Contractual Obligations, Commitments, Contingent Liabilities and Off-Balance Sheet Arrangements

(1)Amounts include imputed interest of $5 million related to finance leases.(2)Based on estimated payment dates.(3)Includes accrued interest and future contractual interest obligations. Variable rate payments are based upon the rate in effect at December 31, 2020.(4)Represents obligations to purchase goods or services that are enforceable and legally binding. Many of the purchase obligations have terms that are not fixed and determinable and are included in the table above based upon the estimated timing and amount of payment. In addition, certain of the purchase agreements contain clauses that would allow Truist to cancel the agreement with specified notice; however, that impact is not included in the table above.(5)Although technically unfunded plans, rabbi trusts and insurance policies on the lives of certain of the covered employees are available to finance future benefit plan payments.Truist's commitments include investments in affordable housing projects throughout its market area, renewable energy credits, and private equity funds. Refer to "Note 1. Basis of Presentation" and "Note 16. Commitments and Contingencies" for further discussion of these commitments. In addition, Truist enters into derivative contracts to manage various financial risks. Further discussion of derivative instruments is included in "Note 1. Basis of Presentation" and "Note 19. Derivative Financial Instruments." Further discussion related to the nature of Truist's obligations is included in "Note 16. Commitments and Contingencies." Further discussion of Truist's commitments is included in "Note 16. Commitments and Contingencies" and "Note 18. Fair Value Disclosures." 76   Truist Financial Corporation


Capital

(1)The Truist targets are subject to revision based on finalization of pending regulatory guidance and other strategic factors.(2)Truist's goal is to maintain capital levels above all regulatory minimums.(3)Reflects a SCB of 270 basis points for Truist.During the first quarter of 2020, as market conditions evolved, Truist received Board approval to establish new interim operating targets that provide for sufficient capital levels while allowing the company to support clients through the economic downturn. These interim operating targets will be evaluated as economic conditions evolve.While nonrecurring events or management decisions may result in the Company temporarily falling below its operating targets for one or more of these ratios, it is management's intent to return to these operating targets within a reasonable period of time through capital planning. Such temporary decreases below the operating minimums shown above are not considered an infringement of Truist's overall capital policy, provided a return above the minimums is forecasted to occur within a reasonable time period.In August 2020, the Federal Reserve informed Truist of its SCB of 270 basis points for risk-based capital ratios. This buffer was determined based on stress testing results developed by the Federal Reserve and is effective from October 1, 2020 through September 30, 2021, at which point a revised SCB will be calculated and provided to Truist. Consistent with the Federal Reserve’s mandate across the industry, Truist resubmitted its capital plan in November 2020 to reflect changes in financial markets and the macroeconomic outlook. Truist’s review of the results of the 2020 CCAR supervisory stress test notes that the modeled outcomes shown by the FRB differ from those calculated by the Company. Truist believes those differences are attributable in part to the application of purchase accounting associated with the Merger. Purchase accounting adjustments could result in a reduction in provision expense and an increase in pre-provision net revenue. These differences could result in higher capital ratios than were reflected in the CCAR results.In December 2020, the Board of Directors authorized the repurchase of up to $2.0 billion of the Company’s common stock beginning in the first quarter of 2021, as well as certain other actions to optimize Truist’s capital position. Management’s intention is to maintain an approximate 10% Common Equity Tier 1 ratio after considering strategic actions such as non-bank acquisitions or stock repurchases, as well as changes in risk-weighted assets. Any stock repurchase activity will be informed by economic and regulatory considerations as well as Truist’s capital position, earnings outlook, and capital deployment priorities.Payments of cash dividends and repurchases of common shares are the methods used to manage any excess capital generated. In addition, management closely monitors the Parent Company's double leverage ratio (investments in subsidiaries as a percentage of shareholders' equity). The active management of the subsidiaries' equity capital, as described above, is the process used to manage this important driver of Parent Company liquidity and is a key element in the management of Truist's capital position.Management intends to maintain capital at Truist Bank at levels that will result in classification as "well-capitalized" for regulatory purposes. Secondarily, it is management's intent to maintain Truist Bank's capital at levels that result in regulatory risk-based capital ratios that are generally comparable with peers of similar size, complexity and risk profile. If the capital levels of Truist Bank increase above these guidelines, excess capital may be transferred to the Parent Company in the form of special dividend payments, subject to regulatory and other operating considerations.Management's capital deployment plan in order of preference is to focus on (i) organic growth, (ii) dividends, and (iii) strategic opportunities and/or share repurchases depending on opportunities in the marketplace and Truist's interest and ability to proceed with acquisitions.Truist Bank's capital ratios are presented in the following table:


Capital

(1)The leverage ratio is calculated using end of period Tier 1 capital and quarterly average tangible assets. The timing of the Merger impacted the 4Q19 result.(2)Truist Bank became subject to the supplementary leverage ratio as of January 1, 2020. Truist's capital ratios are presented in the following table:


Capital

(1)The leverage ratio is calculated using end of period Tier 1 capital and quarterly average tangible assets. The timing of the Merger impacted the 4Q19 result.(2)Truist became subject to the supplementary leverage ratio as of January 1, 2020. (3)Tangible common equity and related measures are non-GAAP measures that exclude the impact of intangible assets, net of deferred taxes, and their related amortization. These measures are useful for evaluating the performance of a business consistently, whether acquired or developed internally. Truist's management uses these measures to assess the quality of capital and returns relative to balance sheet risk. These capital measures are not necessarily comparable to similar capital measures that may be presented by other companies.Capital ratios improved compared to year-end 2020, due to growth in CET1 capital, partially offset by higher risk-weighted assets. Truist's capital levels remain strong compared to the regulatory levels for well capitalized banks at December 31, 2020. Truist’s other capital measures also improved as Truist issued various capital instruments to strengthen its capital position. Truist issued $3.5 billion of preferred stock and redeemed $500 million of Series K preferred stock during 2020. In addition, Truist issued $1.3 billion of subordinated debt. During 2020,Truist paid $2.4 billion in common stock dividends or $1.80 per share, which resulted in a total payout ratio of 58.0% for the year.78   Truist Financial Corporation


Capital

(1)Loans and leases are net of unearned income and include LHFS.


NPAs

(1)Loans may be returned to performing status when (i) the borrower has resumed paying the full amount of the scheduled contractual interest and principal payments, (ii) management concludes that all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment, and (iii) there is a sustained period of repayment performance, generally a minimum of six months.(2)Or when it is probable that principal or interest is not fully collectible, whichever occurs first.(3)Depends on product type, loss mitigation status, status of the government guaranty, if applicable, and certain other product-specific factors.(4)Student loans are not placed in nonperforming status, which reflects consideration of governmental guarantees or accelerated charge-off policies related to certain non-guaranteed portfolios.(5)Claims related to government guaranteed loans may be filed once the loans reach 270 days past due. The non-guaranteed balance, which ranges from 2-3%, is charged off once the claim proceeds related to the guaranteed portion have been received.(6)Credit cards are generally not placed on nonperforming status, but are fully charged off at specified delinquency dates consistent with regulatory guidelines.


Commercial

Loans are generally pooled one level below the portfolio segment for the collectively calculated ALLL based on factors such as business sector, project and property type, line of business, collateral, loan type, obligor exposure, and risk grade or score. Commercial loss forecasting models are expected loss frameworks that use macroeconomic forecast data across scenarios and current portfolio attributes as inputs. The models forecast probability of default, exposure at default and loss given default by correlating certain macroeconomic forecast data to historical experience. The primary macroeconomic drivers for the commercial portfolios include unemployment trends, U.S. real GDP, corporate credit spreads, rental rates and property values.Truist's policy is to review and individually evaluate the reserve for all nonperforming lending relationships and TDRs with an outstanding balance of $5 million or more, as such lending relationships do not typically share similar risk characteristics with others. Individually evaluated reserves are based on current forecasts, the present value of expected cash flows discounted at the loan's effective interest rate or the value of collateral, which is generally based on appraisals, recent sales of foreclosed properties and/or relevant property-specific market information. Truist has elected to measure expected credit losses on collateral-dependent loans based on the fair value of the collateral. Loans are considered collateral dependent when it is probable that Truist will be unable to collect principal and interest according to the contractual terms of the agreement and repayment is expected to be provided substantially by the sale or continued operation of the underlying collateral. Commercial loans are typically secured by real estate, business equipment, inventories and other types of collateral.

|  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
| Risk Rating | | | Description | | |
| Pass | | | Loans not considered to be problem credits | | |
| Special Mention | | | Loans that have a potential weakness deserving management's close attention | | |
| Substandard | | | Loans for which a well-defined weakness has been identified that may put full collection of contractual cash flows at risk | | |
| Nonperforming | | | Loans for which full collection of principal and interest is not considered probable | | |


Derivative Financial Instruments

102   Truist Financial Corporation

|  |  |  |  |  |  |  |  |  |  | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | | | Cash Flow Hedges | | | Fair Value Hedges | | |  | | |
| Risk exposure | | | Variability in cash flows of interest payments on floating rate loans, overnight funding and various LIBOR and successor rate funding instruments. | | | Changes in value on fixed rate long-term debt, FHLB advances, loans and AFS securities due to changes in interest rates. | | |  | | |
| Risk management objective | | | Hedge the variability in the interest payments and receipts on future cash flows for forecasted transactions related to the first unhedged payments and receipts of variable interest due to changes in the contractually specified interest rate. | | | Convert the fixed rate paid or received to a floating rate, primarily through the use of swaps. | | |  | | |
| Treatment during the hedge period | | | Changes in value of the hedging instruments are recognized in AOCI until the related cash flows from the hedged item are recognized in earnings. The amount reclassified to earnings is recorded in the same line item as the earnings effect of the hedged item. | | | Changes in value of both the hedging instruments and the assets or liabilities being hedged are recognized in the income statement line item associated with the asset or liability being hedged. | | |  | | |
| Treatment if hedge ceases to be highly effective or is terminated | | | Hedge is dedesignated. Changes in value recorded in AOCI before dedesignation are amortized to yield over the period the forecasted hedged transactions impact earnings. | | | If hedged item remains outstanding, the basis adjustment that resulted from hedging is amortized into earnings over the designated hedged period or the maturity date of the instrument, and cash flows from terminated hedges are reported in the same category as the cash flows from the hedged item. | | |  | | |
| Treatment if transaction is no longer probable of occurring during forecast period or within a short period thereafter | | | Hedge accounting ceases and any gain or loss in AOCI is recognized in earnings immediately. | | | Not applicable | | |  | | |


NOTE 2. Business Combinations

The following is a description of the methods used to determine the fair values of significant assets and liabilities.Cash and cash equivalents; Interest-bearing deposits with banks, and Federal Funds sold and securities purchased under resale agreements: The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets.


NOTE 3. Securities Financing Activities

For securities sold under agreements to repurchase, the Company would be obligated to provide additional collateral in the event of a significant decline in fair value of the collateral pledged. This risk is managed by monitoring the liquidity and credit quality of the collateral, as well as the maturity profile of the transactions. Refer to "Note 16. Commitments and Contingencies" for additional information related to pledged securities. Securities sold under agreements to repurchase are accounted for as secured borrowings. The following table presents the Company’s related activity, by collateral type and remaining contractual maturity:


NOTE 3. Securities Financing Activities

There were no securities financing transactions subject to legally enforceable master netting arrangements that were eligible for balance sheet netting for the periods presented.


NOTE 4. Investment Securities

Certain securities issued by FNMA and FHLMC exceeded 10% of shareholders' equity at December 31, 2020. The FNMA investments had total amortized cost and fair value of $28.5 billion and $29.0 billion, respectively. The FHLMC investments had total amortized cost and fair value of $29.0 billion and $29.4 billion, respectively.


NOTE 4. Investment Securities

The following tables present the fair values and gross unrealized losses of investments based on the length of time that individual securities have been in a continuous unrealized loss position:


NOTE 4. Investment Securities

At December 31, 2020, no ACL was established for AFS securities. Substantially all of the unrealized losses on the securities portfolio were the result of changes in market interest rates compared to the date the securities were acquired rather than the credit quality of the issuers or underlying loans. The majority of the unrealized loss on states and political subdivisions securities was the result of fair value hedge basis adjustments that are a component of amortized cost.


NOTE 4. Investment Securities

For 2020, the realized gains primarily relate to the sales of non-agency and agency MBS in the second and third quarter, respectively.


NOTE 5. Loans and ACL

The following table presents the amortized cost basis of loans by origination year and credit quality indicator:


NOTE 5. Loans and ACL

(1)Includes certain deferred fees and costs, unapplied payments and other adjustments.


ACL

(1)Includes amounts assumed in the Merger.(2)Balance is prior to the adoption of CECL.(3)Includes the adoption of CECL, the ALLL for PCD acquisitions and other activity.


Nonperforming and Impaired Loans

The following table includes certain information regarding impaired loans, excluding PCI and LHFS, that were individually evaluated for impairment. This table excludes guaranteed student loans and guaranteed residential mortgages for which there was nominal risk of principal loss due to the government guarantee or other credit enhancements.


TDRs

The primary reason loan modifications were classified as TDRs is summarized in the tables below. New TDR balances represent the recorded investment at the end of the quarter in which the modification was made. The prior quarter balance represents recorded investment at the beginning of the quarter in which the modification was made. Rate modifications consist of TDRs made with below market interest rates, including those that also have modifications of loan structures.


TDRs

118   Truist Financial Corporation


TDRs

Charge-offs and forgiveness of principal and interest for TDRs were immaterial for all periods presented.The re-default balance for modifications that had been classified as TDRs during the previous 12 months that experienced a payment default was $93 million, $78 million and $76 million for the years ended December 31, 2020, 2019 and 2018, respectively. Payment default is defined as movement of the TDR to nonperforming status, foreclosure or charge-off, whichever occurs first.


NPAs

(1) Beginning January 1, 2020, nonperforming loans and leases include certain assets previously classified as PCI.


NOTE 7. Goodwill and Other Intangible Assets

The following table, which excludes fully amortized intangibles, presents information for identifiable intangible assets:


The estimated amortization expense of identifiable intangibles for the next five years and thereafter is presented as follows:


120   Truist Financial Corporation


Residential Mortgage Activities

The following table presents a roll forward of the carrying value of residential MSRs recorded at fair value:


Residential Mortgage Activities

The sensitivity of the fair value of the Company's residential MSRs to changes in key assumptions is presented in the following table:


Residential Mortgage Activities

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in the above table, the effect of an adverse variation in one assumption on the fair value of the MSRs is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another, which may magnify or counteract the effect of the change. See "Note 18. Fair Value Disclosures" for additional information on the valuation techniques used.


Commercial Mortgage Activities

In the third quarter of 2020, the Company transferred certain servicing activities involving cancellable servicing rights to third parties, resulting in a decrease in the UPB of CRE mortgages serviced for others. This transfer did not materially impact commercial MSRs.

|  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | | |  | | |
|  | | |  | | |  | | |  | | |
| December 31,(Dollars in millions) | | | 2020 | | |  | | | 2019 | | |
| UPB of CRE mortgages serviced for others | | | $ | 36,670 |  |  | | | $ | 70,404 |  |
| CRE mortgages serviced for others covered by recourse provisions | | | 9,019 | |  |  | | | 8,676 | |  |
| Maximum recourse exposure from CRE mortgages sold with recourse liability | | | 2,624 | |  |  | | | 2,479 | |  |
| Recorded reserves related to recourse exposure | | | 18 | |  |  | | | 13 | |  |
| CRE mortgages originated during the year-to-date period | | | 6,739 | |  |  | | | 8,062 | |  |
| Commercial MSRs at fair value | | | 245 | |  |  | | | 247 | |  |
|  | | |  | | |  | | |  | | |


Lessor Operating Leases

(1) Includes certain land parcels subject to operating leases that have indefinite lives.


NOTE 10. Deposits

The following table presents time deposits maturities:


NOTE 11. Borrowings

The following table presents a summary of long-term debt:


NOTE 11. Borrowings

(1)Includes the impact of debt issuance costs and purchase accounting, and excludes hedge accounting impacts.(2)Subordinated notes with a remaining maturity of one year or greater qualify under the risk-based capital guidelines as Tier 2 supplementary capital, subject to certain limitations.(3)Consist of notes with various terms that include fixed or floating rate interest, or returns that are linked to an equity index.(4)Includes finance leases, tax credit investments, and other.(5)Includes debt associated with structured real estate leases.


NOTE 11. Borrowings

(1)Amounts include imputed interest of $5 million related to finance leases.


Preferred Stock

(1)Converted security from previously issued SunTrust preferred stock.(2)Dividend rate is the greater of 4.00% or 3-month LIBOR plus 0.530%.(3)Dividend rate is the greater of 4.00% or 3-month LIBOR plus 0.645%.(4)Fixed dividend rate will reset on June 15, 2022, then dividend rate will be 3-month LIBOR plus 3.102%.(5)Fixed dividend rate will reset on December 15, 2027, then dividend rate will be 3-month LIBOR plus 2.786%.(6)Fixed dividend rate will reset on September 1, 2024, and on each following fifth anniversary of the reset date to the five-year U.S. Treasury rate plus 3.003%.(7)Fixed dividend rate will reset on December 1, 2025, and on each following fifth anniversary of the reset date to the five-year U.S. Treasury rate plus 4.605%.(8)Fixed dividend rate will reset on September 1, 2030, and on each following tenth anniversary of the reset date to the ten-year U.S. Treasury rate plus 4.349%.(9)Dividend payments become quarterly beginning on September 15, 2022.(10)Dividend payments become quarterly after dividend rate reset.


NOTE 14. Income Taxes

A reconciliation of the provision for income taxes at the statutory federal income tax rate to the Company’s actual provision for income taxes and actual effective tax rate is presented in the following table:


NOTE 14. Income Taxes

128   Truist Financial Corporation


NOTE 14. Income Taxes

The DTAs include Federal and state NOLs and other state carryforwards that will expire, if not utilized, in varying amounts from 2021 to 2040. The Company had a valuation allowance recorded against its state carryforwards and certain state DTAs of $123 million and $130 million at December 31, 2020 and 2019, respectively.


NOTE 14. Income Taxes

The amount of UTBs that would favorably affect the Company's effective tax rate, if recognized, was $100 million and $99 million at December 31, 2020 and 2019, respectively. Interest and penalties related to UTBs are recorded in the Provision for income taxes in the Consolidated Statement of Income. The Company had a gross liability of $12 million and $11 million for interest and penalties related to its UTBs at December 31, 2020 and 2019, respectively. The amount of gross expense related interest and penalties on UTBs was immaterial.The Company files U.S. federal, state and local income tax returns. The Company's federal income tax returns are no longer subject to examination by the IRS for taxable years prior to 2017. With limited exceptions, the Company is no longer subject to examination by state and local taxing authorities for taxable years prior to 2013. It is reasonably possible that the liability for unrecognized tax benefits could decrease by as much as $15 million during the next 12 months due to completion of tax authority examinations and the expiration of statutes of limitations. It is uncertain how much, if any, of this potential decrease will impact the Company’s effective tax rate.

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| December 31,(Dollars in millions) | | |  | | | 2020 | | |  | | | 2019 | | |
| Balance, January 1 | | |  | | | $ | 127 |  |  | | | $ | 2 |  |
| Increases in UTBs related to prior years | | |  | | | 4 | |  |  | | | 120 | |  |
| Decreases in UTBs related to prior years | | |  | | | (1) | |  |  | | | — | |  |
| Increases in UTBs related to the current year | | |  | | | 18 | |  |  | | | 6 | |  |
| Decreases in UTBs related to settlements | | |  | | | (13) | |  |  | | | (1) | |  |
| Decreases in UTBs related to lapse of the applicable statues of limitations | | |  | | | (2) | |  |  | | | — | |  |
| Balance, December 31 | | |  | | | $ | 133 |  |  | | | $ | 127 |  |


Defined Benefit Retirement Plans

The weighted average expected long-term rate of return on plan assets represents the average rate of return expected to be earned on plan assets over the period the benefits included in the benefit obligation are to be paid. In developing the expected rate of return, Truist considers long-term compound annualized returns of historical market data for each asset category, as well as historical actual returns on the plan assets. Using this reference information, the Company develops forward-looking return expectations for each asset category and a weighted average expected long-term rate of return for the plan based on target asset allocations contained in the Company's Investment Policy Statement. For 2021, the expected rate of return on plan assets is 6.7%.


Defined Benefit Retirement Plans

(1)The assumed rate for qualified and nonqualified plans is 3.50% in 2021 and increases to 4.50% thereafter.


Defined Benefit Retirement Plans

The following are the pre-tax amounts recognized in AOCI:


Defined Benefit Retirement Plans

The following table presents the amount expected to be amortized from AOCI into net periodic pension cost during 2021:


Defined Benefit Retirement Plans

Truist makes contributions to the qualified pension plan in amounts between the minimum required for funding and the maximum amount deductible for federal income tax purposes. Truist made discretionary contributions of $387 million during the first quarter of 2021. Management may make additional contributions in 2021. For the nonqualified plans, the employer contributions are based on benefit payments.


Defined Benefit Retirement Plans

The Company's primary total return objective is to achieve returns that, over the long term, will fund retirement liabilities and provide for the desired plan benefits in a manner that satisfies the fiduciary requirements of the ERISA. The plan assets have a long-term time horizon that runs concurrent with the average life expectancy of the participants. As such, the Plan can assume a time horizon that extends well beyond a full market cycle, and can assume an above-average level of risk, as measured by the standard deviation of annual return. The investments are broadly diversified among economic sector, industry, quality and size in order to reduce risk and to produce incremental return. Within approved guidelines and restrictions, investment managers have wide discretion over the timing and selection of individual investments.Truist periodically reviews its asset allocation and investment policy and makes changes to its target asset allocation. Truist has established guidelines within each asset category to ensure the appropriate balance of risk and reward. The following table presents the fair values of the qualified pension plan assets by asset category:


Defined Benefit Retirement Plans

(1)The plan may hold up to 10% of its assets in Truist common stock.


Equity-Based Compensation Plans

The following table presents a summary of selected data related to equity-based compensation costs:


Equity-Based Compensation Plans

The following table presents the activity related to awards of RSUs, PSUs and restricted shares:

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| As of / For the Year Ended December 31,(Dollars in millions) | | | 2020 | | |  | | | 2019 | | |  | | | 2018 | | |
| Equity-based compensation expense | | | $ | 353 |  |  | | | $ | 165 |  |  | | | $ | 141 |  |
| Income tax benefit from equity-based compensation expense | | | 84 | |  |  | | | 38 | |  |  | | | 34 | |  |
| Intrinsic value of options exercised, and RSUs and PSUs that vested during the year | | | 412 | |  |  | | | 216 | |  |  | | | 260 | |  |
| Grant date fair value of equity-based awards that vested during the year | | | 420 | |  |  | | | 134 | |  |  | | | 139 | |  |
| Unrecognized compensation cost related to equity-based awards | | | 234 | |  |  | | | 274 | |  |  | | | 135 | |  |
| Weighted-average life over which compensation cost is expected to be recognized | | | 2.3 years | | |  | | | 2.3 years | | |  | | | 2.4 years | | |


Tax Credit and Certain Equity Investments

The following table presents a summary of tax credits and amortization associated with the Company's tax credit investment activity:

|  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | | |  | | |  | | |  | | |  | | |
| December 31,(Dollars in millions) | | | Balance Sheet Location | | | 2020 | | |  | | | 2019 | | |
| Investments in affordable housing projects: | | |  | | |  | | |  | | |  | | |
| Carrying amount | | | Other assets | | | $ | 3,823 |  |  | | | $ | 3,684 |  |
| Amount of future funding commitments included in carrying amount | | | Other liabilities | | | 1,057 | |  |  | | | 1,271 | |  |
| Lending exposure | | | NA | | | 546 | |  |  | | | 647 | |  |
|  | | |  | | |  | | |  | | |  | | |
| Renewable energy investments: | | |  | | |  | | |  | | |  | | |
| Carrying amount | | | Other assets | | | 167 | |  |  | | | 81 | |  |
| Amount of future funding commitments not included in carrying amount | | | NA | | | 76 | |  |  | | | 246 | |  |
| Private equity and certain other equity method investments: | | |  | | |  | | |  | | |  | | |
| Carrying amount | | | Other assets | | | 1,574 | |  |  | | | 1,556 | |  |
| Amount of future funding commitments not included in carrying amount | | | NA | | | 471 | |  |  | | | 331 | |  |


Letters of Credit and Financial Guarantees

134   Truist Financial Corporation


NOTE 17. Regulatory Requirements and Other Restrictions

(1)The leverage ratio is calculated using end of period Tier 1 capital and quarterly average tangible assets. The timing of the Merger impacted the 4Q19 result.(2)Truist became subject to the supplementary leverage ratio as of January 1, 2020.


Recurring Fair Value Measurements

138   Truist Financial Corporation


Recurring Fair Value Measurements

(1)Refer to "Note 19. Derivative Financial Instruments" for additional discussion on netting adjustments.


Recurring Fair Value Measurements

During 2020, Truist sold non-agency MBS previously categorized as Level 3 that represented ownership interests in various tranches of Re-REMIC trusts. The Re-REMIC tranches did not have an active market and therefore were categorized as Level 3.During 2020, as a result of a change in control of the funds’ manager, the Company deconsolidated certain SBIC funds for which it had previously concluded that it was the primary beneficiary. Following the deconsolidation, the investments in SBIC funds are valued based on net asset value per unit, as provided by the fund manager as a practical expedient, which approximates the fair value, and have not been classified in the fair value hierarchy. The SBIC funds in which the Company invests primarily focus on equity and subordinated debt investments in privately-held middle market companies. The majority of these VIE investments are not redeemable and distributions are received as the underlying assets of the funds liquidate. The timing of distributions, which are expected to occur on various dates over the next 10 years, is uncertain and dependent on various events such as recapitalizations, refinance transactions and ownership changes among others. As of December 31, 2020, restrictions on the ability to sell the investments include, but are not limited to, consent of a majority of members or general partner approval for transfer of ownership. These investments are spread over numerous privately-held middle market companies, and thus the sensitivity to a change in fair value for any single investment is limited. Refer to "Note 8. Loan Servicing" for additional information on valuation techniques and inputs for MSRs.


Nonrecurring Fair Value Measurements

LHFS with valuation adjustments in the table above consisted primarily of residential mortgages and commercial loans that were valued using market prices and measured at the lower of cost or market. LHFS as of December 31, 2020 includes the small ticket loan and lease portfolio. The table above excludes $125 million of LHFS carried at cost at December 31, 2020 that did not require a valuation adjustment during the period. The remainder of LHFS is carried at fair value. Excluding government guaranteed loans, the Company held $5 million in nonperforming LHFS at December 31, 2020 and $107 million of nonperforming LHFS at December 31, 2019. LHFS that were 90 days or more past due and still accruing interest were not material at December 31, 2020. Loans and leases are primarily collateral dependent and may be subject to liquidity adjustments. Refer to "Note 1. Basis of Presentation" for additional discussion of individually evaluated loans and leases. Other includes foreclosed real estate, other foreclosed property, ROU assets, premises and equipment and OREO, and consists primarily of residential homes, commercial properties, vacant lots and automobiles. ROU assets are measured based on the fair value of the assets, which considers the potential for future sublease income. The remaining assets are measured at the lower of cost or fair value less costs to sell.


Financial Instruments Not Recorded at Fair Value

The carrying value of the RUFC, which approximates the fair value of unfunded commitments, was $364 million and $373 million at December 31, 2020 and December 31, 2019, respectively. Prior to the adoption of CECL, the carrying value includes deferred fees.


Impact of Derivatives on the Consolidated Balance Sheets

144   Truist Financial Corporation


The following table presents the carrying value of hedged items in fair value hedging relationships:


Derivatives Designated as Hedging Instruments under GAAP

The following table summarizes the impact on net interest income related to fair value hedges:


The following table presents information about the Company's cash flow and fair value hedges:


Credit Derivative Instruments

The following table summarizes collateral positions with counterparties:


Other, Treasury & Corporate

(1)Includes financial data from business units below the quantitative and qualitative thresholds requiring disclosure.


NOTE 22. Parent Company Financial Information

152   Truist Financial Corporation


The transfer of funds in the form of dividends, loans or advances from bank subsidiaries to the Parent Company is restricted. Federal law requires loans to the Parent Company or its affiliates to be secured and at market terms and generally limits loans to the Parent Company or an individual affiliate to 10% of Truist Bank's unimpaired capital and surplus. In the aggregate, loans to the Parent Company and all affiliates cannot exceed 20% of the bank's unimpaired capital and surplus.Dividend payments to the Parent Company by Truist Bank are subject to regulatory review and statutory limitations and, in some instances, regulatory approval. In general, dividends from Truist Bank to the Parent Company are limited by rules which compare dividends to net income for regulatory-defined periods. Furthermore, dividends are restricted by regulatory minimum capital constraints.


SIGNATURES

160   Truist Financial Corporation


Submitted Applications

2018 compared to 2017—Medicare submitted applications grew 39% for the year ended December 31, 2018 compared to the year ended December 31, 2017. The increase was primarily due to direct-to consumer marketing initiatives, our flexible call center capabilities, an improved online experience and our acquisition of GoMedigap. Individual and family plan submitted applications declined 56% for the year ended December 31, 2018 compared to the year ended December 31, 2017, due to the continuing turmoil in the individual and family plan market as a result of the Affordable Care Act and our continued focus on the Medicare market in 2018. 16% of all Medicare Advantage and Medicare Supplement applications were submitted online for the year ended December 31, 2018, compared to 10% for the year ended December 31, 2017.The decline in individual and family plan submitted applications has also limited our ability to cross-sell ancillary plans, resulting in a decline of 6% in submitted applications for all ancillary products combined for the year ended December 31, 2018 compared to the year ended December 31, 2017. Small business submitted applications grew 35% for the year ended December 31, 2018 compared to the year ended December 31, 2017, due to progress in implementing a focused marketing strategy for this market, technology enhancements and an increased conversion rate. 2017 compared to 2016—Medicare submitted applications grew 10% for the year ended December 31, 2017 compared to the year ended December 31, 2016. a deceleration from prior years’ growth, driven primarily by the change in our marketing strategy as we de-emphasized less profitable customer acquisition channels and worked on building out the more efficient direct and strategic partner channels. As a result of this strategy, we experienced an improvement in conversion of leads to applications and lower cost of acquisition in the second half of 2017 compared to the first half of 2017 and the same period a year ago, and anticipate that we will see higher growth in Medicare submitted applications in 2018.  Individual and family plan submitted applications declined 51% for the year ended December 31, 2017 compared to the year ended December 31, 2016, due to a continuing challenging environment in this market, as well as our reduction in marketing spend. The decline in individual and family plan submitted applications has also limited our ability to cross-sell ancillary plans, resulting in a decline of 16% in submitted applications for all ancillary products combined for the year ended December 31, 2017 compared to the year ended December 31, 2016. Small business submitted applications grew 9% for the year ended December 31, 2017 compared to the year ended December 31, 2016, due to progress in implementing a focused marketing strategy for this market, technology enhancements and an increased conversion rate.

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| (1) | Medicare-related health insurance applications submitted on our website or through our customer care center during the period, including Medicare Advantage, Medicare Part D prescription drug and Medicare Supplement plans. |
| (2) | Major medical Individual and Family plan ("IFP") health insurance applications submitted on our website during the period. An applicant may submit more than one application. We define our IFP offerings as major medical individual and family health insurance plans, which does not include Medicare-related, small business or ancillary plans. |
| (3) | Ancillary Plans consists primarily of short-term, dental and vision insurance plans submitted on our website during the period. |
| (4) | Applications for small business health insurance applications are counted as submitted when the applicant completes the application, the employees complete their applications, the applicant submits the application to us and we submit the application to the carrier. |


Approved Members

2018 compared to 2017—Medicare approved members grew 36% for the year ended December 31, 2018 compared to the year ended December 31, 2017. The increase was primarily due to 39% growth in Medicare submitted applications mainly driven by our investment in Medicare-related marketing initiatives, call center capabilities and an improved online experience and our acquisition of GoMedigap. Individual and Family Plan approved members declined 46% for the year ended December 31, 2018 compared to the year ended December 31, 2017, due to the state of the individual and family health insurance plan market. Approved members for all ancillary products combined for the year ended December 31, 2018 increased 1% compared to the year ended December 31, 2017, despite a decrease in submitted applications of 6%, due to improved conversion rates year-over-year. Small business approved members grew 28% for the year ended December 31, 2018 compared to the year ended December 31, 2017, due to improved focus on key partnerships, technology enhancements and increased conversion rates.2017 compared to 2016—Medicare approved members grew 8% for the year ended December 31, 2017 compared to the year ended December 31, 2016. The increase was primarily due to 10% growth in Medicare submitted applications mainly driven by our investment in Medicare platforms and call center capabilities. Individual and Family Plan approved members declined 55% for the year ended December 31, 2017 compared to the year ended December 31, 2016, due to the state of the individual and family health insurance plan market. The decline in Individual and Family Plan approved members has also limited our ability to cross-sell ancillary plans, resulting in a decline of 16% in approved members for all ancillary products combined for the year ended December 31, 2017 compared to the year ended December 31, 2016. Small business approved members grew 75% for the year ended December 31, 2017 compared to the year ended December 31, 2016, due to improved focus on key partnerships, technology enhancements and an increased conversion rate.


Constrained Lifetime Value of Commissions Per Approved Member

2018 compared to 2017—The constrained lifetime value of commissions per approved member improved 7% and 8% for Medicare Advantage and Medicare Supplement, respectively, for the year ended December 31, 2018 compared to the year ended December 31, 2017. The improvement in constrained lifetime value per approved member for Medicare Advantage was driven by higher commission rates and customer retention, and the improvement in constrained lifetime value for Medicare Supplement was driven by an improvement in commission rates and our acquisition of GoMedigap in January 2018. The constrained lifetime value of commissions per approved member for Non-Qualified Health Plans and Qualified Health Plans increased 11% and 8%, respectively, mostly driven by improved churn, for the year ended December 31, 2018 compared to the year ended December 31, 2017, while the constrained lifetime value of commissions per approved member for Medicare Part D, Short Term and Small Business plans decreased 9%, 14% and 1%, respectively, for the year ended December 31, 2018 compared to the year ended December 31, 2017. The decrease in Medicare Part D was due to higher churn year-over-year. The decrease in Short Term constrained lifetime value was mainly driven by a regulatory change issued in April 2017 that reduced the maximum length of a short-term policy from one year to 90 days. The change year-over-year in Small Business was not material.2017 compared to 2016—The constrained lifetime value of commissions per approved member improved 9% and 3% for Medicare Advantage and Medicare Supplement, respectively, for the year ended December 31, 2017 compared to the year ended December 31, 2016. The improvement in constrained lifetime value per approved member for Medicare Advantage was driven by higher commission rates and customer retention, and the improvement in constrained lifetime value for Medicare Supplement was driven by an improvement in commission rates. The constrained lifetime value of commissions per approved member for Medicare Part D, Non-Qualified and Qualified Health Plans, Dental and Vision remained relatively unchanged for the year ended December 31, 2017 compared to the year ended December 31, 2016.  The constrained lifetime value of commissions per approved member decreased 11% for Short-term for the year ended December 31, 2017 compared to the year ended December 31, 2016, mainly driven by a regulatory change that reduced the maximum length of a short-term policy from one year to 90 days. The constrained lifetime value of commissions per approved member improved 6% for Small Business for the year ended December 31, 2017 compared to the year ended December 31, 2016 due to improved customer retention and higher commission rates.

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| (1) | Constrained lifetime value of commissions per approved member represents commissions estimated to be collected over the estimated life of an approved member’s policy after applying constraints in accordance with our revenue recognition policy. The estimate is driven by multiple factors, including but not limited to, contracted commission rates, carrier mix, expected policy churn and applied constraints. These factors may result in varying values from period to period. For additional information on constraints see Note 1 - Summary of Business and Significant Accounting Policies in the Notes to Consolidated Financial Statements. |
| (2) | For small business the amount represents the estimated commissions we expect to collect from the plan over the following 12-months. The estimate is driven by multiple factors, including but not limited to, contracted commission rates, carrier mix, expected policy churn and applied constraints. These factors may result in varying values from period to period. |


Estimated Membership

Health insurance carriers bill and collect insurance premiums paid by our members. The carriers do not report to us the number of members that we have as of a given date. The majority of our members who terminate their policies do so by discontinuing their premium payments to the carrier and do not inform us of the cancellation. Also, some of our members pay their premiums less frequently than monthly. Given the number of months required to observe non-payment of commissions in order to confirm cancellations, we estimate the number of members who are active on insurance policies as of a specified date.After we have estimated membership for a period, we may receive information from health insurance carriers that would have impacted the estimate if we had received the information prior to the date of estimation. We may receive commission payments or other information that indicates that a member who was not included in our estimates for a prior period was in fact an active member at that time, or that a member who was included in our estimates was in fact not an active member of ours. For instance, we reconcile information carriers provide to us and may determine that we were not historically paid commissions owed to us, which would cause us to have underestimated membership. Conversely, carriers may require us to return commission payments paid in a prior period due to policy cancellations for members we previously estimated as being active. We do not update our estimated membership numbers reported in previous periods. Instead, we reflect updated information regarding our historical membership in the membership estimate for the current period. As a result of the delay in our receipt of information from insurance carriers, actual trends in our membership are most discernible over periods longer than from one quarter to the next. As a result of the delay we experience in receiving information about our membership, it is difficult for us to determine with any certainty the impact of current conditions on our membership retention. Health care reform and its impacts as well as other factors could cause the assumptions and estimates that we make in connection with estimating our membership to be inaccurate, which would cause our membership estimates to be inaccurate.2018 compared to 2017—Medicare estimated membership grew 26% as of December 31, 2018 compared to December 31, 2017 primarily due to our continued investment in Medicare-related marketing activities, call center capabilities and an improved online experience and our acquisition of GoMedigap. Individual and Family Plan estimated membership declined 32% as of December 31, 2018 compared to December 31, 2017 due to the state of the Individual and Family Plan market as a result of health care reform and our continued shift in focus on the Medicare market. Ancillary plan estimated membership declined 7% as of December 31, 2018 compared to December 31, 2017 as a result of the decline in our ability to cross-sell dental and vision plans as a result of the decline in Individual and Family Plan membership. Small Business estimated membership grew 23% as of December 31, 2018 compared to December 31, 2017 due to improved focus on technology enhancements and an increased conversion rate.2017 compared to 2016—Medicare estimated membership grew 26% as of December 31, 2017 compared to December 31, 2016 primarily due to our continued investment in the Medicare market. Individual and Family Plan estimated membership declined 38% as of December 31, 2017 compared to December 31, 2016 due to the state of the Individual and Family Plan market as a result of health care reform. Ancillary plan estimated membership declined 8% as of December 31, 2017 compared to December 31, 2016 as a result of the decline in our ability to cross-sell dental and vision plans as a result of the decline in Individual and Family Plan membership. Small Business estimated membership grew 7% as of December 31, 2017 compared to December 31, 2016 due to improved focus on technology enhancements and an increased conversion rate.

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| (1) | For Medicare-related health insurance plans, we take the sum of (i) the number of members for whom we have received or applied a commission payment for a month that is up to two months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the period being estimated); and (ii) the number of approved members over that period (after reducing that number using historical experience for an assumed number of members who do not accept their approved policy from the same month of the previous year and for estimated member cancellations through the date of the estimate). To the extent we determine we have received substantially all of the commission payments related to a given month during the period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation. Estimated number of members active on Medicare-related health insurance as of the date indicated based on the number of members for whom we have received or applied a commission payment during the month of estimation. |
| (2) | To estimate the number of members on Individual and Family health insurance plans ("IFP"), we take the sum of (i) the number of IFP members for whom we have received or applied a commission payment for a month that is up to six months prior to the date of estimation after reducing that number using historical experience for assumed member cancellations over the period being estimated; and (ii) the number of approved members over that period (after reducing that number by the percentage of members who do not accept their approved policy from the same month of the previous year for estimated member cancellations through the date of the estimate). To the extent we determine we have received substantially all of the commission payments related to a given month during the period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation. For IFP health insurance plans, a member who purchases and is active on multiple standalone insurance plans will be counted as a member more than once. For example, a member who is active on both an individual and family health insurance plan and a standalone dental plan will be counted as two continuing members. |
| (3) | For ancillary health insurance plans (such as short-term, dental and vision insurance), we take the sum of (i) the number of members for whom we have received or applied a commission payment for a month that is up to three months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the period being estimated); and (ii) the number of approved members over that period (after reducing that number using historical experience for an assumed number of members who do not accept their approved policy from the same month of the previous year and for estimated member cancellations through the date of the estimate). To the extent we determine we have received substantially all of the commission payments related to a given month during the period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation. The one to three-month period varies by insurance product and is largely dependent upon the timeliness of commission payment and related reporting from the related carriers. |
| (4) | For small business health insurance plans, we estimate the number of members using the number of initial members at the time the group is approved, and we update this number for changes in membership if such changes are reported to us by the group or carrier in the period it is reported. However, groups generally notify the carrier directly of policy cancellations and increases or decreases in group size without informing us. Health insurance carriers often do not communicate policy cancellation information or group size changes to us. We often are made aware of policy cancellations and group size changes at the time of annual renewal and update our membership statistics accordingly in the period they are reported. |


Member Acquisition

2018 compared to 2017—Medicare CC&E expense per approved MA-equivalent member decreased 5% for the year ended December 31, 2018 compared to the year ended December 31, 2017 due to the scalability of a flexible agent staffing model. Variable marketing cost per approved MA-equivalent member decreased 12% for the year ended December 31, 2018 due to an increase in demand generated from direct channels, including direct mail, television, search engine optimization, and paid search advertising, while reducing the purchases of customer leads from third-party lead generation sources. Variable marketing cost per approved IFP-equivalent member increased 18% for the year ended December 31, 2018 compared to the year ended December 31, 2017 due to higher marketing spend. IFP CC&E expense per approved IFP-equivalent member decreased 18% for the year ended December 31, 2018 compared to the year ended December 31, 2017 due to cost saving efforts. 2017 compared to 2016—Medicare CC&E expense per approved MA-equivalent member increased 15% for the year ended December 31, 2017 compared to the year ended December 31, 2016 due to increased sales agent and training costs. Variable marketing cost per approved MA-equivalent member decreased 9% for the year ended December 31, 2017 due to our focus on marketing optimization efforts to enhance the quality of demand we generate and enhance conversions through our direct and paid search advertising channels while reducing marketing spend with certain marketing partners. Variable marketing cost per approved IFP-equivalent member decreased 9% for the year ended December 31, 2017 compared to the year ended December 31, 2016 due to lower marketing spend. IFP CC&E expense per approved IFP-equivalent member increased 131% for the year ended December 31, 2017 compared to the year ended December 31, 2016 due to continuing adverse market conditions in the Individual and Family Plan market.

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| (1) | Variable marketing cost per approved MA-equivalent member represents direct costs incurred in member acquisition for Medicare Advantage, Medicare Supplement and Medicare Part D plans from our direct, marketing partners and online advertising channels divided by MA-equivalent approved members in a given period. MA-equivalent members is a derived metric and is equal to the sum of (i) the number of Medicare Part D approved members divided by 4, (ii) the number of Medicare Advantage approved members and (iii) the number of Medicare Supplement approved members in the given period. |
| (2) | Variable marketing cost per approved IFP-equivalent member represents direct costs incurred in member acquisition for IFP plans from our direct, marketing partners and online advertising channels divided by IFP-equivalent approved members in a given period. IFP-equivalent approved members is a derived metric and is equal to the sum of (i) the number of short-term approved members divided by 3 and (ii) the IFP approved members in the given period. |
| (3) | Medicare CC&E expense per approved MA-equivalent member is equal to the CC&E expense of our Medicare business included in our operating costs and reported in our Consolidated Statements of Comprehensive Income divided by MA-equivalent approved members in a given period. MA-equivalent approved members is a derived metric and is equal to the sum of (i) the number of Medicare Part D approved members divided by 4, (ii) the number of Medicare Advantage approved members and (iii) the number of Medicare Supplement approved members in the given period. |
| (4) | IFP CC&E expense per approved IFP-equivalent member is equal to the CC&E expense of our IFP business included in our operating costs and reported in our consolidated statement of comprehensive income divided by IFP-equivalent approved members in a given period. IFP-equivalent approved members is a derived metric and is equal to the sum of (i) the number of short-term approved members divided by 3 and (ii) the IFP approved members in the given period. |


Results of Operations

(1)Financial data for 2017 and 2016 have been adjusted to reflect the impact of the adoption of ASC 606.Operating costs and expenses include the following amounts of stock-based compensation expense (in thousands):


Revenue

2018 compared to 2017—Commission revenue increased $50.3 million, or 28%, in 2018, due to an increase of $57.2 million, or 42%, in Medicare commission revenue, partially offset by a $5.0 million decrease in Individual, Family and Small Business commission revenue. The increase in Medicare commission revenue was due to an increase in approved members of 36%, as well as increases in the lifetime value of commissions per Medicare Supplement and Medicare Advantage approved members for the year ended December 31, 2018 compared to December 31, 2017. The decrease in Individual, Family and Small Business commission revenue was primarily due to a 46% decline in individual and family health insurance approved members as of December 31, 2018 compared to December 31, 2017 due to the state of the individual and family health insurance plan market as a result of health care reform. Commission revenue was higher in the fourth quarter for both of the years ended December 31, 2018 and 2017 due to the seasonality of enrollments.Other revenue increased $10.4 million, or 75% in 2018 due primarily to increases of $7.7 million in sponsorship and advertising revenue and $4.6 million in lead generation revenue, offset partially by a decrease of $1.9 million in licensing revenue.2017 compared to 2016—Commission revenue decreased $0.4 million, or 0.2%, in 2017, due to a $19.1 million, or 31%, decrease in Individual, Family and Small Business commission revenue, partially offset by an $18.7 million, or 16% increase in Medicare commission revenue. The decrease in Individual, Family and Small Business commission revenue was primarily due to a 55% decline in individual and family health insurance approved members as of December 31, 2017 compared to December 31, 2016 due to the state of the individual and family health insurance plan market as a result of health care reform. The increase in Medicare commission revenue was primarily attributable to the increase in lifetime value of commissions per Medicare Supplement and Medicare Advantage approved members and an 8% increase in Medicare approved members as of December 31, 2017 compared to December 31, 2016, in part due to growth in our sale of Medicare Advantage and Medicare Supplement plans. Commission revenue was higher in the fourth quarter for both of the years ended December 31, 2017 and 2016 due to the seasonality of enrollments.Other revenue decreased $2.3 million, or 14%, in 2017 due primarily to decreases of $1.5 million in online sponsorship and advertising revenue, $0.5 million in lead generation revenue and $0.3 million in licensing revenue.


Cost of Revenue

2018 compared to 2017—Cost of revenue increased $0.6 million in 2018 compared to 2017, due primarily to an increased volume of Medicare submitted applications related to marketing partners with whom we have revenue sharing arrangements.2017 compared to 2016—Cost of revenue decreased $0.3 million in 2017 compared to 2016, due primarily to a decrease in payments to marketing partners with whom we have revenue sharing arrangements.


Marketing and Advertising

2018 compared 2017—Marketing and advertising expenses increased $17.1 million, or 26%, in 2018, primarily due to our investment in Medicare-related marketing initiatives partially offset by a decline in IFP-related marketing costs.  In 2018 we saw increases of $9.5 million in variable advertising costs, $5.7 million in personnel costs due to additional headcount, and $1.2 million in stock-based compensation expenses. Marketing expenses were higher in the fourth quarter for both of the years ended December 31, 2018 and 2017 due to the seasonality of enrollments. 2017 compared 2016—Marketing and advertising expenses decreased $6.3 million, or 9%, in 2017, primarily due to decreases of $7.8 million in variable advertising costs and $0.3 million in stock-based compensation, partially offset by increases of $1.2 million in personnel costs due to additional headcount and $0.6 million in consulting expenses. The decrease in variable advertising costs was largely attributable to decreases of $13.3 million in online advertising costs and $9.2 million in marketing partner channel costs, partially offset by a $14.7 million increase in direct marketing costs and was driven primarily by our strategy to shift our demand generation in the Medicare market to more cost-effective channels, as well as the lower volume of submitted individual and family applications compared to 2016. Marketing expenses were higher in the fourth quarter for both of the years ended December 31, 2017 and 2016 due to the seasonality of enrollments.


Customer Care and Enrollment

2018 compared to 2017—Customer care and enrollment expenses increased $11.4 million, or 19%, in 2018 compared to 2017, primarily due to growth in our Medicare and small group businesses, which resulted in increases of $6.3 million in personnel costs, $4.3 million in consulting costs, and $0.4 million in stock-based compensation expense, partially offset by a decrease of $0.4 million in facilities and other operating costs.2017 compared to 2016—Customer care and enrollment expenses increased $10.5 million, or 21%, in 2017 compared to 2016, primarily due to growth in our Medicare and small group businesses, which resulted in increases of $6.3 million in personnel costs, $2.1 million in external call center costs, $1.2 million in licensing costs and $0.8 million in facilities and other operating costs.


Technology and Content

2018 compared 2017—Technology and content expenses decreased $0.9 million, or 3%, in 2018 as a result of a $2.8 million decrease in personnel costs, $0.4 million in depreciation and amortization expense, and $0.1 million in other professional fees, partially offset by increases of $1.0 million in consulting expenses, $0.4 million in facilities and other operating costs, and $0.3 million in stock-based compensation expense.2017 compared 2016—Technology and content expenses remained relatively flat in 2017 as a result of a $1.2 million increase in personnel costs, offset by decreases of $0.7 million in facilities and other operating costs and $0.4 million in stock-based compensation expense.


General and Administrative

2018 compared to 2017—General and administrative expenses increased $5.9 million, or 15%, in 2018, primarily due to increases of $3.2 million in personnel costs, $1.0 million in stock-based compensation expense, $1.1 million in legal and other professional fees, and $0.5 million in facilities and other operating costs.   2017 compared to 2016—General and administrative expenses increased $4.8 million, or 13%, in 2017, primarily due to increases of $3.2 million in stock-based compensation expense, $1.9 million in personnel costs largely due to higher headcount, $0.7 million in lobbying fees, and $0.4 million in facilities and other operating costs, partially offset by decreases of $1.2 million in legal fees and $0.4 million in consulting expenses.


Amortization of Intangible Assets

2018 compared to 2017—Amortization expense was driven by intangible assets purchased through our acquisitions of PlanPrescriber and GoMedigap. Amortization expense for the year ended December 31, 2018 increased year over year due to the amortization of intangible assets from the GoMedigap acquisition, which was completed on January 22, 2018.2017 compared to 2016—Amortization expense related to intangible assets purchased through our acquisition of PlanPrescriber was flat in 2017 compared to 2016.


Other Income, Net

Other income, net, for the years ended December 31, 2018, 2017 and 2016 primarily consisted of margin earned on commissions received from Medicare plan members transferred to us in 2010 through 2012 by a broker partner, whereby we became the broker of record on the underlying policies. In addition, other income, net included interest income earned on our invested cash, cash equivalents and marketable securities balances, offset by administrative bank fees, investment management fees and interest expense on capital lease obligations and our debt facility.2018 compared to 2017—Other income, net, decreased by $427,000 in 2018, primarily due to an increase in interest expense as a result of a new debt facility entered into in the year ended December 31, 2018 and realized losses.2017 compared to 2016—Other income, net, increased $33,000 in 2017, primarily due to an increase in interest income.


Provision (Benefit) for Income Taxes

2018 compared to 2017—For the year ended December 31, 2018, we recorded a provision for income taxes of $3.1 million, representing an effective tax rate of 92.7%, which was higher than the statutory federal rate due primarily to a one-time increase of $2.4 million in the valuation allowance related to deferred tax assets related to state net operating loss carryforwards that are expected to expire unutilized.  The remaining $0.7 million of provision for income taxes was impacted by lobbying and other non-deductible expenses, partially offset by research and development tax credits and stock-based compensation windfalls.2017 compared to 2016—For the year ended December 31, 2017, we recorded a benefit from income taxes of $33.7 million, representing an effective tax rate of 407.6%, which was higher than the statutory federal rate due primarily to the Tax Cuts and Jobs Act of 2017, or the Jobs Act, which was signed into law on December 22, 2017 resulting in significant changes to the Internal Revenue Code. The Jobs Act reduces the federal corporate income tax rate from 35% to 21% effective for tax periods beginning after December 31, 2017; changes U.S international taxation from a worldwide tax system to a territorial system; and imposes a one-time transition tax on untaxed cumulative foreign earnings and profits as of December 31, 2017. We calculated our best estimate of the impact of the Jobs Act in our 2017 year end income tax provision in accordance with our understanding of the Jobs Act as of the filing date of the 2017 10-K. The 2017 benefit from income taxes was largely due to the remeasurement of the net U.S. deferred tax liability based on the rate at which it is expected to reverse in the future, which resulted in a one-time benefit of $29.4 million.  The 2017 benefit also includes a $1.7 million decrease in our liability for unrecognized tax benefits due to the expiration of the related statute of limitations.  The remaining benefit of $2.6 million was impacted by research and development credits and stock-based compensation windfalls, partially offset by lobbying and other non-deductible expenses.


Segment Information

(1)As adjusted for the adoption of ASC 606 using the full retrospective method


Summary of Selected Application and Membership Metrics

Health insurance carrier’s bill and collect insurance premiums paid by our members. The carriers do not report to us the number of members that we have as of a given date. The majority of our members who terminate their policies do so by discontinuing their premium payments to the carrier and do not inform us of the cancellation. Also, some of our members pay their premiums less frequently than monthly. Given the number of months required to observe non-payment of commissions in order to confirm cancellations, we estimate the number of members who are active on insurance policies as of a specified date. After we have estimated membership for a period, we may receive information from health insurance carriers that would have impacted the estimate if we had received the information prior to the date of estimation. We may receive commission payments or other information that indicates that a member who was not included in our estimates for a prior period was in fact an active member at that time, or that a member who was included in our estimates was in fact not an active member of ours. For instance, we reconcile information carriers provide to us and may determine that we were not historically paid commissions owed to us, which would cause us to have underestimated membership. Conversely, carriers may require us to return commission payments paid in a prior period due to policy cancellations for members we previously estimated as being active. We do not update our estimated membership numbers reported in previous periods. Instead, we reflect updated information regarding our historical membership in the membership estimate for the current period. As a result of the delay in our receipt of information from insurance carriers, actual trends in our membership are most discernible over periods longer than from  one quarter to the next. As a result of the delay we experience in receiving information about our membership, it is difficult for us to determine with any certainty the impact of current conditions on our membership retention. Health care reform and its impacts as well as other factors could cause the assumptions and estimates that we make in connection with estimating our membership to be inaccurate, which would cause our membership estimates to be inaccurate.

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| Notes: | | |
| (1) |  | Medicare-related health insurance applications submitted on our website or through our customer care center during the period, including Medicare Advantage, Medicare Part D prescription drug and Medicare Supplement plans. Applications are counted as submitted when the applicant completes the application and either clicks the submit button on our website or provides verbal authorization to submit the application. The applicant may have additional actions to take before the application will be reviewed by the insurance carrier, such as providing additional information. In addition, an applicant may submit more than one application. |
| (2) |  | Major medical Individual and Family plan ("IFP") health insurance applications submitted on our website during the period. Applications are counted as submitted when the applicant completes the application, clicks the submit button on our website and submits the application to us. The applicant may have additional actions to take before the application will be reviewed by the insurance carrier, such as providing additional information. In addition, an applicant may submit more than one application. We define our IFP offerings as major medical individual and family health insurance plans, which does not include Medicare-related, small business or ancillary plans (primarily consisting of short-term, dental, life, vision, and accident insurance plans). |
| (3) |  | Applications for health insurance plans other than Medicare and IFP submitted on our website during the period. Applications for ancillary plans are counted as submitted when the applicant completes the application, clicks the submit button on our website and submits the application to us. Applications for small business plans are counted as submitted when the applicant completes the application, the employees complete their applications, the applicant submits the application to us and we submit the application to the carrier. The applicant may have additional actions to take before the application will be reviewed by the insurance carrier, such as providing additional information. In addition, an applicant may submit more than one application. |
| (4) |  | Applications for all health insurance plans submitted on our website or through our customer care center during the period. See notes (1), (2) and (3) above for more information as to what constitutes a submitted application. |
| (5) |  | Medicare Advantage plan health insurance applications submitted on our website or through our customer care center during the period. Applications are counted as submitted when the applicant completes the application and either clicks the submit button on our website or provides verbal authorization to submit the application. The applicant may have additional actions to take before the application will be reviewed by the insurance carrier, such as providing additional information. In addition, an applicant may submit more than one application. Medicare Advantage submitted applications are included in Medicare submitted applications - See Note1 above for more detail. |
| (6) |  | Estimated number of members active on Medicare-related health insurance as of the date indicated based on the number of members for whom we have received or applied a commission payment during the month of estimation. |
| (7) |  | Estimated number of members active on IFP health insurance plans as of the date indicated. To determine the estimate, we take the sum of (i) the number of IFP members for whom we have received or applied a commission payment for a month that is up to six months prior to the date of estimation after reducing that number using historical experience for assumed member cancellations over the period being estimated; and (ii) the number of approved members over that period (after reducing that number by the percentage of members who do not accept their approved policy from the same month of the previous year for estimated member cancellations through the date of the estimate). To the extent we determine we have received substantially all of the commission payments related to a given month during the period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation. For IFP health insurance plans, a member who purchases and is active on multiple standalone insurance plans will be counted as a member more than once. For example, a member who is active on both an individual and family health insurance plan and a standalone dental plan will be counted as two continuing members. |
| (8) |  | Estimated number of members active on insurance plans other than Medicare-related health insurance and IFP health insurance plans as of the date indicated. For ancillary health insurance plans (such as short-term, dental, vision, accident and student), we take the sum of (i) the number of members for whom we have received or applied a commission payment for a month that is up to three months prior to the date of estimation (after reducing that number using historical experience for assumed member cancellations over the period being estimated); and (ii) the number of approved members over that period (after reducing that number using historical experience for an assumed number of members who do not accept their approved policy from the same month of the previous year and for estimated member cancellations through the date of the estimate). To the extent we determine we have received substantially all of the commission payments related to a given month during the period being estimated, we will take the number of members for whom we have received or applied a commission payment during the month of estimation. The one to three-month period varies by insurance product and is largely dependent upon the timeliness of commission payment and related reporting from the related carriers. For small business health insurance plans, we estimate the number of members using the number of initial members at the time the group is approved, and we update this number for changes in membership if such changes are reported to us by the group or carrier in the period it is reported. However, groups generally notify the carrier directly of policy cancellations and increases or decreases in group size without informing us. Health insurance carriers often do not communicate policy cancellation information or group size changes to us. We often are made aware of policy cancellations and group size changes at the time of annual renewal and update our membership statistics accordingly in the period they are reported. |
| (9) |  | Estimated number of members active on all insurance plans as of the date indicated. See the notes (6), (7) and (8) above for additional information regarding our calculation of total estimated membership. |


Results of Operations

Operating costs and expenses include the following amounts of stock-based compensation expense (in thousands):


Revenue

2017 compared to 2016—Commission revenue decreased $12.4 million, or 7%, in 2017, due to a $33.2 million or 34% decrease in Individual, Family and Small Business commission revenue, partially offset by a $20.8 million, or 28% increase in Medicare commission revenue. The decrease in Individual, Family and Small Business commission revenue was primarily due to a 38% decline in estimated individual and family health insurance membership as of December 31, 2017 compared to December 31, 2016, primarily attributable to lower submitted application volumes and a decline in our membership retention rate in 2017. The increase in Medicare commission revenue was primarily attributable to a 26% increase in estimated Medicare membership as of December 31, 2017 compared to December 31, 2016, in part due to growth in our sale of Medicare Advantage and Medicare Supplement plans and improved retention rates.Other revenue decreased $2.2 million, or 14%, in 2017 due primarily to decreases of $1.5 million in online sponsorship and advertising revenue, $0.4 million in lead generation revenue and $0.2 million in licensing fees.2016 compared to 2015—Commission revenue decreased $0.4 million in 2016, due to a $17.2 million decrease in Individual, Family and Small Business commission revenue, partially offset by a $16.8 million increase in Medicare commission revenue. The decrease in Individual, Family and Small Business commission revenue was primarily due to a 28% decrease in individual and family health insurance estimated membership as of December 31, 2017 compared to December 31, 2016. The increase in Medicare commission revenue was primarily due to a 33% increase in Medicare estimated membership as of December 31, 2017 compared to December 31, 2016.Other revenue decreased $2.2 million, or 12%, in 2016, due to decreases of $1.4 million in licensing fees, $0.5 million in online sponsorship and advertising revenue and $0.3 million in lead generation revenue.


Cost of Revenue

2017 compared to 2016—Cost of revenue decreased $0.9 million in the 2017 compared to 2016, due primarily to a $0.4 million decrease in amortization expense associated with the consideration we paid to a broker partner in connection with the transfer of several Medicare plan books-of-business to us whereby we became the broker of record on the underlying plans and a $0.4 million decrease in payments to marketing partners with whom we have revenue sharing arrangements for health insurance plans sold to members who were referred to our website. 2016 compared to 2015—Cost of revenue decreased $1.0 million, or 24%, in 2016 compared to 2015, due primarily to a $0.5 million decrease in payments related to health insurance policies sold to members who were referred to our website by marketing partners with whom we have revenue-sharing arrangements and a $0.4 million decrease in amortization expense associated with the consideration we paid to a broker partner in connection with the transfer of several Medicare plan books-of-business to us whereby we became the broker of record on the underlying policies.


Marketing and Advertising

2017 compared 2016—Marketing and advertising expenses decreased $6.3 million, or 9%, in 2017, primarily due to decreases of $7.8 million in variable advertising costs and $0.3 million in stock-based compensation, partially offset by increases of $1.2 million in personnel costs due to additional headcount and $0.6 million in consulting expenses. The decrease in variable advertising costs was largely attributable to decreases of $13.3 million in online advertising costs and $9.2 million in marketing partner channel costs, partially offset by a $14.7 million increase in direct marketing costs and was driven primarily by our strategy to shift our demand generation in the Medicare market to more cost-effective channels, as well as the lower volume of submitted individual and family applications compared to 2016. 2016 compared to 2015—Marketing and advertising expenses decreased $3.4 million, or 4%, in 2016, primarily due to decreases of $1.9 million in personnel costs resulting from lower headcount, including executive officer departures, $0.8 million in variable advertising costs and $0.7 million in stock-based compensation expense, largely due to reversal of stock-based compensation resulting from executive officer departures.  The decrease in variable advertising costs resulted from decreases of $2.7 million in direct marketing expenses and $2.3 million in marketing partner channel costs, partially offset by a $4.2 million increase in online advertising costs.


Customer Care and Enrollment

2017 compared to 2016 —Customer care and enrollment expenses increased $10.5 million, or 21%, in 2017 compared to 2016, primarily due to growth in our Medicare and small group businesses, which resulted in increases of $6.2 million in personnel costs, $2.1 million in external call center costs, $1.2 million in licensing costs and $0.8 million in facilities and other operating costs.2016 compared to 2015—Customer care and enrollment expenses increased $5.6 million, or 13%, in 2016 compared to 2015, largely due to increases of $4.1 million in personnel costs primarily relating to our Medicare business and $1.0 million in facilities and other operating costs.


Technology and Content

2017 compared 2016 —Technology and content expenses remained relatively flat in 2017 as a result of a $1.2 million increase in personnel costs, offset by decreases of $0.7 million in facilities and other operating costs and $0.4 million in stock-based compensation expense. 2016 compared to 2015—Technology and content expenses decreased $3.6 million, or 10%, in 2016 compared to 2015, due to a decrease in personnel costs resulting from lower headcount.


General and Administrative

2017 compared to 2016 — General and administrative expenses increased $4.8 million, or 13%, in 2017, primarily due to increases of $3.2 million in stock-based compensation expense, $2.1 million in personnel costs largely due to higher headcount, $0.7 million in lobbying fees, and $0.4 million in facilities and other operating costs, partially offset by decreases of $1.2 million in legal fees and $0.4 million in consulting expenses. 2016 compared to 2015—General and administrative expenses increased $5.0 million, or 16%, in 2016 compared to 2015, due to increases of $1.9 million in personnel costs primarily resulting from severance and relocation costs related to executive officer changes, $0.9 million in stock-based compensation expense resulting from executive officer changes, $0.9 million in third party fees related to a review and analysis of strategic plans, $0.8 million in legal fees and $0.2 million in lobbying fees.


Restructuring Charge (Benefit)

In the second and third quarters of 2016, we reversed $0.3 million related to facility exit costs as we reoccupied office space we had previously vacated and were also released from a lease for other office space we had previously vacated.


Amortization of Intangible Assets

2017 compared to 2016—Amortization expense related to intangible assets purchased through our acquisition of PlanPrescriber was flat in 2017 compared to 2016.2016 compared to 2015—Amortization expense related to intangible assets purchased through our acquisition of PlanPrescriber decreased in 2016 compared to 2015, due to certain assets that were fully amortized compared to the prior period.


Other Income (Expense), Net

Other income (expense), net, for the years ended 2015, 2016 and 2017 primarily consisted of interest income earned on our invested cash, cash equivalents and marketable securities balances, offset by administrative bank fees, investment management fees and interest expense on capital lease obligations.  2017 compared to 2016—Other income (expense), net increased $0.2 million in 2017, primarily due to an increase in interest income.2016 compared to 2015— Other income (expense), net increased $0.1 million in 2016, primarily due to an increase in interest income.


Benefit from Income Taxes

2017 compared to 2016—On December 22, 2017, the Tax Cuts and Jobs Act of 2017, or the Jobs Act, was signed into law resulting in significant changes to the Internal Revenue Code. The Jobs Act reduces the federal corporate income tax rate from 35% to 21% effective for tax periods beginning after December 31, 2017; changes U.S international taxation from a worldwide tax system to a territorial system; and imposes a one-time transition tax on untaxed cumulative foreign earnings and profits as of December 31, 2017. The Act also includes provisions for the elimination of the Alternative Minimum Tax, or AMT, among other changes. We calculated our best estimate of the impact of the Jobs Act in our year end income tax provision in accordance with our understanding of the Jobs Act and guidance available as of the filing date of this Annual Report on Form 10-K and recorded $2.3 million as additional income tax benefit in the fourth quarter of 2017, the period in which the legislation was enacted. Of the $2.3 million, we recorded a provisional amount for 2017 included a benefit of $1.8 million related to the reversal of AMT credits, which are now refundable credits under the provisions of the Jobs Act and recorded as long-term receivables, which are included in other assets in the Consolidated Balance Sheets. We have  also remeasured the deferred tax assets and liabilities based on the rate at which they are expected to reverse in the future and recorded a $0.5 million benefit as a result of this remeasurement. The effects of other provisions of the Jobs Act are not expected to have a material impact on our consolidated financial statements, however, the final impact of the Jobs Act may differ from our estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued, and resulting actions we may take. In addition, the benefit from income taxes in 2017, includes a $1.7 million decrease in our liability for unrecognized tax benefits due to the expiration of the related statute of limitations, partially offset by a provision for income taxes related to a minimum taxes and a foreign tax rate differential. 2016 compared to 2015—We recorded a benefit from income taxes of $0.8 million and $0.9 million during the years ended December 31, 2015 and 2016, respectively. The benefit from income taxes in 2015 and 2016, primarily related to a decrease in our liability for unrecognized tax benefits due to the expiration of the related statute of limitations, partially offset by a provision for income taxes related to a minimum taxes and a foreign tax rate differential.