(Address of principal executive offices) (Zip Code)
(404) 588-7711
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
ý Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No ý
At April 30, 2012, 538,168,627 shares of the Registrant’s Common Stock, $1.00 par value, were outstanding.
Dodd-Frank Act — The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
EPS — Earnings per share.
ERISA — Employee Retirement Income Security Act of 1974.
Exchange Act - Securities Exchange Act of 1934.
FASB — Financial Accounting Standards Board.
FDIC — The Federal Deposit Insurance Corporation.
Federal Reserve — The Board of Governors of the Federal Reserve System.
Fed funds — Federal funds.
FFELP — Federal Family Education Loan Program.
FHA — Federal Housing Administration.
FHLB — Federal Home Loan Bank.
i
FICO — Fair Isaac Corporation.
FINRA — Financial Industry Regulatory Authority.
Fitch — Fitch Ratings Ltd.
FRB — Federal Reserve Board.
FTE — Fully taxable-equivalent.
FVO — Fair value option.
GSE — Government-sponsored enterprise.
HARP — Home Affordable Refinance Program.
HUD — U.S. Department of Housing and Urban Development.
IFRS — International Financial Reporting Standards.
IIS — Institutional Investment Solutions.
IPO — Initial public offering.
IRLC — Interest rate lock commitment.
IRS — Internal Revenue Service.
ISDA — International Swaps and Derivatives Associations.
LGD — Loss given default.
LHFI — Loans held for investment.
LHFI-FV — Loans held for investment carried at fair value.
LHFS — Loans held for sale.
LIBOR —London InterBank Offered Rate.
LOCOM – Lower of cost or market.
LTI — Long-term incentive.
LTV— Loan to value.
MBS — Mortgage-backed securities.
MD&A — Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Moody’s — Moody’s Investors Service.
MSR — Mortgage servicing right.
MVE — Market value of equity.
NEO — Named executive officers.
NOW — Negotiable order of withdrawal account.
NPL — Nonperforming loan.
OCI — Other comprehensive income.
OREO — Other real estate owned.
OTC — Over-the-counter.
OTTI — Other-than-temporary impairment.
Parent Company — Parent Company of SunTrust Banks, Inc. and subsidiaries.
PD — Probability of default.
PPG — Playbook for profitable growth.
QSPE — Qualifying special-purpose entity.
RidgeWorth — RidgeWorth Capital Management, Inc.
ROA — Return on average total assets.
ROE — Return on average common shareholders’ equity.
ii
RSU — Restricted Stock Unit.
RWA — Risk-weighted assets.
S&P — Standard and Poor’s.
SBA — Small Business Administration.
SEC — U.S. Securities and Exchange Commission.
SERP — Supplemental Executive Retirement Plan.
SPE — Special purpose entity.
STIS — SunTrust Investment Services, Inc.
STM — SunTrust Mortgage, Inc.
STRH — SunTrust Robinson Humphrey, Inc.
SunTrust — SunTrust Banks, Inc.
TARP — Troubled Asset Relief Program.
TDR — Troubled debt restructuring.
The Agreements — Equity forward agreements.
Three Pillars —Three Pillars Funding, LLC.
TRS — Total return swaps.
U.S. — United States.
U.S. GAAP — Generally Accepted Accounting Principles in the United States.
U.S. Treasury — The United States Department of the Treasury.
UTB — Unrecognized tax benefits.
VA —Veterans Administration.
VAR —Value at risk.
VI — Variable interest.
VIE — Variable interest entity.
Visa —The Visa, U.S.A. Inc. card association or its affiliates, collectively.
W&IM — Wealth and Investment Management.
PART I – FINANCIAL INFORMATION
The following unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and accordingly do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary to comply with Regulation S-X have been included. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2012.
iii
Item 1.
FINANCIAL STATEMENTS (UNAUDITED)
SunTrust Banks, Inc.
Consolidated Statements of Income
For the Three Months Ended March 31
(Dollars in millions and shares in thousands, except per share data) (Unaudited)
2012
2011
Interest Income
Interest and fees on loans
$1,300
$1,314
Interest and fees on loans held for sale
25
28
Interest and dividends on securities available for sale:
Taxable interest
168
165
Tax-exempt interest
4
5
Dividends1
22
20
Trading account interest and other
15
22
Total interest income
1,534
1,554
Interest Expense
Interest on deposits
127
169
Interest on long-term debt
88
124
Interest on other borrowings
8
12
Total interest expense
223
305
Net interest income
1,311
1,249
Provision for credit losses
317
447
Net interest income after provision for credit losses
994
802
Noninterest Income
Service charges on deposit accounts
164
163
Trust and investment management income
130
135
Other charges and fees
115
126
Mortgage production related income/(loss)
63
(1
)
Mortgage servicing related income
81
72
Investment banking income
71
67
Card fees
61
100
Retail investment services
59
58
Trading income
57
52
Net securities gains2
18
64
Other noninterest income
57
47
Total noninterest income
876
883
Noninterest Expense
Employee compensation
652
618
Employee benefits
145
136
Outside processing and software
176
158
Net occupancy expense
88
89
Operating losses
60
27
Credit and collection services
56
51
Regulatory assessments
52
71
Other real estate expense
50
69
Equipment expense
45
44
Marketing and customer development
27
38
Amortization of intangible assets
11
11
Other noninterest expense
179
153
Total noninterest expense
1,541
1,465
Income before provision for income taxes
329
220
Provision for income taxes
69
33
Net income including income attributable to noncontrolling interest
260
187
Net income attributable to noncontrolling interest
10
7
Net income
$250
$180
Net income available to common shareholders
$245
$38
Net income per average common share
Diluted
$0.46
$0.08
Basic
0.46
0.08
Dividends declared per common share
$0.05
$0.01
Average common shares - diluted
536,407
503,503
Average common shares - basic
533,100
499,669
1 Includes dividends on common stock of The Coca-Cola Company of $15 million and $14 million during the three months ended March 31, 2012 and 2011, respectively.
2 Includes credit-related other-than-temporary impairment losses of $2 million and $1 million for the three months ended March 31, 2012 and 2011, respectively. There were no non-credit related unrealized other-than-temporary impairment losses recorded in other comprehensive income, before taxes, for the three months ended March 31, 2012 and 2011.
See Notes to Consolidated Financial Statements (unaudited).
1
SunTrust Banks, Inc.
Consolidated Statements of Comprehensive Income/(Loss)
For the Three Months Ended March 31
(Dollars in millions) (Unaudited)
2012
2011
Net Income
$250
$180
Components of Other Comprehensive Income/(Loss):
Change in unrealized gains on securities, net of tax of ($27) and $40, respectively
50
(69
)
Change in unrealized gains on derivatives, net of tax of $58 and $72, respectively
(101
)
(125
)
Change related to employee benefit plans, net of tax of $14 and ($2), respectively
(24
)
3
Total Other Comprehensive Loss
(75
)
(191
)
Total Comprehensive Income/(Loss)
$175
($11
)
See Notes to Consolidated Financial Statements (unaudited).
2
SunTrust Banks, Inc.
Consolidated Balance Sheets
As of
(Dollars in millions and shares in thousands) (Unaudited)
March 31 2012
December 31 2011
Assets
Cash and due from banks
$5,019
$3,696
Securities purchased under agreements to resell
941
792
Interest-bearing deposits in other banks
21
21
Cash and cash equivalents
5,981
4,509
Trading assets (including encumbered securities of $520 and $574 as of March 31, 2012 and December 31, 2011, respectively)
6,316
6,279
Securities available for sale
27,323
28,117
Loans held for sale1 (loans at fair value: $2,207 and $2,141 as of March 31, 2012 and December 31, 2011, respectively)
2,749
2,353
Loans2 (loans at fair value: $413 and $433 as of March 31, 2012 and December 31, 2011, respectively)
122,691
122,495
Allowance for loan and lease losses
(2,348
)
(2,457
)
Net loans
120,343
120,038
Premises and equipment
1,561
1,564
Goodwill
6,344
6,344
Other intangible assets (MSRs at fair value: $1,070 and $921 as of March 31, 2012 and December 31, 2011, respectively)
1,155
1,017
Other real estate owned
411
479
Other assets
6,043
6,159
Total assets
$178,226
$176,859
Liabilities and Shareholders’ Equity
Noninterest-bearing consumer and commercial deposits
$36,771
$34,359
Interest-bearing consumer and commercial deposits
90,947
91,252
Total consumer and commercial deposits
127,718
125,611
Brokered time deposits (CDs at fair value: $1,005 and $1,018 as of March 31, 2012 and December 31, 2011, respectively)
2,284
2,281
Foreign deposits
30
30
Total deposits
130,032
127,922
Funds purchased
908
839
Securities sold under agreements to repurchase
1,781
1,644
Other short-term borrowings
6,878
8,983
Long-term debt 3 (debt at fair value: $2,000 and $1,997 as of March 31, 2012 and December 31, 2011, respectively)
11,894
10,908
Trading liabilities
1,554
1,806
Other liabilities
4,938
4,691
Total liabilities
157,985
156,793
Preferred stock, no par value
275
275
Common stock, $1.00 par value
550
550
Additional paid in capital
9,243
9,306
Retained earnings
9,198
8,978
Treasury stock, at cost, and other4
(699
)
(792
)
Accumulated other comprehensive income, net of tax
1,674
1,749
Total shareholders’ equity
20,241
20,066
Total liabilities and shareholders’ equity
$178,226
$176,859
Common shares outstanding
538,056
536,967
Common shares authorized
750,000
750,000
Preferred shares outstanding
3
3
Preferred shares authorized
50,000
50,000
Treasury shares of common stock
11,865
12,954
1 Includes loans held for sale, at fair value, of consolidated VIEs
$326
$315
2 Includes loans of consolidated VIEs
1,378
3,322
3 Includes debt of consolidated VIEs ($289 at fair value as of both March 31, 2012 and December 31, 2011)
713
722
4 Includes $111 and $107 as of March 31, 2012 and December 31, 2011, respectively, related to noncontrolling interest held.
See Notes to Consolidated Financial Statements (unaudited).
3
SunTrust Banks, Inc.
Consolidated Statements of Shareholders’ Equity
(Dollars and shares in millions, except per share data) (Unaudited)
Preferred
Stock
Common
Shares
Outstanding
Common
Stock
Additional
Paid in
Capital
Retained
Earnings
Treasury
Stock and
Other 1
Accumulated
Other
Comprehensive
Income 2
Total
Balance, January 1, 2011
$4,942
500
$515
$8,403
$8,542
($888
)
$1,616
$23,130
Net income
—
—
—
—
180
—
—
180
Other comprehensive loss
—
—
—
—
—
—
(191
)
(191
)
Change in noncontrolling interest
—
—
—
—
—
2
—
2
Common stock dividends, $0.01 per share
—
—
—
—
(5
)
—
—
(5
)
Preferred stock dividends, $1,000 per share
—
—
—
—
(2
)
—
—
(2
)
U.S. Treasury preferred stock dividends, $1,236 per share
—
—
—
—
(60
)
—
—
(60
)
Accretion of discount for preferred stock issued to U.S. Treasury
6
—
—
—
(6
)
—
—
—
Repurchase of preferred stock issued to U.S. Treasury
(4,776
)
—
—
—
(74
)
—
—
(4,850
)
Issuance of common stock
—
35
35
981
—
—
—
1,016
Stock compensation expense
—
—
—
3
—
—
—
3
Restricted stock activity
—
2
—
(58
)
—
43
—
(15
)
Amortization of restricted stock compensation
—
—
—
—
—
9
—
9
Issuance of stock for employee benefit plans and other
—
—
—
(5
)
—
11
—
6
Balance, March 31, 2011
$172
537
$550
$9,324
$8,575
($823
)
$1,425
$19,223
Balance, January 1, 2012
$275
537
$550
$9,306
$8,978
($792
)
$1,749
$20,066
Net income
—
—
—
—
250
—
—
250
Other comprehensive loss
—
—
—
—
—
—
(75
)
(75
)
Change in noncontrolling interest
—
—
—
—
—
4
—
4
Common stock dividends, $0.05 per share
—
—
—
—
(27
)
—
—
(27
)
Preferred stock dividends, $1,011 per share
—
—
—
—
(3
)
—
—
(3
)
Exercise of stock options and stock compensation expense
—
—
—
(6
)
—
10
—
4
Restricted stock activity
—
1
—
(50
)
—
58
—
8
Amortization of restricted stock compensation
—
—
—
—
—
7
—
7
Issuance of stock for employee benefit plans and other
—
—
—
(7
)
—
14
—
7
Balance, March 31, 2012
$275
538
$550
$9,243
$9,198
($699
)
$1,674
$20,241
1 At March 31, 2012 includes ($737) million for treasury stock, ($73) million for compensation element of restricted stock, and $111 million for noncontrolling interest.
At March 31, 2011 includes ($881) million for treasury stock, ($73) million for compensation element of restricted stock, and $131 million for noncontrolling interest.
2 Components of AOCI at March 31, 2012 included $1,913 million in unrealized net gains on AFS securities, $468 million in unrealized net gains on derivative financial instruments, and ($707) million related to employee benefit plans. At March 31, 2011 components included $1,457 million in unrealized net gains on AFS securities, $407 million in unrealized net gains on derivative financial instruments, and ($439) million related to employee benefit plans.
See Notes to Consolidated Financial Statements (unaudited).
4
SunTrust Banks, Inc.
Consolidated Statements of Cash Flows
Three Months Ended March 31
(Dollars in millions) (Unaudited)
2012
2011
Cash Flows from Operating Activities
Net income including income attributable to noncontrolling interest
$260
$187
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization, and accretion
192
186
Origination of mortgage servicing rights
(83
)
(88
)
Provisions for credit losses and foreclosed property
362
490
Mortgage repurchase provision
175
80
Stock option compensation and amortization of restricted stock compensation
8
12
Net securities gains
(18
)
(64
)
Net gain on sale of assets
(252
)
(17
)
Net decrease in loans held for sale
246
1,465
Net increase in other assets
(251
)
(125
)
Net decrease in other liabilities
(537
)
(221
)
Net cash provided by operating activities
102
1,905
Cash Flows from Investing Activities
Proceeds from maturities, calls, and paydowns of securities available for sale
1,506
1,158
Proceeds from sales of securities available for sale
670
9,413
Purchases of securities available for sale
(992
)
(10,100
)
Proceeds from maturities, calls, and paydowns of trading securities
—
77
Proceeds from sales of trading securities
—
102
Net increase in loans including purchases of loans
(1,296
)
(304
)
Proceeds from sales of loans
252
143
Capital expenditures
(48
)
(1
)
Proceeds from the sale of other assets
121
198
Net cash provided by investing activities
213
686
Cash Flows from Financing Activities
Net increase in total deposits
2,110
941
Net (decrease)/increase in funds purchased, securities sold under agreements
to repurchase, and other short-term borrowings
(1,899
)
301
Proceeds from the issuance of long-term debt
1,000
1,039
Repayment of long-term debt
(34
)
(132
)
Proceeds from the exercise of stock options
2
—
Excess tax benefits from stock-based compensation
8
—
Proceeds from the issuance of common stock
—
1,016
Repurchase of preferred stock
—
(4,850
)
Common and preferred dividends paid
(30
)
(67
)
Net cash provided by/(used in) financing activities
1,157
(1,752
)
Net increase in cash and cash equivalents
1,472
839
Cash and cash equivalents at beginning of period
4,509
5,378
Cash and cash equivalents at end of period
$5,981
$6,217
Supplemental Disclosures:
Loans transferred from loans held for sale to loans
$11
$5
Loans transferred from loans to loans held for sale
429
122
Loans transferred from loans to other real estate owned
96
201
Accretion of discount for preferred stock issued to the U.S. Treasury
—
80
See Notes to Consolidated Financial Statements (unaudited).
5
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these financial statements, have been made.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could vary from these estimates. Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
The Company evaluated subsequent events through the date its financial statements were issued.
These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Except for accounting policies that have been recently adopted as described below, there have been no significant changes to the Company’s accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
Accounting Policies Recently Adopted and Pending Accounting Pronouncements
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The primary purpose of the ASU is to conform the language in the fair value measurements guidance in U.S. GAAP and IFRS. The ASU also clarifies how to apply existing fair value measurement and disclosure requirements. Further, the ASU requires additional disclosures about transfers between level 1 and 2 of the fair value hierarchy, quantitative information for level 3 inputs, and the level of the fair value measurement hierarchy for items that are not measured at fair value in the statement of financial position but for which the fair value is required to be disclosed. The ASU is effective for the interim reporting period ending March 31, 2012. The Company adopted the standard as of January 1, 2012, and the required disclosures are included in Note 12, “Fair Value Election and Measurement.” The adoption did not impact the Company’s financial position, results of operations, or EPS.
In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” The ASU requires presentation of the components of comprehensive income in either a continuous statement of comprehensive income or two separate but consecutive statements. The update does not change the items presented in OCI and does not affect the calculation or reporting of EPS. In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items out of Accumulated Other Comprehensive Income in Accounting Standards update No. 2011-05,” which deferred the effective date for the amendments to the reclassification of items out of AOCI. The guidance, with the exception of reclassification adjustments, was effective on January 1, 2012 and must be applied retrospectively for all periods presented. The Company adopted the standard as of January 1, 2012, and the required disclosures are included in the Consolidated Statements of Comprehensive Income/(Loss). The adoption did not impact the Company’s financial position, results of operations, or EPS.
In September 2011, the FASB issued ASU 2011-08, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment.” The ASU amends interim and annual goodwill impairment testing requirements such that an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The more likely than not threshold is defined as having a likelihood of more than 50 percent. The guidance is effective for annual and interim goodwill impairment tests beginning January 1, 2012. The Company adopted the standard as of January 1, 2012 and has applied the guidance to interim goodwill impairment testing. The adoption did not have an impact on the Company's financial position, results of operations, or EPS.
6
Notes to Consolidated Financial Statements (Unaudited), continued
NOTE 2 – SECURITIES AVAILABLE FOR SALE
Securities Portfolio Composition
March 31, 2012
(Dollars in millions)
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
U.S. Treasury securities
$221
$10
$—
$231
Federal agency securities
1,671
77
1
1,747
U.S. states and political subdivisions
406
19
6
419
MBS - agency
20,251
718
2
20,967
MBS - private
237
—
21
216
CDO/CLO securities
43
—
—
43
ABS
394
13
6
401
Corporate and other debt securities
43
3
—
46
Coke common stock
—
2,220
—
2,220
Other equity securities1
1,032
1
—
1,033
Total securities AFS
$24,298
$3,061
$36
$27,323
December 31, 2011
(Dollars in millions)
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
U.S. Treasury securities
$671
$23
$—
$694
Federal agency securities
1,843
89
—
1,932
U.S. states and political subdivisions
437
21
4
454
MBS - agency
20,480
743
—
21,223
MBS - private
252
—
31
221
CDO/CLO securities
50
—
—
50
ABS
460
11
7
464
Corporate and other debt securities
49
2
—
51
Coke common stock
—
2,099
—
2,099
Other equity securities1
928
1
—
929
Total securities AFS
$25,170
$2,989
$42
$28,117
1At March 31, 2012, other equity securities included the following securities at cost: $432 million in FHLB of Atlanta stock, $398 million in Federal Reserve Bank stock, and $202 million in mutual fund investments. At December 31, 2011, other equity securities included the following securities at cost: $342 million in FHLB of Atlanta stock, $398 million in Federal Reserve Bank stock, and $187 million in mutual fund investments.
Securities AFS that were pledged to secure public deposits, repurchase agreements, trusts, and other funds had a fair value of $8.0 billion and $9.1 billion as of March 31, 2012 and December 31, 2011, respectively. Further, under The Agreements, the Company pledged its shares of Coke common stock, which is hedged with derivative instruments, as discussed in Note 10, “Derivative Financial Instruments.” As of March 31, 2012 and December 31, 2011, there were no securities AFS pledged under which the transferee may repledge the collateral. The Company has also pledged $944 million and $770 million of certain marketable securities and cash equivalents to secure $923 million and $747 million of repurchase agreements as of March 31, 2012 and December 31, 2011, respectively.
7
Notes to Consolidated Financial Statements (Unaudited), continued
The amortized cost and fair value of investments in debt securities at March 31, 2012 by estimated average life are shown below. Actual cash flows may differ from estimated average lives and contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
Distribution of Maturities
(Dollars in millions)
1 Year
or Less
1-5
Years
5-10
Years
After 10
Years
Total
Amortized Cost:
U.S. Treasury securities
$8
$213
$—
$—
$221
Federal agency securities
99
1,391
91
90
1,671
U.S. states and political subdivisions
126
203
23
54
406
MBS - agency
797
15,376
1,750
2,328
20,251
MBS - private
—
185
52
—
237
CDO/CLO securities
—
43
—
—
43
ABS
172
155
—
67
394
Corporate and other debt securities
2
4
37
—
43
Total debt securities
$1,204
$17,570
$1,953
$2,539
$23,266
Fair Value:
U.S. Treasury securities
$8
$223
$—
$—
$231
Federal agency securities
100
1,456
99
92
1,747
U.S. states and political subdivisions
129
217
23
50
419
MBS - agency
841
15,972
1,802
2,352
20,967
MBS - private
—
168
48
—
216
CDO/CLO securities
—
43
—
—
43
ABS
173
155
—
73
401
Corporate and other debt securities
2
4
40
—
46
Total debt securities
$1,253
$18,238
$2,012
$2,567
$24,070
Securities in an Unrealized Loss Position
The Company held certain investment securities having unrealized loss positions. Market changes in interest rates and credit spreads will result in temporary unrealized losses as the market price of securities fluctuates. As of March 31, 2012, the Company did not intend to sell these securities nor was it more-likely-than-not that the Company would be required to sell these securities before their anticipated recovery or maturity. The Company has reviewed its portfolio for OTTI in accordance with the accounting policies outlined in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
8
Notes to Consolidated Financial Statements (Unaudited), continued
March 31, 2012
Less than twelve months
Twelve months or longer
Total
(Dollars in millions)
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Temporarily impaired securities:
Federal agency securities
$48
$1
$—
$—
$48
$1
U.S. states and political subdivisions
1
—
24
6
25
6
MBS - agency
472
2
1
—
473
2
ABS
—
—
11
4
11
4
Total temporarily impaired securities
521
3
36
10
557
13
Other-than-temporarily impaired securities:1
MBS - private
1
—
215
21
216
21
ABS
1
—
4
2
5
2
Total other-than-temporarily impaired securities
2
—
219
23
221
23
Total impaired securities
$523
$3
$255
$33
$778
$36
December 31, 2011
Less than twelve months
Twelve months or longer
Total
(Dollars in millions)
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Temporarily impaired securities:
Federal agency securities
$10
$—
$—
$—
$10
$—
U.S. states and political subdivisions
1
—
28
4
29
4
MBS - agency
224
—
1
—
225
—
CDO/CLO securities
50
—
—
—
50
—
ABS
—
—
11
5
11
5
Total temporarily impaired securities
285
—
40
9
325
9
Other-than-temporarily impaired securities:1
MBS - private
15
1
206
30
221
31
ABS
1
—
3
2
4
2
Total other-than-temporarily impaired securities
16
1
209
32
225
33
Total impaired securities
$301
$1
$249
$41
$550
$42
1Includes OTTI securities for which credit losses have been recorded in earnings in current or prior periods.
At March 31, 2012 and December 31, 2011, unrealized losses on securities that have been in a temporarily impaired position for longer than twelve months include municipal ARS and one ABS collateralized by 2004 vintage home equity loans. The municipal securities are backed by investment grade rated obligors; however, the fair value of these securities continues to be impacted by the lack of a functioning ARS market and the extension of time for expected refinance and repayment. No credit loss is expected on these securities. The ABS is also highly-rated, continues to receive timely principal and interest payments, and is evaluated quarterly for credit impairment. Cash flow analysis shows that the underlying collateral can withstand highly stressed loss assumptions without incurring a credit loss.
The portion of unrealized losses on securities that have been other-than-temporarily impaired that relates to factors other than credit are recorded in AOCI. Losses related to credit impairment on these securities is determined through estimated cash flow analyses and have been recorded in earnings in current or prior periods. The unrealized OTTI loss relating to private MBS as of March 31, 2012 includes purchased and retained interests from 2007 vintage securitizations. The unrealized OTTI loss relating to ABS is related to four securities within the portfolio that are 2003 and 2004 vintage home equity issuances. The expectation of cash flows for the previously impaired ABS securities has improved since the time credit-related impairment was recognized, and as a result, the amount of expected credit losses was reduced, and the expected increase in cash flows will be accreted into earnings as a yield adjustment over the remaining life of the securities.
9
Notes to Consolidated Financial Statements (Unaudited), continued
Realized Gains and Losses and Other-than-Temporarily Impaired Securities
Three Months Ended March 31
(Dollars in millions)
2012
2011
Gross realized gains
$20
$143
Gross realized losses
—
(78
)
OTTI
(2
)
(1
)
Net securities gains
$18
$64
The securities that gave rise to the $2 million and $1 million credit impairments recognized during the three months ended March 31, 2012 and 2011, respectively, consisted of private MBS with a fair value of $114 million at both March 31, 2012 and 2011. Credit impairment that is determined through the use of cash flow models is estimated using cash flows on security specific collateral and the transaction structure. Future expected credit losses are determined by using various assumptions, the most significant of which include default rates, prepayment rates, and loss severities. For the majority of the securities that the Company has reviewed for credit-related OTTI, credit information is available and modeled for the collateral underlying each security. As part of that analysis, the model incorporates loan level information such as loan to collateral values, FICO scores, and home price appreciation/depreciation data specific to the geography of the loan. These inputs are updated on a regular basis to ensure the most current credit and other assumptions are utilized in the analysis. If, based on this analysis, the Company does not expect to recover the entire amortized cost basis of the security, the expected cash flows are then discounted at the security’s initial effective interest rate to arrive at a present value amount. OTTI credit losses reflect the difference between the present value of cash flows expected to be collected and the amortized cost basis of these securities. During the three months ended March 31, 2012 and 2011, all OTTI recognized in earnings on private MBS have underlying collateral of residential mortgage loans securitized in 2007. The Company has not purchased new private MBS during the three months ended March 31, 2012, and continues to reduce existing exposure primarily through paydowns.
Three Months Ended March 31
2012
2011
(Dollars in millions)
MBS - Private
MBS - Private
OTTI1
$2
$1
Portion of losses recognized in OCI (before taxes)
—
—
Net impairment losses recognized in earnings
$2
$1
1 The initial OTTI amount represents the excess of the amortized cost over the fair value of AFS debt securities. For subsequent impairments of the same security, amount represents additional declines in the fair value subsequent to the previously recorded OTTI, if applicable, until such time the security is no longer in an unrealized loss position.
10
Notes to Consolidated Financial Statements (Unaudited), continued
The following is a rollforward of credit losses recognized in earnings for the three months ended March 31, 2012 and 2011 related to securities for which some portion of the OTTI loss remains in AOCI:
(Dollars in millions)
Balance, January 1, 2012
$25
Additions:
OTTI credit losses on previously impaired securities
2
Balance, March 31, 2012
$27
Balance, January 1, 2011
$20
Additions:
OTTI credit losses on previously impaired securities
1
Balance, March 31, 2011
$21
The following table presents a summary of the significant inputs used in determining the measurement of credit losses recognized in earnings for private MBS for the three months ended March 31, 2012 and 2011:
