filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, the accompanying Notes to the Consolidated Financial Statements in this Form 10-Q, other information contained in this document, as well as with Truist’s Annual Report on Form 10-K for the year ended December 31, 2020.
Regulatory Considerations
The regulatory framework applicable to banking organizations is intended primarily for the protection of depositors and the stability of the financial system, rather than for the protection of shareholders and creditors. Truist is subject to banking laws and regulations, and various other laws and regulations, which affect the operations and management of Truist and its ability to make distributions to shareholders. Truist and its subsidiaries are also subject to supervision and examination by multiple regulators. The descriptions below summarize updates since the filing of the Annual Report on Form 10-K for the year ended December 31, 2020 to state and federal laws to which Truist is subject. These descriptions do not summarize all possible or proposed changes in current laws or regulations, and are not intended to be a substitute for the related statues or regulatory provisions. Refer to Truist’s Annual Report on Form 10-K for the year ended December 31, 2020 for additional disclosures.
Supplementary Leverage Ratio
The temporary exclusion of U.S. Treasury securities and deposits at the FRB from the calculation of the supplementary leverage ratio expired as scheduled on March 31, 2021. This temporary relief previously benefited the Company’s supplementary leverage ratio by approximately 20 basis points. The FRB also announced plans to invite public comment on several potential supplementary leverage ratio modifications to ensure that the supplementary leverage ratio remains effective in an environment of higher reserves, though such proposal had not been published as of the date of this report.
Stress Capital Buffer
The FRB assigned Truist an SCB of 2.5%, which is effective from October 1, 2021 to September 30, 2022, at which point a revised SCB will be calculated and provided to Truist.
The FRB has lifted the restrictions on capital distributions for large banking organizations, including Truist, that had been in place due to the uncertainty caused by the COVID-19 pandemic. Going forward, Truist is subject to the normal restrictions on capital distributions under the SCB framework and applicable law.
Security-Based Swap Dealer Registration
In November 2021, Truist Bank conditionally registered with the SEC as a security-based swap dealer. As a result, Truist Bank’s security-based swaps business is now subject to requirements that are similar to the CFTC rules applicable to swap dealers, including trade reporting, business conduct standards, recordkeeping, margin, and potentially mandatory clearing and exchange trading requirements.
Resolution Plans
The FDIC issued a policy statement in June 2021 announcing that it will resume requiring bank level resolution plans for large banks, including Truist Bank, and bank-level resolution plans will have more streamlined content requirements. Truist Bank will be required to submit a bank-level resolution plan every three years. During the third quarter, Truist Bank was informed by the FDIC that its next resolution plan will be due on or before December 1, 2022. The FDIC also clarified the content requirements of the next resolution plan Truist Bank is required to submit.
Truist submitted its inaugural resolution plan to the FRB and FDIC in September 2021, which is currently under review.
Lifting of Consent Order
In June 2021, the FDIC terminated the consent order between SunTrust Bank and the FRB relating to certain identified legacy compliance issues. Truist Bank, as successor to SunTrust Bank, committed to comply with the obligations in the order in connection with the FDIC’s and FRB’s approval of the Merger.
Truist Financial Corporation 39
Executive Overview
Truist had solid financial performance in the third quarter of 2021 that was driven by strong fee income from a diverse business mix - including wealth, insurance brokerage, investment banking, and positive trends in a number of other businesses given improving economic conditions. Improving economic conditions also led to strong credit performance and a benefit from the provision for credit losses. The Company achieved a significant milestone in early October with the successful migration of approximately 7 million clients (primarily heritage BB&T) to the new Truist technology ecosystem. In addition, Truist completed the retail mortgage origination conversion and accelerated the roll-out of the new Truist digital app during the third quarter of 2021. Truist continues to reaffirm its commitment to achieving $1.6 billion in net cost saves on a run rate basis by the fourth quarter of 2022. Truist also continues to closely monitor the COVID-19 pandemic and its effects on stakeholders and the financial markets and is actively supporting teammates, clients, and communities.
Integration Efforts
Major milestones during 2021 include:
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Completed the Wealth brokerage and trust transitions.
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Completed the mortgage systems transition, enabling clients to get the best of both heritage SunTrust and heritage BB&T to meet their homeownership needs.
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Continued to activate the Integrated Relationship Management approach. Truist’s Integrated Relationship Management approach is designed to deepen client relationships and bring the full breadth and depth of Truist’s products and services to meet clients’ financial needs.
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Introduced the new Truist digital app; migrated approximately 7 million clients to the new Truist digital banking experience, with nearly half of clients beginning to use the app
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Converted heritage BB&T retail and commercial clients to the new Truist technology ecosystem, the most significant milestone to date.
Supporting Clients
Truist continues to work closely with clients as they navigate through the continuing challenges from the COVID-19 pandemic. Truist supported clients by being the sixth largest amongst commercial banks in the second round of PPP funding, assisting clients with the forgiveness process, and continuing to support clients as they transition from payment relief programs. Truist originated approximately $17 billion of PPP loans. As of September 30, 2021, Truist had $3.5 billion of PPP loans outstanding.
Supporting Teammates
Truist offered a voluntary separation and retirement program to eligible teammates in June 2021. Nearly 2,000 teammates elected to participate in the voluntary program designed to provide tenured teammates flexibility on how they want to manage their career. Approximately 50% of those that elected to participate had separation dates of September 30, 2021. While Truist is hiring in some areas and rightsizing in others through natural attrition, planned staffing reductions, and the voluntary separation and retirement program, Truist is actively supporting all teammates affected by reductions with opportunities and tools for internal placement, severance payments, and outplacement assistance and coaching. The Company recognized $189 million of merger-related and restructuring charges in 2021 related to the voluntary separation and retirement program.
Truist has made progress towards the commitment to increase racially and ethnically diverse teammates among senior leadership roles to more than 15% by 2023 with current progress at 14.2% as of September 30, 2021. For early career program hiring in 2021, 54% of seats at Truist were filled by candidates from various diverse backgrounds. Truist teammates have received $24 million through Truist Momentum, a workplace financial wellness program that educates, equips, and inspires teammates to manage their money based on what matters most to them.
Supporting Communities
Truist continued to fulfill its purpose in meaningful ways in the community in the third quarter through a number of unique and creative initiatives. Truist expanded its partnership with EVERFI bringing literacy tools to elementary schools across the nation. Truist showed leadership as the first top-10 bank to join BlackRock’s philanthropic Emergency Savings Initiative. Truist Community Capital provided over $300 million in equity in the third quarter to support communities through investments in affordable housing, access to healthy foods and education, and investments in job creation and small businesses. Truist continued to make solid progress towards the Company’s $60 billion Community Benefits Plan, ending August 2021 at 112% of the annual target. In July, Truist also released its second annual Corporate Social Responsibility and Environmental, Social and Governance report to outline its advancements and commitments with regard to diversity, equity, and inclusion; environmental sustainability and climate change; governance; community involvement; and financial inclusion.
40 Truist Financial Corporation
Executive Leadership changes
During the third quarter Truist announced its new executive leadership structure effective September 1, 2021. As previously announced as part of the Merger, William H. Rogers, Jr. succeeded Kelly S. King as CEO on September 12, 2021 and Kelly S. King transitioned to the role of executive chairman through March 12, 2022. The other members of the executive leadership team and their roles are:
Daryl N. Bible - Chief Financial Officer
Scott Case - Chief Information Officer
Hugh S. (Beau) Cummins, III - Vice Chair
Ellen M. Fitzsimmons - Chief Legal Officer and Head of Public Affairs
John Howard - Chief Insurance Officer
Michael B. Maguire - Chief National Consumer Finance Services and Payments Officer
Kimberly Moore-Wright - Chief Teammate Officer and Head of Enterprise Diversity
Brant J. Standridge - Chief Retail Community Banking Officer
Clarke R. Starnes III - Chief Risk Officer
Joseph M. Thompson - Chief Wealth Officer
David H. Weaver - Chief Commercial Community Banking Officer
Dontá L. Wilson - Chief Digital and Client Experience Officer
Financial Results
Net income available to common shareholders for the third quarter of 2021 totaled $1.6 billion, up 51%, compared with the third quarter of last year. On a diluted per common share basis, earnings for the third quarter of 2021 were $1.20, an increase of $0.41 compared to the third quarter of 2020. Truist’s results of operations for the third quarter of 2021 produced an annualized return on average assets of 1.28% and an annualized return on average common shareholders’ equity of 10.2% compared to prior year returns of 0.91% and 6.9%, respectively. Results for the third quarter of 2021 included merger-related and restructuring charges of $172 million ($132 million after-tax), incremental operating expenses related to the Merger of $191 million ($147 million after-tax), and a one-time professional fee expense of $30 million ($23 million after-tax). Results for the third quarter of 2020 included $236 million ($181 million after-tax) of merger-related and restructuring charges, $152 million ($115 million after-tax) of incremental operating expenses related to the Merger, securities gains of $104 million ($80 million after-tax), and a charitable contribution of $50 million ($38 million after-tax).
Truist’s revenue for the third quarter of 2021 was $5.6 billion. On a TE basis, revenue was also $5.6 billion for the third quarter of 2021, an increase of $25 million, or 0.4%, compared to the same period in 2020. Excluding securities gains of $104 million from the third quarter of 2020, adjusted taxable equivalent revenues increased $129 million, or 2.3%, compared to the earlier quarter.
TE net interest income for the third quarter of 2021 was down $130 million, or 3.8%, compared to the earlier quarter due to lower purchase accounting accretion, lower rates on earning assets, and a decrease in loans. These decreases were partially offset by growth in the securities portfolio, lower funding costs, higher fees on PPP loans, and fewer interest deferrals on COVID-19 loan accommodations. Average earning assets increased $26.4 billion, or 6.1%, compared to the earlier quarter. The increase in average earning assets reflects a $66.4 billion, or 83%, increase in average securities, while average total loans and leases decreased $25.4 billion, or 8.0%, and average other earning assets decreased $16.5 billion, or 46%. The growth in average earning assets is a result of an increase in investment securities driven by strong deposit growth resulting from fiscal and monetary stimulus. Average deposits increased $30.5 billion, or 8.2%, compared to the earlier quarter, while average long-term debt and short-term borrowings decreased $3.6 billion, or 8.8%, and $849 million, or 14%, respectively.
Net interest margin was 2.81%, down 29 basis points compared to the same period in 2020. The yield on the total loan portfolio for the third quarter of 2021 was 3.90%, down 14 basis points compared to the earlier quarter, reflecting the impact of lower purchase accounting accretion and a lower rate environment. The yield on the average securities portfolio was 1.50%, down 47 basis points compared to the earlier quarter primarily due to lower yields on new purchases.
The provision for credit losses was a benefit of $324 million, compared to a cost of $421 million for the same period in 2020. The earlier quarter reflected significant uncertainty related to the economic impacts resulting from the pandemic, whereas the current quarter includes a reserve release due to the improving economic outlook. Net charge-offs for the third quarter of 2021 totaled $135 million compared to $326 million in the earlier quarter. The third quarter of 2020 included $97 million of charge-offs related to the implementation of CECL, which required a gross up of loan carrying values in connection with the establishment of an allowance on PCD loans. The net charge-off ratio for the current quarter of 0.19% was down 23 basis points compared to the third quarter 2020, due primarily to the additional losses on PCD loans taken in the earlier quarter and lower actual net losses in the commercial portfolio.
Truist Financial Corporation 41
Noninterest income for the third quarter of 2021 increased $155 million, or 7.0%, compared to the same period in 2020. Noninterest income for the third quarter of 2020 included $104 million of securities gains on available-for-sale securities. Excluding securities gains, noninterest income increased $259 million, or 12%, compared to the earlier quarter. Insurance income increased $127 million due to acquisitions, as well as organic growth. Investment banking and trading income increased $57 million due to strong merger and acquisition activity and loan syndications. Wealth management income increased $32 million due to higher valuations of assets under management. Residential mortgage banking income decreased $42 million primarily due to lower production related revenues as a result of lower gain on sale margins and volumes, partially offset by higher servicing income due to increases in the valuation of mortgage servicing rights and lower prepayment rates. Additionally, there were increases in service charges on deposit accounts, other income, and card and payment related fees due to improved economic activity.
Noninterest expense for the third quarter of 2021 was up $40 million, or 1.1%, compared to the same period in 2020. Merger-related and restructuring charges decreased $64 million primarily due to facilities impairments in the earlier quarter, while incremental operating expenses related to the Merger increased $39 million, primarily reflected in professional fees and outside processing. The current quarter also includes a $30 million professional fee to develop an ongoing program to identify, prioritize, and roadmap teammate generated revenue growth and expense savings opportunities beyond the Merger. The earlier quarter included $50 million for charitable contributions to the Truist Charitable Fund (other expense). Excluding the aforementioned items and changes in amortization of intangibles, adjusted noninterest expense was up $110 million, or 3.5%, compared to the earlier quarter. Additionally, increases in personnel expense of $129 million were partially offset by a decline in net occupancy expense of $46 million and other expense of $72 million.
The provision for income taxes was $423 million for the third quarter of 2021, compared to $255 million for the same period in 2020. This produced an effective tax rate for the third quarter of 2021 of 19.9%, compared to 18.3% for the earlier quarter. The higher effective tax rate is primarily due to higher pre-tax income in the current quarter without a corresponding increase in beneficial tax items.
Truist’s total assets at September 30, 2021 were $529.9 billion, an increase of $20.7 billion, or 4.1%, compared to December 31, 2020. The increase in total assets was primarily a result of strong deposit growth, the deployment of which led to an increase in AFS securities of $30.3 billion, which was partially offset by a $15.1 billion decline in total loans and leases.
Total deposits at September 30, 2021 were $405.9 billion, an increase of $24.8 billion, or 6.5%, compared to December 31, 2020. Deposit growth was strong during the first nine months of 2021 resulting from fiscal and monetary stimulus, partially offset by the maturity of higher-cost personal accounts.
Asset quality remains excellent, reflecting Truist’s prudent risk culture, diverse portfolio, improving economic conditions, and the ongoing effects of government stimulus. As of September 30, 2021, nonperforming assets were 0.23% of total assets, down four basis points from December 31, 2020. The allowance for loan and lease loss coverage ratio was 4.35x nonperforming loans and leases held for investment, compared to 4.39x at December 31, 2020.
Truist maintained strong capital and liquidity. As of September 30, 2021, the CET1 ratio was 10.1% and the average LCR was 114%. For the nine months ended September 30, 2021, Truist completed $1.1 billion of share repurchases and redeemed $1.4 billion of preferred stock. Additionally, the Company had $5.8 billion of senior long term debt maturities and redemptions, partially offset by $4.5 billion of issuances. Truist increased the common dividend 7% during the third quarter to $0.48 per share, resulting in dividend and total payout ratios for the third quarter of 2021 of 40%. In October 2021, Truist declared common dividends of $0.48 per share for the fourth quarter of 2021.
Truist continues to target a CET1 ratio of approximately 9.75% over the near-term. As previously communicated, the Company expects to be able to, with appropriate approvals from its Board of Directors, deploy approximately $4 billion to $5 billion of capital (either in the form of share repurchases or acquisitions) between 3Q21 and 3Q22. During the third quarter of 2021, Truist completed the acquisition of Constellation Affiliated Partners and announced the acquisition of Service Finance, LLC, reducing the amount of capital deployment available for acquisitions or share repurchases to approximately $1 billion to $2 billion through 3Q22. Truist resumed repurchasing shares and expects to consume approximately $500 million of this capacity via share repurchases in the fourth quarter of 2021 reflecting the Company’s strong capital position, and the reduced integration risk with successful migration of heritage BB&T retail and commercial clients to the Truist ecosystem.
42 Truist Financial Corporation
Analysis of Results of Operations
Net Interest Income and NIM
Third Quarter 2021 compared to Third Quarter 2020
Net interest income for the third quarter of 2021 was down $130 million, or 3.8%, compared to the earlier quarter due to lower purchase accounting accretion, lower rates on earning assets, and a decrease in loans. These decreases were partially offset by growth in the securities portfolio, lower funding costs, higher fees on Payroll Protection Program loans, and fewer interest deferrals on COVID-19 loan accommodations. Average earning assets increased $26.4 billion, or 6.1%, compared to the earlier quarter. The increase in average earning assets reflects a $66.4 billion, or 83%, increase in average securities, while average total loans and leases decreased $25.4 billion, or 8.0%, and average other earning assets decreased $16.5 billion, or 46%. The growth in average earning assets is a result of an increase in investment securities driven by strong deposit growth resulting from fiscal and monetary stimulus. Average deposits increased $30.5 billion, or 8.2%, compared to the earlier quarter, while average long-term debt and short-term borrowings decreased $3.6 billion, or 8.8%, and $849 million, or 14%, respectively.
Net interest margin was 2.81%, down 29 basis points compared to the earlier quarter. The yield on the total loan portfolio for the third quarter of 2021 was 3.90%, down 14 basis points compared to the earlier quarter, reflecting the impact of lower purchase accounting accretion and a lower rate environment. The yield on the average securities portfolio was 1.50%, down 47 basis points compared to the earlier quarter primarily due to lower yields on new purchases.
The average cost of total deposits was 0.03%, down seven basis points compared to the earlier quarter. The average rate on short-term borrowings was 0.68%, down 17 basis points compared to the earlier quarter. The average rate on long-term debt was 1.61%, up 13 basis points compared to the earlier quarter. The lower rates on deposits and short-term borrowings reflect the lower rate environment. The higher rates on long-term debt was due to the runoff of lower rate FHLB advances.
Nine Months of 2021 compared to Nine Months of 2020
Net interest income for the nine months ended September 30, 2021 was down $710 million, or 6.7%, compared to the prior period due to lower purchase accounting accretion, lower rates on earning assets, and a decrease in loans. These decreases were partially offset by growth in the securities portfolio, lower funding costs, higher fees on Payroll Protection Program loans, and fewer interest deferrals on COVID-19 loan accommodations. Average earning assets increased $21.8 billion, or 5.0%, compared to the prior period. The increase in average earning assets reflects a $57.9 billion, or 75%, increase in average securities, while average total loans and leases decreased $22.4 billion, or 7.1%, and average other earning assets decreased $14.3 billion, or 42%. The growth in average earning assets is a result of an increase in investment securities driven by strong deposit growth resulting from fiscal and monetary stimulus. Average deposits increased $34.9 billion, or 9.7%, compared to the prior period, while average long-term debt and short-term borrowings decreased $10.3 billion, or 22%, and $5.3 billion, or 46%, respectively.
Net interest margin was 2.90% for the nine months ended September 30, 2021, down 36 basis points compared to the prior period. The yield on the total loan portfolio for the nine months ended September 30, 2021 was 4.00%, down 39 basis points compared to the prior period, reflecting the impact of lower purchase accounting accretion and the lower rate environment. The yield on the average securities portfolio was 1.48% for the nine months ended September 30, 2021, down 83 basis points compared to the prior period primarily due to lower yields on new purchases and premium amortization.
The average cost of total deposits was 0.04% for the nine months ended September 30, 2021, down 23 basis points compared to the prior period. The average rate on short-term borrowings was 0.84% for the nine months ended September 30, 2021, down 62 basis points compared to the prior period. The average rate on long-term debt was 1.59% for the nine months ended September 30, 2021, down 19 basis points compared to the prior period. The lower rates on interest-bearing liabilities reflect the lower rate environment.
As of September 30, 2021, the remaining unamortized fair value marks on the loan and lease portfolio, deposits, and long-term debt were $1.5 billion, $9 million, and $157 million, respectively. As of December 31, 2020, the remaining 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 $807 million for consumer loans and leases, and $733 million for commercial loans and leases. These amounts will be recognized over the remaining contractual lives of the underlying instruments or as paydowns occur.
The major components of net interest income and the related annualized yields as well as the variances between the periods caused by changes in interest rates versus changes in volumes are summarized below.
Truist Financial Corporation 43
| Table 1-1: Taxable-Equivalent Net Interest Income and Rate / Volume Analysis (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, (Dollars in millions) | Average Balances (5) | Annualized Yield/Rate | Income/Expense | Incr. (Decr.) | Change due to | ||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | Rate | Volume | ||||||||||||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total securities, at amortized cost: (2) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury | $ | 9,699 | $ | 2,218 | 0.72 | % | 1.78 | % | $ | 18 | $ | 10 | $ | 8 | $ | (9) | $ | 17 | |||||||||||||||||||||||||||||||||||
| GSE | 1,830 | 1,842 | 2.31 | 2.33 | 10 | 10 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Agency MBS | 132,890 | 75,232 | 1.53 | 1.95 | 509 | 366 | 143 | (93) | 236 | ||||||||||||||||||||||||||||||||||||||||||||
| States and political subdivisions | 425 | 499 | 3.52 | 5.03 | 4 | 7 | (3) | (2) | (1) | ||||||||||||||||||||||||||||||||||||||||||||
| Non-agency MBS | 1,398 | — | 2.20 | — | 8 | — | 8 | — | 8 | ||||||||||||||||||||||||||||||||||||||||||||
| Other | 30 | 37 | 1.90 | 1.99 | — | 1 | (1) | — | (1) | ||||||||||||||||||||||||||||||||||||||||||||
| Total securities | 146,272 | 79,828 | 1.50 | 1.97 | 549 | 394 | 155 | (104) | 259 | ||||||||||||||||||||||||||||||||||||||||||||
| Interest earning trading assets | 5,809 | 4,056 | 2.81 | 3.23 | 41 | 32 | 9 | (5) | 14 | ||||||||||||||||||||||||||||||||||||||||||||
| Other earning assets (3) | 19,331 | 35,819 | 0.25 | 0.26 | 13 | 24 | (11) | (1) | (10) | ||||||||||||||||||||||||||||||||||||||||||||
| Loans and leases, net of unearned income: (4) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 130,025 | 143,452 | 3.00 | 3.02 | 981 | 1,087 | (106) | (7) | (99) | ||||||||||||||||||||||||||||||||||||||||||||
| CRE | 24,849 | 27,761 | 2.86 | 2.88 | 181 | 203 | (22) | (1) | (21) | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial Construction | 5,969 | 6,861 | 2.96 | 3.26 | 42 | 55 | (13) | (5) | (8) | ||||||||||||||||||||||||||||||||||||||||||||
| Lease financing | 4,917 | 5,626 | 3.39 | 3.71 | 42 | 52 | (10) | (4) | (6) | ||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 45,369 | 51,500 | 3.96 | 4.47 | 450 | 576 | (126) | (62) | (64) | ||||||||||||||||||||||||||||||||||||||||||||
| Residential home equity and direct | 25,242 | 26,726 | 5.67 | 5.86 | 360 | 394 | (34) | (13) | (21) | ||||||||||||||||||||||||||||||||||||||||||||
| Indirect auto | 26,830 | 24,732 | 5.99 | 6.51 | 405 | 405 | — | (33) | 33 | ||||||||||||||||||||||||||||||||||||||||||||
| Indirect other | 11,112 | 11,530 | 6.54 | 7.05 | 183 | 204 | (21) | (14) | (7) | ||||||||||||||||||||||||||||||||||||||||||||
| Student | 7,214 | 7,446 | 4.02 | 4.30 | 74 | 80 | (6) | (4) | (2) | ||||||||||||||||||||||||||||||||||||||||||||
| Credit card | 4,632 | 4,810 | 9.01 | 9.03 | 105 | 109 | (4) | — | (4) | ||||||||||||||||||||||||||||||||||||||||||||
| Total loans and leases HFI | 286,159 | 310,444 | 3.92 | 4.06 | 2,823 | 3,165 | (342) | (143) | (199) | ||||||||||||||||||||||||||||||||||||||||||||
| LHFS | 4,179 | 5,247 | 2.69 | 2.78 | 28 | 37 | (9) | (1) | (8) | ||||||||||||||||||||||||||||||||||||||||||||
| Total loans and leases | 290,338 | 315,691 | 3.90 | 4.04 | 2,851 | 3,202 | (351) | (144) | (207) | ||||||||||||||||||||||||||||||||||||||||||||
| Total earning assets | 461,750 | 435,394 | 2.98 | 3.34 | 3,454 | 3,652 | (198) | (254) | 56 | ||||||||||||||||||||||||||||||||||||||||||||
| Nonearning assets | 64,935 | 65,432 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 526,685 | $ | 500,826 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities and Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-checking | $ | 107,802 | $ | 96,707 | 0.05 | 0.06 | 14 | 15 | (1) | (3) | 2 | ||||||||||||||||||||||||||||||||||||||||||
| Money market and savings | 136,094 | 123,598 | 0.03 | 0.06 | 9 | 19 | (10) | (12) | 2 | ||||||||||||||||||||||||||||||||||||||||||||
| Time deposits | 17,094 | 27,940 | 0.23 | 0.89 | 10 | 62 | (52) | (34) | (18) | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits (6) | 260,990 | 248,245 | 0.05 | 0.15 | 33 | 96 | (63) | (49) | (14) | ||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | 5,360 | 6,209 | 0.68 | 0.85 | 9 | 13 | (4) | (2) | (2) | ||||||||||||||||||||||||||||||||||||||||||||
| Long-term debt | 37,329 | 40,919 | 1.61 | 1.48 | 151 | 152 | (1) | 13 | (14) | ||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 303,679 | 295,373 | 0.25 | 0.35 | 193 | 261 | (68) | (38) | (30) | ||||||||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing deposits (6) | 141,738 | 123,966 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | 11,915 | 11,853 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders’ equity | 69,353 | 69,634 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 526,685 | $ | 500,826 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Average interest-rate spread | 2.73 | % | 2.99 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
| NIM/net interest income - taxable equivalent | 2.81 | % | 3.10 | % | $ | 3,261 | $ | 3,391 | $ | (130) | $ | (216) | $ | 86 | |||||||||||||||||||||||||||||||||||||||
| Taxable-equivalent adjustment | $ | 28 | $ | 29 |
(1) Yields are stated on a TE basis utilizing federal tax rate. The change in interest not solely due to changes in rate or volume has been allocated based on the pro-rata absolute dollar amount of each. Interest income includes certain fees, deferred costs, and dividends.
(2) Total securities include AFS securities.
(3) Includes cash equivalents, interest-bearing deposits with banks, FHLB stock and other earning assets.
(4) Fees, which are not material for any of the periods shown, are included for rate calculation purposes. NPLs are included in the average balances.
(5) Excludes basis adjustments for fair value hedges.
(6) Total deposit costs were 0.03% and 0.10% for the three months ended September 30, 2021 and 2020, respectively.
44 Truist Financial Corporation
| Table 1-2: Taxable-Equivalent Net Interest Income and Rate / Volume Analysis (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Nine Months Ended September 30, (Dollars in millions) | Average Balances (5) | Annualized Yield/Rate | Income/Expense | Incr. (Decr.) | Change due to | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | Rate | Volume | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total securities, at amortized cost: (2) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Treasury | $ | 6,872 | $ | 2,243 | 0.74 | % | 1.86 | % | $ | 38 | $ | 31 | $ | 7 | $ | (28) | $ | 35 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| GSE | 1,837 | 1,847 | 2.32 | 2.33 | 32 | 32 | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Agency MBS | 125,157 | 72,152 | 1.49 | 2.29 | 1,401 | 1,240 | 161 | (533) | 694 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| States and political subdivisions | 435 | 512 | 3.53 | 4.04 | 12 | 16 | (4) | (2) | (2) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non-agency MBS | 477 | 115 | 2.18 | 16.78 | 8 | 15 | (7) | (21) | 14 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | 32 | 37 | 1.90 | 2.44 | — | 1 | (1) | (1) | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total securities | 134,810 | 76,906 | 1.48 | 2.31 | 1,491 | 1,335 | 156 | (585) | 741 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest earning trading assets | 5,208 | 4,695 | 2.80 | 3.85 | 110 | 135 | (25) | (39) | 14 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other earning assets (3) | 19,453 | 33,708 | 0.26 | 0.57 | 38 | 144 | (106) | (60) | (46) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans and leases, net of unearned income: (4) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 133,218 | 142,731 | 3.06 | 3.47 | 3,045 | 3,710 | (665) | (425) | (240) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| CRE | 25,563 | 27,538 | 2.86 | 3.46 | 553 | 717 | (164) | (116) | (48) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial Construction | 6,293 | 6,673 | 2.98 | 3.92 | 135 | 192 | (57) | (46) | (11) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Lease financing | 4,928 | 5,872 | 3.86 | 4.24 | 143 | 187 | (44) | (16) | (28) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 44,931 | 52,288 | 4.25 | 4.53 | 1,431 | 1,778 | (347) | (106) | (241) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential home equity and direct | 25,378 | 27,161 | 5.74 | 6.08 | 1,089 | 1,237 | (148) | (68) | (80) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Indirect auto | 26,547 | 24,809 | 6.25 | 6.68 | 1,240 | 1,240 | — | (83) | 83 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Indirect other | 10,920 | 11,255 | 6.79 | 7.19 | 555 | 606 | (51) | (33) | (18) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Student | 7,375 | 7,622 | 3.96 | 4.75 | 219 | 271 | (52) | (43) | (9) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Credit card | 4,610 | 5,097 | 8.99 | 9.34 | 310 | 356 | (46) | (13) | (33) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total loans and leases HFI | 289,763 | 311,046 | 4.02 | 4.42 | 8,720 | 10,294 | (1,574) | (949) | (625) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| LHFS | 4,485 | 5,575 | 2.61 | 3.00 | 88 | 126 | (38) | (15) | (23) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total loans and leases | 294,248 | 316,621 | 4.00 | 4.39 | 8,808 | 10,420 | (1,612) | (964) | (648) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total earning assets | 453,719 | 431,930 | 3.08 | 3.72 | 10,447 | 12,034 | (1,587) | (1,648) | 61 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Nonearning assets | 64,444 | 65,780 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 518,163 | $ | 497,710 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities and Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-checking | $ | 106,234 | $ | 93,205 | 0.06 | 0.28 | 44 | 199 | (155) | (178) | 23 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Money market and savings | 133,167 | 123,536 | 0.03 | 0.27 | 27 | 254 | (227) | (245) | 18 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Time deposits | 18,609 | 32,157 | 0.32 | 1.10 | 45 | 265 | (220) | (138) | (82) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits (6) | 258,010 | 248,898 | 0.06 | 0.39 | 116 | 718 | (602) | (561) | (41) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | 6,081 | 11,350 | 0.84 | 1.46 | 38 | 124 | (86) | (41) | (45) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Long-term debt | 37,339 | 47,643 | 1.59 | 1.78 | 446 | 635 | (189) | (63) | (126) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 301,430 | 307,891 | 0.27 | 0.64 | 600 | 1,477 | (877) | (665) | (212) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Noninterest-bearing deposits (6) | 136,118 | 110,375 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | 11,262 | 12,133 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders’ equity | 69,353 | 67,311 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 518,163 | $ | 497,710 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Average interest-rate spread | 2.81 | % | 3.08 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| NIM/net interest income - taxable equivalent | 2.90 | % | 3.26 | % | $ | 9,847 | $ | 10,557 | $ | (710) | $ | (983) | $ | 273 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Taxable-equivalent adjustment | $ | 84 | $ | 97 |
(1)Yields are stated on a TE basis utilizing federal tax rate. The change in interest not solely due to changes in rate or volume has been allocated based on the pro-rata absolute dollar amount of each. Interest income includes certain fees, deferred costs and dividends.
(2)Total securities include AFS securities.
(3)Includes cash equivalents, interest-bearing deposits with banks, FHLB stock and other earning assets.
(4)Fees, which are not material for any of the periods shown, are included for rate calculation purposes. NPLs are included in the average balances.
(5)Excludes basis adjustments for fair value hedges.
(6)Total deposit costs were 0.04% and 0.27% for the nine months ended September 30, 2021 and 2020, respectively.
Truist Financial Corporation 45
Provision for Credit Losses
Third Quarter 2021 compared to Third Quarter 2020
The provision for credit losses was a benefit of $324 million, compared to a cost of $421 million for the earlier quarter. The earlier quarter reflected significant uncertainty related to the economic impacts resulting from the pandemic, whereas the current quarter includes a reserve release due to the improving economic outlook. Net charge-offs for the third quarter of 2021 totaled $135 million compared to $326 million in the earlier quarter. The third quarter of 2020 included $97 million of charge-offs related to the implementation of CECL, which required a gross up of loan carrying values in connection with the establishment of an allowance on PCD loans. The net charge-off ratio for the current quarter of 0.19% was down 23 basis points compared to the third quarter 2020, due primarily to the additional losses on PCD loans taken in the earlier quarter and lower actual net losses in the commercial portfolio.
Nine Months of 2021 compared to Nine Months of 2020
The provision for credit losses was a benefit of $710 million for the nine months ended September 30, 2021, compared to a cost of $2.2 billion for the prior period. The prior period included significant uncertainty related to the economic impacts resulting from the pandemic, whereas the current period includes reserve releases due to the improving economic outlook. Net charge-offs for the nine months ended September 30, 2021 totaled $515 million compared to $914 million in the earlier period. The 2020 period included the previously mentioned $97 million of charge-offs related to the implementation of CECL. The net charge-off ratio for the current year of 0.24% was down 15 basis points compared to the prior period, primarily driven by lower losses across all portfolios, partially driven by additional losses on PCD loans taken in 2020, combined with higher recoveries.
Noninterest Income
Noninterest income is a significant contributor to Truist’s financial results. Management focuses on diversifying its sources of revenue to reduce Truist’s reliance on traditional spread-based interest income, as certain fee-based activities are a relatively stable revenue source during periods of changing interest rates.
| Table 2: Noninterest Income | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | % Change | 2021 | 2020 | % Change | ||||||||||||||||||||||||||||||||||||||||||||
| Insurance income | $ | 645 | $ | 518 | 24.5 | % | $ | 1,961 | $ | 1,648 | 19.0 | % | ||||||||||||||||||||||||||||||||||||||
| Wealth management income | 356 | 324 | 9.9 | 1,042 | 945 | 10.3 | ||||||||||||||||||||||||||||||||||||||||||||
| Service charges on deposits | 276 | 247 | 11.7 | 787 | 754 | 4.4 | ||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage income | 179 | 221 | (19.0) | 396 | 807 | (50.9) | ||||||||||||||||||||||||||||||||||||||||||||
| Investment banking and trading income | 301 | 244 | 23.4 | 958 | 636 | 50.6 | ||||||||||||||||||||||||||||||||||||||||||||
| Card and payment related fees | 225 | 200 | 12.5 | 650 | 558 | 16.5 | ||||||||||||||||||||||||||||||||||||||||||||
| Lending related fees | 74 | 77 | (3.9) | 268 | 210 | 27.6 | ||||||||||||||||||||||||||||||||||||||||||||
| Operating lease income | 57 | 72 | (20.8) | 191 | 232 | (17.7) | ||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate related income | 78 | 55 | 41.8 | 259 | 148 | 75.0 | ||||||||||||||||||||||||||||||||||||||||||||
| Income from bank-owned life insurance | 43 | 46 | (6.5) | 139 | 135 | 3.0 | ||||||||||||||||||||||||||||||||||||||||||||
| Securities gains (losses) | — | 104 | NM | — | 402 | NM | ||||||||||||||||||||||||||||||||||||||||||||
| Other income | 131 | 102 | 28.4 | 316 | 119 | 165.5 | ||||||||||||||||||||||||||||||||||||||||||||
| Total noninterest income | $ | 2,365 | $ | 2,210 | 7.0 | $ | 6,967 | $ | 6,594 | 5.7 | ||||||||||||||||||||||||||||||||||||||||
Third Quarter 2021 compared to Third Quarter 2020
Noninterest income for the third quarter of 2021 increased $155 million, or 7.0%, compared to the earlier quarter. Noninterest income for the third quarter of 2020 included $104 million of securities gains on available-for-sale securities. Excluding securities gains, noninterest income increased $259 million, or 12%, compared to the earlier quarter. Insurance income increased $127 million due to acquisitions, as well as organic growth. Investment banking and trading income increased $57 million due to strong merger and acquisition activity and loan syndications. Wealth management income increased $32 million due to higher valuations of assets under management. Service charges on deposit accounts and card and payment related fees increased $29 million and $25 million, respectively, due to increased economic activity. Residential mortgage banking income decreased $42 million primarily due to lower production related revenues as a result of lower gain on sale margins and volumes, partially offset by higher servicing income due to increases in the valuation of mortgage servicing rights and lower prepayment rates. Other income increased $29 million primarily due to investment income (primarily valuation gains) from the Company’s SBIC investments.
46 Truist Financial Corporation
Nine Months of 2021 compared to Nine Months of 2020
Noninterest income for the nine months ended September 30, 2021 increased $373 million, or 5.7%, compared to the prior period. Other income for the nine months ended September 30, 2021 includes a $37 million gain from the divestiture of certain businesses, whereas noninterest income for the nine months ended September 30, 2020 included $402 million of securities gains on available-for-sale securities. Excluding securities gains and the divestiture gain, noninterest income increased $738 million, or 12%, compared to the prior period. Investment banking and trading income increased $322 million due to strong investment banking income from loan syndications and merger and acquisition fees, as well as the impact from CVA recoveries in the current period compared to losses in the earlier period. Insurance income increased $313 million due to acquisitions, as well as organic growth. Other income increased $197 million primarily due to higher valuations of $96 million for assets held for certain post-retirement benefits, which is largely offset by higher benefits expense included in personnel expense. In addition, other income increased $94 million related to increased investment income (primarily valuations gains) from the Company’s SBIC and Truist Ventures investments. Commercial real-estate related income increased $111 million primarily due to client-related structured real estate transactions. Wealth management increased $97 million due to higher valuations of assets under management. Card and payment related fees and service charges on deposits increased $92 million and $33 million, respectively, due to increased economic activity. Lending related fees increased $58 million due to gains from the sale of finance leases and noninterest loan fees due to higher unused line fees. Residential mortgage banking income decreased $411 million primarily due to lower production related revenues as a result of lower gain on sale margins and volumes, partially offset by higher servicing income due to an increase in the valuation of mortgage servicing rights. Operating lease income decreased $41 million due to declines in the lease portfolio.
Noninterest Expense
The following table provides a breakdown of Truist’s noninterest expense:
| Table 3: Noninterest Expense | |||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||||||||||
| Personnel expense | $ | 2,187 | $ | 2,058 | 6.3 | % | $ | 6,536 | $ | 6,038 | 8.2 | % | |||||||||||||||||||||||||||||||||||
| Professional fees and outside processing | 372 | 323 | 15.2 | 1,063 | 859 | 23.7 | |||||||||||||||||||||||||||||||||||||||||
| Net occupancy expense | 187 | 233 | (19.7) | 578 | 697 | (17.1) | |||||||||||||||||||||||||||||||||||||||||
| Software expense | 251 | 221 | 13.6 | 707 | 647 | 9.3 | |||||||||||||||||||||||||||||||||||||||||
| Amortization of intangibles | 145 | 170 | (14.7) | 431 | 513 | (16.0) | |||||||||||||||||||||||||||||||||||||||||
| Equipment expense | 154 | 127 | 21.3 | 389 | 363 | 7.2 | |||||||||||||||||||||||||||||||||||||||||
| Marketing and customer development | 94 | 75 | 25.3 | 226 | 215 | 5.1 | |||||||||||||||||||||||||||||||||||||||||
| Operating lease depreciation | 47 | 56 | (16.1) | 144 | 204 | (29.4) | |||||||||||||||||||||||||||||||||||||||||
| Loan-related expense | 52 | 59 | (11.9) | 161 | 177 | (9.0) | |||||||||||||||||||||||||||||||||||||||||
| Regulatory costs | 43 | 34 | 26.5 | 99 | 93 | 6.5 | |||||||||||||||||||||||||||||||||||||||||
| Merger-related and restructuring charges | 172 | 236 | (27.1) | 610 | 552 | 10.5 | |||||||||||||||||||||||||||||||||||||||||
| Loss (gain) on early extinguishment of debt | — | — | — | (3) | 235 | (101.3) | |||||||||||||||||||||||||||||||||||||||||
| Other expense | 91 | 163 | (44.2) | 475 | 471 | 0.8 | |||||||||||||||||||||||||||||||||||||||||
| Total noninterest expense | $ | 3,795 | $ | 3,755 | 1.1 | $ | 11,416 | $ | 11,064 | 3.2 | |||||||||||||||||||||||||||||||||||||
Third Quarter 2021 compared to Third Quarter 2020
Noninterest expense for the third quarter of 2021 was up $40 million, or 1.1%, compared to the earlier quarter. Merger-related and restructuring charges decreased $64 million primarily due to facilities impairments in the earlier quarter, while incremental operating expenses related to the Merger increased $39 million, primarily reflected in professional fees and outside processing. The current quarter also includes a $30 million professional fee to develop an ongoing program to identify, prioritize, and roadmap teammate generated revenue growth and expense savings opportunities beyond the Merger. The earlier quarter included $50 million for charitable contributions to the Truist Charitable Fund (other expense). Excluding the aforementioned items and changes in amortization of intangibles, adjusted noninterest expense was up $110 million, or 3.5%, compared to the earlier quarter. Personnel expense increased $129 million primarily due to higher incentive expenses due to variable compensation from higher revenues and improved overall performance relative to targets, higher medical insurance claims, and personnel cost related to acquired companies, partially offset by lower equity based compensation. Additionally, net occupancy expense decreased $46 million primarily due to branch and property consolidations. Other expense also includes a decrease of $42 million for non-service-related pension cost components.
Truist Financial Corporation 47
Nine Months of 2021 compared to Nine Months of 2020
Noninterest expense for the nine months ended September 30, 2021 was up $352 million, or 3.2%, compared to the earlier period. Merger-related and restructuring charges increased $58 million and other incremental operating expenses related to the Merger increased $201 million. The current period also includes $200 million for charitable contributions to the Truist Foundation and the Truist Charitable Fund, $36 million of expense associated with an acceleration of loss recognition related to certain terminated cash flow hedges, the previously mentioned $30 million professional fee expense and a small gain on the early extinguishment of debt, whereas the earlier period included a $235 million loss on the early extinguishment of debt and a $50 million charitable contribution. Excluding the aforementioned items and changes in amortization of intangibles, noninterest expense increased $197 million, or 2.1%, compared to the earlier period. Personnel expense increased $498 million primarily driven by higher incentive expenses due to variable compensation from higher revenues and improved overall performance relative to targets, higher other employee benefits due to the previously mentioned increase in noninterest income, higher medical insurance claims, and personnel cost related to acquired companies. These increases in personnel expense were partially offset by lower salaries due to fewer FTEs. Software expense increased $60 million due to higher spending on certain projects. Other expense includes decreases of $125 million for non-service-related pension cost components. There was also a decrease of $119 million from net occupancy expense primarily due to branch and property consolidations and a decrease in operating lease depreciation of $60 million due to valuation adjustments taken in the prior year.
Merger-Related and Restructuring Charges
The following table presents a summary of merger-related and restructuring charges and the related accruals:
| Table 4: Merger-Related and Restructuring Accrual Activity | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, 2021 | Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Accrual at Jul 1, 2021 | Expense | Utilized | Accrual at Sep 30, 2021 | Accrual at Jan 1, 2021 | Expense | Utilized | Accrual at Sep 30, 2021 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Severance and personnel-related (1) | $ | 152 | $ | 77 | $ | (154) | $ | 75 | $ | 36 | $ | 269 | $ | (230) | $ | 75 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Occupancy and equipment | 5 | 3 | (8) | — | — | 110 | (110) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Professional services | 28 | 79 | (69) | 38 | 16 | 197 | (175) | 38 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Systems conversion and related costs | — | 9 | (9) | — | — | 22 | (22) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other | 10 | 4 | (4) | 10 | 11 | 12 | (13) | 10 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total (2) | $ | 195 | $ | 172 | $ | (244) | $ | 123 | $ | 63 | $ | 610 | $ | (550) | $ | 123 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1)Includes $189 million of restructuring charges for the nine months ended September 30, 2021 related to the Company’s voluntary separation and retirement program.
(2)Related to the Merger, the Company recognized $170 million of expenses for the three months ended September 30, 2021 and $578 million for the nine months ended September 30, 2021. At September 30, 2021, the Company had an accrual of $117 million related to the Merger. The remaining expense and accrual relate to other restructuring activities.
Segment Results
Truist operates and measures business activity across three segments: Consumer Banking and Wealth, Corporate and Commercial Banking, and Insurance Holdings, with functional activities included in Other, Treasury and Corporate. The Company’s business segment structure is based on the manner in which financial information is evaluated by management as well as the products and services provided or the type of client served. See “Note 18. Operating Segments” herein and “Note 21. Operating Segments” in Truist’s Annual Report on Form 10-K for the year ended December 31, 2020 for additional disclosures related to Truist’s reportable business segments, including additional details related to results of operations. Fluctuations in noninterest income and noninterest expense are more fully discussed in the Noninterest Income and Noninterest Expense sections above.
| Table 5: Net Income by Reportable Segment | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | % Change | 2021 | 2020 | % Change | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer Banking and Wealth | $ | 872 | $ | 818 | 6.6 | % | $ | 2,510 | $ | 2,204 | 13.9 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Corporate and Commercial Banking | 1,075 | 586 | 83.4 | 3,245 | 1,408 | 130.5 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Insurance Holdings | 105 | 77 | 36.4 | 392 | 308 | 27.3 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other, Treasury & Corporate | (348) | (340) | 2.4 | (1,312) | (758) | 73.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Truist Financial Corporation | $ | 1,704 | $ | 1,141 | 49.3 | $ | 4,835 | $ | 3,162 | 52.9 |
48 Truist Financial Corporation
Third Quarter 2021 compared to Third Quarter 2020
Consumer Banking and Wealth
CB&W net income was $872 million for the third quarter of 2021, an increase of $54 million compared to the earlier quarter. Segment net interest income decreased $155 million primarily due to a decline in the funding credit provided on deposits, lower purchase accounting accretion, and a decline in average loans. The allocated provision for credit losses decreased $186 million which reflects the impact of an allowance release during the current quarter and an allowance build during the earlier quarter. The earlier quarter reflected significant uncertainty related to the economic impacts resulting from the pandemic, whereas the current quarter includes a reserve release due to the improving economic outlook. Noninterest income increased $35 million due to increases in wealth management income due to favorable market conditions in the current quarter, card and related fee income, and service charges on deposits, partially offset by lower residential mortgage income driven by lower gain on sale margins and volumes. Noninterest expense was stable compared to earlier quarter.
CB&W average loans held for investment decreased $6.8 billion, or 4.9%, for the third quarter of 2021 compared to the earlier quarter, primarily driven by lower residential mortgage and home equity lending, partially offset by increased indirect auto lending. Average total deposits increased $23 billion, or 10.4%, for the third quarter of 2021 compared to the earlier quarter primarily due to the impact of fiscal and monetary stimulus.
Corporate and Commercial Banking
C&CB net income was $1.1 billion for the third quarter of 2021, an increase of $489 million compared to the earlier quarter. Segment net interest income decreased $110 million primarily due to reduced funding credit on deposits, lower purchase accounting accretion, and a decline in average loans, partially offset by higher spreads on loans. The allocated provision for credit losses decreased $575 million primarily reflecting an allowance release in the current quarter, whereas the earlier quarter included an allowance build. The earlier quarter reflected significant uncertainty related to the economic impacts resulting from the pandemic, whereas the current quarter includes a reserve release due to the improving economic outlook. Noninterest income increased $145 million driven by investment banking income, commercial real estate income, and higher investment income (primarily valuation gains) from SBIC investments. Noninterest expense decreased $25 million primarily due to lower operating losses, operating lease depreciation, and lower allocated corporate expenses in the current quarter, partially offset by higher restructuring charges in the current quarter.
C&CB average loans held for investment decreased $17.6 billion, or 10.5%, for the third quarter of 2021 compared to the earlier quarter, primarily due to PPP loan forgiveness and lower line utilization in commercial loans, commercial real estate, and dealer floor plan. Average total deposits increased $8.8 billion, or 6.2%, for the third quarter of 2021 compared to the earlier quarter, primarily due to the impact of fiscal and monetary stimulus.
Insurance Holdings
IH net income was $105 million for the third quarter of 2021, an increase of $28 million compared to the earlier quarter. Noninterest income increased $128 million primarily due to acquisitions and higher property and casualty insurance production from strong organic growth. Noninterest expense increased $91 million primarily due to higher performance-based incentives and amortization of intangibles related to acquisitions.
Other, Treasury & Corporate
OT&C generated a net loss of $348 million in the third quarter of 2021, compared to a net loss of $340 million in the earlier quarter. Segment net interest income increased $135 million primarily due to lower net funding credits on liabilities to other segments and higher earnings in the securities portfolio from purchases to utilize excess liquidity. The allocated provision for credit losses increased $15 million which primarily reflects a smaller release in the reserve for unfunded commitments in the current quarter compared to the earlier quarter. Noninterest income decreased $153 million primarily due to a gain on sale of securities in the earlier quarter. Noninterest expense decreased $22 million primarily due to lower merger related charges in the current quarter and charitable contributions to the Truist Foundation and the Truist Charitable Fund in the earlier quarter, partially offset by higher incentive expense driven by executive incentive compensation and higher accruals reflecting the job regrading project in the fourth quarter 2020.
Truist Financial Corporation 49
Nine Months of 2021 compared to Nine Months of 2020
Consumer Banking and Wealth
CB&W net income was $2.5 billion for the nine months ended September 30, 2021, an increase of $306 million compared to the same period of the prior year. Segment net interest income decreased $325 million primarily due to reduced funding credit on deposits, lower purchase accounting accretion, and a decline in average loans. The allocated provision for credit losses decreased $796 million primarily due to an allowance release that was primarily driven by an improving economic outlook and lower net charge offs in the auto, home equity, card, and mortgage portfolios as well as lower loan balances. Noninterest income decreased $197 million, due to lower residential mortgage income driven by lower gain on sale margins and volumes, partially offset by increased revenues in wealth management and card and payment related activities resulting from improving economic conditions as well as gains from the divestiture of certain businesses. Noninterest expense decreased $120 million primarily due to lower salary expense, pension costs, amortization of intangibles, and occupancy expenses, partially offset by increased incentives tied to performance and related benefits expense in the current year.
CB&W average loans and leases decreased $7.6 billion, or 5.4%, at September 30, 2021, compared to the same period of the prior year, primarily due to lower residential mortgage loans and home equity lending, partially offset by increased mortgage warehouse and indirect auto lending. Average total deposits were up $25.7 billion, or 12%, at September 30, 2021, compared to the same period of the prior year, primarily due to the impact of fiscal and monetary stimulus.
Corporate and Commercial Banking
C&CB net income was $3.2 billion for the nine months ended September 30, 2021, an increase of $1.8 billion compared to the same period of the prior year. Segment net interest income decreased $283 million primarily due to reduced funding credit on deposits, lower purchase accounting accretion, and a decline in average loans. The allocated provision for credit losses decreased $1.9 billion which reflects an allowance release driven by an improving economic outlook, lower net charge offs primarily in the commercial and industrial portfolio as well as lower loan balances. Noninterest income increased $570 million due to strong investment banking and trading income, commercial real-estate related income, increased lending related fees, income from strategic investments, and increased service charges on deposits. Noninterest expense decreased $174 million primarily due to lower operating lease depreciation, lower allocated corporate expenses, a reduction in LIHTC liability mark accretion, and reduced salary and equity based compensation expense, partially offset by higher incentives tied to performance and increased professional fees and outside processing expense.
C&CB average loans and leases decreased $14 billion, or 8.3%, at September 30, 2021, compared to the same period of the prior year, primarily due to lower line utilization in commercial loans, commercial real estate, and dealer floor plan. Average total deposits were up $12.5 billion, or 9.3%, at September 30, 2021, compared to the same period of the prior year, primarily due to the impact of fiscal and monetary stimulus.
Insurance Holdings
IH net income was $392 million for the nine months ended September 30, 2021, an increase of $84 million compared to the same period of the prior year. Noninterest income increased $304 million primarily due to higher property and casualty insurance production as well as acquisitions. Noninterest expense increased $198 million primarily due to commissions on higher production in the current year.
Other, Treasury and Corporate
OT&C generated a net loss of $1.3 billion in the nine months ended September 30, 2021, compared to a net loss of $758 million in the same period of the prior year. Segment net interest income decreased $84 million primarily due to lower net funding credits to other segments due to lower market rates partially offset by lower interest expense on borrowings. The allocated provision for credit losses decreased $124 million which primarily reflects changes in the reserve for unfunded commitments as well as an allowance release in the current year resulting from the improving economic outlook. Noninterest income decreased $304 million primarily due to a gain on the sale of non-agency MBS in the same period of the prior year, partially offset by income from assets held for certain post-employment benefits. Noninterest expense increased $448 million primarily due to charitable contributions to the Truist Foundation and the Truist Charitable Fund, as well as higher incremental operating expenses related to the Merger and higher restructuring charges in the current year, partially offset by the loss on early extinguishment of long-term debt in the same period of the prior year.
50 Truist Financial Corporation
Analysis of Financial Condition
Investment Activities
The securities portfolio totaled $151.0 billion at September 30, 2021, compared to $120.8 billion at December 31, 2020. The increase was due primarily to increases in U.S. Treasury securities and MBS resulting from strong deposit growth resulting from fiscal and monetary stimulus.
As of September 30, 2021, approximately 2.9% of the securities portfolio was variable rate, excluding the impact of swaps, compared to 1.9% as of December 31, 2020. The effective duration of the securities portfolio was 5.6 years at September 30, 2021, compared to 4.0 years at December 31, 2020.
U.S. Treasury, GSE, and Agency MBS represents 98% of the total securities portfolio as of September 30, 2021 and more than 99% at December 31, 2020.
Lending Activities
The following table presents the composition of average loans and leases:
| Table 6: Average Loans and Leases | ||||||||||||||||||||||||||||||||
| For the Three Months Ended (Dollars in millions) | Sep 30, 2021 | Jun 30, 2021 | Mar 31, 2021 | Dec 31, 2020 | Sep 30, 2020 | |||||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 130,025 | $ | 133,646 | $ | 136,051 | $ | 139,223 | $ | 143,452 | ||||||||||||||||||||||
| CRE | 24,849 | 25,645 | 26,211 | 27,030 | 27,761 | |||||||||||||||||||||||||||
| Commercial construction | 5,969 | 6,359 | 6,557 | 6,616 | 6,861 | |||||||||||||||||||||||||||
| Lease financing | 4,917 | 4,893 | 4,975 | 5,401 | 5,626 | |||||||||||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||||||||||
| Residential mortgage | 45,369 | 43,605 | 45,823 | 48,847 | 51,500 | |||||||||||||||||||||||||||
| Residential home equity and direct | 25,242 | 25,238 | 25,658 | 26,327 | 26,726 | |||||||||||||||||||||||||||
| Indirect auto | 26,830 | 26,444 | 26,363 | 25,788 | 24,732 | |||||||||||||||||||||||||||
| Indirect other | 11,112 | 10,797 | 10,848 | 11,291 | 11,530 | |||||||||||||||||||||||||||
| Student | 7,214 | 7,396 | 7,519 | 7,519 | 7,446 | |||||||||||||||||||||||||||
| Credit card | 4,632 | 4,552 | 4,645 | 4,818 | 4,810 | |||||||||||||||||||||||||||
| Total average loans and leases HFI | $ | 286,159 | $ | 288,575 | $ | 294,650 | $ | 302,860 | $ | 310,444 |
Average loans and leases held for investment for the third quarter of 2021 were $286.2 billion, down $2.4 billion, or 0.8%, compared to the second quarter of 2021.
Average commercial loans decreased $4.8 billion, or 2.8%, as $1.5 billion of average growth within the core commercial and industrial portfolio was more than offset by a $4.0 billion decrease in average Paycheck Protection Program loans (commercial and industrial), a $1.1 billion decrease in average dealer floor plan loans (commercial and industrial), a $796 million decrease in average CRE loans, and a $390 million decrease in average commercial construction loans. Approximately $600 million of senior care facility loans were transferred primarily from CRE to commercial and industrial at the beginning of August, which impacted the variances noted above.
Average consumer loans increased $2.3 billion, or 2.0%, primarily due to a $1.8 billion increase in residential mortgages due to increased capacity, lower prepayments, and the decision to balance sheet certain production from the correspondent channel, a $386 million increase in indirect auto loans primarily due to solid growth in the prime automobile segment, and a $315 million increase in other indirect loans primarily due to growth in recreational and power sports lending. Residential home equity and direct loans were up slightly due to solid growth from LightStream more than offsetting the decline in home equity lines of credit.
Truist Financial Corporation 51
COVID-19 Lending Activities
The CARES Act created the PPP, which has temporarily expanded the Small Business Administration’s business loan guarantee program. The carrying value of PPP loans was $3.5 billion as of September 30, 2021. 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. Refer to “Note 1. Basis of Presentation” in Truist’s Annual Report on Form 10-K for the year ended December 31, 2020 for additional disclosures related to modifications and TDRs. Payment relief assistance includes forbearance, deferrals, extension and re-aging programs, along with certain other modification strategies. The following table provides a summary of accommodations as of September 30, 2021:
| Table 7: Client Accommodations (1) | |||||||||||||||||||||||||||||
| Active Accommodations | Exited Accommodations | ||||||||||||||||||||||||||||
| September 30, 2021 (Dollars in millions) | Total Count | Outstanding Balance | Outstanding Balance | % Paid-off or Current (2) | Types of Accommodations | ||||||||||||||||||||||||
| Commercial | 324 | $ | 4 | $ | 17,297 | 98 | % | 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 | 13,715 | 553 | 8,292 | 87 | 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. Additional relief may be provided in certain circumstances. | ||||||||||||||||||||||||
| Credit card | 454 | 2 | 156 | 88 | 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 | 14,493 | $ | 559 | $ | 25,745 |
(1)Excludes approximately 9,000 client accommodations related to government guaranteed loans totaling approximately $1.2 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:
| Table 8: Accommodations Exposure | |||||
| September 30, 2021 (Dollars in millions) | Exposure | ||||
| Current | $ | 24,513 | |||
| Past due and still accruing | 492 | ||||
| Nonperforming | 740 | ||||
| Total | $ | 25,745 |
The following table provides a summary of exposure to industries that management believes were more vulnerable during the COVID-19 pandemic. These selected industry exposures represent 8.8% of loans held for investment at September 30, 2021. Truist is actively managing these portfolios and will continue to make underwriting or risk acceptance adjustments as appropriate.
| Table 9: Selected Credit Exposures | |||||||||||
| September 30, 2021 (Dollars in billions) | Outstanding Balance | Percentage of Loans HFI | |||||||||
| Senior Care | $ | 6.7 | 2.4 | % | |||||||
| Hotels, Resorts & Cruise Lines | 5.7 | 2.0 | |||||||||
| Acute Care Facilities | 4.9 | 1.7 | |||||||||
| Oil & Gas Portfolio | 3.8 | 1.3 | |||||||||
| Restaurants | 2.4 | 0.8 | |||||||||
| Sensitive Retail | 1.7 | 0.6 | |||||||||
| Total | $ | 25.2 | 8.8 | % |
52 Truist Financial Corporation
Asset Quality
The following tables summarize asset quality information:
| Table 10: Asset Quality | |||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Sep 30, 2021 | Jun 30, 2021 | Mar 31, 2021 | Dec 31, 2020 | Sep 30, 2020 | ||||||||||||||||||||||||||||||
| NPAs: | |||||||||||||||||||||||||||||||||||
| NPLs: | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 411 | $ | 397 | $ | 451 | $ | 532 | $ | 507 | |||||||||||||||||||||||||
| CRE | 20 | 25 | 58 | 75 | 52 | ||||||||||||||||||||||||||||||
| Commercial construction | 7 | 12 | 13 | 14 | 7 | ||||||||||||||||||||||||||||||
| Lease financing | 12 | 5 | 23 | 28 | 32 | ||||||||||||||||||||||||||||||
| Residential mortgage | 306 | 302 | 290 | 316 | 205 | ||||||||||||||||||||||||||||||
| Residential home equity and direct | 146 | 165 | 172 | 205 | 180 | ||||||||||||||||||||||||||||||
| Indirect auto | 172 | 148 | 158 | 155 | 137 | ||||||||||||||||||||||||||||||
| Indirect other | 6 | 6 | 6 | 5 | 4 | ||||||||||||||||||||||||||||||
| Total NPLs HFI | 1,080 | 1,060 | 1,171 | 1,330 | 1,124 | ||||||||||||||||||||||||||||||
| Loans held for sale | 76 | 78 | 72 | 5 | 130 | ||||||||||||||||||||||||||||||
| Total nonaccrual loans and leases | 1,156 | 1,138 | 1,243 | 1,335 | 1,254 | ||||||||||||||||||||||||||||||
| Foreclosed real estate | 9 | 13 | 18 | 20 | 30 | ||||||||||||||||||||||||||||||
| Other foreclosed property | 39 | 41 | 38 | 32 | 30 | ||||||||||||||||||||||||||||||
| Total nonperforming assets | $ | 1,204 | $ | 1,192 | $ | 1,299 | $ | 1,387 | $ | 1,314 | |||||||||||||||||||||||||
| TDRs: | |||||||||||||||||||||||||||||||||||
| Performing TDRs: | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 144 | $ | 144 | $ | 142 | $ | 78 | $ | 84 | |||||||||||||||||||||||||
| CRE | 8 | 24 | 47 | 47 | 36 | ||||||||||||||||||||||||||||||
| Commercial construction | — | — | — | — | 1 | ||||||||||||||||||||||||||||||
| Lease financing | 56 | 58 | 59 | 60 | 1 | ||||||||||||||||||||||||||||||
| Residential mortgage | 712 | 727 | 733 | 648 | 640 | ||||||||||||||||||||||||||||||
| Residential home equity and direct | 105 | 107 | 109 | 88 | 71 | ||||||||||||||||||||||||||||||
| Indirect auto | 390 | 389 | 399 | 392 | 336 | ||||||||||||||||||||||||||||||
| Indirect other | 7 | 7 | 7 | 6 | 5 | ||||||||||||||||||||||||||||||
| Student | 23 | 13 | 8 | 5 | 5 | ||||||||||||||||||||||||||||||
| Credit card | 30 | 32 | 35 | 37 | 38 | ||||||||||||||||||||||||||||||
| Total performing TDRs | 1,475 | 1,501 | 1,539 | 1,361 | 1,217 | ||||||||||||||||||||||||||||||
| Nonperforming TDRs | 159 | 190 | 207 | 164 | 140 | ||||||||||||||||||||||||||||||
| Total TDRs | $ | 1,634 | $ | 1,691 | $ | 1,746 | $ | 1,525 | $ | 1,357 | |||||||||||||||||||||||||
| Loans 90 days or more past due and still accruing: (1) | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 2 | $ | 14 | $ | 14 | $ | 13 | $ | 6 | |||||||||||||||||||||||||
| CRE | — | — | — | — | 8 | ||||||||||||||||||||||||||||||
| Lease financing | 16 | — | — | — | — | ||||||||||||||||||||||||||||||
| Residential mortgage | 852 | 976 | 975 | 841 | 573 | ||||||||||||||||||||||||||||||
| Residential home equity and direct | 7 | 7 | 11 | 10 | 5 | ||||||||||||||||||||||||||||||
| Indirect auto | 2 | 2 | 2 | 2 | 8 | ||||||||||||||||||||||||||||||
| Indirect other | 2 | 1 | 1 | 2 | 3 | ||||||||||||||||||||||||||||||
| Student | 968 | 1,046 | 1,037 | 1,111 | 570 | ||||||||||||||||||||||||||||||
| Credit card | 23 | 22 | 32 | 29 | 24 | ||||||||||||||||||||||||||||||
| Total loans 90 days or more past due and still accruing | $ | 1,872 | $ | 2,068 | $ | 2,072 | $ | 2,008 | $ | 1,197 | |||||||||||||||||||||||||
| Loans 30-89 days past due and still accruing: (1) | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 131 | $ | 128 | $ | 117 | $ | 83 | $ | 155 | |||||||||||||||||||||||||
| CRE | 4 | 7 | 9 | 14 | 7 | ||||||||||||||||||||||||||||||
| Commercial construction | 2 | 1 | 4 | 5 | — | ||||||||||||||||||||||||||||||
| Lease financing | 4 | 18 | 35 | 6 | 9 | ||||||||||||||||||||||||||||||
| Residential mortgage | 495 | 543 | 577 | 782 | 796 | ||||||||||||||||||||||||||||||
| Residential home equity and direct | 81 | 73 | 82 | 98 | 103 | ||||||||||||||||||||||||||||||
| Indirect auto | 560 | 428 | 328 | 495 | 321 | ||||||||||||||||||||||||||||||
| Indirect other | 53 | 47 | 45 | 68 | 52 | ||||||||||||||||||||||||||||||
| Student | 456 | 548 | 556 | 618 | 666 | ||||||||||||||||||||||||||||||
| Credit card | 37 | 31 | 35 | 51 | 39 | ||||||||||||||||||||||||||||||
| Total loans 30-89 days past due and still accruing | $ | 1,823 | $ | 1,824 | $ | 1,788 | $ | 2,220 | $ | 2,148 |
(1)The past due status of loans that received a deferral under the CARES Act is generally frozen during the deferral period.
Truist Financial Corporation 53
Nonperforming assets totaled $1.2 billion at September 30, 2021, up $12 million compared to June 30, 2021. Nonperforming loans and leases represented 0.40% of total loans and leases, up one basis point compared to June 30, 2021.
Performing TDRs were down $26 million compared to the prior quarter primarily due to declines in the residential mortgage and CRE portfolios.
Loans 90 days or more past due and still accruing totaled $1.9 billion at September 30, 2021, down $196 million compared to the prior quarter. The ratio of loans 90 days or more past due and still accruing as a percentage of loans and leases was 0.66% at September 30, 2021, down six basis points from the prior quarter. The decline in loans 90 days or more past due and still accruing was primarily in residential mortgages and student loans. Excluding government guaranteed loans, the ratio of loans 90 days or more past due and still accruing as a percentage of loans and leases was 0.03% at September 30, 2021, down one basis point from June 30, 2021.
Loans 30-89 days past due and still accruing of $1.8 billion at September 30, 2021 were stable compared to the prior quarter.
Problem loans include NPLs and loans that are 90 days or more past due and still accruing as disclosed in Table 10. In addition, for the commercial portfolio segment, loans that are rated special mention or substandard performing are closely monitored by management as potential problem loans. Refer to “Note 5. Loans and ACL” for additional disclosures related to these potential problem loans.
| Table 11: Asset Quality Ratios | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| As of / For the Three Months Ended | Sep 30, 2021 | Jun 30, 2021 | Mar 31, 2021 | Dec 31, 2020 | Sep 30, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans 30-89 days past due and still accruing as a percentage of loans and leases HFI | 0.64 | % | 0.64 | % | 0.61 | % | 0.74 | % | 0.70 | % | ||||||||||||||||||||||||||||||||||||||||||||||
| Loans 90 days or more past due and still accruing as a percentage of loans and leases HFI | 0.66 | 0.72 | 0.71 | 0.67 | 0.39 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| NPLs as a percentage of loans and leases HFI | 0.38 | 0.37 | 0.40 | 0.44 | 0.37 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| NPLs as a percentage of total loans and leases (1) | 0.40 | 0.39 | 0.42 | 0.44 | 0.40 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| NPAs as a percentage of: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets (1) | 0.23 | 0.23 | 0.25 | 0.27 | 0.26 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans and leases HFI plus foreclosed property | 0.40 | 0.39 | 0.42 | 0.46 | 0.39 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net charge-offs as a percentage of average loans and leases HFI | 0.19 | 0.20 | 0.33 | 0.27 | 0.42 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| ALLL as a percentage of loans and leases HFI | 1.65 | 1.79 | 1.94 | 1.95 | 1.91 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Ratio of ALLL to: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net charge-offs | 8.79x | 8.98x | 5.87x | 7.15x | 4.52x | |||||||||||||||||||||||||||||||||||||||||||||||||||
| NPLs | 4.35x | 4.83x | 4.84x | 4.39x | 5.22x | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Loans 90 days or more past due and still accruing as a percentage of loans and leases HFI, excluding PPP and other government guaranteed (2) | 0.03 | % | 0.04 | % | 0.04 | % | 0.04 | % | 0.03 | % | ||||||||||||||||||||||||||||||||||||||||||||||
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. 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.
54 Truist Financial Corporation
The following table presents activity related to NPAs:
| Table 12: Rollforward of NPAs | |||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | |||||||||||||||
| Balance, January 1 | $ | 1,387 | $ | 684 | |||||||||||||
| New NPAs (1) | 1,580 | 2,467 | |||||||||||||||
| Advances and principal increases | 280 | 255 | |||||||||||||||
| Disposals of foreclosed assets (2) | (297) | (333) | |||||||||||||||
| Disposals of NPLs (3) | (203) | (521) | |||||||||||||||
| Charge-offs and losses | (279) | (443) | |||||||||||||||
| Payments | (775) | (553) | |||||||||||||||
| Transfers to performing status | (445) | (258) | |||||||||||||||
| Other, net | (44) | 16 | |||||||||||||||
| Ending balance, September 30 | $ | 1,204 | $ | 1,314 |
(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 $95 million and $99 million for the nine months ended September 30, 2021 and 2020, respectively.
(3)Includes charge-offs and losses recorded upon sale of $1 million and $126 million for the nine months ended September 30, 2021 and 2020, respectively.
TDRs occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near term and a concession has been granted to the borrower. As a result, Truist works with borrowers to prevent further difficulties and to improve the likelihood of recovery on 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” in Truist’s Annual Report on Form 10-K for the year ended December 31, 2020 for the policies 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:
| Table 13: Rollforward of Performing TDRs | |||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | |||||||||||||||
| Balance, January 1 | $ | 1,361 | $ | 980 | |||||||||||||
| Inflows | 548 | 599 | |||||||||||||||
| Payments and payoffs (1) | (283) | (113) | |||||||||||||||
| Charge-offs | (33) | (34) | |||||||||||||||
| Transfers to nonperforming TDRs (2) | (31) | (66) | |||||||||||||||
| Removal due to the passage of time | (10) | (6) | |||||||||||||||
| Non-concessionary re-modifications | (15) | (2) | |||||||||||||||
| Transferred to LHFS, sold and other | (62) | (141) | |||||||||||||||
| Balance, September 30 | $ | 1,475 | $ | 1,217 | |||||||||||||
(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.
Truist Financial Corporation 55
The following table provides further details regarding the payment status of TDRs outstanding at September 30, 2021:
| Table 14: Payment Status of TDRs (1) | |||||||||||||||||||||||||||||||||||||||||
| September 30, 2021 (Dollars in millions) | Current | Past Due 30-89 Days | Past Due 90 Days Or More | Total | |||||||||||||||||||||||||||||||||||||
| Performing TDRs: | |||||||||||||||||||||||||||||||||||||||||
| Commercial: | |||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 144 | 100.0 | % | $ | — | — | % | $ | — | — | % | $ | 144 | |||||||||||||||||||||||||||
| CRE | 8 | 100.0 | — | — | — | — | 8 | ||||||||||||||||||||||||||||||||||
| Lease financing | 56 | 100.0 | — | — | — | — | 56 | ||||||||||||||||||||||||||||||||||
| Consumer: | |||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 482 | 67.7 | 81 | 11.4 | 149 | 20.9 | 712 | ||||||||||||||||||||||||||||||||||
| Residential home equity and direct | 101 | 96.2 | 4 | 3.8 | — | — | 105 | ||||||||||||||||||||||||||||||||||
| Indirect auto | 320 | 82.1 | 70 | 17.9 | — | — | 390 | ||||||||||||||||||||||||||||||||||
| Indirect other | 6 | 85.7 | 1 | 14.3 | — | — | 7 | ||||||||||||||||||||||||||||||||||
| Student | 22 | 95.7 | 1 | 4.3 | — | — | 23 | ||||||||||||||||||||||||||||||||||
| Credit card | 26 | 86.7 | 3 | 10.0 | 1 | 3.3 | 30 | ||||||||||||||||||||||||||||||||||
| Total performing TDRs | 1,165 | 78.9 | 160 | 10.9 | 150 | 10.2 | 1,475 | ||||||||||||||||||||||||||||||||||
| Nonperforming TDRs | 49 | 30.8 | 17 | 10.7 | 93 | 58.5 | 159 | ||||||||||||||||||||||||||||||||||
| Total TDRs | $ | 1,214 | 74.3 | $ | 177 | 10.8 | $ | 243 | 14.9 | $ | 1,634 |
(1)Past due performing TDRs are included in past due disclosures and nonperforming TDRs are included in NPL disclosures.
56 Truist Financial Corporation
ACL
Activity related to the ACL is presented in the following tables:
| Table 15: Activity in ACL | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Sep 30, 2021 | Jun 30, 2021 | Mar 31, 2021 | Dec 31, 2020 | Sep 30, 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance, beginning of period | $ | 5,436 | $ | 6,011 | $ | 6,199 | $ | 6,229 | $ | 6,133 | $ | 6,199 | $ | 1,889 | |||||||||||||||||||||||||||||||||||||||
| CECL adoption - impact to retained earnings before tax | — | — | — | — | — | — | 2,762 | ||||||||||||||||||||||||||||||||||||||||||||||
| CECL adoption - reserves on PCD assets | — | — | — | — | — | — | 378 | ||||||||||||||||||||||||||||||||||||||||||||||
| Provision for credit losses | (324) | (434) | 48 | 177 | 421 | (710) | 2,158 | ||||||||||||||||||||||||||||||||||||||||||||||
| Charge-offs: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | (57) | (51) | (73) | (84) | (112) | (181) | (274) | ||||||||||||||||||||||||||||||||||||||||||||||
| CRE | (1) | — | (4) | (19) | (44) | (5) | (59) | ||||||||||||||||||||||||||||||||||||||||||||||
| Commercial construction | — | — | (2) | (8) | (19) | (2) | (22) | ||||||||||||||||||||||||||||||||||||||||||||||
| Lease financing | — | (2) | (6) | (4) | (44) | (8) | (50) | ||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | (7) | (4) | (11) | (6) | (4) | (22) | (50) | ||||||||||||||||||||||||||||||||||||||||||||||
| Residential home equity and direct | (51) | (57) | (55) | (46) | (52) | (163) | (185) | ||||||||||||||||||||||||||||||||||||||||||||||
| Indirect auto | (73) | (69) | (105) | (84) | (72) | (247) | (294) | ||||||||||||||||||||||||||||||||||||||||||||||
| Indirect other | (13) | (11) | (17) | (14) | (8) | (41) | (46) | ||||||||||||||||||||||||||||||||||||||||||||||
| Student | (6) | (3) | (3) | (3) | (6) | (12) | (20) | ||||||||||||||||||||||||||||||||||||||||||||||
| Credit card | (31) | (42) | (40) | (35) | (44) | (113) | (147) | ||||||||||||||||||||||||||||||||||||||||||||||
| Total charge-offs | (239) | (239) | (316) | (303) | (405) | (794) | (1,147) | ||||||||||||||||||||||||||||||||||||||||||||||
| Recoveries: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | 21 | 20 | 19 | 34 | 20 | 60 | 58 | ||||||||||||||||||||||||||||||||||||||||||||||
| CRE | 1 | 4 | 1 | 1 | — | 6 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||
| Commercial construction | 1 | 1 | 1 | 1 | 2 | 3 | 10 | ||||||||||||||||||||||||||||||||||||||||||||||
| Lease financing | 21 | 3 | — | — | 4 | 24 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||
| Residential mortgage | 3 | 5 | 2 | 3 | 3 | 10 | 7 | ||||||||||||||||||||||||||||||||||||||||||||||
| Residential home equity and direct | 20 | 20 | 18 | 20 | 16 | 58 | 46 | ||||||||||||||||||||||||||||||||||||||||||||||
| Indirect auto | 22 | 27 | 22 | 24 | 22 | 71 | 63 | ||||||||||||||||||||||||||||||||||||||||||||||
| Indirect other | 5 | 7 | 6 | 5 | 4 | 18 | 18 | ||||||||||||||||||||||||||||||||||||||||||||||
| Student | 1 | — | — | — | — | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||||
| Credit card | 9 | 10 | 9 | 10 | 8 | 28 | 22 | ||||||||||||||||||||||||||||||||||||||||||||||
| Total recoveries | 104 | 97 | 78 | 98 | 79 | 279 | 233 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net charge-offs | (135) | (142) | (238) | (205) | (326) | (515) | (914) | ||||||||||||||||||||||||||||||||||||||||||||||
| Other | 1 | 1 | 2 | (2) | 1 | 4 | (44) | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance, end of period | $ | 4,978 | $ | 5,436 | $ | 6,011 | $ | 6,199 | $ | 6,229 | $ | 4,978 | $ | 6,229 | |||||||||||||||||||||||||||||||||||||||
| ALLL (excluding PCD loans) | $ | 4,577 | $ | 4,979 | $ | 5,506 | $ | 5,668 | $ | 5,675 | |||||||||||||||||||||||||||||||||||||||||||
| ALLL for PCD loans | 125 | 142 | 156 | 167 | 188 | ||||||||||||||||||||||||||||||||||||||||||||||||
| RUFC | 276 | 315 | 349 | 364 | 366 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Total ACL | $ | 4,978 | $ | 5,436 | $ | 6,011 | $ | 6,199 | $ | 6,229 | |||||||||||||||||||||||||||||||||||||||||||
Net charge-offs during the third quarter totaled $135 million, down $7 million compared to the prior quarter. The net charge-off ratio was 0.19%, down one basis point compared to the prior quarter.
The allowance for credit losses was $5.0 billion and includes $4.7 billion for the allowance for loan and lease losses and $276 million for the reserve for unfunded commitments. The ALLL ratio was 1.65% compared to 1.79% at June 30, 2021. The ALLL covered nonperforming loans and leases held for investment 4.35X compared to 4.83X at June 30, 2021. At September 30, 2021, the ALLL was 8.79X annualized net charge-offs, compared to 8.98X at June 30, 2021.
Truist Financial Corporation 57
The following table presents an allocation of the ALLL. The entire amount of the allowance is available to absorb losses occurring in any category of loans and leases.
| Table 16: Allocation of ALLL by Category | |||||||||||||||||||||||||||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| (Dollars in millions) | Amount | % ALLL in Each Category | % Loans in Each Category | Amount | % ALLL in Each Category | % Loans in Each Category | |||||||||||||||||||||||||||||
| Commercial and industrial | $ | 1,541 | 32.7 | % | 45.2 | % | $ | 2,156 | 37.0 | % | 46.2 | % | |||||||||||||||||||||||
| CRE | 370 | 7.9 | 8.5 | 573 | 9.8 | 8.9 | |||||||||||||||||||||||||||||
| Commercial construction | 59 | 1.3 | 2.0 | 81 | 1.4 | 2.2 | |||||||||||||||||||||||||||||
| Lease financing | 31 | 0.7 | 1.7 | 48 | 0.8 | 1.7 | |||||||||||||||||||||||||||||
| Residential mortgage | 311 | 6.6 | 16.4 | 368 | 6.3 | 15.8 | |||||||||||||||||||||||||||||
| Residential home equity and direct | 645 | 13.7 | 8.8 | 714 | 12.2 | 8.7 | |||||||||||||||||||||||||||||
| Indirect auto | 1,071 | 22.8 | 9.4 | 1,198 | 20.5 | 8.7 | |||||||||||||||||||||||||||||
| Indirect other | 194 | 4.1 | 3.9 | 208 | 3.6 | 3.7 | |||||||||||||||||||||||||||||
| Student | 126 | 2.7 | 2.5 | 130 | 2.2 | 2.5 | |||||||||||||||||||||||||||||
| Credit card | 354 | 7.5 | 1.6 | 359 | 6.2 | 1.6 | |||||||||||||||||||||||||||||
| Total ALLL | 4,702 | 100.0 | % | 100.0 | % | 5,835 | 100.0 | % | 100.0 | % | |||||||||||||||||||||||||
| RUFC | 276 | 364 | |||||||||||||||||||||||||||||||||
| Total ACL | $ | 4,978 | $ | 6,199 |
Truist monitors the performance of its home equity loans and lines secured by second liens similarly to other consumer loans and utilizes assumptions specific to these loans in determining the necessary ALLL. Truist also receives notification when the first lien holder, whether Truist or another financial institution, has initiated foreclosure proceedings against the borrower. When notified that the first lien is in the process of foreclosure, Truist obtains valuations to determine if any additional charge-offs or reserves are warranted. These valuations are updated at least annually thereafter.
Truist has limited ability to monitor the delinquency status of the first lien, unless the first lien is held or serviced by Truist. Truist estimates second lien loans where the first lien is delinquent based on historical experience; the increased risk of loss on these credits is reflected in the ALLL. As of September 30, 2021, Truist held or serviced the first lien on 30% of its second lien positions.
Other Assets
The components of other assets are presented in the following table:
| Table 17: Other Assets as of Period End | ||||||||||||||
| (Dollars in millions) | September 30, 2021 | December 31, 2020 | ||||||||||||
| Bank-owned life insurance | $ | 6,512 | $ | 6,479 | ||||||||||
| Tax credit and other private equity investments | 6,012 | 5,685 | ||||||||||||
| Prepaid pension assets | 4,814 | 4,358 | ||||||||||||
| Derivative assets | 2,976 | 3,837 | ||||||||||||
| Accrued income | 1,841 | 1,934 | ||||||||||||
| Accounts receivable | 1,910 | 1,833 | ||||||||||||
| Leased assets and related assets | 1,846 | 1,810 | ||||||||||||
| ROU assets | 1,207 | 1,333 | ||||||||||||
| Prepaid expenses | 1,091 | 1,247 | ||||||||||||
| Equity securities at fair value | 1,026 | 1,054 | ||||||||||||
| Structured real estate | 322 | 390 | ||||||||||||
| FHLB stock | 48 | 164 | ||||||||||||
| Other | 446 | 549 | ||||||||||||
| Total other assets | $ | 30,051 | $ | 30,673 | ||||||||||
58 Truist Financial Corporation
Funding Activities
Deposits
The following table presents average deposits:
| Table 18: Average Deposits | ||||||||||||||||||||||||||||||||
| Three Months Ended (Dollars in millions) | Sep 30, 2021 | Jun 30, 2021 | Mar 31, 2021 | Dec 31, 2020 | Sep 30, 2020 | |||||||||||||||||||||||||||
| Noninterest-bearing deposits | $ | 141,738 | $ | 137,892 | $ | 128,579 | $ | 127,103 | $ | 123,966 | ||||||||||||||||||||||
| Interest checking | 107,802 | 106,121 | 104,744 | 99,866 | 96,707 | |||||||||||||||||||||||||||
| Money market and savings | 136,094 | 134,029 | 129,303 | 124,692 | 123,598 | |||||||||||||||||||||||||||
| Time deposits | 17,094 | 18,213 | 20,559 | 23,605 | 27,940 | |||||||||||||||||||||||||||
| Total average deposits | $ | 402,728 | $ | 396,255 | $ | 383,185 | $ | 375,266 | $ | 372,211 |
Average deposits for the third quarter of 2021 were $402.7 billion, an increase of $6.5 billion, or 1.6%, compared to the prior quarter. Average noninterest bearing deposits grew 2.8% compared to the prior quarter and represented 35.2% of total deposits for the third quarter of 2021, compared to 34.8% for the prior quarter. Average interest checking and money market and savings grew 1.6% and 1.5%, respectively, compared to the prior quarter.
Average time deposits decreased 6.1% primarily due to the maturity of higher-cost personal accounts.
Borrowings
At September 30, 2021, short-term borrowings totaled $5.2 billion, a decrease of $866 million compared to December 31, 2020, due primarily to a decrease of $2.6 billion in short-term FHLB advances, partially offset by an increase of $1.4 billion in securities sold under agreements to repurchase.
Average short-term borrowings were $5.4 billion or 1.2% of total funding for the third quarter of 2021, as compared to $6.2 billion or 1.5% for the prior year. Average short-term borrowings decreased as a percentage of funding sources due to strong deposit growth. Long-term debt provides funding and, to a lesser extent, regulatory capital, and primarily consists of senior and subordinated notes issued by Truist and Truist Bank. Long-term debt totaled $37.8 billion at September 30, 2021, a decrease of $1.8 billion compared to December 31, 2020. During 2021, the Company had $5.8 billion of senior long term debt maturities and redemptions, partially offset by $2.3 billion of issuances of fixed rate senior notes with an interest rate of 1.27% to 1.89% maturing between 2027 to 2029 and issuances of $2.3 billion in variable rate senior notes maturing between 2024 and 2025. FHLB advances represented 2.3% of total outstanding long-term debt at September 30, 2021, compared to 2.2% at December 31, 2020. The average cost of long-term debt was 1.59% for the nine months ended September 30, 2021, down 19 basis points compared to the same period in 2020.
Shareholders’ Equity
Total shareholders’ equity was $68.9 billion at September 30, 2021, a decrease of $2.0 billion from December 31, 2020. This decrease includes a decrease of $2.3 billion in AOCI, redemptions of $1.4 billion in preferred stock for Series F, G, and H, $2.1 billion in dividends, and $1.1 billion in repurchases of common stock, partially offset by $4.8 billion in net income. Truist’s book value per common share at September 30, 2021 was $46.62, compared to $46.52 at December 31, 2020.
Refer to “Note 10. Shareholders’ Equity” for additional disclosures related to preferred stock redemptions.
Risk Management
Truist maintains a comprehensive risk management framework supported by people, processes, and systems to identify, measure, monitor, manage, and report significant risks arising from its exposures and business activities. Effective risk management involves 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 risk to acceptable levels.
Truist Financial Corporation 59
Truist is committed to fostering a culture that supports 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 any activity or behavior that is inconsistent with the Company’s culture. The Truist code of ethics guides the Company’s decision making and informs teammates on how to act in the absence of specific guidance.
Truist seeks an appropriate return for the risk taken in its business operations. Risk-taking activities are evaluated and prioritized to identify those that present attractive risk-adjusted returns, while preserving asset value and capital.
Compensation decisions take into account a teammate’s adherence to and successful implementation of Truist’s risk values and associated policies and procedures. The Company’s compensation structure supports its core values and sound risk management practices in an effort to promote judicious risk-taking behavior.
Truist employs a comprehensive change management program to manage the risks associated with integrating heritage BB&T and heritage SunTrust. The Board and Executive Leadership oversee the change management program, which is designed to ensure key decisions are reviewed and that there is appropriate oversight of integration activities.
Refer to Truist’s Annual Report on Form 10-K for the year ended December 31, 2020 for additional disclosures under the section titled “Risk Management.”
Market Risk
Market risk is the risk to current or anticipated earnings, capital, or economic value arising from changes in the market value of portfolios, securities, or other financial instruments. Market risk results from changes in the level, volatility, or correlations among financial market risk factors or prices, including interest rates, credit spreads, foreign exchange rates, equity, and commodity prices.
Effective management of market risk is essential to achieving Truist’s strategic financial objectives. Truist’s most significant market risk exposure is to interest rate risk in its balance sheet; however, market risk also results from underlying product liquidity risk, price risk, and volatility risk in Truist’s business units. Interest rate risk results from differences between the timing of rate changes and the timing of cash flows associated with assets and liabilities (re-pricing risk); from changing rate relationships among different yield curves affecting bank activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest-related options inherently embedded in bank products (options risk).
The primary objectives of effective market risk management are to minimize adverse effects from changes in market risk factors on net interest income, net income, and capital, and to offset the risk of price changes for certain assets and liabilities recorded at fair value. At Truist, market risk management also includes the enterprise-wide IPV function.
Interest Rate Market Risk
As a financial institution, Truist is exposed to interest rate risk both on its assets and on its liabilities. 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.
60 Truist Financial Corporation
The following table shows the effect that the indicated changes in interest rates would have on net interest income as projected for the next 12 months assuming a gradual change in interest rates as described below.
| Table 19: Interest Sensitivity Simulation Analysis | ||||||||||||||||||||||||||
| Interest Rate Scenario | Annualized Hypothetical Percentage Change in Net Interest Income | |||||||||||||||||||||||||
| Gradual Change in Prime Rate (bps) | Prime Rate | |||||||||||||||||||||||||
| Sep 30, 2021 | Sep 30, 2020 | Sep 30, 2021 | Sep 30, 2020 | |||||||||||||||||||||||
| Up 100 | 4.25 | % | 4.25 | % | 4.08 | % | 3.43 | % | ||||||||||||||||||
| Up 50 | 3.75 | 3.75 | 3.15 | 2.68 | ||||||||||||||||||||||
| No Change | 3.25 | 3.25 | — | — | ||||||||||||||||||||||
| Down 25 (1) | 3.00 | 3.00 | (1.22) | (1.62) | ||||||||||||||||||||||
| Down 50 (1) | 2.75 | 2.75 | (1.71) | (1.94) |
(1)The Down 25 and 50 rates are floored at one basis point and may not reflect Down 25 and 50 basis points for all rate indices.
Rate sensitivity increased compared to prior periods, primarily driven by excess liquidity and hedging changes partially offset by an increase in the investment securities portfolio.
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%.
| Table 20: Deposit Mix Sensitivity Analysis | ||||||||||||||||||||
| Gradual Change in Rates (bps) | Base Scenario at September 30, 2021 (1) | Results Assuming a Decrease in Noninterest-Bearing Demand Deposits | ||||||||||||||||||
| $20 Billion | $40 Billion | |||||||||||||||||||
| Up 100 | 4.08 | % | 3.22 | % | 2.37 | % | ||||||||||||||
| Up 50 | 3.15 | 2.52 | 1.90 |
(1)The base scenario is equal to the annualized hypothetical percentage change in net interest income at September 30, 2021 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 21: EVE Simulation Analysis | ||||||||||||||||||||||||||
| Change in Interest Rates (bps) | Hypothetical Percentage Change in EVE | |||||||||||||||||||||||||
| Sep 30, 2021 | Sep 30, 2020 | |||||||||||||||||||||||||
| Up 100 | (5.1) | % | 7.4 | % | ||||||||||||||||||||||
| No Change | — | — | ||||||||||||||||||||||||
| Down 100 | (3.5) | (6.8) | ||||||||||||||||||||||||
Truist uses financial instruments including derivatives to manage interest rate risk related to securities, commercial loans, MSRs, and mortgage banking operations, long-term debt, and other funding sources. Truist hedges a portion of its AFS securities to reduce mark-to-market volatility within AOCI and also to increase its overall asset sensitivity position. As of September 30, 2021, the Company had $24.0 billion of pay-fixed swaps associated with this hedging program that are accounted for as fair value hedges. In the third quarter of 2021, this hedging program reduced net interest income by $17 million. Truist also uses derivatives to facilitate transactions on behalf of its clients and as part of associated hedging activities. As of September 30, 2021, Truist had derivative financial instruments outstanding with notional amounts totaling $329.9 billion, with an associated net fair value of $2.4 billion. See “Note 16. Derivative Financial Instruments” for additional disclosures.
Truist Financial Corporation 61
LIBOR in its current form will no longer be available after 2021. For most tenors of U.S. dollar LIBOR, the administrator of LIBOR extended publication until June 30, 2023. Tenors used infrequently by Truist, including one week and two month U.S. dollar LIBOR and all non-U.S. dollar LIBOR, will cease publication at December 31, 2021, based on this guidance. Truist has U.S. dollar LIBOR-based contracts that extend beyond June 30, 2023. In accordance with regulatory guidance, production of new U.S. dollar LIBOR contracts will cease before the end of 2021. To prepare for the transition to an alternative reference rate, management formed a cross-functional project team to address the LIBOR transition. The project team 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. The Company has plans for impacted lines of business to remediate these contracts, train impacted teammates, and provide timely notice to impacted clients. Current fallback language used for new, renewed, and modified contracts is generally consistent with ARRC recommendations and includes use of “hardwired fallback” language, where appropriate. 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. In 2020, Truist began offering SOFR-based lending solutions to wholesale and consumer clients and entered into SOFR-based derivative contracts. The Company has actively been using SOFR as a reference rate in various loan contracts and has originated approximately $3 billion of loans as of September 30, 2021 using this alternative reference rate. Truist expects SOFR to become a more commonly-used pricing benchmark across the industry and will offer additional SOFR based products during 2021. Other alternative reference rates, such as emerging credit sensitive rates, will be evaluated as additional alternatives for LIBOR. 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 the Form 10-K for the year ended December 31, 2020.
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.
Covered Trading Positions
Covered positions subject to the Market Risk Rule include trading assets and liabilities, specifically those held for the purpose of short-term resale or with the intent of benefiting from actual or expected short-term price movements or to lock in arbitrage profits. Truist’s trading portfolio of covered positions results primarily from market making and underwriting services for 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 and methodologies exist for all trading positions. Additionally, these positions are subject to independent price verification. See “Note 16. Derivative Financial Instruments,” “Note 15. Fair Value Disclosures,” and “Critical Accounting Policies” herein for discussion of valuation policies and methodologies.
Securitizations
As of September 30, 2021, the aggregate market value of on-balance sheet securitization positions subject to the Market Risk Rule was $38 million, all of which were non-agency asset backed securities positions. Consistent with the Market Risk Rule requirements, the Company performs pre-purchase due diligence on each securitization position to identify the characteristics including, but not limited to, deal structure and the asset quality of the underlying assets, that materially affect valuation and performance. Securitization positions are subject to Truist’s comprehensive risk management framework, which includes daily monitoring against a suite of limits. There were no off-balance sheet securitization positions during the reporting period.
Correlation Trading Positions
The trading portfolio of covered positions did not contain any correlation trading positions as of September 30, 2021.
62 Truist Financial Corporation
VaR-Based Measures
VaR measures the potential loss of a given position or portfolio of positions at a specified confidence level and time horizon. Truist utilizes a historical VaR methodology to measure and aggregate risks across its covered trading positions. 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, scenario analysis, 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 the three and nine months ended September 30, 2021 and 2020. In the third quarter of 2021, one and ten day VaR measures declined from the same period of last year as heightened market volatility experienced during March 2020 aged out of the 12-month VaR look-back window.
| Table 22: VaR-based Measures | |||||||||||||||||||||||||||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 10-Day Holding Period | 1-Day Holding Period | 10-Day Holding Period | 1-Day Holding Period | 10-Day Holding Period | 1-Day Holding Period | 10-Day Holding Period | 1-Day Holding Period | |||||||||||||||||||||||||||||||||||||||
| VaR-based Measures: | |||||||||||||||||||||||||||||||||||||||||||||||
| Maximum | $ | 6 | $ | 3 | $ | 65 | $ | 11 | $ | 68 | $ | 16 | $ | 65 | $ | 11 | |||||||||||||||||||||||||||||||
| Average | 5 | 2 | 31 | 6 | 16 | 5 | 23 | 5 | |||||||||||||||||||||||||||||||||||||||
| Minimum | 3 | 2 | 13 | 3 | 3 | 1 | 3 | 1 | |||||||||||||||||||||||||||||||||||||||
| Period-end | 6 | 3 | 46 | 8 | 6 | 3 | 46 | 8 | |||||||||||||||||||||||||||||||||||||||
| VaR by Risk Class: | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest Rate Risk | 2 | 1 | 2 | 1 | |||||||||||||||||||||||||||||||||||||||||||
| Credit Spread Risk | 4 | 10 | 4 | 10 | |||||||||||||||||||||||||||||||||||||||||||
| Equity Price Risk | 2 | 2 | 2 | 2 | |||||||||||||||||||||||||||||||||||||||||||
| Foreign Exchange Risk | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||
| Portfolio Diversification | (5) | (6) | (5) | (6) | |||||||||||||||||||||||||||||||||||||||||||
| Period-end | 3 | 8 | 3 | 8 |
Stressed VaR-based measures
Stressed VaR, another component of market risk capital, is calculated using the same internal models as used for the VaR-based measure. Stressed VaR is calculated over a ten-day holding period at a one-tail, 99% confidence level and employs a historical simulation approach based on a continuous twelve-month historical window selected to reflect a period of significant financial stress for the Company’s trading portfolio. The following table summarizes Stressed VaR-based measures:
| Table 23: Stressed VaR-based Measures - 10 Day Holding Period | |||||||||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| (Dollars in millions) | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Maximum | $ | 82 | $ | 65 | $ | 91 | $ | 65 | |||||||||||||||
| Average | 52 | 31 | 55 | 31 | |||||||||||||||||||
| Minimum | 31 | 14 | 26 | 13 | |||||||||||||||||||
| Period-end | 57 | 46 | 57 | 46 |
Compared to the prior year periods, stressed VaR measures increased in the third quarter of 2021 primarily due to the normalization of market making inventory levels this year compared to the same periods of 2020 when inventory levels were lower due to the market volatility.
Truist Financial Corporation 63
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. As illustrated in the following graph, there were no Company-wide VaR backtesting exceptions during the twelve months ended September 30, 2021. The total number of Company-wide VaR backtesting exceptions over the preceding twelve months is used to determine the multiplication factor for the VaR-based capital requirement under the Market Risk Rule. The capital multiplication factor increases from a minimum of three to a maximum of four, depending on the number of exceptions. All Company-wide VaR backtesting exceptions are thoroughly reviewed in the context of VaR model use and performance. There was no change in the capital multiplication factor over the preceding twelve months.
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 MD&A for additional discussion of capital adequacy.
64 Truist Financial Corporation
Liquidity
Liquidity represents the continuing ability to meet funding needs, including deposit withdrawals, repayment of borrowings and other liabilities, and funding of loan commitments. In addition to the level of liquid assets, such as cash, cash equivalents, and AFS securities, other factors affect the ability to meet liquidity needs, including access to a variety of funding sources, maintaining borrowing capacity, growing core deposits, loan repayment, and the ability to securitize or package loans for sale.
Truist monitors the ability to meet client demand for funds under both normal and stressed market conditions. In considering its liquidity position, management evaluates Truist’s funding mix based on client core funding, client rate-sensitive funding and national markets funding. In addition, management evaluates exposure to rate-sensitive funding sources that mature in one year or less. Management also measures liquidity needs against 30 days of stressed cash outflows for Truist and Truist Bank. To ensure a strong liquidity position and compliance with regulatory requirements, management maintains a liquid asset buffer of cash on hand and highly liquid unencumbered securities. As of September 30, 2021 and December 31, 2020, Truist’s liquid asset buffer, as a percent of total assets, was 24.5% and 20.2%, respectively.
The LCR rule directs large U.S. banking organizations to hold unencumbered high-quality liquid assets sufficient to withstand projected 30-day total net cash outflows, as defined under the LCR rule. As of January 1, 2020, Truist is subject to the Category III reduced LCR requirements. Truist’s average LCR was 114% for the three months ended September 30, 2021, well above the regulatory minimum of 100%.
Effective July 2021, Truist became subject to final rules implementing the NSFR, which are designed to ensure that banking organizations maintain a stable, long-term funding profile in relation to their asset composition and off-balance sheet activities. At September 30, 2021, the Company was compliant with this requirement.
The ability to raise funding at competitive prices is affected by the rating agencies’ views of the Parent Company’s and Truist Bank’s credit quality, liquidity, capital, and earnings. Management meets with the rating agencies on a regular basis to discuss current outlooks. During the nine months ended September 30, 2021, Fitch Ratings, S&P Global Ratings, DBRS Morningstar, and Moody’s Investors Service all affirmed their ratings and provided updates to their rating outlooks for the Company and the Bank as further detailed below.
On May 7, 2021, Fitch Ratings affirmed the ratings of the Parent Company and Truist Bank, and revised the rating outlook to “stable” from “negative.” The revision to the rating outlook reflects the rating agency’s view that the Company’s diverse business model and strategy execution will drive stable earnings performance that supports its credit ratings. The revised rating outlook also reflects increased confidence in a U.S. economic recovery, which reduces the likelihood of the downside scenario that was contemplated when Fitch Ratings revised the ratings outlook to “negative” in April 2020.
On May 24, 2021, S&P Global Ratings affirmed the ratings of the Parent Company and Truist Bank, and revised the rating outlook to “positive” from “stable”, citing the stabilization in U.S. economic trends and the easing industry risk in the U.S. banking system. The rating agency also noted that the positive outlook reflects the view that, as a merged entity, Truist’s better geographic diversity, increased market position, improved earnings power, and higher technology spending provide a sustainable competitive advantage, and that the financial and credit positives of the merged entity could outweigh the operational risks of integrating two large regional banks.
On June 10, 2021, DBRS Morningstar confirmed the ratings of the Parent Company and Truist Bank and revised the trend for all ratings to “positive” from “stable,” citing substantial progress to date with the Merger integration and the rating agency’s view that the impact of the economic fallout from the coronavirus pandemic on Truist’s asset quality and capital will continue to be manageable.
On July 12, 2021, Moody’s Investors Service upgraded Truist Bank’s long-term subordinated debt rating to A2 from A3, and downgraded Truist Bank’s long-term bank deposit rating to Aa3 from Aa2. The rating actions were driven by revisions to the rating agency’s advanced loss given failure analysis within its updated methodology published on July 9, 2021.
See the “Liquidity” section of MD&A in Truist’s Annual Report on Form 10-K for the year ended December 31, 2020 for additional information regarding credit ratings.
Parent Company
The Parent Company serves as the primary source of capital for the operating subsidiaries. The Parent Company’s assets consist primarily of cash on deposit with Truist Bank, equity investments in subsidiaries, advances to subsidiaries, and notes receivable from subsidiaries. The principal obligations of the Parent Company are payments on long-term debt. The main sources of funds for the Parent Company are dividends and management fees from subsidiaries, repayments of advances to subsidiaries, and proceeds from the issuance of equity and long-term debt. The primary uses of funds by the Parent Company are investments in subsidiaries, advances to subsidiaries, dividend payments to common and preferred shareholders, repurchases of common stock, and payments on long-term debt.
Truist Financial Corporation 65
See “Note 22. Parent Company Financial Information” in Truist’s Annual Report on Form 10-K for the year ended December 31, 2020 for additional information regarding dividends from subsidiaries and debt transactions.
Access to funding at the Parent Company is more sensitive to market disruptions. Therefore, Truist prudently manages cash levels at the Parent Company to cover a minimum of one year of projected cash outflows which includes unfunded external commitments, debt service, common and preferred dividends and scheduled debt maturities, without the benefit of any new cash inflows. Truist maintains a significant buffer above the projected one year of cash outflows. In determining the buffer, Truist considers cash requirements for common and preferred dividends, unfunded commitments to affiliates, serving as a source of strength to Truist Bank, and being able to withstand sustained market disruptions that could limit access to the capital markets. At September 30, 2021 and December 31, 2020, the Parent Company had 36 months and 43 months, respectively, of cash on hand to satisfy projected cash outflows, and 20 months and 22 months, respectively, when including the payment of common stock dividends.
Truist Bank
Truist carefully manages liquidity risk at Truist Bank. Truist Bank’s primary source of funding is client deposits. Continued access to client deposits is highly dependent on public confidence in the stability of Truist Bank and its ability to return funds to clients when requested.
Truist Bank maintains a number of diverse funding sources to meet its liquidity requirements. These sources include unsecured borrowings from the capital markets through the issuance of senior or subordinated bank notes, institutional CDs, overnight and term Federal funds markets, and retail brokered CDs. Truist Bank also maintains access to secured borrowing sources including FHLB advances, repurchase agreements, and the FRB discount window. The following table presents a summary of Truist Bank’s available secured borrowing capacity and eligible cash at the FRB:
| Table 24: Liquidity Sources | |||||||||||
| (Dollars in millions) | Sep 30, 2021 | Dec 31, 2020 | |||||||||
| Unused borrowing capacity: | |||||||||||
| FRB | $ | 51,457 | $ | 52,831 | |||||||
| FHLB | 52,459 | 52,274 | |||||||||
| AFS securities | 120,462 | 93,623 | |||||||||
| Available secured borrowing capacity | 224,378 | 198,728 | |||||||||
| Eligible cash at the FRB | 14,674 | 13,437 | |||||||||
| Total | $ | 239,052 | $ | 212,165 |
At September 30, 2021, Truist Bank’s available secured borrowing capacity represented approximately 10.8 times the amount of wholesale funding maturities in one-year or less.
66 Truist Financial Corporation
Contractual Obligations, Commitments, Contingent Liabilities, and Off-Balance Sheet Arrangements
Refer to Truist’s Annual Report on Form 10-K for the year ended December 31, 2020 for discussion with respect to Truist’s quantitative and qualitative disclosures about its fixed and determinable contractual obligations. Truist’s commitments include investments in affordable housing projects throughout its market area, renewable energy credits, private equity funds, derivative contracts to manage various financial risks, as well as other commitments. Refer to “Note 14. Commitments and Contingencies,” “Note 15. Fair Value Disclosures,” and “Note 16. Derivative Financial Instruments” in this Form 10-Q, and “Note 16. Commitments and Contingencies” of the Annual Report on Form 10-K for further discussion of these commitments.
Capital
The maintenance of appropriate levels of capital is a management priority and is monitored on a regular basis. Truist’s principal goals related to the maintenance of capital are to provide adequate capital to support Truist’s risk profile consistent with the Board-approved risk appetite, provide financial flexibility to support future growth and client needs, comply with relevant laws, regulations, and supervisory guidance, achieve optimal credit ratings for Truist and its subsidiaries, and provide a competitive return to shareholders. Risk-based capital ratios, which include CET1 capital, Tier 1 capital, and Total capital are calculated based on regulatory guidance related to the measurement of capital and risk-weighted assets.
Truist regularly performs stress testing on its capital levels and is required to periodically submit the Company’s capital plans and stress testing results to the banking regulators. Management regularly monitors the capital position of Truist on both a consolidated and bank-level basis. In this regard, management’s overriding policy is to maintain capital at levels that are in excess of internal capital targets, which are above the regulatory “well capitalized” minimums. Management evaluates whether capital ratios calculated after the effect of alternative capital actions are likely to remain above minimums specified by the FRB for the annual CCAR process. Breaches of minimum targets prompt a review of the planned capital actions included in Truist’s capital plan.
| Table 25: Capital Requirements | |||||||||||||||||||||||||||||||||||
| Minimum Capital | Well Capitalized | Minimum Capital Plus Stress Capital Buffer (1) | |||||||||||||||||||||||||||||||||
| Truist | Truist Bank | ||||||||||||||||||||||||||||||||||
| CET1 | 4.5 | % | NA | 6.5 | % | 7.2 | % | ||||||||||||||||||||||||||||
| Tier 1 capital | 6.0 | 6.0 | % | 8.0 | 8.7 | ||||||||||||||||||||||||||||||
| Total capital | 8.0 | 10.0 | 10.0 | 10.7 | |||||||||||||||||||||||||||||||
| Leverage ratio | 4.0 | NA | 5.0 | NA | |||||||||||||||||||||||||||||||
| Supplementary leverage ratio | 3.0 | NA | NA | NA |
(1)Reflects a SCB of 2.7% applicable to Truist through September 30, 2021.
Truist completed the 2021 CCAR process and received a SCB of 2.5% for the period October 1, 2021 to September 30, 2022. Truist increased the common dividend 7% during the third quarter of 2021 to $0.48 per share. Truist continues to target a CET1 ratio of approximately 9.75% over the near-term. As previously communicated, the Company expects to be able to, with appropriate approvals from its Board of Directors, deploy approximately $4 billion to $5 billion of capital (either in the form of share repurchases or acquisitions) between 3Q21 and 3Q22. During the third quarter of 2021, Truist completed the acquisition of Constellation Affiliated Partners and announced the acquisition of Service Finance, LLC, reducing the amount of capital deployment available for acquisitions or share repurchases to approximately $1 billion to $2 billion through 3Q22. Truist resumed repurchasing shares and expects to consume approximately $500 million of this capacity via share repurchases in the fourth quarter of 2021 reflecting the Company’s strong capital position, and the reduced integration risk with successful migration of heritage BB&T retail and commercial clients to the Truist ecosystem.
Truist Financial Corporation 67
Truist’s capital ratios are presented in the following table:
| Table 26: Capital Ratios - Truist Financial Corporation | ||||||||||||||
| (Dollars in millions, except per share data, shares in thousands) | Sep 30, 2021 | Dec 31, 2020 | ||||||||||||
| Risk-based: | (preliminary) | |||||||||||||
| CET1 capital to risk-weighted assets | 10.1 | % | 10.0 | % | ||||||||||
| Tier 1 capital to risk-weighted assets | 11.9 | 12.1 | ||||||||||||
| Total capital to risk-weighted assets | 13.9 | 14.5 | ||||||||||||
| Leverage ratio | 9.0 | 9.6 | ||||||||||||
| Supplementary leverage ratio | 7.8 | 8.7 | ||||||||||||
| Non-GAAP capital measure (1): | ||||||||||||||
| Tangible common equity per common share | $ | 26.34 | $ | 26.78 | ||||||||||
| Calculation of tangible common equity (1): | ||||||||||||||
| Total shareholders’ equity | $ | 68,900 | $ | 70,912 | ||||||||||
| Less: | ||||||||||||||
| Preferred stock | 6,673 | 8,048 | ||||||||||||
| Noncontrolling interests | — | 105 | ||||||||||||
| Goodwill and intangible assets, net of deferred taxes | 27,066 | 26,629 | ||||||||||||
| Tangible common equity | $ | 35,161 | $ | 36,130 | ||||||||||
| Risk-weighted assets | $ | 383,073 | $ | 379,153 | ||||||||||
| Common shares outstanding at end of period | 1,334,892 | 1,348,961 |
(1)Tangible common equity and related measures are non-GAAP measures that exclude the impact of intangible assets, net of deferred taxes, and their related amortization. These measures are useful for evaluating the performance of a business consistently, whether acquired or developed internally. Truist’s management uses these measures to assess the quality of capital and returns relative to balance sheet risk. These capital measures are not necessarily comparable to similar capital measures that may be presented by other companies.
Capital ratios remained strong compared to the regulatory requirements for well capitalized banks. For the nine months ended September 30, 2021,Truist paid $1.8 billion in common stock dividends or $1.38 per share, and completed $1.1 billion in common share repurchases. The dividend and total payout ratios for the nine months ended September 30, 2021 were 41% and 66%, respectively. Truist also redeemed $1.4 billion of preferred stock to optimize the Company’s capital position.
Share Repurchase Activity
| Table 27: 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 (3) | Maximum Remaining Dollar Value of Shares Available for Repurchase Pursuant to Publicly-Announced Plan | |||||||||||||||||||
| July 2021 | — | $ | — | — | $ | 3,065 | |||||||||||||||||
| August 2021 | — | — | — | 3,065 | |||||||||||||||||||
| September 2021 | — | — | — | 3,065 | |||||||||||||||||||
| Total | — | — | — |
(1)Includes shares exchanged or surrendered in connection with the exercise of equity-based awards under equity-based compensation plans.
(2)Excludes commissions.
(3)Pursuant to the 2020 Repurchase Plan, announced in December 2020, authorizing up to $2.0 billion of share repurchases beginning in the first quarter of 2021. In June 2021, the Board of Directors increased, effective July 1, 2021, the previous repurchase authority to effectuate repurchases up to an additional $2.2 billion in shares of the Company’s common stock through September 30, 2022 (up to $4.2 billion in aggregate amount). With the additional authorization, the Company has $3.1 billion remaining for share repurchases.
68 Truist Financial Corporation
Critical Accounting Policies
The accounting and reporting policies of Truist are in accordance with GAAP and conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. Truist’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of assets and liabilities, and amounts reported for revenues and expenses. Different assumptions in the application of these policies could result in material changes in the consolidated financial position and/or consolidated results of operations, and related disclosures. The more critical policies include accounting for the ACL, determining fair value of financial instruments, intangible assets, income taxes, and benefit obligations associated with pension and postretirement benefit plans. Understanding Truist’s accounting policies is fundamental to understanding the consolidated financial position and consolidated results of operations. The critical accounting policies are discussed in MD&A in Truist’s Annual Report on Form 10-K for the year ended December 31, 2020. Significant accounting policies and changes in accounting principles and effects of new accounting pronouncements are discussed in “Note 1. Basis of Presentation” in Form 10-K for the year ended December 31, 2020. Disclosures regarding the effects of new accounting pronouncements are included in the “Note 1. Basis of Presentation” in this report. Except for the item noted below, there have been no other changes to the significant accounting policies during 2021.
Intangible Assets
The Company performed a qualitative assessment of current events and circumstances, including macroeconomic and market factors, industry and banking sector events, Truist specific performance indicators, and a comparison of management’s forecast and assumptions to those used in its October 1, 2020 quantitative impairment test, concluding that it was not more-likely-than-not that the fair value of one or more of its reporting units is below its respective carrying amount as of September 30, 2021, and therefore no triggering event occurred that required a quantitative goodwill impairment test. If economic conditions deteriorate, or the COVID-19 pandemic’s effects prolong or worsen, it may be more-likely-than-not that the fair value of one or more of Truist’s reporting units falls below its respective carrying amount, which would require a quantitative goodwill impairment test.
Truist Financial Corporation 69
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