Truist Financial Corp

NYSE:TFC

Earnings Call Transcript 2020-Q1

[Operator]

Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation First Quarter 2020 Earnings Conference Call. Currently, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this event is being recorded.

It is now my pleasure to introduce your host, Mr. Ryan Richards, Director of Investor Relations for Truist Financial Corporation. Please go ahead.

[Ryan Richards, Director of Investor Relations]

Thank you, John, and good morning, everyone. We appreciate you joining us today and sincerely you're doing well.

On today's call are Chairman and Chief Executive Officer, Kelly King, and our Chief Financial Officer, Daryl Bible, will review our first quarter results and provide some thoughts for the second quarter of 2020. We also have Bill Rogers, our President and Chief Operating Officer; Chris Henson, our Head of Banking and Insurance; and Clarke Starnes, our Chief Risk Officer, to participate in the Q&A session.

Note that we are conducting our call today from different locations to protect our executives and teammates.

We will reference a slide presentation during today's call. A copy of the presentation, as well as our earnings release and supplemental financial information, are available on the Truist Investor Relations website.

Please note that Truist does not provide public earnings predictions or forecasts. However, there may be statements made during this call that express management's intentions, beliefs or expectations. These statements are subject to inherent risks and uncertainties, including the impact of COVID-19, and Truist's actual results may differ materially from those contemplated by these forward-looking statements. Please refer to the cautionary notes regarding forward-looking information in our presentation and our SEC filings.

Please also note that our presentation includes certain non-GAAP financial measures. Please refer to page 3 and the appendix of our presentation for the appropriate reconciliations to GAAP.

And now, I will turn it over to Kelly.

[Kelly King, Chairman and Chief Executive Officer]

Thank you, Ryan. Good morning, everybody. Thank you for joining our call. I certainly hope you and your families are safe and well in the difficult environment we're all living in.

I want to take a minute before we get into the numbers to just talk about culture because I believe, now more than ever, culture matters most of all of the things we can talk about.

So, you've heard us say that our purpose is to inspire and build better lives and communities. This is absolutely a critical time for us to live out that purpose. So, our mission is focusing on our clients, our teammates and our stakeholders – in that order – and we do that very, very seriously every day.

Our values are to be trustworthy, caring, operate as one team, focus on success and, ultimately, happiness for our teammates. We're focusing during this environment, number one, on the health and safety of our teammates. We are pleased that about 35,000 of our 58,000 teammates are able to work remotely.

We are spending a lot of time supporting our clients, particularly on the Payroll Protection Program. We're spending a lot of energy and focus supporting our communities through our Truist Cares $25 million philanthropic donations that we did early in the cycle.

I'll tell you that our teammates are working really, really hard. They're working 24/7 in many cases. They're working very, very closely together. It's incredible to see the kind of positive results that we're getting, particularly like in the PPP program where our people were able to stand up literally overnight, an automated portal to allow our clients to access automatically with us in terms of getting their applications in.

Our teammates are bonding faster than we would ever have expected. And I can say to you today that our culture at Truist is really, really strong.

If you're following on the presentation, I'm on slide 5. Just as a reminder, after the combination, we're the sixth largest US commercial bank by assets and market value. We have a very strong, number 2 weighted average deposit market share in the top 20 MSAs. We have 12 million households, 58,000 teammates. We are very well positioned, we think, to achieve our purpose.

We are recognized as one of the highest rated financial institutions, and we're continuing to grow loans and deposits, particularly in this period of flight to quality. Daryl is going to cover a lot of information about our very strong capital and liquidity in just a bit.

I would point out that our diversification is a real strength. We are very diversified in products, services and geographies.

On slide 6, we talk about some of the things we're doing with regard to the crisis. Like others, we have been providing payment relief assistance, including forbearance, deferrals, extensions, other ways we can help our clients. We've already done over 300,000 accommodations for consumers, 16,000 for our commercial clients. We've temporarily waived ATM surcharges. And we're uniquely offering a 5% cashback on qualifying card purchases for important basic needs.

We're real pleased that we've been able to continue to allow appointment interventions with our clients in terms of particular needs they have. We're fortunate that 90% of our branches have drive-throughs, so we've been able to keep those branches open in terms of activity.

We've been really focused on the Paycheck Protection Program. Our average loan amount is about 323,000. We've been authorized for 32,000 companies, representing about 1 million employees. And we're expecting funding to be a little more than $10 billion on the first round, and it will likely be more on the second round, if it is in fact approved.

We're providing financial relief programs for small businesses in many other ways also. And we've been able to fund, without hesitation, extensive line draws for our commercial clients.

For our teammates, we've awarded $1,200 coronavirus relief bonuses to about 78% of our teammates making less than $100,000 a year. We've been very aggressive in providing work from home and other alternative work strategies for our teammates to provide safety for them.

We also increased our onsite special rate pay for those that have to be at work in critical roles, with $6.25 special pay for those on hourly and $50 a day for those that are not.

Our Truist Foundation is contributing $4 for every $1 that our Truist teammates donate to our One Team Fund, which helps our teammates that are in financial hardship and need assistance.

For our communities, we announced earlier a $25 million philanthropic contribution which has really gone a long way to help. We donated $1 million for each of the CDC Foundation and Johns Hopkins. And our Truist Foundation donated $3 million to local United Way organizations.

On page seven, just a few financial highlights. We did have $5.6 billion in taxable-equivalent revenue. Adjusted net income available to common shareholders was $1.18 billion. Diluted earnings per share on an adjusted basis was $0.87. Our return on tangible common equity adjusted was 15.5%, which is very strong in this environment. And our adjusted efficiency ratio was 53.4%. So, we feel really good about that.

Our January and February, like a lot of people, were really strong. And then we, of course, ran into all the challenges that we're all experiencing because of COVID-19. Interestingly, insurance and mortgage continued to have strong performance throughout the entire quarter.

Our asset quality, as Clarke will describe to you, is actually very good right now, but we know that's the calm before the storm. And that's why we added a strong $893 million provision in anticipation of the challenges that we know we will face.

We have a tight focus on our teammates and our clients and our communities, which we believe is our job number one right now.

If you go to slide 8, just a couple of the unusual items this quarter. We know it's a little messy, but we got the issue of the merger and the COVID impact. While merger-related charges are $107 million before tax, about $0.06 negative impact after tax, the incremental operating expenses, these are ones that provide future benefits, but they're not a part of the ongoing run rate, so we call them out separately, and that's $74 million or $0.04 a share. And then, the COVID impact in terms of cost and foregone revenues is about $71 million or $0.04. So, there really is, in my view, about $0.14 of unusual items, which gets you to the $0.87.

If you go to deck 9, slide 9, in loans and leases, it's been an interesting period. You can see that our first quarter average loans was $301 billion, but by the end of the period, it was $319 billion. Obviously, we had a surge at the end of March. We had about $18 billion in drawdowns. That continued into early part of April. We had another about $1.4 billion. Again, it's kind of subsided. It's been relatively flat since then. We do expect substantial PPP funding. As I said, we have in process about $10 billion in committed loans and we expect will be drawn down relatively soon.

In terms of the market, everybody wants to know what's going to happen. I do too. But the truth is we just don't know. It depends, obviously, on the depth and the length of the health crisis as we work through that, and then how that has the knock-off effect with regard to the economy.

The good news is, going into this, the economy was very strong. The bad news is small business will really struggle to recover from this. Still, I would say to you, Americans are resilient and I believe our country is likely to outperform the worst expectations.

If you look at deposits on page 10, same kind of thing. Average balances were $334 billion. It popped up to $350 billion as we had an increase of $15 billion during that period of time. About $7 billion of that was line draws, but then we also had some seasonal increases and some flight-to-quality deposits that moved in, which we're very pleased to see. Our total average cost of deposits decreased by 6 basis points, which we're very happy to see.

So, let me turn it to Daryl now and let him give you some detail.

[Daryl Bible, Chief Financial Officer]

Thank you, Kelly, and good morning, everyone. Today, I want to talk about the key points from the first quarter and provide some color on current business conditions.

Turning to slide 11, net interest margin of 3.58% up 17 basis points. Purchase accounting contributed 52 basis points to reported net interest margin.

Core net interest margin was 3.06%, down 8 basis points. The decline reflected the full quarter impact of the merger of equals, lower interest rates and our liquidity build in March.

The yield on loans and leases held for investment increased 8 basis points as the benefit from purchase accounting more than offset lower short-term rates.

The yield on our securities portfolio decreased 3 basis points. We became more asset sensitive due to floating rate loan growth, expected higher prepayment, trimming out Federal Home Loan Bank advances and increased non-interest bearing deposits.

Our loan mix was 55% floating and 45% fixed. Current trends suggest our net interest margin will decline further from a full quarter impact of lower rates, line draws, PPP funding and elevated reserves at the Fed.

To protect loan yields, we are implementing towards an all new production and we continue to aggressively reduce deposit costs.

Turning to slide 12. Non-interest income increased $563 million, reflecting a full quarter on the merger of equals.

Insurance income increased $39 million or 7.6% versus first quarter 2019 due to higher P&C commissions, organic growth, strong retention and increased pricing.

Residential mortgage income was strong, with origination volumes at $11.7 billion. Refi was 56% of originations and gain on sale margins were 176 basis points. While forbearance is a potential headwind, that could be offset by higher volume and spreads.

This quarter, several fee income categories were impacted by the pandemic. Investment banking and trading was impacted by $92 million due to the increase in CVA reserves arising from lower interest rates and wider credit spreads.

As shown on the slide, discretionary actions resulted in lower service charges on deposits and card and payment-related fees. Current trends include seasonally strong insurance income, strong residential mortgage production, partially offset by lower service income due to forbearance, lower asset valuations and lower purchase volume related to COVID.

Turning to slide 13. Non-interest expense increased $856 million, reflecting a full quarter impact from the merger. Merger-related costs included $107 million of merger-related and restructuring charges and $74 million of incremental operating expenses related to the merger.

Discretionary actions in response to COVID impacted non-interest expense by approximately $65 million and included a $1,200 bonus to all teammates earning less than $100,000.

Personnel expense included $44 million of incremental operating expenses related to the merger. This was positively impacted by the decrease in the market value of non-qualified plan assets, which is offset in net interest income and other income.

We also updated our intangible valuation. As a result, annualized full-year amortization expense for 2020 was revised to about $660 million.

Current trends in expenses include relief measures, such as special pay for some client-facing teammates, and measures to better protect our teammates, clients and communities. We continue to have good core expense discipline even in the face of COVID health crisis.

Turning to slide 14. Asset quality remained strong, but economic conditions have deteriorated. Truist will continue to apply the CECL standard adopted January 1.

Our MPA ratio increased 9 basis points to 23 basis points, largely due to the adoption of CECL and the transition from PCI to PCD.

NPLs were 32 basis points to total loans, up 17 basis points from year-end, primarily due to the PCI to PCD transition. Adjusting for this transition, our MPA and MPR ratios were essentially flat from last quarter.

Net charge-offs were 36 basis points of average loans, down 4 basis points. The provision was $893 million and reflected the reserving in accordance with CECL. The increased provision was mostly due to a significant loan growth and scenarios reflecting a weaker economic outlook. The increase also reflected a full quarter of post-merger activity.

Our allowance coverage ratio was 1.63%. The combination of our allowance and the unamortized fair value mark remains a very robust 2.71% of total loans. The adoption of CECL resulted in strong coverage ratios at 4.76 times for net charge-offs and 5.04 times for NPLs. We expect second quarter asset quality matrix to be elevated reflecting COVID stress across the loan portfolios.

Turning to slide 15. The table on the left summarizes our exposure to industries we believe are most vulnerable in the current environment. We have very low exposure, reflecting meaningful diversification from our merger. Outstanding loans to the group totaled $28.4 billion or 8.9% of loans held for investment at the end of March. Our oil and gas portfolio is weighted towards lower risk sectors.

Outstanding balances on levered loans totaled $10.5 billion or $3.3 billion of loans held for investment. 42% of our leveraged loans are investment grade or the equivalent. We are actively managing these portfolios and will continue to make underwriting or risk acceptance adjustments as appropriate.

Turning to slide 16. The $582 million increase in the ACL from the initial CECL adoption reflects rapidly evolving market conditions. Our standard practice is to use three scenarios to inform the CECL allowance, implying judgment to assign the probability of each scenario.

These scenarios include Moody's baseline with implied rates for an optimistic scenario and one stress scenario. We also consider heightened industry concerns from the pandemic effects, together with the impact of government relief packages when calculating the CECL estimate.

Slide 17 adds additional details on our loss estimation approach.

Turning to slide 18, our capital ratios declined slightly, mostly due to a significant balance sheet growth related to line draws. However, our capital levels remain strong relative to regulatory levels for well capitalized banks.

Our CET1 ratio was 9.3%, down 9.5% in the fourth quarter. Our dividend and total payouts are 61.4% for the first quarter.

We are taking a prudent approach to capital due to the uncertainty of the economy. Our CCAR submission incorporated this impact. Ending CET1 ratios for the internal baseline and severely adverse scenarios well exceeded regulatory minimums and internal post stress policy goals.

We intend to utilize the five-year CECL transition for regulatory capital purposes, which provides a 17 basis point benefit to CET1. We expect to grow capital and serve our clients throughout this challenging time.

Turning to slide 19. This slide shows the second best performance among peers under stress conditions and from a capital resiliency perspective due to strong PPNR and lower credit losses.

The table compares credit loss reserves reported by Truist and its peers at March 31 to their respective stress losses under 2018 DFAST. We use stress losses from 2018 as this was the last year the Fed published DFAST results for BB&T and SunTrust. We think that 2019 will be similar given the improved risk profile and earnings power of the combined company.

As the column on the right shows, Truist's 35% ratio of credit loss reserves to stress losses is above the peer average of 33%. However, after layering in the unamortized fair value marks on the SunTrust portfolio, which totaled $3.5 billion on March 31, Truist stress loss coverage increased to 58%.

This is a great illustration of how the merger enhanced the risk profile of both companies and resulted in a defensive balance sheet that is insulated by purchase accounting marks and CECL reserves. It is also another example of why we believe we are better together at Truist.

Turning to slide 20, we acted quickly in response to the pandemic to term out short-term borrowings and increased cash to meet capital funding needs. As such, our liquidity ratios remain strong, with an average LCR of 117% and a liquid asset buffer of 19.6%. Our access to secure funding sources remains robust.

We have experienced a flight to quality amid recent market volatility, with total deposits increasing $15.5 billion and we continue to see robust growth this quarter. We have sufficient liquidity to fund our PPP loans from our existing Fed balances at the Fed.

In addition, holding company cash is sufficient to cover 17 months of contractual expected outflows with no inflows.

We are withdrawing our guidance for 2020, given the uncertainty going forward. For the second quarter, we're providing guidance on several categories based on linked-quarter changes versus the first quarter of 2020.

We expect earning assets to grow in excess of 5% on linked quarter average basis, reflecting the increase in loans from C&I line draws and the PPP program.

Total taxable-equivalent revenue will be down a few percent linked-quarter, reflecting a meaningful decline in net interest margin, driven by lower rates, liquidity build and fee income pressure, as noted earlier.

Core non-interest expense, adjusted for the merger, amortization and COVID expenses, is expected to be flat linked-quarter, excluding the adjustment to the non-qualified plan. We're making good progress, generating savings some third-party spend and facilities optimization.

Depending on the length of the economic downturn, how deep the downturn goes, and how effective the government programs play out will influence scenarios that unfold. You can see net charge-offs increase throughout the year and possibly add more pressure, so there will be allowance. We are also striving to achieve positive operating leverage despite this challenging environment.

Now, let me turn it back to Kelly for an update on the merger and closing thoughts and Q&A.

[Kelly King, Chairman and Chief Executive Officer]

Thanks, Daryl. So, in terms of the accomplishments – and keep in mind, we really just merged these two companies in December. So, we've accomplished a lot. Most importantly, we rolled out the Truist culture. We were able to complete 32 townhall meetings. We had a few at the very end that we had to cancel or defer because of COVID-19, but we got through most of the enterprise and the reception to it was extremely good.

We introduced and rolled out the Truist visual identity and logo. We did complete the purchase of Truist Center, which is our corporate headquarters here in Charlotte. We launched our Truist Foundation.

And we were able to go ahead and begin consolidating some redundant real estate portfolios that we had that we could go ahead and begin to get some early cost saves.

So, in terms of the next steps, if you think about it right now, we really have two major priorities. Number one priority is focusing on COVID-19. We're laser focused on taking care of our teammates, making sure everybody's safe and well. We're doing everything we can possibly do to support our clients, not only in terms of their safety, in terms of interaction with us, but also in terms of helping them sustain the economic challenges that are going along with this terrible experience we're all going through.

We're trying to be very willing to invest and be creative in terms of how to support our communities, and we're doing some really interesting things there in terms of broadband and all types of things that we can do to help communities that are really, really struggling.

So, the second priority, of course, is keeping the integration and conversion on track. We believe we are in a good place there. It's hard to know exactly what may happen with regard to any delays. It really depends on the depth and the length of the health crisis. But at this point, we still feel good about where we are in terms of our planned conversion and integration activities.

In terms of our performance targets, we still believe in the medium term. We would project a return on tangible common equity in the low 20s, adjusted efficiency in the low 50s. You can see we're already pretty much there. And we're still remaining very confident in terms of our $1.6 billion in net cost saves.

Exactly when we achieve that kind of depends on, obviously, the environment we're living in. If it's a V, then we'll recover pretty quickly and we'll hit these in the not-too-distant medium target type of range. If it's a U, it will take a little bit longer, and that's just pretty obvious.

Regardless, we believe that we will be a top-tier performer, whatever the absolute numbers are. I will say to you that all of the benefits of the merger look better now than they did a year ago.

Finally, if you look at our value proposition slide, we believe we provide a really strong value proposition. We are a purpose-driven company, committed to inspiring and building better lives and communities. That's really important, more important than ever in today's world.

We have an exceptional franchise with diverse products, services and markets. We have strong market share and vibrant fast-growing MSAs in the Southeast, Mid-Atlantic and a growing national presence. We have a very comprehensive and diverse business mix in banking, capital markets and insurance.

And very importantly, we are simply better together. We're stronger. We're more resilient. We have best-in-breed in terms of talent, technology, strategy and processes.

We are very uniquely positioned to deliver best-in-class efficiency and returns, while investing in the future. As I said, we have net $1.6 billion of net cost saves yet to come. These complementary businesses are clearly going to yield substantial revenue increases as we develop the synergies.

Our returns and capital are buoyed by purchase accounting accretion, which Daryl has described to you, and we're making meaningful investments in technology capabilities, our teammates, marketing and advertising.

We have a very strong capital and liquidity with resilient risk profile, enhanced by the merger. We are very prudent and disciplined in risk management and financial management. We have a very conservative risk culture, leading credit metrics among the highest-rated large banks.

We have diversification benefits that arise from the merger we discussed. We stress test very, very well – separately and together. We have a very strong capital and liquidity position and being enhanced even with the flight to quality.

And we have a very defensive and, I would call it, strong and resilient balance sheet supported by purchase accounting marks combined with the CECL credit reserves.

Because of the strength of our balance sheet and our liquidity, I would expect us to continue our dividend as we move forward into as far as we can see.

So, like I said in January, if you liked us a year ago, you should love us now, but we continue to believe our best days are ahead.

Ryan, I'll turn it back over to you.

[Ryan Richards, Director of Investor Relations]

Thank you, Kelly. John, at this time, will you please explain how our listeners can participate in the Q&A session?

[Operator]

Certainly. [Operator Instructions]. We will take our first question from Saul Martinez of UBS. Please go ahead.

[Saul Martinez, UBS]

Hi. Good morning, guys. I wanted to ask a little bit about the outlook for credit and the interplay with the accounting and a lot of the moving parts there. So, on slide 16, you go through your day one, January 1 true-up and the additional reserve builds in the first quarter. But, Daryl, how much of it – can you just tell us how much of the $3.5 billion credit mark is – $3.5 billion loan mark, sorry, is for credit versus liquidity and rates?

[Daryl Bible, Chief Financial Officer]

Yeah, Saul. So, first, I would tell you, when we came up with our day one estimate on our reserve, we had three scenarios that we came up with. And we weighted our stress scenario 40% on day one. So, we started the year off with a strong reserve from that perspective.

When we moved over and made our provision this quarter, we went through multiple scenarios as we always run. And then, with Moody's changing their scenarios every few days, we actually ended up running 10 different scenarios through quarter-end into early April, trying to use an overlay to help us adjust on that CECL number that we came up with.

And then, at the end of the day, you go back to using expert judgment. And we always have qualitative factors this year, for this time. Clarke and Ellen and the team really had to spend a lot of time qualitatively because the models have limitations when a government's infusing over $5 trillion and they have to weigh in on what the effectiveness is. You have all these payment plans basically out there. And you need the expert judgments on how effective those programs might be. So, there's lots of qualitative adjustments that we came up with. We feel very good about the reserves that we have there.

As far as your fair value mark, it's a combination of credit, liquidity and interest rate, and it's at $3.5 billion.

[Saul Martinez, UBS]

Okay. How much of that is credit versus industry?

[Daryl Bible, Chief Financial Officer]

We didn't disclose that, Saul.

[Saul Martinez, UBS]

Okay.

[Daryl Bible, Chief Financial Officer]

Saul, at the end of the day, it's all going to accrete into earnings. It's all going to be used as a lower value for when we – you get a little bit of benefit because you have a lower book value when you apply your reserves. So, it's all going to count, whether it's credit, interest rate or liquidity. It really doesn't matter.

[Saul Martinez, UBS]

Okay, got it. But I'm trying to understand the loss-absorbing capacity for credit a little bit more. And then, just going forward though, you did mention that there is a possibility for reserve builds. And as I think about going forward, if the economic environment does worsen and credit does worsen more than what's sort of embedded in your outlook, how does that play out? Obviously, on the SunTrust book, you'll have to – and on your BB&T legacy book, you'll have to true-up your ACLs. But on the credit mark, if it turns out that whatever that portion of the $3.5 billion that's your credit marks is insufficient and the losses will be larger than that, how does that work in terms of the accounting? Do you need to re-estimate that down and then get a subsequent benefit on purchase accounting accretion? I guess what I'm asking is, even going forward, do you get a – is there a risk of sort of a double hit to your equity base from reserve builds and credit mark adjustments that only come back over time?

[Daryl Bible, Chief Financial Officer]

So, when you come up with your CECL reserves, you really don't take into account the fair value mark. It is a lower book value, so you end up providing less. It really is going to depend on what I said in my prepared remarks. What happens in the economy? Is it going to be more stressful? If the government plans, how effective they're going to be and then how deep it really is. Clarke?

[Clarke Starnes III, Chief Risk Officer]

Saul, we assume through a weighted probability of all those scenarios that Daryl described and we did our estimate. We assumed very sharp initial GDP contraction, a spike in unemployment and then lingering high-single digit unemployment for the two-year reasonable supportable period. And our mean reversion was basically similar to what we experienced after the Great Recession.

And so, then we get, to Daryl's point, a good bit of sensitivity analysis around the different stress portfolios. We looked at the historical and projected redefault rates on the different mods and deferrals. And we baked all of that into our qualitative overlay. So, we feel like the estimate today is the best we know. Obviously, if things deteriorate worse, then we would have to provide more. If it holds up as we projected, then we're well reserved.

[Saul Martinez, UBS]

I understand it on the CECL reserves, but on the unamortized loan mark, the losses are greater than $3.5 billion. And you recalibrate those estimates and you're now assuming [indiscernible], how does that work?

[Daryl Bible, Chief Financial Officer]

So, you have a year to true-up your goodwill, but that's based upon any miscalculations you had at 12/6. So, we feel pretty good. We finalized all of the marks. I think I mentioned what the new amortization amount is on the intangible. So, all that was trued up this quarter. Actually, we have a table on it in the deck. So, all that kind of finalized from that perspective. We really can't go back and readjust any of that.

[Saul Martinez, UBS]

Okay. Okay. So, there's no – there's not really a risk there that there's an incremental loss associated with that on top of the CECL reserve, I guess?

[Daryl Bible, Chief Financial Officer]

That's correct. Yeah, that's right, Saul.

[Saul Martinez, UBS]

Okay, thank you. All right. Thanks a lot.

[Daryl Bible, Chief Financial Officer]

You're welcome.

[Operator]

We will now take our next question from Gerard Cassidy of RBC. Please go ahead. Your line is open.

[Gerard Cassidy, RBC Capital Markets]

Thank you. Good morning, Daryl. Good morning, Kelly.

[Daryl Bible, Chief Financial Officer]

Hi, Gerard.

[Gerard Cassidy, RBC Capital Markets]

Can you share with us – it looked like your purchase accounting accretion came in stronger this quarter. Your tangible book value, obviously, jumped up to $26 a share. That was probably attributed to, I guess, stronger purchase accounting accretion. Can you give us some color on how that worked out this quarter versus maybe prior expectation?

And so, we came in higher than expected and it was mainly due to loans paying off, both on the corporate side and on the consumer side. So, it was a little bit above our own estimates that we had.

On a go-forward basis, I would say that you can't count on that basically over-estimating throughout the year. It's possible, but you wouldn't count on it. So, if you look at core versus reported margin, we were 52 basis points difference. I would probably think it averages closer to the 40 basis points on a consistent basis. But you never know what's going to happen on a quarter-on-quarter basis on payoffs. When people pay off their loans, you have to basically take in all the accretion.

[Gerard Cassidy, RBC Capital Markets]

Very good. And then, on slide 19, which was very insightful and appreciate putting that together, can you share with us – and maybe it's just simple, the economic assumptions are not – aren't different than the stress test. But why – in CECL accounting, everyone, you and your peers, are looking at life-of-loan losses. Why aren't the reserves even higher? And yours are the highest relative to the stress losses? Why don't they match what the stress test we're testing for? Again, is it simple as the economic assumptions?

[Daryl Bible, Chief Financial Officer]

Yeah. So, there's a difference between CECL and stress testing. Stress testing is a dynamic, living, breathing process. So, you basically have to project new volumes and grow for runoff depending on whatever happens. CECL is basically a static balance sheet with runoff assumptions. So, there's differences there.

The chart that we put in on 2019, just to give credit, we basically plagiarized that from Jason Goldberg. I give Jason a lot of credit for that. But I think on that table, it clearly shows that our reserves that we have versus the combined company's losses that we added together from 2018 is at 35%. That's a little bit above the peer group. And as you add in the fair market value, it's at 58%.

One thing to note, though, if you actually look at our company run results on a combined basis in 2018, that number was basically 44%. The reason I'm telling you that is, is that we don't have our 2020 CCAR stress results yet from the Fed. That will come later this quarter. But we do have what we submitted to the Fed a few weeks ago. And if you look at what the company run stress results were on the severely adverse, we were basically at 52%. So, I think that shows a good indication that, as we put the company together, Clarke and Ellen have really derisked a company and we just are a less riskier company than we would have been on a combined 2018 basis. So, our reserves then at 52%, and then if you add in the fair value mark, you're at 84% of our – we came up with $10.8 billion of losses in our 2020 severely adverse.

[Gerard Cassidy, RBC Capital Markets]

Very helpful. Thank you.

[Daryl Bible, Chief Financial Officer]

Thank you.

[Operator]

We'll now take our next question from Betsy Graseck of Morgan Stanley. Please go ahead. Your line is open.

[Betsy Graseck, Morgan Stanley]

Hi, good morning. Thanks for the call and the color. Two questions. One, you gave us the number of customers that have been requesting deferrals. I think it's 330,000 on the consumer side and 15,000 on the wholesale side. Can you give us a sense as to the percentage of balances that those each represent?

[Clarke Starnes III, Chief Risk Officer]

Yeah. Betsy, this is Clarke. On the consumer side, it's about $9 billion. That's for both onUps and Service for Others. So, it's about $8 billion for balance sheet. So, roughly 3%. On the commercial side, it's about roughly $10 billion or so, 5% or 6%. So, again, I would note the far majority of all of our re-agings have been with accounts that are current to start with, even in our subprime auto as an example. So, again, I think this is a very unusual environment. So, you have a lot of people that are worried that have – maybe have lost their job or maybe have not, but they're worried and they're just all little different than normal, in that most are current to start with.

[Betsy Graseck, Morgan Stanley]

And in your forward look on the CECL that we're just talking through, how high do you expect those numbers to go?

[Daryl Bible, Chief Financial Officer]

It really depends on the three factors I said earlier, Betsy. Right now, we feel we are adequately reserved from what we know. There is a lot more that we don't know than what we know, though, and how things are going to impact. The government's going to have over $6 trillion of stimulus when it's all said and done. That's 3 times more than what they had in the Great Recession. We really don't know how effective those programs are going to be. So, you really need to let a lot of that play out. All of the forbearance that's been occurring right now, that all has to play out. And some of the clients may not make it. We feel really comfortable where we are reserved today, and we'll just see what happens as we move forward.

[Kelly King, Chairman and Chief Executive Officer]

So, Betsy, keep in mind too that the effects of the Payroll Protection Program will keep people whole in terms of their income. And those that are furloughed, in most cases, as I understand it, their unemployment insurance because there was an increase in the normalized unemployment insurance substantially, in many cases, people have more take home income than they had before. So, it's hard to say exactly today, in the short run, that that would be a huge negative impact. Obviously, if this is extended and the government programs don't provide continued stimulus, then it will be a factor. But in the short run, the government has actually done a pretty good job in terms of providing short-term buffer.

[Betsy Graseck, Morgan Stanley]

Okay. And then, just moving to expenses, on the $1.6 billion, I understand it's hard to know the timeframe, given everything that's going on. I'm just wondering how much of that $1.6 billion do you feel you can control today versus maybe you put on the – you put aside because it's redundancies that you don't want to touch at this stage?

[Kelly King, Chairman and Chief Executive Officer]

Well, all of it is, over term, still achievable. You're right, though some of it may be deferred because of the environment we're in today. Because of more people working away from the office, the connectivity, et cetera, there may be some things that we're not able to do as quickly as we had anticipated. But our people are studying this daily. And as of today, they have not discovered any material issues that will dramatically slow down our progression in terms of integration. And the progression of the integration is what drives call centers.

[Daryl Bible, Chief Financial Officer]

I'll give you a couple of examples. So, on third-party vendor, right now, our teams are still working on it, but we're probably 35% to 40% of the way of our target. So, we'll have about close to $100 million annual run rate save this year. And over the next couple of years, we have already locked in $135 million of that. So, that's progressing well. We're making really good progress on our corporate real estate portfolio. We have over 30,000 square feet. Right now, we have known savings in there of about $66 million of what we're executing on. If you look at what we're going through right now, with people working at home, we have to really evaluate the impacts of that after it's all said and done. But that could be an opportunity for much more saves. So, we have $30 million – we might go down to $20 million over the next three to five years. You just don't know that. So, that could be even a bigger opportunity. So those are just a few examples, Betsy.

[Betsy Graseck, Morgan Stanley]

Thanks.

[Operator]

I will now take our next question from Mike Mayo of Wells Fargo Securities. Please go ahead. Your line is open.

[Mike Mayo, Wells Fargo Securities]

Hi. A few more questions about your forward guidance. Kelly, I thought you said, maybe Daryl, talked about the potential for positive operating results this year, which seems pretty tough with your second quarter guidance. As it relates that guidance, only slight expenses in the second quarter you just mentioned – vendor, real estate, all these other things that you said that was the extra COVID effect and the other part of the guidance. Some other banks have said, expect much higher reserve building in the second quarter. I know you've given some numbers on that, but just exactly where you stand. Thank you.

[Daryl Bible, Chief Financial Officer]

Yeah, Mike. So, I would definitely say it's going to be a challenge from linked quarter from first to second. We will continue to execute and do the best that we can within the parameters that we have. And we aren't giving up on our positive operating leverage. We're going to do the best we can. We may not achieve it this year. But we still may. It is not out of the woods. It all depends on how quickly the economy recovers. And if it's a sharp V, we have a shot at it.

[Mike Mayo, Wells Fargo Securities]

And the other question, the reserve build in the second quarter, some banks are saying, 'hey, look, since the end of the first quarter, conditions have gotten worse.' I guess you said you use Moody's. I guess maybe have some flexibility to use your own capital markets group for forecast, like the larger banks. Given the decline since the end of the first quarter, would you expect more reserve building? And even though you said you're 84% reserved from, what, your 2020 bank submitted stress test, which is a big number. That's all in with your purchase accounting marks, if I got that correct?

[Daryl Bible, Chief Financial Officer]

Yes. You're right on that. As far as – we use Moody's and we also have a couple other scenarios that we run. But we went into early April running scenarios in our reserve. So, we didn't cut it off on the 31st. We closed a little later this quarter just because we're later in the cycle. So, we went through at least the first week of April with that information.

[Clarke Starnes III, Chief Risk Officer]

Yeah. And again, if the economy actually underperforms those scenarios, we would have to provide more, but based on what we know today, we think we're well reserved, but we're certainly watching it.

[Mike Mayo, Wells Fargo Securities]

Okay. And so, how much of the expense savings have you achieved so far? And you said some of the timeframes might slip. You mentioned some areas that you'll still have. You have a pandemic with the biggest merger in your history happening at the same time. So, it's a tough situation. It sounds like you're managing through it. But maybe just to get out on the table now what we should expect as opposed to waiting till later.

[Daryl Bible, Chief Financial Officer]

Yeah. So, from specific expense savings, we have some savings and there has been some slippage just with what happened in March, in that, with COVID, some of our expenses are a little bit elevated. We pulled forward buying a bunch of our laptops and Wi-Fis and other equipment. That got pulled forward into the first quarter that we were planning on later in the year. So, a little bit elevated from that perspective. And our goal was to try to get our expenses down to 30% of the $1.6 billion by the end of the year. We are on track so far this quarter to doing that. We were trying to have some buffer and be ahead of that. It doesn't get any easier as we get into this next quarter to be honest with you. But we still have a shot at getting our 30% at the end of the year if we have a sharp recovery.

[Mike Mayo, Wells Fargo Securities]

All right, thank you.

[Daryl Bible, Chief Financial Officer]

Yeah.

[Operator]

We will take our next question from John Pancari of Evercore ISI.

[John Pancari, Evercore ISI]

Good morning. Regarding the exposures, the at-risk credit exposures on slide 15, the $28.5 billion, I know you indicate on that slide that you have qualitative overlays for the affected industries. So, can you give us a little bit more color on that – on the magnitude and maybe the amount of loan loss reserve against those portfolios and maybe the loan marks against them?

[Kelly King, Chairman and Chief Executive Officer]

We haven't disclosed that level of detail. I would tell you this that, for each of those segments, we have done detailed analysis, things like risk grade notching and a good bit of sensitivity to the downside. And each and every one of those, we've looked at the modification or deferral request. And so, we've used that to add additional overlays on top of what the models would have driven in. They're considerably higher than the other segments, I will just tell you that.

[John Pancari, Evercore ISI]

Okay. All right. And then, in terms of the insurance business, I know you indicated in your second quarter outlook that you do expect COVID could dampen the organic trends in the business. Can you give us a little bit more detail how that could play out? And is there an offset from perhaps any better pricing that you see in the industry? Just want to see how you think about how that plays out. Thanks.

[Kelly King, Chairman and Chief Executive Officer]

Chris will cover that.

[Christopher Henson, Head of Banking and Insurance]

Yeah. This is Chris, John. Thank you for the question. First off, we would expect second quarter to be up about 3%. That's seasonally strong this quarter of the year. And you're right, the slow down as a result of COVID really is creating declining exposure units that could be lost, people, lost business, what have you, and that will slow economic – new business production. But to your point, there will be a potential pickup in pricing.

When we went into the Great Recession, we went in with the backdrop of a soft insurance market. We go into this one – it's actually a very strong market on the back of 2017 and 2018 being the two largest [indiscernible] loss years in history. So, we're kind of in the up 4.5%, 5% range right now. If we've got to go into one, that's a good backdrop to have – if you're going to have it to back. And just for this quarter, for example, rates are up 4.5%. If you throw on top of that lower interest rates, these P&C underwriters are going to be struggling on their investment returns. So, they will likely continue to keep upward pressure on the rate environment. So, I think your intuition is exactly right.

We expect momentum in pricing for the balance of the year. But we do see tough new business reduction. So, we might have been looking at – this past quarter, we had 7.3% organic growth. Kind of looking forward, it's looking more like maybe in the flat to 2% kind of range for the balance of the year.

[John Pancari, Evercore ISI]

Okay. Thanks, Chris.

[Operator]

We will now take our next question from Ken Usdin of Jefferies. Please go ahead. Your line is open.

[Kenneth Usdin, Jefferies & Company, Inc.]

Thank you. Good morning. Daryl, just wondering if we could step back out, step on the revenue side. You talked about second quarter revenues down a few percent. And just following on bit of the fee part that was just talked about, can you help us just understand NII versus fees? There's so many moving parts involved, but if you can directionally just help us understand the moving parts and direction of fees, that would be helpful. Thank you.

[Daryl Bible, Chief Financial Officer]

Yeah. Just high level, Ken, I would tell you – and Chris commented on insurance up. Insurance is seasonally strong second quarter. That won't change from that perspective. Service charges, we have some programs in place to help our clients during this time of stress. That's what Kelly talked about, the 5% cashback. We are waiving ATM fees, so people can meet their banking services. People are coming in now, we're getting more requests for relief on NSF and we're granting that. So, I would say, service charges overall might be down a touch from that perspective. Depending on what interest rates do and credit spreads, Beau's area, while the volumes overall are lower, there is CVA, the $92 million, that line item has a chance of recovering potentially on what happens with that.

And then, mortgage, mortgage will have good volumes, strong. The offset will be the impact on forbearance on the servicing. We did try to factor in some estimates on the MSR valuation already. We don't know if that's the full impact of that, but it is embedded in there. So, we did adjust for that accordingly. So, mortgage will probably have a decent quarter would be my guess.

[Kenneth Usdin, Jefferies & Company, Inc.]

And on the NII side, also can you just help us understand, your balance sheet looks like it's going to keep growing. You mentioned the difference between stated and core NIM. But can you help us understand – a lot of other peers are talking about NII growing from here. You guys have the purchase accounting as an extra factor in that. Any way you can help us just parse out the moving parts there too? Thanks.

[Daryl Bible, Chief Financial Officer]

Yeah. I don't foresee – unless purchase accounting really is stronger than we think, I don't foresee NII being positive second quarter versus first.

Core margin, if you looked at our sensitivity, and you probably need to go back to our disclosures back in January when we disclosed, what, down 100 basis points – our disclosures that we show on our earnings reports are gradual. So, that's assuming that the 100 basis points would go down throughout the 12 months. And at that point in January, it was a negative 1.78% or 1.72%. If you say, that's equivalent to, like, a shock of 50. So, what we experienced in March was a shock of 150. Now, you had a little bit weird going on with LIBOR. And LIBOR, we'll talk about in a second. So, you had a shock of 150. So, if you take the 1.72% and multiply it by 3, that would probably be what the impact would be, rough estimate, on what our NII change might be for second quarter from that perspective.

Then we have built a lot of liquidity. Now, we built liquidity because we were in a stress period, we want to make sure we can meet our clients' need both from a funding and from a deposit perspective. So, the cost of carrying what we're carrying at the Fed right now is anywhere from 10 basis points to 15 basis points.

If you look at our balance sheet right now, and through Friday on March – or on April 17, our balance sheet, the total balances are $518 billion. Our deposits now are $364 billion. So, all the government stimulus checks that started to come in last week, we had one day, I think it was Wednesday, where we went up $6 billion in deposits in that one time period. Our PPP funding is going to start going on the books. It started last week. It's going to go on this week and the following week. We'll probably have $330 billion of loans. So, we're definitely going to have much higher earning assets.

The other thing I would note is that our deposit costs, we were at 70 basis points, down 12 basis points on an interest-bearing basis. And if you look at March, our interest-bearing deposit costs were already 56 basis points. When you go back and look at the Great Recession and you look at how far the deposit costs get down to back then, we got down to about 23 basis points. So, I don't think we're going to get to 23 basis points in the second quarter, but we're going to get in the 20s for sure over the next couple quarters as we continue to push down rates if these rates stay where they are.

So, I think we've got a lot of things that we have to manage with, but our margin will be down, will be down because of liquidity. But once we feel that the stress is over, we can reverse the liquidity pressure there pretty easily and get that core margin back. So, hopefully, that's helpful.

[Kenneth Usdin, Jefferies & Company, Inc.]

Very much so, Daryl. We're going to talk about LIBOR. And that is a point I was wondering if you could talk about. How are you seeing LIBOR normalize down as you look out over time? Thanks for all the color.

[Daryl Bible, Chief Financial Officer]

Yeah. So, it peaked on April 1 at 1.02%. It's now at 0.67%, one-month LIBOR. We have about $130 billion net LIBOR assets tied to one-month LIBOR right now. So, as that migrates down, that will kind of put in that full effect of that interest rate sensitivity that you saw there. We aren't there yet. It still has room to come down some more, but that will also allow us to push down our deposit costs faster too as LIBOR is coming down as well. And when you look at the money market equivalent, that will all kind of come down together. It will hurt our asset side, but we're going to make it up on the deposit side.

[Kenneth Usdin, Jefferies & Company, Inc.]

Got it. Thanks very much.

[Daryl Bible, Chief Financial Officer]

You're welcome.

[Operator]

We will now take our next question from Matt O'Connor of Deutsche Bank. Please go ahead. Your line is open.

[Matthew O'Connor, Deutsche Bank]

Good morning. You guys have addressed the risk that some of the integration gets delayed if we don't get a V-shaped recovery here. I guess, on the flip side, the risk of losing customers and staff to competitors is probably a lot less than maybe some people feared, partly because the virus, partly the action that you're doing for your staff, being very generous. So, maybe you could just talk, Kelly, Bill, about the engagement of your staff and how you keep the cultures, kind of both of them in the same direction. You can't do it from the town halls that you were doing before. But talk about some of those kind of softer aspects of the doing the business and your customer base – employee base. Thanks.

[Kelly King, Chairman and Chief Executive Officer]

Bill, why don't you go ahead and maybe I'll add a comment at the end?

[William Rogers]

Okay. Thanks, Matt. I think as you point out, the retention numbers were already good coming in from a teammate perspective. And we just did a survey that was an engagement proxy. And in this incredible environment, the survey actually showed high levels of engagement from our teammates.

In many ways, the cultural integration has been accelerated by months, if not years, because people are operating under stressful conditions. The teamwork has been spectacular. I think, Kelly, you would echo that. No one's wearing a jersey because they're all headed towards the same objective.

So, I think you point out accurately, there are elements of this that are advantageous as we go through this process. And I've personally been just really, really proud of the work that our teammates have done.

The town halls and the rollout of purpose, mission and values, we were well underway there, and that has been a really good catalyst because everybody's got something to lean forward on. They're all speaking the same language and operating from the same playbook.

[Kelly King, Chairman and Chief Executive Officer]

And I will just point out one additional point. I said earlier, culture matters always. It really matters in a time like this. A really big part of our culture is just taking care of our teammates. We get that our clients come first, but you can't take care of your clients without doing a really good job for your teammates. So, Truist is unique in terms of having a fully paid for pension plan, 6%-on-6% 401(k) match. And then, we do things like $1,200 bonuses and premium pay for people on the lines. So, all of those things, our teammates really appreciate. And so, they see that, during difficult times, we're going to take care of them even if there's some sacrifice in terms of short-term profitability. We're going to take care of our teammates, so they can feel safe and secure, and then they can help our clients feel safe and secure. Those memories will be here for decades. And so, we feel very good about our culture. As Bill said, it is accelerating and it is strong as steel.

[Matthew O'Connor, Deutsche Bank]

Helpful. And then, I just have a question for Daryl. You talk about, for new loans, implementing some floors. Can you just talk about the rate, how much above the floors you are? And I assume, as loans come up for renewal, you'll attempt to do the same thing on those loans?

[Daryl Bible, Chief Financial Officer]

Yeah. So, David reported, I think a week or two ago, that the floors that he's putting in range anywhere from, I think, 25 basis points to 75 basis points from a LIBOR perspective. I think those are the floors that he's putting in from that perspective. That's the LIBOR rate, not the spread over it.

[Matthew O'Connor, Deutsche Bank]

Okay. Thank you.

[Daryl Bible, Chief Financial Officer]

Welcome.

[Operator]

And we will take our next question from Erika Najarian of Bank of America. Please go ahead.

[Erika Najarian, Bank of America Merrill Lynch]

Hi, good morning. I just had one follow-up question. Of the $480 million in annualized cost saves that you noted, how much of that is achievable without interruption to pandemic-related support of your employees and your clients? And if I'm interpreting, Daryl, your answer to Betsy's question, $100 million of annual run rate savings from third-party vendors, $66 million from loan savings in corporate real estate. So, it sounds like at least $166 million of that $480 million would have nothing to do with supporting the employees or clients.

[Kelly King, Chairman and Chief Executive Officer]

So, Erika, just one comment. Daryl, can I add? You're right. You can count, I think, in terms of expenses being bifurcated. There are expenses that are independent of kind of the LIFO effect – some of our vendor contracts, some are independent of COVID and we've seen substantial reductions in run rate of vendor contracts already and more to come.

With regard to the teammates, there's a one-time big charge we had with regard to the $1,200 bonus, but the ongoing, from this point forward, teammate charges are not marginally incremental.

And in terms of the impact on the conversion, it really depends. But today, our people are functioning very well, working offsite. And keep in mind, in the technology area, we've already – we've had thousands of people working offsite forever. So, this is not a new idea. It's just more people doing it. And so, as long as they're able to continue to do their scoping and their mapping and their programming remotely, which now we see that they can, it's not self-evident that there will be a dramatic change with regard to our integration and conversion scheduling.

[Daryl Bible, Chief Financial Officer]

Yeah. For the second quarter, Erika, we are paying a premium to our teammates right now that are on the front line. So, you're going to see an elevated charge in personnel with that. Depending on how quickly we basically can adjust from work at home, that will fade away. We also are actively getting more laptops in, so more people on the call centers can do more of their work at home. So, that will subside as we get more of that equipment in as well that we've accelerated from that perspective.

As far as the implementation of third party and facilities, as they execute and play out, that's when you get the savings. So, you may not see as much early on this year, but as it goes out throughout the year, and as we continue to move, it will start to build, such that the fourth quarter will have a higher annualized impact than what you would see at this point from that perspective. So, a lot of good things, although some of the third-party savings is tied to conversions.

Or just to be transparent, there's some big card conversions coming up, some big conversions coming up in the wealth and broker dealer areas. So, like, right now, in Joe's world, he's planning to still stay on track with an earlier conversion in his broker dealer. I think that's going to be in the first part of 2021. If that stays on track, that might miss a little bit at the end of 2020, but he wasn't supposed to be there at the end of 2020. He's scheduled more for early 2021. But if that plays out, then some of those things will come in at that point in time. So…

[Erika Najarian, Bank of America Merrill Lynch]

Thank you.

[Operator]

We will now take our next question from Stephen Scouten of Piper Sandler. Please go ahead. Your line is open.

[Stephen Scouten, Piper Sandler Companies]

Hey. Good morning, guys. Thanks. First, I want to say thank you guys for the way you all are leading in community impact. Being in one of your affected communities, I'd say the leadership is appreciated and important. So, thank you guys for that.

I wanted to ask you, as it pertains to your capital and how you've talked about longer term you need to get back to 10% to regain buybacks. And I know in this environment, it's probably far ways out. But I'm just curious, how are you thinking about that number, the 9.3% CET1 versus kind of the – I think it was 8.7% if you had fully phased in the CECL impact and kind of how that pertains to that 10% target and where you think about buybacks way down the line?

[Kelly King, Chairman and Chief Executive Officer]

So, nobody's thinking about buybacks today. We are in a very strong capital position and are still accreting capital. We still made $1 billion even before adjustments this year – this quarter. So, we will be steadily moving up unless there are dramatic increases in loan losses, which we would not project at this time. Again, if it's a long U, that makes a difference. We all understand that. So, we have said that our intermediate term target was 10%. We've said we did that because of the uncertainties that we knew about with regard to the merger. We said we were doing it because of uncertainties we didn't know about. We didn't know about COVID, of course. But thank goodness, we did prepare for that. And we're in a really good position.

Now, as those uncertainties subside in terms of the merger integration and surely the health crisis will go away and surely the economy will improve, then we have said, and I would reaffirm, we have capital opportunities as we go forward below that 10% level. It will depend on the then existing circumstances, but there are opportunities available for our shareholders.

[Daryl Bible, Chief Financial Officer]

The other minor point is remember that PPP loans that we're putting on the book have a zero percent risk rate. So, we put $10 billion on from the first round. That's not going to cost us any risk weighted capital.

And then, from a leverage number, even though we're going to fund it ourselves, it's not going to really cost us because we're basically just trading out at 10 basis points balance at the Fed to 100 basis points earning asset from PPP. So, from a capital perspective, those should be fine.

[Stephen Scouten, Piper Sandler Companies]

Great. Helpful. And then, one other thing, I'm curious, we've seen some others in the industry kind of tighten underwriting standards around resi mortgage, HELOCs, other categories, have you guys – you've always been fairly conservative on lending. But have you further tightened any of your underwriting standards? And kind of within that, what are you seeing with the forbearance requests in terms of industry concentrations? Thank you, guys.

[Clarke Starnes III, Chief Risk Officer]

This is Clarke. I would say yes to that question. Across all our asset classes, we've done pretty extensive reviews and we have made underwriting and risk acceptance changes as appropriate. You would expect us to do. So, I think we would be more on the conservative end, and they are in place today. We've also worked hard to be very careful about what we call any non-essential lending right now, given the uncertainty.

So, as far as the modification requests, I'd say, from the commercial side, we've had a lot in the stressed industries that we laid out, things like hospitality, et cetera . And then, on the consumer side, it's been predominantly on the mortgage and all those sides right now.

[Kelly King, Chairman and Chief Executive Officer]

And if you recall, we had made some adjustments with regard to our underwriting standards even pre-COVID. So, we were already anticipating a potential slowdown. We had made adjustments already.

[Stephen Scouten, Piper Sandler Companies]

Thank you, guys, very much.

[Operator]

We will take our next question from Christopher Marinac of Janney Montgomery Scott. Please go ahead. Your line is open.

[Christopher Marinac, Janney Montgomery Scott]

Thanks. Good morning. Daryl, is there an average life on the PPP loans that we should expect?

[Daryl Bible, Chief Financial Officer]

Sure. Chris, we don't really have a good estimate on how much forgiveness is going to be out there. If I gave you a number, it would be a pure guess right now. So, I don't really know. Whether it goes out – my guess is, everybody's making the loans now. So, you've got a big tsunami. Remember, the SBA has to process all these forgivenesses in 60 days. It probably is going to take some time to process all that. So, my guess is it might linger on into three, four, five months before all the forgivenesses are happening, and we'll see how quickly they do that. But then, there will be some and portions of some loans that will stay the full two years. We will accrete the earnings and we're booking them at a discount. The last time I looked at our average discount that we'll put on the books, about 2.7% discount, and that will accrete in. And then, when it pays off for forgiveness, we'll take all that in at that point in time. It plays out to two years and you just earn it over that time period.

[Christopher Marinac, Janney Montgomery Scott]

Got it. That makes sense. Thanks very much, guys, for all the information today.

[Operator]

And we will take our final question from John McDonald of Autonomous Research. Please go ahead. Your line is open.

[John McDonald, Autonomous Research]

Hey, guys. Two quick follow-ups. Wondering if you could give any color on how the reserve is allocated between consumer and commercial buckets as of today?

[Daryl Bible, Chief Financial Officer]

John, I would just say – and one noteworthy thing, for the increase for Q1, about 70% of that reserve, that provision increase was related to commercial and about 30% was consumer. I have to look and see on the split between – I guess we can get back to you on that, John. On the split in the actual allowance itself, we can get you that.

[John McDonald, Autonomous Research]

Okay. And then, just kind of wandering – this comes up with questions frequently – is there a dumbed down example you guys could give us of how the marks absorb credit and how that helps? Is it just the idea that, if you have a write-off on a marked loan, you're marking it down from a smaller amount? So, if it was a $100 loan, you're writing it down from $95 as opposed to $100, so it's a smaller charge-off? That's kind of the question. Like, how does that mechanic work of helping absorb losses, the marks?

[Daryl Bible, Chief Financial Officer]

Yeah, that's exactly right. So, basically, your book value is lower. So, you apply your reserve against the lower balance. So, it helps you a little bit. But I think of it as its earnings that are coming in. Those earnings can be used to provide for other provision or could fall to the bottom line from an earnings perspective.

[John McDonald, Autonomous Research]

Meaning the PAA?

[Daryl Bible, Chief Financial Officer]

Yeah, exactly. I think to your first question –

[Unidentified Company Speaker]

I've got it.

[Daryl Bible, Chief Financial Officer]

You've got it? Yeah. John, back to your first question, the wholesale reserves for Q1 are about $2.270 billion and the consumer is $2.941 billion.

[John McDonald, Autonomous Research]

Okay. Daryl, when you think about the loss absorbency, it comes in the form of PAA. So, you've got an extra cushion. That's how you kind of think of it absorbing losses, you have more cushion on the PAA side?

[Daryl Bible, Chief Financial Officer]

Yeah. We definitely have more absorption, more cushion from that perspective. But also, I think when you just cut – the bank coming together and the diversification of how we came together, we really don't have any really significant exposures in any of our portfolios because, as we came together, we were much more diversified. And that should play out when the new stress test come out from the Fed later this quarter. Our hope is that we're going to have a really strong PPNR, a really strong loss number and very resilient capital ratio. We should, hopefully, be well under the 250 basis points stress capital buffer.

[Kelly King, Chairman and Chief Executive Officer]

And remember that, in all of our portfolios, essentially, the exposure was reduced in half because of the doubling of the denominator. So, it was an automatic diversification that's material in this kind of environment.

[John McDonald, Autonomous Research]

Okay. Thanks, guys.

[Operator]

We have no further [Technical Difficulty].

[Ryan Richards, Director of Investor Relations]

Okay. Thanks very much. And thank everyone for joining us today. Hope everybody has a good day, and please stay well.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.