, taking into accountwhen including the payment of common stock dividends.
BranchTruist Bank
BB&TTruist carefully manages liquidity risk at BranchTruist Bank. Branch Bank’sTruist Bank's primary source of funding is customerclient deposits. Continued access to customerclient deposits is highly dependent on thepublic confidence the public has in the stability of the bankTruist Bank and its ability to return funds to the clientclients when requested. BB&T
Truist Bank maintains a strong focus on its reputation in the market to ensure continued access to client deposits. BB&T integrates its risk appetite into its overall risk management framework to ensure the bank does not exceed its risk tolerance through its lending and other risk taking functions and thus risk becoming undercapitalized. BB&T believes that sufficient capital is paramount to maintaining the confidencenumber of its depositors and other funds providers. BB&T has extensive capital management processes in place to ensure it maintains sufficient capital to absorb losses and maintain a highly capitalized position that will instill confidence in the bank and allow continued access to deposits and otherdiverse funding sources. Branch Bank monitors many liquidity metrics at the bank including funding concentrations, diversification, maturity distribution, contingent funding needs and ability to meet liquidity requirements under times of stress.
Branch Bank has several major sources of funding to meet its liquidity requirements, including access torequirements. These sources include unsecured borrowings from the capital markets through the issuance of senior or subordinated bank notes, and institutional CDs, access to the FHLB system, dealer repurchase agreements and repurchase agreements with commercial clients, access to the overnight and term Federal funds markets, use of a Cayman branch facility,and retail brokered CDs. Truist Bank also maintains access to retail brokered CDssecured borrowing sources including FHLB advances, repurchase agreements, and a borrower in custody program with the FRB for the discount window. As ofAt December 31, 2017, BB&T has2020, Truist Bank had approximately $80.9$198.7 billion of available secured borrowing capacity, which represents approximately 8.89.4 times the amount of one year wholesale funding maturities.maturities in one-year or less. In addition to secured borrowing sources, Truist had excess eligible cash at the Federal Reserve Bank of $13.4 billion at December 31, 2020.
74 Truist Financial Corporation
The ability to raise funding at competitive prices is affected by the rating agencies’agencies' views of the Parent Company’sCompany's and Branch Bank’sTruist Bank's credit quality, liquidity, capital and earnings. Management meets with the rating agencies on a regular basis to discuss current outlooks. In April 2020, DBRS revised its outlook for Truist and Truist Bank from "positive" to "stable," citing economic deterioration related to COVID-19. DBRS affirmed all other ratings for Truist and Truist Bank. Additionally, Fitch revised its outlook for Truist and Truist Bank from "stable" to "negative," also citing pandemic-related economic deterioration. Fitch downgraded Truist’s subordinated debt to A-, and upgraded Truist’s preferred stock to BBB, in order to align these ratings to its recently revised bank rating methodology.
In July 2020, Fitch completed the implementation of its revised bank rating methodology. As a result, Fitch downgraded Truist’s senior unsecured debt to A and affirmed Truist Bank’s senior unsecured and subordinated debt ratings. This rating action taken by Fitch was solely a function of implementing its revised bank rating methodology and did not reflect a change in Fitch’s current or expected view of Truist’s or Truist Bank’s credit fundamentals.
The ratings for BB&TTruist and BranchTruist Bank by the major rating agencies are detailed in the table below:
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Table 28 |
39: Credit Ratings of BB&TTruist Financial Corporation and BranchTruist Bank |
December 31, 2017 | S&P | | Moody's | | Fitch | | DBRS Morningstar |
Truist Financial Corporation: | | | | | | | |
Issuer | S&PA- / A-2 | | Moody'sA3 | | FitchA+ / F1 | | DBRSAH / R-1L |
BB&T Corporation:Senior unsecured | A- | | A3 | | A | | AH |
Commercial PaperSubordinated | A-2BBB+ | | N/AA3 | | F1A- | | R-1(low)A |
IssuerPreferred stock | A-BBB- | | A2Baa2(hyb) | | A+BBB | | A(high)BBBH |
LT/Senior debtTruist Bank: | A- | | A2 | | A+ | | A(high) |
Subordinated debtIssuer | BBB+A / A-1 | | A2 | | AA+ / F1 | | AAAL / R-1M |
Preferred stockSenior unsecured | BBB-A | | Baa1(hyb)A2 | | BBB-A+ | | BBB(high)AAL |
Deposits | NA | | Aa2 / P-1 | | AA- / F1+ | | AAL / R-1M |
Branch Bank:Subordinated | A- | | (P) A3 | | A | | AH |
Long term depositsRatings outlook: | N/A | | Aa1 | | AA- | | AA(low) |
LT/Senior unsecured bank notesCredit trend | AStable | | A1Stable | | A+Negative | | AA(low) |
Other long term senior obligations | A | | N/A | | A+ | | AA(low) |
Other short term senior obligations | A-1 | | N/A | | F1 | | R-1(middle) |
Short term bank notes | A-1 | | P-1 | | F1 | | R-1(middle) |
Short term deposits | N/A | | P-1 | | F1+ | | R-1(middle) |
Subordinated bank notes | A- | | A2 | | A | | A(high) |
| | | | | | | |
Ratings Outlook: | | | | | | | |
Credit Trend | Stable | | Stable | | Stable | | Stable |
BB&T and Branch Bank have Contingency Funding PlansTruist has a contingency funding plan designed to ensure that liquidity sources are sufficient to meet their ongoing obligations and commitments, particularly in the event of a liquidity contraction. These plans areThis plan is designed to examine and quantify the organization’sorganization's liquidity under various "stress" scenarios. Additionally, the plans provideplan provides a framework for management and other critical personnel to follow in the event of a liquidity contraction or in anticipation of such an event. The plans addressplan addresses authority for activation and decision making, liquidity options, and the responsibilities of key departments in the event of a liquidity contraction. The liquidity options available to management could include seeking secured funding, asset sales, and under the most extreme scenarios, curtailing new loan originations.
Management believes current sources of liquidity are adequate to meet BB&T’sTruist's current requirements and plans for continued growth. See "Note 4. Premises9. Other Assets and Equipment,Liabilities," "Note 8. Long-Term Debt"11. Borrowings" and "Note 13.16. Commitments and Contingencies" for additional information regarding outstanding balances of sources of liquidity and contractual commitments and obligations.
Truist Financial Corporation 75
Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements and Related Party Transactions
The following table presents Truist's contractual obligations by payment date as of December 31, 2017, BB&T’s contractual obligations by payment date.2020. The payment amounts represent those amounts contractually due to the recipient.due. The table excludes liabilities recorded where management cannot reasonably estimate the timing of any payments that may be requiredrequired. UTBs, which represent a reserve for tax positions taken or expected to be taken, which ultimately may not be sustained upon examination by taxing authorities, have been excluded from the table below since the ultimate amount and timing of any future tax settlements are uncertain. Refer to "Note 14. Income Taxes" for additional details related to UTBs.
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| | | | | | | | | |
Table 40: Contractual Obligations and Other Commitments |
December 31, 2020 (Dollars in millions) | Total | | Less than 1 Year | | 1 to 3 Years | | 3 to 5 Years | | After 5 Years |
Long-term debt (1) | $ | 39,602 | | | $ | 5,373 | | | $ | 14,375 | | | $ | 11,106 | | | $ | 8,748 | |
Operating leases | 2,079 | | | 361 | | | 677 | | | 468 | | | 573 | |
Commitments to fund affordable housing investments | 1,057 | | | 623 | | | 364 | | | 27 | | | 43 | |
Renewable energy, private equity and certain other equity method investment commitments (2) | 547 | | | 284 | | | 145 | | | 74 | | | 44 | |
Time deposits | 21,941 | | | 17,438 | | | 3,860 | | | 593 | | | 50 | |
Contractual interest payments (3) | 3,723 | | | 1,012 | | | 1,407 | | | 838 | | | 466 | |
Purchase obligations (4) | 2,020 | | | 705 | | | 739 | | | 401 | | | 175 | |
Nonqualified benefit plan obligations (5) | 1,914 | | | 22 | | | 54 | | | 53 | | | 1,785 | |
Total contractual cash obligations | $ | 72,883 | | | $ | 25,818 | | | $ | 21,621 | | | $ | 13,560 | | | $ | 11,884 | |
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| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(1)Amounts include imputed interest of $5 million related to finance leases.
(2)Based on estimated payment dates.
(3)Includes accrued interest and future contractual interest obligations. Variable rate payments are based upon the rate in connection with these liabilities. Further discussioneffect at December 31, 2020.
(4)Represents obligations to purchase goods or services that are enforceable and legally binding. Many of the nature of each obligation ispurchase obligations have terms that are not fixed and determinable and are included in "Note 13. Commitmentsthe table above based upon the estimated timing and Contingencies."amount of payment. In addition, certain of the purchase agreements contain clauses that would allow Truist to cancel the agreement with specified notice; however, that impact is not included in the table above.
(5)Although technically unfunded plans, rabbi trusts and insurance policies on the lives of certain of the covered employees are available to finance future benefit plan payments.
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Table 29 |
Contractual Obligations and Other Commitments |
December 31, 2017 |
| | | | | | | | | | |
(Dollars in millions) | | Total | | Less than 1 Year | | 1 to 3 Years | | 3 to 5 Years | | After 5 Years |
Long-term debt and capital leases | | $ | 23,559 |
| | $ | 2,446 |
| | $ | 10,845 |
| | $ | 6,107 |
| | $ | 4,161 |
|
Operating leases | | 1,511 |
| | 255 |
| | 427 |
| | 320 |
| | 509 |
|
Commitments to fund affordable housing investments | | 928 |
| | 536 |
| | 349 |
| | 20 |
| | 23 |
|
Private equity and other investments commitments (1) | | 143 |
| | 39 |
| | 69 |
| | 28 |
| | 7 |
|
Time deposits | | 13,170 |
| | 8,379 |
| | 3,804 |
| | 970 |
| | 17 |
|
Contractual interest payments (2) | | 3,004 |
| | 751 |
| | 1,113 |
| | 560 |
| | 580 |
|
Purchase obligations (3) | | 1,335 |
| | 608 |
| | 544 |
| | 160 |
| | 23 |
|
Nonqualified benefit plan obligations (4) | | 1,020 |
| | 15 |
| | 31 |
| | 33 |
| | 941 |
|
Total contractual cash obligations | | $ | 44,670 |
| | $ | 13,029 |
| | $ | 17,182 |
| | $ | 8,198 |
| | $ | 6,261 |
|
| |
(1) | Based on estimated payment dates. |
| |
(2) | Includes accrued interest, future contractual interest obligations and the impact of hedges in a loss position. Other derivatives are excluded. Variable rate payments are based upon the rate in effect at December 31, 2017. |
| |
(3) | Represents obligations to purchase goods or services that are enforceable and legally binding. Many of the purchase obligations have terms that are not fixed and determinable and are included in the table above based upon the estimated timing and amount of payment. In addition, certain of the purchase agreements contain clauses that would allow BB&T to cancel the agreement with specified notice; however, that impact is not included in the table above. |
| |
(4) | Although technically unfunded plans, Rabbi Trusts and insurance policies on the lives of certain of the covered employees are available to finance future benefit plan payments. |
BB&T’sTruist's commitments include investments in affordable housing projects throughout its market area, renewable energy credits, and private equity funds. Refer to "Note 1. SummaryBasis of Significant Accounting Policies"Presentation" and "Note 13.16. Commitments and Contingencies" for further discussion of these commitments.
In addition, BB&TTruist enters into derivative contracts to manage various financial risks. A derivative is a financial instrument that derives its cash flows, and therefore its value, by reference to an underlying instrument, index or referenced interest rate. Derivative contracts are carried at fair value on the Consolidated Balance Sheets with the fair value representing the net present value of expected future cash receipts or payments based on market interest rates as of the balance sheet date. Derivative contracts are written in amounts referred to as notional amounts, which only provide the basis for calculating payments between counterparties and are not a measure of financial risk. Therefore, the derivative liabilities recorded on the balance sheet as of December 31, 2017 do not represent the amounts that may ultimately be paid under these contracts. Further discussion of derivative instruments is included in "Note 1. SummaryBasis of Significant Accounting Policies"Presentation" and "Note 17.19. Derivative Financial Instruments."
In the ordinary course of business, BB&T indemnifies its officers and directors Further discussion related to the fullest extent permitted by law against liabilities arising from litigation. BB&T also issues standard representationnature of Truist's obligations is included in "Note 16. Commitments and warranties in underwriting agreements, merger and acquisition agreements, loan sales, brokerage activities and other similar arrangements. Counterparties in many of these indemnifications provide similar indemnifications to BB&T. Although these agreements often do not specify limitations, BB&T does not believe that any payments related to these guarantees would materially change the financial condition or results of operations of BB&T.
BB&T holds public funds in certain states that do not require 100% collateralization on public fund bank deposits. In these states, should the failure of another public fund depository institution result in a loss for the public entity, the resulting uncollateralized deposit shortfall would have to be absorbed on a pro-rata basis (based upon the public deposits held by each bank within the respective state) by the remaining financial institutions holding public funds in that state. BB&T monitors deposits levels relative to the total public deposits held by all depository institutions within these states.
As a member of the FHLB, BB&T is required to maintain a minimum investment in capital stock. The board of directors of the FHLB can increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Agency. Because the extent of any obligation to increase BB&T’s investment in the FHLB depends entirely upon the occurrence of a future event, potential future payments to the FHLB are not determinable.
In the normal course of business, BB&T is also a party to financial instruments to meet the financing needs of clients and to mitigate exposure to certain risks. Such financial instruments include commitments to extend credit and certain contractual agreements, including standby letters of credit and financial guarantee arrangements.Contingencies." Further discussion of BB&T’sTruist's commitments is included in "Note 13.16. Commitments and Contingencies" and "Note 16.18. Fair Value Disclosures."
76 Truist Financial Corporation
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Table 30 |
Mortgage Indemnification, Recourse and Repurchase Reserves Activity (1) |
| | |
| | Year Ended December 31, |
(Dollars in millions) | | 2017 | | 2016 | | 2015 |
Balance, at beginning of period | | $ | 40 |
| | $ | 79 |
| | $ | 94 |
|
Payments | | — |
| | (2 | ) | | (5 | ) |
Expense | | (3 | ) | | (37 | ) | | (15 | ) |
Acquisitions | | — |
| | — |
| | 5 |
|
Balance, at end of period | | $ | 37 |
| | $ | 40 |
| | $ | 79 |
|
| |
(1) | Excludes the FHA-insured mortgage loan reserve of $85 million established during 2014 and settled in 2016. |
Related Party Transactions
The Company may transact with its officers, directors and other related parties in the ordinary course of business. These transactions include substantially the same terms as comparable third-party arrangements and are in compliance with applicable banking regulations.
Capital
The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. BB&T’sTruist's principal goals related to the maintenance of capital are to provide adequate capital to support BB&T’sTruist's risk profile consistent with the Board-approved risk appetite, provide financial flexibility to support future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, achieve optimal credit ratings for BB&TTruist and its subsidiaries and provide a competitive return to shareholders. Risk-based capital ratios, which include CET1 capital, Tier 1 capital and Total capital are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.
Truist regularly performs stress testing on its capital levels and is required to periodically submit the Company's capital plans and stress testing results to the banking regulators. Management regularly monitors the capital position of BB&TTruist on both a consolidated and bank levelbank-level basis. In this regard, management’smanagement's overriding policy is to maintain capital at levels that are in excess of theinternal capital targets, which are above the regulatory "well capitalized" levels.minimums. Management has implemented stressed capital ratio minimum targets to evaluate whether capital ratios calculated with plannedafter the effect of alternative capital actions are likely to remain above minimums specified by the FRB for the annual CCAR.CCAR process. Breaches of stressed minimum targets prompt a review of the planned capital actions included in BB&T’sTruist's capital plan.
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Table 41: Capital Requirements and Targets |
| Minimum Capital | | Well Capitalized | | Minimum Capital Plus Stress Capital Buffer (3) | | Truist Targets (1) |
| | Truist | Truist Bank | | | Interim Operating (2) | | Stressed |
CET1 | 4.5 | % | | NA | 6.5 | % | | 7.2 | % | | 8.0 | % | | 7.2 | % |
Tier 1 capital | 6.0 | | | 6.0 | 8.0 | | | 8.7 | | | 9.3 | | | 8.7 | |
Total capital | 8.0 | | | 10.0 | 10.0 | | | 10.7 | | | 11.3 | | | 10.7 | |
Leverage ratio | 4.0 | | | NA | 5.0 | | | NA | | 7.5 | | | 7.0 | |
Supplementary leverage ratio | 3.0 | | | NA | NA | | NA | | 6.5 | | | 6.0 | |
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Table 31 |
BB&T's Capital Targets |
| | | | |
| | Operating | | Stressed |
CET1 to risk-weighted assets | | 8.5 | % | | 6.0 | % |
Tier 1 capital to risk-weighted assets | | 10.0 |
| | 7.5 |
|
Total capital to risk-weighted assets | | 12.0 |
| | 9.5 |
|
Leverage ratio | | 8.0 |
| | 5.5 |
|
Tangible common equity ratio | | 6.0 |
| | 4.0 |
|
(1)The Truist targets are subject to revision based on finalization of pending regulatory guidance and other strategic factors.
(2)Truist's goal is to maintain capital levels above all regulatory minimums.
(3)Reflects a SCB of 270 basis points for Truist. |
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Table 32 |
Capital Requirements Under Basel III |
| | | | | | | | | | | | |
| | Minimum Capital | | Well-Capitalized | | Minimum Capital Plus Capital Conservation Buffer | | BB&T Target |
| | | | 2017 | | 2018 | | 2019 (1) | |
CET1 to risk-weighted assets | | 4.5 | % | | 6.5 | % | | 5.750 | % | | 6.375 | % | | 7.000 | % | | 8.5 | % |
Tier 1 capital to risk-weighted assets | | 6.0 |
| | 8.0 |
| | 7.250 |
| | 7.875 |
| | 8.500 |
| | 10.0 |
|
Total capital to risk-weighted assets | | 8.0 |
| | 10.0 |
| | 9.250 |
| | 9.875 |
| | 10.500 |
| | 12.0 |
|
Leverage ratio | | 4.0 |
| | 5.0 |
| | N/A |
| | N/A |
| | N/A |
| | 8.0 |
|
| |
(1) | BB&T's goal is to maintain capital levels above the 2019 requirements. |
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 targets for one or more of these ratios, it is management's intent to return to these operating targets within a reasonable period of time through capital planning. Such temporary decreases below the operating minimums shown above are not considered an infringement of Truist's overall capital policy, provided a return above the minimums is forecasted to occur within a reasonable time period.
In August 2020, the Federal Reserve informed Truist of its SCB of 270 basis points for risk-based capital ratios. This buffer was determined based on stress testing results developed by the Federal Reserve and is effective from October 1, 2020 through September 30, 2021, at which point a revised SCB will be calculated and provided to Truist. Consistent with the Federal Reserve’s mandate across the industry, Truist resubmitted its capital plan in November 2020 to reflect changes in financial markets and the macroeconomic outlook. Truist’s review of the results of the 2020 CCAR supervisory stress test notes that the modeled outcomes shown by the FRB differ from those calculated by the Company. Truist believes those differences are attributable in part 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.
In December 2020, the Board of Directors authorized the repurchase of up to $2.0 billion of the Company’s common stock beginning in the first quarter of 2021, as well as certain other actions to optimize Truist’s capital position. Management’s intention is to maintain an approximate 10% Common Equity Tier 1 ratio after considering strategic actions such as non-bank acquisitions or stock repurchases, as well as changes in risk-weighted assets. Any stock repurchase activity will be informed by economic and regulatory considerations as well as Truist’s capital position, earnings outlook, and capital deployment priorities.
Payments of cash dividends and repurchases of common shares are the methods used to manage any excess capital generated. In addition, management closely monitors the Parent Company’sCompany's double leverage ratio (investments in subsidiaries as a percentage of shareholders’shareholders' equity). The active management of the subsidiaries’subsidiaries' equity capital, as described above, is the process used to manage this important driver of Parent Company liquidity and is a key element in the management of BB&T’sTruist's capital position.
Truist Financial Corporation 77
Management intends to maintain capital at BranchTruist Bank at levels that will result in classification as "well-capitalized" for regulatory purposes. Secondarily, it is management’smanagement's intent to maintain Branch Bank’sTruist Bank's capital at levels that result in regulatory risk-based capital ratios that are generally comparable with peers of similar size, complexity and risk profile. If the capital levels of BranchTruist Bank increase above these guidelines, excess capital may be transferred to the Parent Company in the form of special dividend payments, subject to regulatory and other operating considerations.
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 through capital planning to return to these targeted operating minimums within a reasonable period of time. Such temporary decreases below the operating minimums shown above are not considered an infringement of BB&T’s overall capital policy, provided a return above the minimums is forecast to occur within a reasonable time period.
BB&T regularly performs stress testing on its capital levels and is required to periodically submit the company’s capital plans to the banking regulators. The FRB did not object to the Company’s 2017 capital plan, and the 2018 capital plan is expected to be submitted during April 2018. Management’sManagement's capital deployment plan in order of preference is to focus on 1)(i) organic growth, 2)(ii) dividends, and 3) acquisitions(iii) strategic opportunities and/or share repurchases depending on opportunities in the marketplace and ourTruist's interest and ability to proceed with acquisitions.
Risk-based capital ratios, which include Tier 1 Capital, Total Capital and Tier 1 Common Equity, are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.
BranchTruist Bank's capital ratios are presented in the following table:
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Table 42: Capital Ratios - Truist Bank |
December 31, | | 2020 | | 2019 |
CET1 to risk-weighted assets | | 11.0 | % | | 10.6 | % |
Tier 1 capital to risk-weighted assets | | 11.0 | | | 10.6 | |
Total capital to risk-weighted assets | | 13.0 | | | 12.0 | |
Leverage ratio (1) | | 8.7 | | | 14.5 | |
Supplementary leverage ratio (2) | | 7.5 | | | NA |
(1)The leverage ratio is calculated using end of period Tier 1 capital and quarterly average tangible assets. The timing of the Merger impacted the 4Q19 result.
(2)Truist Bank became subject to the supplementary leverage ratio as of January 1, 2020.
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Table 33 |
Capital Ratios - Branch Bank |
|
| | December 31, |
| | 2017 | | 2016 |
CET1 to risk-weighted assets | | 11.3 | % | | 11.5 | % |
Tier 1 capital to risk-weighted assets | | 11.3 |
| | 11.5 |
|
Total capital to risk-weighted assets | | 13.3 |
| | 13.6 |
|
Leverage ratio | | 9.4 |
| | 9.6 |
|
BB&T'sTruist's capital ratios are presented in the following table:
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Table 43: Capital Ratios - Truist Financial Corporation |
December 31, (Dollars in millions, except per share data, shares in thousands) | | 2020 | | 2019 |
| | | | |
Risk-based: | | | | |
CET1 capital to risk-weighted assets | | 10.0 | % | | 9.5 | % |
Tier 1 capital to risk-weighted assets | | 12.1 | | | 10.8 | |
Total capital to risk-weighted assets | | 14.5 | | | 12.6 | |
Leverage ratio (1) | | 9.6 | | | 14.7 | |
Supplementary leverage ratio (2) | | 8.7 | | | NA |
Non-GAAP capital measure (3): | | | | |
Tangible common equity per common share | | $ | 26.78 | | | $ | 25.93 | |
Calculation of tangible common equity (3): | | | | |
Total shareholders' equity | | $ | 70,912 | | | $ | 66,558 | |
Less: | | | | |
Preferred stock | | 8,048 | | | 5,102 | |
Noncontrolling interests | | 105 | | | 174 | |
Goodwill and intangible assets, net of deferred taxes | | 26,629 | | | 26,482 | |
Tangible common equity | | $ | 36,130 | | | $ | 34,800 | |
Risk-weighted assets | | $ | 379,153 | | | $ | 376,056 | |
Common shares outstanding at end of period | | 1,348,961 | | | 1,342,166 | |
(1)The leverage ratio is calculated using end of period Tier 1 capital and quarterly average tangible assets. The timing of the Merger impacted the 4Q19 result.
(2)Truist became subject to the supplementary leverage ratio as of January 1, 2020.
(3)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.
Fair value estimates and assumptions are compared to industry surveys, recent market activity, actual portfolio experience and, when available, observable market data. Due to the nature of the valuation inputs, residential MSRs are classified within Level 3 of the valuation hierarchy. The value of residential MSRs is significantly affected by mortgage interest rates available in the marketplace, which influence mortgage loan prepayment speeds. In general, during periods of declining interest rates, the value of MSRs declines due to increasing prepayments attributable to increased mortgage-refinance activity. Conversely, during periods of rising interest rates, the value of residential MSRs generally increases due to reduced refinance activity. BB&TTruist typically hedges against market value changes in the residential MSRs. Refer to "Note 6.8. Loan Servicing" for quantitative disclosures reflecting the effect that changes in management’smanagement's assumptions would have on the fair value of residential MSRs.
The accompanying notes are an integral part of these consolidated financial statements.